Time for Our Grid Operator To Ditch Delaware

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Power to the People is a column by Donald M. Kreis, New Hampshire’s Consumer Advocate. Kreis and his staff of four represent the interests of residential utility customers before the NH Public Utilities Commission and elsewhere.

By DONALD M. KREIS, Power to the People

What’s more important to New Hampshire: An elite boarding school — or the nonprofit organization that runs all of New England’s high voltage transmission grid, oversees the buying and selling of electricity throughout the six-state region, and keeps our lights on?

It is, in some respects, an absurd question.

On Pleasant Street in Concord is the sprawling campus Saint Paul’s School.  Among its alumni are John Kerry (former Secretary of State and U.S. Senator), Robert Mueller (former FBI director), Garry Trudeau (Doonsbury), Clement Hurd (author of Goodnight Moon), and Maurice Roche (the 4th Baron Fermoy and maternal grandfather of Diana, Princess of Wales).

St. Paul’s includes red-brick buildings designed by famous architects like Robert A.M. Stern (library), Edward Larrabee Barnes (dormitories), and Ralph Adams Cram (chapel).  The endowment is worth more than a half-billion dollars.

On Sullivan Road in Holyoke, Massachusetts is ISO New England.  It has no alumni.  Its small campus is built in a style that can be best described as “1980s office-park nondescript.”  There is no endowment. As approved by the Federal Energy Regulatory Commission, ISO New England is a regional transmission organization.

According to its web site, ISO New England has three jobs:

Job 1: “Every minute of every day, we coordinate and direct the flow of electricity over the region’s high-voltage transmission system.”

Job 2: “We design, run, and oversee the billion-dollar markets that attract a large and diverse mix of participants to buy and sell wholesale electricity at the most competitive prices.”

Job 3:  “We do the studies, analyses, and planning to make sure New England’s electricity needs will be met by considering the evolution of the system over the next 10 years and beyond.”

Here is what do Saint Paul’s School and ISO New England have in common:  They are both nonprofit corporations.

In other words, neither Saint Paul’s School nor ISO New England have shareholders – or, really, any owners at all.  Each is governed by a board whose job is to assure that the people who run the place are doing so in the public interest.

But here’s the rub.  St. Paul’s School is incorporated in New Hampshire.  ISO New England, though based in Massachusetts and serving all of New England, is incorporated in – get this – Delaware.

Under New Hampshire law, to be incorporated as a nonprofit is to subject your organization to some genuine oversight.  The Charitable Trusts Unit of the Office of the Attorney General oversees New Hampshire nonprofits.  From 2004 to 2008, in response to allegations of overly lax financial management and governance practices, St. Paul’s School was under the active supervision of the Attorney General’s Office.

Who supervises, or even oversees, nonprofits incorporated under Delaware law?  Nobody.

Delaware, of course, is the go-to state for incorporating investor-owned businesses.  Two-thirds of the Fortune 500 are Delaware corporations, because the applicable statute is considered flexible and the legal principles applicable to corporate law in Delaware are well-established.

However, a Delaware corporation whose shares are traded publicly is pervasively regulated by the Securities and Exchange Administration (SEC).  Also, shareholders have rights, and the Delaware Supreme Court has made lots of decisions defining those rights.

The problem is that Delaware, unlike New Hampshire, has no separate law governing the incorporation of nonprofits.  The same management-friendly and super-flexible statute applies whether you are Wal-Mart or ISO New England.

But, unlike a publicly traded corporation like Wal-Mart, ISO New England has no shareholders.  So there is no annual meeting at which shareholders can ask tough question of management, no possibility of a hostile takeover attempt in response to poor performance, nor even the management-disciplining effect of a share price that varies according to how well the company is producing results for its owners.

The only people recognized as having ownership-type rights to a nonprofit incorporated in Delaware are its own board members.

You might be tempted to shrug because, after all, ISO New England is regulated as a utility by FERC pursuant to the Federal Power Act.  But FERC has precisely zero authority over the Board of ISO New England.

How do I know that?  Because I have read California Independent System Operating Corp. v. FERC, a 2004 decision of the U.S. Court of Appeals for the District of Columbia Circuit.  Popularly known as the D.C. Circuit, this appellate tribunal is the second most powerful federal court and the one that hears most appeals from federal agencies.

In that 2004 decision, the D.C. Circuit ruled that the Federal Power Act does not give FERC the right to oversee the corporate governance of organizations like ISO New England.  FERC’s job, the Court ruled, is to oversee only the rates, charges, and practices of the utilities subject to the Federal Power Act.

In the 2004 case, FERC did not approve of the way the board of ISO New England’s counterpart was chosen.  But the Court of Appeals did not approve of the way FERC overstepped its authority.  “Staggering” and “drastic” are among the words the Court used.

To me it is staggering – and a drastic claim to sole ownership of a vital public function – for the ISO New England board to place its deliberations, its decisions, and the process of choosing its members.  But there are at least two potential solutions.

I’ll start with the harder path.  ISO New England could ditch Delaware and revise its Articles of Incorporation so that it becomes a New Hampshire nonprofit.

I like New Hampshire, even though ISO New England is headquartered in Massachusetts, largely because the geographic center of the region lies somewhere in the middle of Lake Winnipesaukee.  (That’s because fully half of the region’s real estate lies in Maine.)  Also, as already noted, New Hampshire keeps a vigilant eye on its nonprofits.

An easier path would be for the ISO New England board to open itself up to some engagement and scrutiny.  Although the public enjoys no rights to participate in the governance of ISO New England under Delaware law, ratepayers remain the moral owners of the nonprofit that oversees our electricity grid.  And nothing in the law of Delaware prohibits the board from moving toward transparency and accountability.

Delaware might be the perfect haven for companies like Apple, Amazon, and Google.  Ditto for energy giants like Exelon, NextEra, and NRG.  But ratepayers deserve better.

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