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Audit   1 - Duke Energy Employee Advocate

Duke Power Audit - Page 2

"If you can't get rid of the skeleton in your closet,
you'd best teach it to dance." - George Bernard Shaw (1856-1950)

Whistle-blowing is risky business

The Charlotte Observer - By D. Perlmutt, T. Whitmire - September 24, 2001

An employee sees his company doing something he believes is illegal. He wants to do something about it. But can he, without retribution?

Some corporations have policies that shield whistle-blowers from firing or demotion. And there's precedent in Carolinas law for keeping such corporate do-gooders safe. But experts say telling on your employer is still a risky business.

That will be put to a test after a Duke Power employee made allegations this summer of accounting irregularities at the Carolinas' largest utility - a move that triggered an unprecedented two-state investigation by regulators.

The veteran Duke accountant says he believes that the utility intended to mislead state utility regulators with accounting changes it started in 1998 - a year in which the company nearly exceeded its allowed profit in North Carolina. Those changes reduced the earnings Duke reported to regulators by more than $100million. Duke has denied any wrongdoing.

Regulators limit the profit utilities can make from ratepayers. When a utility exceeds that limit, regulators can order rate reductions. The whistle-blower, speaking on condition of anonymity, said Duke knew it might exceed its profit ceiling in 1998 and made bookkeeping changes to stay under - and avoid a possible rate cut.

As the investigation by the N.C. Utilities Commission and the S.C. Public Service Commission continues, Duke officials have stressed the company has policies that protect whistle-blowers.

"His position is safe," Jacquelyn Gates, compliance officer of Duke Energy, Duke Power's parent company, said of the whistle-blower during an interview Wednesday.

Even in the absence of such corporate policies, experts say, Carolinas whistle-blowers seem to be protected by common law from being fired or other acts of retaliation.

Neither North nor South Carolina has a specific law to protect whistle-blowers - so each matter is viewed on a case-by-case basis. But legal precedents stemming from a 1980s case involving Duke University's medical center exempts corporate squealers from state employment-at-will provisions that generally give Carolinas employers the right to terminate workers for any or no reason.

Still, all of this does not mean that whistle-blowing is worry-free.

Companies are known to maneuver around laws and even ignore their own nonretaliatory policies, said Kris Kolesnik, executive director of the nonprofit National Whistle-blower Center.

"The way it normally works, whether you work for the government or industry, if you detect something that constitutes wrongdoing, there is going to be a big backlash against you," said Kolesnik, who spent 18 years working federal whistle-blower cases for the Senate Judiciary Committee.

"Normally a worker reports the allegations to a superior, and that's the beginning of the end."

Duke's `progressive' policy

Duke Energy has a non-retaliatory policy, which Kolesnik and others described as progressive.

The policy, spelled out in the company's business ethics code, protects employees who report suspected violations of law, regulations or company policy.

"This means Duke Energy will not terminate, demote, transfer to an undesirable assignment, or otherwise discriminate against an employee for calling attention to suspected illegal or unethical acts," the policy says. Kolesnik and other experts say such a policy works only if the company follows it.

"The (whistle-blower) statutes in states that have them don't always work, so why should these policies work?" Kolesnik said. "Companies know how to maneuver around them."

Duke Energy maintains a toll-free ethics hotline, staffed by a third party, for employees to report concerns anonymously. Hotline complaints go to the Duke compliance officer, who initiates an investigation when appropriate.

In its current case, Duke says it conducted an internal inquiry of bookkeeping entries. The company also hired an Atlanta law firm to independently investigate Duke's books, and gauge how free workers feel to voice complaints. "We wanted to be able to assure people (the inquiry) was arm's length," Duke Power President Bill Coley said. Duke says three people in the company know the whistle-blower's identity; Coley said he is not one of them. "I will not try to find out," he said. "We are not going to compromise our compliance program."

1982 Case sets precedent

An N.C. precedent that protects whistle-blowers was set after Marie Sides sued Duke University over her 1982 firing from an 11-year job as a nurse anesthetist at the school's medical center.

