Greed, conflicts of interest and using public services to get rich

Greed, conflicts of interest and using public services to get rich

- in Top Story, Weekly Briefing


Why North Carolina’s coal ash and mental health crises have a lot in common

Two of the biggest stories in the North Carolina policy world right now involve large, Charlotte-based institutions. Interestingly, though the two matters are seemingly unrelated, a closer look reveals a number of important commonalities in the controversies surrounding the state’s largest electric monopoly, Duke Energy, and its largest regional mental health provider, Cardinal Innovation Services.

Topping the list: greed and its tendency to undermine and provide major conflicts of interest in the provision of essential public services.

Duke’s cash grab

The Duke Energy story centers on the commencement of a new state Utilities Commission hearing in which the company is seeking a big hike in electricity rates and fees.

Duke Energy Progress has requested a $477.5 million increase—including a large mandatory fee increase—in the amount the utility can collect from its customers each year. Under Duke’s proposed increase, residential customers’ electricity rates would go up by nearly 17 percent (an increase of about $17.80 per month for a typical customer’s bill). This includes a 75 percent increase in the monthly “basic customer charge,” which would increase from $11.13 to $19.50. Recently, Duke and the Utilities Commission’s Public Staff reached an agreement that would reduce the mandatory fixed charge to $14 per month, but nothing is written in stone yet.

This fixed, mandatory fee would be added to each customer’s monthly bill regardless of how much electricity that customer uses. As consumer and clean energy advocates (including the North Carolina Justice Center—the parent organization of NC Policy Watch) have pointed out in recent weeks, mandatory fees like the one proposed by Duke in this case disproportionately impact low-income households and diminish customers’ incentive to save energy and invest in rooftop solar energy.

Duke, a regulated monopoly that’s obligated by law to serve the public interest, wants the big hikes on consumers to pay for, among other things, cleaning up North Carolina’s mountainous coal ash problem. Duke says such work amounts to part of the cost of delivering electricity.

What this murky logic ignores, however, is that both the coal ash problem and the devastating pollution it has caused in recent years were the result of Duke’s errors.

A recent Capitol Broadcasting Company editorial on WRAL.com put it this way:

There’s no mistaking who was responsible for the February 2014 coal ash spill in Eden. In a March 12, 2014 letter to then Gov. Pat McCrory and the N.C. Department of Environmental Quality, Duke Energy CEO Lynn Good said, ‘We have accepted responsibility for the Dan River ash discharge and have taken a number of immediate actions following the event.’

…As a regulated monopoly, Duke Energy has an obligation to produce reliable, affordable and safe power while still being guaranteed a reasonable profit for the company and its shareholders. It is up to the state Utilities Commission to determine that balance.

When the company fails to meet one of the three obligations it has to its customers, it isn’t the fault of the ratepayers, nor should it be their responsibility to pay.

The Utilities Commission shouldn’t reward Duke for the failure to do its job, nor should its ratepayers, who have no other choice for electric service, be forced to subsidize that failure. No matter what rate increase the Utilities Commission may approve, it should not include costs of dealing with Duke’s coal ash mistake.”

Add to all this the fact that that Duke is also one of the world’s largest public utilities and that it earns massive guaranteed profits each year ($2.1 billion in 2016 alone) and the scenario looks even more like the remarkable cash grab it is.

Cardinal’s collapse

Though it is a vastly different kind of institution – Cardinal Innovations is not (or was not, anyway) a giant, for-profit company, but rather a unique kind of hybrid institution created by state government known as a “Local Management Entity” or “LME” – the recent controversies that have blown up around it bear many similarities to the Duke situation.

As multiple media outlets have reported recently, Cardinal was a provider of mental health services to low-income North Carolinians in several counties who were of low enough income to be eligible for Medicaid. An article in last Friday’s Charlotte Observer does a good job of explaining some of the basics of what Cardinal was and how it came to be. Though not close to Duke-sized, Cardinal was no shrimp. Its FY 2016 budget was more than $682 million.

There have been questions for years about the quality of the services delivered by Cardinal (and other LME’s too, for that matter), but what really precipitated its recent collapse was the behavior of the organization’s leadership. This is from the Observer article:

Q: Why is Cardinal under scrutiny?

A: Lavish Christmas parties. Expensive flights in-state. Hefty executive salaries. Golden parachute severance packages. State audits have detailed Cardinal board members’ expenses and said that “unreasonable spending could erode public trust.” One example, includes paying $15,765 to take four chartered flights to in-state locations during three months of 2015. In addition, ousted CEO Richard Topping was paid $635,000, more than three times the amount that state policy permits.

Q: What happened to Cardinal’s CEO and board?

A: The Cardinal board voted several times to reduce, then raise Topping’s salary. Finally, on Nov. 17, the board voted to remove him [though] he had planned to work until Friday, Dec. 1. The board also approved paying Topping severance at his highest salary and spent $1.7 million on him and a total of $3.8 million in severance to three other outgoing executives.”

To its credit, the Cooper administration moved in and has seized control of Cardinal last week and fired its board of directors. The Department of Health and Human Services is now working to clean up the mess.

The central problem: Using greed as a tool to provide essential public services

Though obviously vastly different businesses with different transgressions, what makes the Duke and Cardinal situations very similar is the way that government has encouraged both to use “free market principles” – i.e. greed – in order to deliver core public service “efficiently.”

The driving concept behind both businesses is that private or semi-private businesses can deliver core public services that are often in many places provided by branches of the government (services like electricity and mental health services for people of low income) more efficiently than a traditional government agency. In other words, rather than delivering electricity via a publicly-owned power department and mental health services through a department of mental health, North Carolina decided that it was worth the extra cost and risk (of profits for Duke and higher, private industry-like salaries for LME bosses) to use privatized and supposedly service delivery.

The massive problem, of course, that both Duke and Cardinal have once again exposed is that once one goes down the road of privatizing core public functions, it gets harder and harder to keep greed and drive for profits in check.

This is not a problem confined to utilities or mental health. As the good people at the national organization known as In the Public Interest point out on a weekly basis, the costs associated with privatizing core public services are massive and growing across the country. This is true when it comes to everything from public schools to prisons to disaster relief to the ownership of roads and highways.

What’s more, this is a problem that has grown significantly more dire in recent decades as conservative mythologizing about the “genius of the market” has come to be taken as a given by public officials of both major political parties. In case after case, government leaders have privatized or sold off core public structures and services and then watched as sharp operators transformed them into vehicles to become millionaires and even billionaires.

The bottom line: There’s nothing wrong with private actors in a market economy who want to get rich. And there’s nothing wrong with making use of incentives and similar private economy tools to spur innovation and efficient services in the public sector. But, when public officials turn core functions over to giant private and semi-private interests, they’d best be extremely careful lest they find themselves with monsters on their hands that they can no longer control.