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Audit   1 - Duke Energy Employee Advocate

Duke Power Audit - Page Three

"Managing Duke's earnings is the commission's job, not Duke Power's job."
- Gary Walsh, executive director of the S. C. Public Service Commission

Duke Whistle-Blower Goes Public

The Charlotte Observer – by Ted Reed - August 19, 2002

He alleged Duke Power accounting problems

(8/18/02) - In February, eight months after he publicly alleged accounting irregularities at Duke Power Co., Barron Stone got some surprising news: He was being assigned, against his will, to a new job.

Two months later, Duke accountant Stone got more news: He had to give up his office and move into a cubicle.

Now, Stone says, he wants his old job back. But months of negotiations with Duke have reached a dead end, he says. As a result, he has decided to go public for the first time.

"I got moved from a position I was happy in to a position that wasn't even defined," said Stone. "There's no question in my mind that my move was motivated by the fact that I was the informant in the accounting investigation. That's not fair."

Duke denies any suggestion that Stone was singled out because he is a whistleblower.

Stone's reassignment was part of an overhaul of the controller's department that involved moving 13 people, and the executive overseeing the changes did not know of Stone's role as a whistleblower, said Duke spokesman Tom Williams.

"Things change," Williams said. "People at Duke Energy get new positions all the time."

Stone's move was a lateral one, Williams said. His salary and benefits did not change. Stone is in the "band-five" employee group, with a salary range of about $70,000 to the low six figures.

Until now, Stone had told only a handful of people that he is the employee who alleged last summer -- first to regulators and then to The Observer -- that Duke made a series of questionable accounting changes. The changes had the effect of reducing the profits reported to regulators by $100 million from 1998 through 2000.

As a result of his revelations, utilities commissions in the Carolinas hired accountant Grant Thornton to conduct an audit -- paid for by Duke -- of whether Duke had developed an accounting strategy specifically to reduce its level of return.

As a monopoly, Duke is allowed to charge consumers a rate set by regulators to provide a double-digit return. If it exceeds that return, regulators can reduce the amount it charges.

Duke says it has done nothing improper. The audit is expected to be concluded this month.

Loyalty vs. ethics

Stone's current situation is not unusual for a whistleblower, said James Fisher, director of Emerson Center for Business Ethics at St. Louis University. "The clearest pattern is that it usually goes badly for the whistleblower," said Fisher, who has studied dozens of whistleblower cases. He said the cases tend to set up "acute ethical dilemmas." While some business ethicists view corporate loyalty as an obligation, others feel individuals have higher obligations to the law or to a code of ethics, such as an accountant may have.

"When one blows the whistle, the assumption is that the latter outweighs the former," Fisher said. "But a corporation may say, `This employee is disloyal, so we may not invest trust in him, so let's move him to an area that does not involve sensitive information.' "

Additionally, in some cases, Fisher said: "Whistleblowers are found to be acting out of mixed motives, due to past grievances, or perhaps being passed over for a promotion, or a boss has slighted them in some way."

Stone said he believes he was moved because his former job was in a sensitive area. As a senior forecast analyst in the corporate controller's office, he evaluated pending acquisitions and the company's future plans, including earnings projections. He implemented management decisions on how earnings are reported.

In his new job as senior analyst, internal and external reporting, also in the controller's office, he works on special projects involving internal management reporting.

Job abolished

Charlotte-based Duke Energy Corp. is the only employer that Stone, a 39-year-old resident of Rock Hill, has ever had. The Greenwood, S.C., native joined the company in 1985 after he graduated with honors from Lander College in Greenwood. He earned a master's in accounting from Clemson University in 1991 and is a licensed CPA in South Carolina.

Duke Energy is the country's 14th largest company, with $59.5 billion in 2001 revenues. It employs 25,000 people, including about 10,000 in the Charlotte area. Subsidiary Duke Power Co. is the Carolinas' largest utility, with two million customers.

Stone's boss, Keith Butler, took over as Duke Energy's controller last August with a mandate to expand the department, which oversees financial matters for both Duke Energy and Duke Power. Butler had no idea that Stone was the whistleblower until Stone complained to him afterward, Duke spokesman Williams said.

The controller's office expansion was prompted by rapid growth at Duke Energy. The office grew from a staff of 33 a year ago to 52 positions today, including 10 yet to be filled. In the February reorganization, one change was that Stone's previous job no longer exists, said Williams.

From office to cubicle

When Stone first went public with his concerns about Duke's accounting in 2001, he spoke with Gary Walsh, executive director of the S.C. Public Service Commission. Walsh said he doesn't know why Stone was moved. "I have been informed that he was part of a reorganization of the controller's area, that he remained within the controller's area but was relocated from one part to another," Walsh said. "That was an internal management decision Duke Power made for reasons I'm not privy to."

Stone's private office was a perk he'd had since 1992. The loss bothered him because at the time he was the only band-five employee in the controller's office without one, Stone said.

"I have no problem working in a cubicle," he said. "But I feel it's my right to be treated in the same manner as someone of equal rank. Clearly I am the exception, not the norm."

Williams said Stone was moved to a cubicle so he could be closer to his work group, and noted that many band-five Duke employees occupy cubicles.