Sides claimed she was fired because she testified against the hospital in a malpractice lawsuit brought by the estate of patient Larry Downs. The suit claimed Downs suffered permanent brain damage and later died due to negligent anesthetic administration.

Sides said she was fired shortly after a jury awarded the Downs estate $1.75million. Sides' suit against Duke was dismissed because she was employed at will.

But the state appeals court ruled in 1985 that "at will" could not extend to wrongful firings that go against a larger public interest. The N.C. Supreme Court upheld the ruling. Sides and Duke settled the case in the late 1980s. "It is one of the leading cases on the point that we rely on," said Michael Kohn, co-founder and general counsel for the whistle-blower center. "The courts of North Carolina used it to establish a firm rule protecting whistle-blowers from retaliation."

Despite the precedent, each matter is decided case by case, said Danny Addison, an assistant N.C. attorney general in the labor section.

"Without a specific law, these situations have to be played out on a case-by-case basis," Addison said.

Big-name cases rare

In both Carolinas, the strongest laws pertaining to whistle-blowing protect workers who expose safety and wage-and-hour violations and dishonest workers' compensation claims.

North Carolina's Retaliatory Employment Discrimination Act was passed in 1993, two years after the Imperial Foods chicken processing plant fire that killed 25 people in Hamlet. In that fire, rescuers found locked exits that kept workers from escaping the fire and contributed to the death toll.

The 1993 act protects employees with knowledge of unsafe working conditions who fear negative consequences if they blow the whistle, and was an attempt to tighten all state laws protecting workers from employer retaliation, said Skip Easterly, head of the N.C. Employment Discrimination Bureau.

Government workers in both states enjoy perhaps the strongest protection from retaliation.

Films like "Silkwood" and "The Insider" have made whistle-blowers like Karen Silkwood and Jeffrey Wigand famous for exposing corporate malfeasance.

Silkwood, a lab worker at a Kerr-McGee plutonium processing plant in Oklahoma, died in 1974 when her car ran off a highway as she was on her way to meet with a New York Times reporter about accusations of health and safety violations. Wigand, a former Brown & Williamson tobacco executive, gained notoriety in 1995 when he went public on "60 Minutes" with accusations that cigarette companies chemically spiked tobacco to make their product more addictive.

But those cases are rare.

"You hear about the Karen Silkwoods and the (Sides case) at Duke" Medical Center, Easterly said. "But they're small numbers compared to all the other" workers who experience discrimination for filing worker's compensation claims or exposing wage-and-hour and workplace safety violations.

Kolesnik said the way Duke appears to be handling its whistle-blower - sticking to its nonretaliatory policy - is rare and should be praised. Still, he said, whistle-blowers and those representing them need to be skeptical about corporate non-retaliation policies.

"As a rule, if the objective is `We have to get rid of this guy,' that is what drives everything," he said. "You always have to keep a skeptical eye on these cases."

Stella M. Hopkins and Ted Reed contributed to this article.

No Need to be Puzzled

Employee Advocate - - September 24, 2001

Stella Hopkins’ article in The Charlotte Observer (below) relates that Duke Power President Bill Coley is puzzled because “a whistle-blower reported concerns about accounting changes to state regulators before calling a company ethics phone line.”

According to this and several other articles, the employee did call the ethics line first. He called the ethics line only after trying unsuccessfully “for more than two years to get managers to explain why the company made the changes.”

The article states that Mr. Coley said: "I am confounded by the fact that there was a no-risk way to report to the company, and (the whistle-blower) chose to go outside the company."

We suppose that some executives cannot comprehend anything other than minimizing risk. Allow us to add some enlightenment. Some employees have principles. Ethics, to them, is more that a hot buzz word. Some are willing to face unlimited risk to get the truth out. If the company tries to whitewash their concerns, then others will listen.

