Commissioner James Danly Dissent Regarding Rate Recovery, Reporting, and Accounting Treatment of Industry Association Dues and Certain Civic, Political, and Related Expenses

Commissioner James Danly Statement
February 1, 2022
Docket No. RM22-5-000
 

Introduction

I dissent from the Commission’s issuance of a Notice of Inquiry (NOI).[1]  While donning the mantle of consumer watchdog, an advocacy organization seeks to suppress expressive conduct with which it disagrees and so it has come to the Commission, asking us to change our accounting rules so as to make such conduct more difficult.  The Commission should not make itself a party to this effort.

In its petition for rule making, the Center for Biological Diversity provides examples of certain trade associations’ participation in regulatory proceedings, litigation in the courts, engagement with legislatures, and other activities[2] at the core of their free speech rights.[3]  The problem—Center for Biological Diversity disagrees with the positions those trade associations have taken, deeming them “controversial” or “political.”[4]  Through the use of freighted terms like “lobbying” and “political activity,” which Center for Biological Diversity only occasionally tethers to specific provisions of the Commission’s accounting regulations, Center for Biological Diversity aims to create the impression that the overwhelming preponderance of these activities are presumptively non-recoverable.  In reality, some may be, but most are not.

Having painted this misleading picture, Center for Biological Diversity goes on to then assume that trade associations which, to facilitate compliance with our accounting regulations, assign specific amounts in their membership dues for presumably unrecoverable “lobbying” and “political activities,” have been widely and drastically underestimating those amounts.  The proposed remedy?  To completely upend our accounting regulations’ treatment of trade association dues such that they be decreed presumptively non-recoverable.

This petition is inadequate.  I cannot understand how anyone can give serious credence to the Center for Biological Diversity’s petition when it has failed to point to a credible example of a trade association misallocating “lobbying” costs.[5]  Instead of pleading facts and law, Center for Biological Diversity attempts to lure the Commission into rewriting our accounting regulations based on no more than hazy insinuation.  We should require more.

We should have simply rejected Center for Biological Diversity’s petition.  But instead, we have launched a full-scale investigation into how trade associations allocate the costs of their advocacy in their membership dues and whether the Commission should modify its accounting regulations or issue guidance.

I typically do not dissent from initial generic proceedings or fact-finding orders where the subject matter is squarely within the Commission’s jurisdiction.[6]  But here, I make an exception.  I have grave concerns that we are opening an inquiry that could ultimately result in burdening protected expressive conduct.  It also troubles me that this petition conflates any sort of advocacy, for any purpose, in any forum, with the narrow category of presumptively non-recoverable “lobbying” and “political” activities.  This petition comes across as no more than a cynical attempt to invoke the Commission’s jurisdiction to silence political opponents.  I can imagine that there could be some showing by some party that would convince us of the necessity of examining our accounting regulations, but this petition has not done so.  We should not dignify it with so robust a response.

The Petition is Inadequate

As they currently stand, the Commission’s accounting regulations allow regulated entities to record industry association dues in Account 930.2 (Miscellaneous general expenses)[7] as presumptively recoverable expenses.  Such costs are often referred to as “above the line.”  The Commission’s regulations describe this account as “includ[ing] the cost of labor and expenses incurred in connection with the general management of the utility not provided for elsewhere.”[8]  The list of examples of expenditures to record in the account includes “industry association dues for company memberships.”[9]

Other “[m]iscellaneous expense items which are nonoperating in nature but which are properly deductible” are recorded in accounts in the 426 family.[10]  At issue in this proceeding is whether regulated entities accurately report the portion of industry association dues that should be recorded in Account 426.4, “Expenditures for certain civic, political and related activities.”[11]  Expenses that could broadly be considered “lobbying” are supposed to be listed in this account:

This account shall include expenditures for the purpose of influencing public opinion with respect to the election or appointment of public officials, referenda, legislation, or ordinances (either with respect to the possible adoption of new referenda, legislation or ordinances or repeal or modification of existing referenda, legislation or ordinances) or approval, modification, or revocation of franchises; or for the purpose of influencing the decisions of public officials . . . .[12]

Expenses, however, “which are directly related to appearances before regulatory or other governmental bodies in connection with the reporting utility’s existing or proposed operations”[13] are explicitly excluded from this account.

 In its petition, Center for Biological Diversity pays little attention to whether the trade association activities that it deems “controversial” or “political” fall into this latter exception.  By way of example, Center for Biological Diversity describes the activity of the Utility Regulatory Groups (URGs), which it says the Edison Electric Institute (EEI) played a role in organizing and funding, but never explains why the URGs’ activities were not operational expenses conducted “in connection with the reporting utility’s existing or proposed operation.”[14]  Rather, Center for Biological Diversity simply describes the URGs as “well-recognized anti-regulatory advocacy groups”[15] and characterizes their activity as “controversial political advocacy.”[16]  Some of the “controversial political activity” identified by Center for Biological Diversity includes participation in the rulemakings for the EPA’s Clean Power Plan, Effluent Limitation Guidelines, and Coal Combustion Residuals Rule.[17]  It takes little creativity to imagine how each of these rulemakings could directly relate to a “utility’s existing or proposed operation.”[18]  It should not be necessary to point out that these rulemakings can have such profound effects on regulated entities’ operations—and, by extension, their ratepayers—that it would be anomalous (and potentially injurious for their rate payers) for regulated entities not to participate in them.[19]

Merely branding a category of the URG’s activity “controversial political advocacy” and offering the observation that they opposed stricter pollution controls do not convince me that these particular expenses belong in Account 426.4.[20]  It does not matter that Center for Biological Diversity and other commenters might strongly disagree with positions taken by the URGs.  Disagreement with positions taken in litigation or in regulatory proceedings—even if “controversial”—cannot be construed as evidence that an entity’s expenditures are being accounted for improperly.

