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Audit   1 - Duke Energy Employee Advocate

Duke Power Audit - Page One

"Good people do not need laws to tell them to act responsibly,
while bad people will find a way around the laws." - Plato (427-347 B.C.)

Whistle-blower: Duke Misled Regulators

The Charlotte Observer - Stella Hopkins, Ted Reed - September 16, 2001

A Duke Power whistle-blower whose allegations of accounting irregularities triggered a two-state audit of the Charlotte utility says he believes the company intentionally misled state regulators.

The whistle-blower's claims, laid out to The Observer last week in several interviews, contradict Duke's position. Duke says some accounting changes were a mistake, but denies wrongdoing. The company also said no changes were meant to deceive regulators.

Duke began making the changes - which reduced profits reported to regulators by $100 million - in 1998, a year when the utility nearly exceeded its allowed profit in North Carolina.

Last week, The Observer also obtained copies of Duke Power e-mails that bolster the whistle-blower's claims that Duke knew in 1998 it was close to exceeding its profit ceiling and used bookkeeping changes to reduce that threat.

As a public utility, the amount of profit Duke can make from ratepayers - sometimes called allowed return, or allowed rate of return - is limited. In one e-mail to the utility's vice president of finance, an assistant controller discussed ways to handle the company's "allowed return problem."

The N.C. Utilities Commission and the S.C. Public Service Commission are investigating, including arranging an unprecedented joint audit of the Carolinas largest utility.

If the audit finds the accounting changes resulted in overcharges to consumers, regulators could order a rate reduction or refund. And regardless of the outcome, regulators say they may tighten reporting rules for all utilities.

Profit limits set by states

Under state law, Carolinas regulators set rates utilities can charge. A key part of those rates is the amount of profit regulators let utilities earn on the value of their assets, such as power plants.

In North Carolina, this profit cap is 12.5 percent. South Carolina's limit is 12.25 percent. If utilities exceed the limit, regulators in both states can order rate reductions.

For 1998, N.C. regulatory reports show that, after the accounting changes, Duke Power came in at 12.45 percent - barely below its limit.

The whistle-blower says Duke made the changes to stay under the limit.

"What I think it's about," said the whistle-blower, who spoke on condition that he not be identified, "is five or six executives who said, `We've got to keep our rate of return where it's at because we don't want to lose revenue by having our rates reduced.'"

A Jan. 5, 1999, e-mail document shows Duke officials were discussing how they might avoid exceeding the profit limit.

"We are currently looking at reclassification entries to help with our `allowed return' problem," Rick Ealey, an assistant controller, wrote to Sandra Meyer, who at the time was Duke Power's vice president of finance.

The whistle-blower, a veteran Duke accountant, felt the changes were wrong. He said he tried twice in 21/2 years to talk with two managers, including his boss.

One offered "no real explanation," and said the changes were being made regardless. The second "shrugged it off," saying the decision had been made, the whistle-blower said.

He said he talked to an attorney, a state accounting board and the American Institute of Certified Public Accountants, trying to gauge his responsibility.

"I felt like I had an obligation to the 2 million customers and to Duke's own business ethics policy, which talks about honesty, loyalty and integrity," he said.

Whistle-blower takes action

In July, the whistle-blower took his concerns to Gary Walsh, executive director of the S.C. commission. Anonymously, he also called the ethics hot line provided by Duke Power's parent, Duke Energy. That call led Duke Power to start an internal investigation.

Because the call concerned regulatory accounting, Duke chose to notify regulators in both states. The company also hired an Atlanta law firm to conduct an independent investigation.

The whistle-blower provided documents to Walsh, who then brought N.C. regulators into the talks.

On Aug. 1 regulators from both states met with Duke. On Aug. 3, N.C. regulators said they were beginning an investigation, and on Aug. 9 regulators from both states requested information from Duke.

The company says it complied, turning over more than 3,500 documents related to all 14 accounting changes - two identified by the whistle-blower and 12 discovered by Walsh.

On Sept. 5, Carolinas regulators announced a joint audit. N.C. Commission Chairwoman Jo Anne Sanford says regulators are taking the allegations seriously. But she and other commissioners say they don't want to say more until the audit is done, probably early next year.

Walsh, who worked closely with the whistle-blower, has been more outspoken.

"From the documents I have reviewed, it appears Duke Power had in place a plan to ensure that they did not report earnings to the South Carolina Commission that were in excess of their authorized rate of return," Walsh said.