There is really no need to be puzzled why state regulators were notified. Many, if not most, employees just do not trust the executive management of Duke Energy. The article stated: “…he believed that only an outsider could successfully confront Duke Power decision-makers.”

If the ethics line has any other purpose than alerting management of items that need to be “swept under the rug,” why is Mr. Coley so upset that it was not the sole medium used to report the accounting concerns? We fully understand that if the regulators had not been notified, Duke would have had more time for damage control. They could have manufactured a positive spin on the matter, before the regulators even knew about it.

The employee did not start work yesterday. He had, no doubt, seen Duke in the damage control mode before. He had been ignored for over two years; why should he believe in Duke’s sense of ethics now? Evidently, he found the conversation over the ethics line to be less that satisfying.

The article stated: “Coley and Jacquelyn Gates - Duke Energy's compliance officer - said the company would have acted as strongly and quickly even if the whistle-blower hadn't called regulators.”

If this is the case, why is the company is such a turmoil?

If the company is only interested in getting the truth out, they should not care what the medium is. If the true intentions are only to conceal, dupe, hide, and create a “cover story,” we can certainly see why Duke is in a tizzy.

The article also stated: “Reporting concerns to outsiders isn't a firing offense, they said. Both executives said the whistle-blower's job is safe, and that Duke policies prohibit retaliation.”

Does “isn’t a firing offence,” mean that telling the truth is still considered an offence?

Ms. Gates said, "We have to make sure employees in the future will want to use the process."

Again, what’s the big deal? - unless the process is only another way to stonewall and silence employees.

Why do employees have so little trust in Duke Energy management? Could it be because of the problems encounter in receiving asbestosis settlements? Dipping into the employees pension fund could have some bearing on the issue. How about the vanishing retirement health care coverage? The early retirement subsidy, which had been promised to employees since day one, also evaporated. These losses are one-sided. As the employees lose; the executives gain. There are other matters such as the price gouging issue and the overtime lawsuit. Duke is not big into admitting fault. Even if they make a settlement, they still do not admit any fault. Was the employee to believe that because he called the ethics line, that Duke management would suddenly confess on the spot? So, there is really no need to be puzzled about the employee’s lack of trust in Duke management.

Mr. Coley has expressed hurt that his company has been accused of wrongdoing. If Mr. Coley is hurt and confounded about the accusations, that does not alter the facts one iota. If one lives one’s life listening only to company “happy talk” and actually believing the company hype, the chance for disillusionment is great. Now, we will see how Mr. Coley deals with the facts. So often, it seems that Duke’s only concern is that they were caught in the act. So far, Mr. Coley only concern seems to be that the issue was reported to the regulators.

We have no vendetta against Mr. Coley. He is the only executive that even hinted that the company had not treated the employees fairly with the cash balance plan. The cash balance pension conversion took place in 1997. In 1998, Mr. Coley admitted that the company had overdrawn the employees good will bank account. He said that 1998 would be the “Year of the Employee.”

He may have had good intentions, but it did not work out that way. In 1998 it was announce that in the next year, employees would lose their retirement health care coverage.

So much for the year of the employee. 1998 was also supposed the be the year of “Zero Accidents,” but that is another story.

Whistle-blower Call to Regulators Puzzles Exec

The Charlotte Observer - By STELLA M. HOPKINS - September 23, 2001

Duke Power's president says he doesn't understand why a whistle-blower reported concerns about accounting changes to state regulators before calling a company ethics phone line.

An outside company operates the ethics line for Duke Power's Charlotte-based parent, Duke Energy Corp. Employees can call anonymously to report complaints ranging from safety issues to management problems and suspected ethics violations.

"I am confounded by the fact that there was a no-risk way to report to the company, and (the whistle-blower) chose to go outside the company," Duke Power President Bill Coley said during an interview Wednesday.

The whistle-blower's allegations - that Duke made bookkeeping changes to mislead regulators about its profits - triggered a two-state audit of the Carolinas' largest utility. Duke has denied any wrongdoing.

The whistle-blower, a veteran Duke accountant, says he tried for more than two years to get managers to explain why the company made the changes.