As another example, Center for Biological Diversity alleges that EEI spent “up to 50% of its income on advocacy and lobbying efforts.”[21]  This is inexact and misleading.  Center for Biological Diversity cites a report and attaches the report to its filing.[22]  The report adds up EEI’s expenses for “legislative advocacy; regulatory advocacy; advertising; marketing; public relations; legislative policy research; [and] regulatory policy research” to get to fifty percent.[23]  The report then declares, without explanation, that “these are expenditures that should not be paid for by customers.”[24]  That declaration is not supported by any inquiry into how those activities might correlate to the Commission’s accounting categories.  Regardless, Center for Biological Diversity concludes in a footnote, that this demonstrates that “‘50% of EEI’s expenditures went to’ political activities.”[25]  Center for Biological Diversity leaves unstated the obvious implication: that what they term “political activities” should be below the line expenditures.  Worse yet, the NOI cites this figure without acknowledging how misleading it is.[26]

Center for Biological Diversity’s Requested Remedy Could Run Afoul of the First Amendment

I will not delve into the First Amendment concerns that Center for Biological Diversity’s proposed remedy presents.  I will only pause to note that I find Center for Biological Diversity and other commenters’ positions particularly troubling because they attempt to justify the burdening of expression specifically because that expression is controversial.  It should go without saying that it is controversial expression that is most at issue under the First Amendment.

Utilities have expressive and associational rights and we should beware of any government action that could burden those rights, as would shifting the presumption about the recoverability of expenses incurred when exercising them.  I encourage the public to respond to the NOI with these considerations in mind.

Whether the Commission could issue guidance or modify its regulations to clarify ambiguity

Having decided to pursue this NOI it may be possible for the Commission to identify through this proceeding ways to reform the Commission’s accounting regulations that eliminate genuine ambiguity.  There seems to be, for instance, confusion over whether and how definitions of “lobbying” and “political activity” from the Internal Revenue Code, the Lobbying Disclosure Act, or other federal statutes relate to FERC’s accounting regulations.  These statutes provide relatively clear definitions of these terms that have been subject to litigation and refinement in the courts.  The Commission’s accounting regulations could potentially benefit from incorporating such terms.  The NOI includes several questions exploring this issue and I encourage the public to offer any suggestions they have on ways the Commission could provide clear, objective guidance in a manner consistent with the First Amendment.  The public should also consider commenting on ways regulated entities could provide additional information beyond “simple invoices” that “lack detailed information on the nature of the association’s activities” in order to aid  the Commission’s evaluation of  whether expenses are properly allocated among accounts.[27]  The public should offer suggestions on how regulated entities can provide additional transparency without exposing themselves or their trade associations to political fishing expeditions.

 But I am wary of any changes that would give the Commission greater discretion to second guess regulated entities’ litigation decisions, regulatory engagement and other advocacy activities.  Such changes would risk turning FERC into a political regulator instead of an economic regulator.  The Commission has no business wading into this territory.  Yet this NOI, at the very least, raises the possibility that the Commission could head down this path, for instance, by querying whether the exception for “expenditures which are directly related to appearances before regulatory or other governmental bodies” in Account 426.4[28] should be narrowed.[29]  The Commission is sending the signal that it is at least willing to entertain proposals that both utilities and trade associations should have the recoverability of expenses incurred appearing before governmental bodies subject to greater scrutiny from the Commission.

EEI and the American Gas Association, which are Center for Biological Diversity’s main focus, are not the only trade associations.  There are scores of trade associations that represent every facet of our industry and which advocate for every policy viewpoint.  They all have an equal privilege to speak and to do so in association with others.  I do not want the Commission to grant itself the discretion that appears to be contemplated in this NOI.  I fear that the Commission will be tempted to favor some viewpoints over others by picking and choosing which expressive conduct it will allow for recovery.  Any path the Commission takes must avoid the appearance of political favoritism and avoid judging advocacy activities based on content or viewpoint.  And while the Commission is obligated to protect ratepayers from bearing costs that are not connected to the service they receive, that obligation does not justify Commission action that could penalize utilities for their legitimate engagement in the regulatory process through their trade associations.

Conclusion

As parties consider the questions posed in the NOI, I strongly encourage them to consider the Constitutional implications of changes to the Commission’s accounting regulations.  This is an area in which the Commission lacks expertise and should tread carefully, making public participation in this proceeding all the more important.

For these reasons, I respectfully dissent.