Duke rejected several requests for interviews last week to discuss the whistle-blower's comments or the e-mails. Duke spokesman Joe Maher said the e-mails represent just a few of the documents the company turned over to state regulators for the audit.

"To pick an isolated document and pick on wording in that document has the strong potential to simply mislead," Maher said. "Trying to use these (e-mails) as indicative of anything that was going on around here has as much chance of being misleading as it has of being accurate."

Maher said the company will await the outcome of the audit.

"Nobody has determined that there is any wrongdoing here, much less that we have knowingly done something wrong," Maher said. "I really think we ought to be presumed innocent and not guilty because someone has raised their own questions about this."

Duke releases report

On Sept. 5, when news of the audit broke, Duke released a report from its internal investigation of the 14 accounting changes. The company said nine changes were handled correctly.

Duke defended its largest change - $84.5 million - but said it might handle such bookkeeping entries differently in the future.

The company said four other changes were mistakes. Those changes had the effect of increasing costs, as reported to regulators, by $12.75 million. That's significant because higher costs help keep the company under its profit cap. The five changes involve two types of accounts. One group of accounts is reported to regulators and covers the income and expenses directly related to operating a utility. The money consumers pay for electricity goes in these income accounts. Fuel costs are an example of these expenses.

These operating accounts are the ones regulators monitor to determine whether a utility is making too much money. Another group of accounts covers income and expenses that aren't directly related to operating the utility and aren't reported to regulators.

Duke said $9.8 million in expenses should not have been charged to utility operations. Those charges covered $4.8 million in executive pay and $5 million for the cost of closing Duke's appliance sales business.

The company also said $2.95 million should have been applied to reduce the utility's operating expenses in the accounts seen by regulators.

Duke Power has characterized these transactions as "simply mistakes."

The Jan. 5 e-mail from Ealey that discusses making accounting changes to keep profits down also talks about the negative impact of lower profits on employee bonuses. The memo concluded that the "best path" was to make the changes, but exclude the higher costs when calculating bonuses.

All of Duke Power's 10,500 employees are eligible for the bonuses.

A Jan. 14 e-mail with the writer's name blacked out is directed to Ealey, Meyer and two Duke Power message groups. The e-mail does not reference the profit-lowering accounting changes. It says the writer and Meyer reviewed and approved items that can be excluded in bonus calculations.

The list includes the four changes that totaled $12.75 million. The list also includes the most significant accounting change, an $84.5 million shift in recording insurance rebates.

"If they weren't making accounting changes to shift those expenses they wouldn't need to make the exceptions," Walsh said.

The e-mail also says Meyer "still plans on running this by (Duke Power President) Bill Coley."

Duke wouldn't say whether that conversation took place or whether Meyer and Coley discussed the accounting changes. The company has said decisions to make the accounting changes were made a couple of levels below Coley.

Rebates recategorized

Duke made the most significant accounting change - the one that prompted the whistle-blower to come forward - in 1998.

The company had been paying nuclear-plant insurance rebates into a reserve fund. In 1997, that fund reached $100 million.

In 1998, Duke decided the insurance reserve was large enough and began crediting the rebates to the accounts regulators don't see. If Duke had credited the rebates to utility operations, they would have reduced costs.

The whistle-blower said the change ended a long-standing Duke Power accounting practice.

Walsh said the insurance accounting change "certainly should have been signed off on by the South Carolina Public Service Commission."

The company said it believed it was acting within industry accounting standards when reclassifying the rebates. In its Aug. 28 report, the company says the change can be justified, but "it now appears that such treatment is inconsistent with the accounting used by others in the industry."

Duke said it may change its handling of the rebates this year. Duke spokesman Maher said no decision has been made.

Impact on rate of return

At The Observer's request, the N.C. Utilities Commission last week calculated what Duke's rate of return would have been had it not made the insurance accounting change and all other factors remained the same.

The calculations show Duke would have slightly exceeded its allowed rate of return in 1998, 1999 and 2000 in North Carolina, by far its largest market.

In South Carolina, which accounts for 25 percent of Duke Power's Carolinas business, the company would have remained under the profit level without the insurance accounting change, Walsh said.

South Carolina's share of the $12.75 million Duke said it charged incorrectly also is not enough to put Duke over the S.C. limit. But Walsh says he's waiting on the audit to determine whether Duke handled the nine other changes correctly, as it claims. Those changes total more than $48 million.

Additionally, he says Duke should have sought regulatory approval before changing its accounting for an additional $11 million in executive pay.