By June, he says he believed that only an outsider could successfully confront Duke Power decision-makers. He contacted state regulators anonymously in June. He met in-person with Gary Walsh, executive director of the S.C. Public Service Commission, on July 19 - three days after he called the Duke ethics line.

The phone line is part of a Duke Energy ethics code that includes urging employees to report concerns to supervisors. Recognizing that that isn't always possible, the company provides the phone line.

Duke said the whistle-blower's call prompted an internal investigation as well as an external review by an Atlanta law firm. Coley and Jacquelyn Gates - Duke Energy's compliance officer - said the company would have acted as strongly and quickly even if the whistle-blower hadn't called regulators.

"We knew these were very serious allegations," Gates said.

Reporting concerns to outsiders isn't a firing offense, they said. Both executives said the whistle-blower's job is safe, and that Duke policies prohibit retaliation.

However, Gates said, "We have to make sure employees in the future will want to use the process." Following media coverage of the whistle-blower's claims, Duke posted reminders about the policy on an in-house Web site. During the Wednesday interview, Coley spoke for the first time about e-mails obtained by The Observer. The documents, which Duke had declined to discuss, bolster the whistle-blower's claims that Duke made changes that reduced regulatory profits by $100 million to remain below its profit cap.

Because it is a public utility, state regulators limit the amount of profit Duke can make from ratepayers - sometimes called allowed return. In one e-mail, a Duke financial executive discussed making accounting changes to handle the company's "allowed return problem."

Another e-mail, while not about making the accounting changes, listed items that could be excluded when calculating employee bonuses. The exceptions included the accounting changes. Those changes, by reducing profits, could have reduced bonus payments. The e-mail said a high-ranking Duke executive would discuss the exclusions with Coley. Coley said Wednesday he doesn't recall being involved in any discussion about the accounting changes. He also said he takes the allegations facing his employer of 35 years very personally.

Duke "is not just my livelihood, it's my life."

Commission sets rules on Duke audit

The Herald - by Gene Crider - September 20, 2001

South Carolina's Public Service Commission set the ground rules Wednesday for the audit it hopes will show whether Duke Power accounting changes led to customers being overcharged.

The commission, which oversees utilities in the state, agreed to an audit scope with changes recommended by the North Carolina Utilities Commission.

The two states are conducting the audit jointly.

PSC Executive Director Gary Walsh said now that the scope of the audit is set, the two states are evaluating independent audit firms. Whatever firm is hired will answer to the two states but be paid by Duke Power.

The S.C. Public Service Commission began looking into Duke Power's accounting in July, after a Duke employee approached Walsh with information about accounting changes within the company. He claimed the company intentionally underreported its revenue to the commissions.

Among the whistleblower's claims, the biggest is that Duke sent $85 million in nuclear insurance refunds to its shareholders, instead of reporting them in away that would have lowered retail rates.

Because the company is only allowed a 12 1/4 percent profit on retail electricity in South Carolina, and 12 1/2 percent in North Carolina, changes in revenue can change rates.

A Duke spokesman told The (Columbia) State newspaper this week the company never intended to mislead regulators. Duke's own report into 14 issues identified by regulators showed "inadvertent" mistakes in four areas, the paper reported.

Under the audit criteria passed Wednesday, the independent auditor will:

-- Investigate 14 accounting issues to see whether Duke Power's own Aug. 28audit report is accurate. -- Review documents to create a detailed narrative about why Duke reclassified revenues and costs. -- Identify any other reclassifications. -- Ensure Duke's quarterly reports to the commissions are accurate.

The commissions are currently garnering recommendations from other states on accounting firms they might use. They do not plan to use one of the nation's "big five" accounting firms, because Duke does business with all of them, Walsh said.

The commissions hope to hire an accounting firm located in one of the two states so that the audit can begin as soon as possible, Walsh said. He expects the audit to take several months.

Once the audit is complete, the commissions will decide how to deal with the results, Walsh said. Refunds to retail customers are "a possibility. It depends on what comes from the audit," he said.

The Charlotte Observer Exposes Duke Energy

Employee Advocate - - September 17, 2001

It is no secret that Duke Energy Corporation would like to control all things. They want to control the press. If the press does not print stories to their liking, Duke simply buys ad space, by the pages, and prints their own version of the news!

Duke tries to completely control its employee’s every action and thought, on and off the job. Duke subtly (and often, not so subtly) makes it known to employees how they would like for them to vote, what charities to support, and what “news spin” they should relate to the public.

It is fair to say that Duke has not been 100 percent successful in the last area. Some employees are not very receptive to brainwashing techniques. Indoctrination programs will only make them more determined to get out the truth.

Duke generally tries to stay on the good side of The Charlotte Observer. And the Observer has been know to print a fluff article or two for the benefit of Duke Energy. But on September 16, 2001, the Observer made it clear that they were not “under the thumb” of Duke Energy.

The Observer gave the story: “Whistle-blower: Duke Misled Regulators,” front page coverage. The terrorist attack on the US has provided no shortage of news headlines. This story could have been omitted or buried deeply in the paper. Even with the huge headline: “We’re at War,” and the related stories, the Duke audit story was still given front page coverage. This is refreshing. We need more coverage; we have had too many cover-ups.

Duke Energy may counter the headline: “Duke Misled Regulators,” by buying ad space and proclaiming: “Oh, No We Didn’t,” but that’s another story.

Whistle-blower: Duke Misled Regulators

Duke Power Executive Suspended

The Charlotte Observer - S. Hopkins, Ted Reed - September 16, 2001

Vice President for Planning and Finance

Duke Power has suspended and reassigned a high-ranking financial executive.

Jeffrey Boyer was suspended as vice president of planning and finance fore the Carolinas largest utility, The Observer has learned. On Friday, Duke Power’s parent company, Duke Energy, said Boyer will return in a new “financial analysis function” in its finance department.

Boyer’s suspension came during the company’s investigation of a whistle-blower’s allegations of accounting irregularities that led to a two-state audit.

“Jeff not being in the workplace has absolutely nothing to do with any accounting call he made,” Duke Power President Bill Coley said in a Sept. 6 interview. “It is not related to the accounting issues.”

Asked if the suspension was related in any way to the allegations and audits, Coley wouldn’t comment.

“It is inappropriate for me to discuss an issue between the company and an employee.”

The whistle-blower said he was told that Boyer was suspended after reviewing the whistle-blower’s electronic calendar on July 31. Boyer acted without his permission, the whistle-blower said.

July31 was the date the whistle-blower met with regulators form both Carolinas.

The whistle-blower believes Boyer suspected his role.

Duke initially said that only one in-house lower knew the man’s identity but later said that two company lawyers and the corporate compliance officer know the whistle-blower’s identity.

Boyer “lacked a valid business reason for reviewing my electronic calendar,” the whistle-blower said.

The day before the announcement of his new job, Boyer sent a fax to The Observer, which had been trying since Sept. 7 to reach him by phone an in person. The three-paragraph letter was not on Duke’s letterhead.

“The recent change in my job status at Duke is a personal issue between me and my employer, and I will not discuss it,” Boyer wrote.

Boyer, 45, also wrote that he wouldn’t discuss the accounting changes.

Boyer joined Duke Power in 1978 and, after several promotions, became controller in 1994.

Following Duke’s 1997 merger with Pan Energy, which created Duke Energy, Boyer became Duke Energy’s controller. In September 1999 he was appointed to the position he held when he was suspended.

In his new position, Boyer, whose title hasn’t been announced, will report to Duke Energy’s chief financial officer Robert Brace.

Last week, Duke again declined to discuss the circumstances of Boyer’s suspension, including whether he was suspended with or without pay.

“We consider that to be a confidential matte between the employee and the company,” Duke spokesman Joe Maher said.