"We're really not going to know the magnitude of this until we have the independent audit done," Walsh said. And, he added "This isn't only about money; it's about whether or not Duke intentionally underreported earnings and, if that was their goal, to what extent would they have gone."

Is reporting adequate?

The whistle-blower's allegations have Carolinas regulators questioning the adequacy of a reporting system that depends heavily on self-policing. Utilities file quarterly accounting statements, which regulators review, but they haven't had an in-depth look at Duke's books since 1991 - the last time the utility asked for a rate increase.

"We've had a system of accounting and reporting that we've felt good about, but clearly this says to us that we have to look at our system to see if there's something else we should require, if there are other questions we should be asking," said Jo Anne Sanford, chairwoman of the N.C. Utilities Commission.

S.C. Commissioner Philip Bradley said: "People might say, `Have you been down there sleeping, allowing this kind of thing to happen?' What can you say except we've got a very in-depth audit, and then we'll move forward."

Bradley said the audit "is going to be very extensive and very invasive."

"I think we'll take some very serious action to make sure it doesn't happen again, even if we decide there was no wrongdoing," he said.

A key change may be that utilities won't be allowed to make accounting changes that could affect ratepayers without regulators' approval, Bradley said.

That said, Bradley added, "Until this audit is over, and we really do see what happened, then I'm not prepared to say my confidence in Duke has been shaken."

Staff writer Anna Griffin contributed to this article.

Securities and Exchange Commission on Accounting Fraud

Duke probe could bring lower rates

The Charlotte Observer - S. Hopkins, T. Reed - September 7, 2001

Duke Power customers could get a rate cut if a two-state audit of the company concludes Duke has overcharged electricity customers millions of dollars since 1998.

N.C. Utilities Commissioner Sam Ervin said Thursday the audit also could lead to changes in reporting requirements for N.C. utilities.

In an unusual move that underscores the gravity of allegations by an employee whistle-blower, the N.C. Utilities Commission and the S.C. Public Service Commission are jointly investigating claims of accounting irregularities by the Carolinas' largest utility. Duke provides electricity to about 2 million customers in the two states. Based on the allegations, the overcharges could total about $100 million. After the audit, regulators will decide whether a rate cut is appropriate, and how much it would be.

Duke conducted an internal audit and hired a law firm for an external audit. Following those investigations - including reviewing 3,500 documents - Duke Power President Bill Coley said the company made mistakes but denied wrongdoing.

"In my 35 years in this company, never have I been asked to do anything improper, illegal, unethical or (that was) not a good business practice, nor have I ever asked anyone to do this," Coley said in an interview at Duke Power parent Duke Energy's Charlotte headquarters. "This concerns me a whole lot."

He said Duke will cooperate with the commissions' investigation. "If you find something wrong, you fix it," he said. The state regulatory agencies plan to hire an auditor within 30 days, and the audit should be completed early next year, said Gary Walsh, executive director of the S.C. commission. Walsh said Duke will pay the audit's cost, which he estimated in the low six figures.

The N.C. commission can levy fines up to $1,000 a day for every day a utility violates a rule. The S.C. commission can't levy fines, but both commissions can reduce rates.

Coley said he doesn't know the identity of the whistle-blower, who still works for Duke. Duke spokesman Joe Maher said only one person within the company, a lawyer, knows the whistle-blower's identity.

The whistle-blower called a Duke ethics hot line, operated by an outside agency, and complained about accounting irregularities July 16. Three days later, he took his allegations to Walsh in their first face-to-face meeting. Duke, meanwhile, began its own investigations.

The most significant allegation is that Duke credited stockholders with $84.5 million in insurance rebates that Walsh said should have gone to ratepayers and could have resulted in lower utility bills.

Historically, the rebates had been put into a reserve. But when the fund reached $100 million, the company decided it was large enough and stopped paying into it, said Steven Young, Duke's vice president of rates.

Walsh said Duke made the change soon after the S.C. commission on Dec. 8 ordered South Carolina Electric & Gas Co. to reduce its rates. The action came days after the utility reported it had exceeded its allowable rate of return by $26 million during the summer because high temperatures drove air conditioning use to record levels.

The rate cut of 1.5 percent trimmed the average customer's monthly bill by $1.23. The cut remains in place. "We were surprised they (the commissioners) moved so quickly," said SCE&G spokesman Brian Duncan. "They took this action without having a hearing or asking for more information."

Duncan said the utility thought the rate reduction wasn't justified because record heat caused an unusual spike in power use. The company chose not to pursue the case in court.

Duke's decision to stop directing insurance rebates to the ratepayer accounts meant Duke's rate of return - a factor regulators use in setting rates - was lower than it would have been.

In its report, Duke said the SCE&G incident factored in its year-end review of accounts. Young also said Thursday that Duke pays attention to what regulators do in all utility cases, but that the SCE&G case didn't trigger the reserve accounting change. He said Duke had been reviewing the reserve levels since 1997.

Duke also said it followed what it thought was standard accounting procedure but may alter the policy this year. In an internal report provided to The Observer, Duke acknowledged it overcharged ratepayer accounts by $12.75 million, including $4.8 million in executive compensation.

Duke's problems sparked concern among consumer groups and employees.

"It would be very disturbing if this was an accidental accounting error and outrageous if it were an intentional act," said Rob Schofield, head of the N.C. Justice and Community Development Center, which represents the interests of low-income people on utility and other issues. "There are people out there struggling over every dollar." One Duke employee, who asked not to be named, said, "We're hoping it's not as bad as it sounds."

Duke Power overcharge examined

The Charlotte Observer - By Ted Reed - September 6, 2001

A tip by an employee whistle-blower has triggered a two-state investigation into whether Duke Power Co. has overcharged Carolinas ratepayers by more than $100 million since 1998.

The S.C. Public Service Commission, the N.C. Utilities Commission and the N.C. Public Staff said Wednesday they were investigating accusations of accounting irregularities by the Carolinas' largest utility, which provides electricity to about 2 million customers in the two states.

The agencies will hire an independent auditor to review more than 3,500 documents Duke has turned over. Never before have Carolinas regulators sought a third-party audit of Duke, said a Duke spokesman.

Duke acknowledged Wednesday that it overcharged ratepayers by $12.75 million. But spokesman Joe Maher said, "Any allegation that we were deliberately misclassifying funds, that is not true."

The primary accusation is that Duke credited stockholders with $84.5 million in insurance rebates between 1998 and 2000. The money should have gone to ratepayers and could have resulted in a rate reduction, said Gary Walsh, executive director of the S.C. commission. The refund came from a company that insures nuclear plants.

Asked if Duke would refund money to its ratepayers, Maher responded: "You do what the regulators tell you to do."

Walsh also said Duke charged ratepayers for $15 million in executive compensation in 1998, after routinely charging shareholders for such expenses in previous years.

"This is as serious a matter as I have encountered during my 30 years at the commission, not only because of the magnitude of the dollars, but also because a plan was orchestrated to do this," Walsh said in an interview Wednesday.

"We rely on our power companies when they report earnings to do it consistent with our commission orders," he said. "Clearly, this was not consistent with our orders."

Walsh said Duke changed its procedures after the commission's 1998 decision to lower rates for another utility, South Carolina Electric & Gas, after that utility exceeded its allowed rate of return by $26 million. Regulators allow Carolinas utilities varying rates of return on investment, usually about 12 percent.

N.C. regulators said they, too, are investigating Duke but would provide no details.

Duke said Wednesday it reviewed allegations of 14 irregularities and found that it made mistakes in four cases. In a fifth case, involving the insurance rebate, Duke said it followed what it believed was a standard industry practice, but probably will change its practice this year.

Maher said Duke is assisting in the commissions' review. "Anytime there is an allegation that we have not been paying attention to the regulatory accounting guidelines, it's a serious thing," he said.

The accounting decisions were made in Duke Power's accounting and risk-management departments, a couple of levels below President Bill Coley, Maher said.

"These issues are not monumental in terms of accounting," he said. "What makes them visible is the mistakes. We're perfectly willing to correct mistakes."

In its report, Duke concluded it mistakenly overcharged ratepayers about $12.75 million, including $4.8 million in executive compensation, $5 million to close a merchandise sales business, $1.2 million to study four hydroelectric projects and $1.75 million for an insurance payment.

Duke Energy, the parent company of Duke Power, also has been under scrutiny in California, where it has been accused of overcharging for power and manipulating power supplies to generate higher profits. The company has denied those charges.

Walsh said claims of accounting irregularities at Duke came to his attention in June, when he was contacted by an anonymous Duke employee, who still works for the company.

Walsh had a series of conversations with the employee, who revealed his identity and provided documents during a face-to-face meeting July 19. Walsh then brought N.C. regulators into the talks. In August, officials of the two commissions met with Duke, which began an internal investigation.