Utility's Records Examined

The State - By DAVE L'HEUREUX - September 16, 2001

Internal documents from Duke Power indicate top executives discussed underreporting income to state regulators as early as December 1998.

Such underreporting would enable Duke Power to avoid cutting rates for its 2 million customers in North Carolina and South Carolina.

The State obtained the documents from a Duke accountant who asked not to be named. The accountant previously told S.C. regulators about the possible underreporting of income.

In response, a Duke Power spokesman said last week that the company never intended to mislead regulators and denied any deliberate wrongdoing.

"At this stage, it is far too early to make any accusations about what was done or not done," Duke spokesman Joe Maher said.

Maher said Duke Power had released more than 3,500 documents to the S.C. Public Service Commission. Out of these, the commission staff identified 14 accounting entries it thought required further examination.

Of the 14, Maher said, Duke considered nine were made properly, four were "inadvertent" errors, and the last was justifiable, even though it differed from standard utility practice.

Duke Power is a subsidiary of Charlotte-based Duke Energy Co. Duke Power serves about 500,000 in Upstate South Carolina, and 1.5 million in North Carolina.

As such, Duke Power rates are subject to regulation by the S.C. Public Service Commission and N.C. Utilities Commission.

Those regulators now are ordering, for the first time, an outside audit of Duke Power's books.

They could decide to force Duke Power to return millions of dollars in overcharges to its electrical customers, said Gary Walsh, executive director of the S.C. Public Service Commission.

Duke Power has pledged full cooperation with the investigation. It will cover the cost of the audit, which could run "in the low six figures," Walsh said.

Walsh said he was convinced Duke executives intentionally engaged in accounting irregularities, based on documents he had read.

He also claimed Duke Power changed its procedures after the Public Service Commission decided in late 1998 to lower rates for another utility, South Carolina Electric & Gas.

In that case, the commission ruled that SCE&G exceeded its allowed rate of return, which determines how much it can charge its customers, by $26 million.

The Duke accountant has told the Public Service Commission that Duke's overcharges include:

  • $123 million in 1998-2001 distributions from Duke Power's nuclear insurance policy, which the utility paid to shareholders instead of rebating to ratepayers.

  • At least $15.8 million in executive compensations in 1998.

  • $12.75 million in other overcharges taken in 1998 only, which Duke has acknowledged were made in error.

The documents provided by the accountant indicate Duke Power shifted money between regulated and nonregulated accounts in order to protect both earnings and incentives.

Duke Power employee incentives depended on the costs of utility operation and maintenance expenses.

Employees, the accountant said, stood to lose lucrative incentives should regulated operation and maintenance costs increase. So the executives shifted certain costs to nonregulated accounts, the accountant said.

Executives also discussed protecting Duke Power's regulated rate of return on common equity, the accountant said. One of the documents, dated Jan. 5, 1999, discussed how Duke Power would list financial entries so that it could avoid exceeding its "allowed return."

The allowed return, which state regulators set, determines how much Duke Power can charge its customers. Should it exceed that return, it would have to cut its rates so that its customers pay less in the future.

Another document, dated Jan. 14, 1999, discussed seven accounts in which Duke Power later diverged from normal reporting to regulators, possibly to bolster employee and executive incentives.

The memo noted Sandra Meyer, then Duke Power's vice president for planning and finance, "still plans on running this by Bill Coley."

William Coley is the president and CEO of Duke Power, the regulated electrical subsidiary of Duke Energy. The accountant first took his concerns to Walsh, the Public Service Commission executive director, in June. On July 14, the accountant also called the Duke Power Anonymous Compliance Ethics Line.

Walsh alerted Jo Anne Sanford, chairwoman of the N.C. Utilities Commission, on July 19.

So far, commissioners on both regulatory boards have declined to take a position on the issue, saying they are awaiting the audit.

"This commission fully understands the seriousness of the issue," said Bill Saunders, chairman of the Public Service Commission. "But we are not assuming guilt here. This is an investigation."

Duke Power Audit - Page 1