The employee also anonymously called a Duke ethics line on July 16 to report the alleged discrepancies. He has since talked with outside lawyers retained by Duke to ensure that its ethics standards remain high, Maher said, noting that Duke has a "non-retaliation policy" to protect employee whistle-blowers.

Carolinas Regulators Want Duke Power Audit

The State - By DAVE L'HEUREUX - September 6, 2001

Duke Power is in hot water with South Carolina and North Carolina regulators, who allege it has underreported more than $100 million in income since 1998.

Regulators from both states called Wednesday for a joint investigation into a series of accounting irregularities. They intend to hire an outside firm to audit the utility's books.

Duke Power serves 2 million customers, including about 500,000 in South Carolina's industrial Upstate. Duke will have to pick up the cost of the audit, which could run in the "low six figures," Gary Walsh, executive director of the S.C. Public Service Commission, said after commissioners discussed the Duke issue Wednesday morning.

Duke spokesman Joe Maher said the Charlotte-based utility never intended to mislead regulators. He said Duke had corrected, or will correct, the accounting irregularities, and will cooperate fully with the investigation.

The regulators' claims against Duke Power stem from five different types of alleged accounting irregularities. The irregularities first came to the attention of the South Carolina PSC last June, when a long-term Duke Power employee called Walsh anonymously to discuss them.

Since July, Duke Power executives have turned over more than 3,500 documents to regulators in both states. The primary focus of the investigation, to date, is on roughly $84.5 million in insurance distributions covering Duke Power's nuclear power plants. Duke annually pays premiums into a nuclear insurance pool and the company gets an annual refund.

Duke Power allegedly gave the refunds to its stockholders, rather than return the money to its ratepayers, Walsh said.

Walsh also accused Duke Power of hiding the existence of the refunds so it would not have to tell regulators that its investors were earning more than the allowed 12.25 percent in yearly returns.

Had Duke exceeded its allowed rate of return, the PSC and the N.C. Utilities Commission could have ordered it to reduce its electric rates.

Whether that could happen retroactively depends on what the investigation reveals as a true rate of return for 1998-2000.

Maher said the company had decided to move funds from its nuclear insurance policy to benefit investors. "Yes, that reduced the rate of return on our regulated operations," he said. "To what level, I cannot say. But our rate of return never exceeded 12.25 percent."

Walsh noted, however, that Duke Energy made the accounting changes in December 1998. That, he said, was shortly after the PSC ordered South Carolina Electric & Gas Co. to cut its retail electric rates after rate of return exceeded regulated levels.

SCE&G's Investigators also will look into Duke Power's 1998 reclassifying of $15.9 million in executive compensation packages.

The reclassification shifted the responsibility of funding the compensation packages from shareholders to ratepayers. Duke Power has not admitted any error in either the nuclear insurance or the executive compensations issues.

It acknowledged error, however, in three other 1998 accounting transactions totaling $8 million.

Maher said the transactions had no effect on Duke Power's roughly 2 million customers.

"We looked at several thousand accounts that we keep, and found errors in only a handful," he added. Maher added that the errors and irregularities were minuscule when compared to Duke Power's $4.49 billion in electric operating revenues for 1998.

Walsh also said Duke Power should have sought regulatory approvals before changing its accounting methods. "My view, from the documents I have received, is that there clearly was a plan orchestrated to ensure that Duke Power did not report excess earnings," he said.

Duke Power's parent corporation, Duke Energy, already has come under fire for alleged overcharges in electricity it sold to power-starved California earlier this year.

"I don't know whether embarrassment is the right term," Maher said. "It does raise our level of concern about how we are perceived."

Duke Power's Books to be Audited

WBTV News - September 5, 2001

There are new developments in a story that could affect how much you pay for power. Duke Power's books will be investigated by independent auditors chosen by utility commissions of both North and South Carolina. This comes after allegations that Duke intentionally understated income by millions.

Gary Walsh, the executive director of South Carolina's Public Service Commission, says he never seen anything like it in thirty years. In June of this year, Walsh says, an informant called him and said Duke is deliberately underreported its income, according to Walsh, income of at least 100 million dollars that did not count as earnings.

Walsh says his investigators discovered a plan to misrepresent income. Joe Maher of Duke Power says these were just accounting errors. Walsh disagrees. He says this was not just bad math and he says he's got evidence to back up his charges that it's deliberate misrepresentation…

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