Disappointing assignment

Stone spent the first 12 years of his Duke career at Oconee Nuclear Plant in Seneca, S.C. In 1997, he moved downtown, and in 1998 he was promoted to band five. At the time, he said, he was told by a senior level manager it was unusual for a person so young, with just 10 months' experience in the corporate office, to be promoted to band five. He felt he was moving ahead in the company.

In September 2000, he became a senior forecast analyst. When he took the job, he said, he was told he would likely need to spend three to four years in forecasting and financial planning to prepare to work in other areas, such as corporate finance.

Nevertheless, on Jan. 31, Stone's boss told him he would be moved the next month. "I was disappointed," Stone said. "I had no desire to be moved."

When he started his new job Feb. 4, there were no special projects. "I basically sat there for five or six weeks and did little or nothing," he said.

Williams said Stone received work assignments soon after he started his new job.

Stone registered his objection to the move with Duke's personnel department, and later with Jacquelyn Gates, Duke's corporate ethics officer, one of the Duke employees who knew his identity. Stone said eight to 10 Duke employees, most of them attorneys, knew his identity in February. But the number rose as he pursued his objection to his job change.

At a Feb. 19 meeting to object to his reassignment, Stone confronted controller Butler. He concluded that Butler didn't have anything planned for him to do, but wanted "more experienced people in the internal/external reporting group."

Butler arranged for more work to be assigned to Stone, but Stone said much of it turned out to be tasks typically assigned to lower-level employees. Meanwhile, Gates reported that her review indicated Butler had not known Stone's identity when he made the personnel changes.

Hiring an attorney

Stone then asked Walsh for help. Walsh said the issue came up at a meeting of the S.C. Public Service Commission in early March, which Duke Power President Bill Coley was attending. There, Duke agreed to pay for an attorney, selected by Stone, to ensure his rights were protected. "That was an extraordinary step for us to take," Williams said. "We don't normally hire an attorney for an employee who has concerns about a new job assignment."

The arrangement was explained to Stone on March 13 in Rock Hill in a meeting with Walsh and Bill Austin, a Duke attorney. Austin said Duke would pay for an attorney, and Stone hired Jerry Bos, an employment litigation attorney in Charlotte since 1994.

Bos said he negotiated with Duke on Stone's behalf, but Duke was unwilling to reinstate Stone to his old job.

Once that outcome became clear, Bos felt it would be a conflict of interest for him to be employed by Duke if Stone was contemplating a lawsuit against the company. Duke paid him $16,000, ending that relationship, and Stone became his employer.

A civil suit remains a possibility, he said; it would reflect the diminution of Stone's career path.

N.C. and S.C. law do not specifically protect whistleblowers at private companies, though they do protect workers from being wrongfully terminated in a few specific situations.

"Barron was on a career path at Duke that was extremely favorable," Bos said. "He made band five at a relatively young age, he had great responsibilities, and he had every reason to think he would continue to do as well in the future. But then he was shunted aside. In my view, that was a demotion, and it is more than coincidental that this situation has befallen him at this time."

Williams said Stone never received a demotion and that he was simply reassigned. "He still has a good job," Williams said. "His old job doesn't exist."

3 choices for Stone

During two meetings with Duke in May and June, Stone and Bos pushed for reinstatement.

But Duke demurred, instead offering Stone three choices: He could remain in his new job, transfer to another job with the same compensation or leave the company.

The two sides disagree on who first raised the possibility of Stone's departure. Bos said that when it became clear Stone would not be reinstated, "We felt a money settlement might be appropriate."

It was Duke who asked that he suggest an amount, Bos said. Williams said Duke never asked for an amount. Rather, he said, a staff attorney ended a May 23 meeting by asking: "If you had a magic wand, what would you do to fix your situation?"

At the next meeting, on June 13, Bos asked for several million dollars, Williams said. Bos wouldn't comment on the amount, saying both sides agreed the talks would be confidential. Williams said it was Stone, not Duke, who violated confidentiality by going to The Observer.

Williams said Duke offered Stone a severance package roughly similar to what any laid-off employee would get: several months' salary, insurance for six months and financial assistance for a job search, including tuition and job placement services. "He envisioned something more," Williams said.

"Duke has an ethics policy where any employee is free to raise any concern they may have," Williams said. "But we do not support an environment where an employee can use this process to gain preferential treatment."

Asked if he was using his case in an effort to enrich himself, Stone said that has never been his interest. The only thing he has ever wanted, he said, is to get his job back.

Duke Power Investigation

The Charlotte Observer – by A. Griffin, T. Reed – January 30, 2002

(1/29/02) - After a month-long debate over just how much access they would have to company records and employees, auditors have begun reviewing Duke Power's accounts.

Letters between lawyers for Duke and an outside accounting firm detail the utility's effort to set tight parameters on the unprecedented two-state investigation.

The auditors, working on behalf of N.C. and S.C. regulators, are investigating a whistleblower's claim that Duke underreported roughly $100 million in profits from 1998 through last year. Duke's 2 million Carolinas customers could get a rate cut or a refund if auditors find the accounting changes that led to the underreported profits also resulted in overcharges.

In recent weeks, attorneys for the energy company and investigators have debated three overarching questions. At issue was whether auditors could copy documents without permission from Duke, whose computer software would be used, and under what circumstances Duke employees could be questioned.

While most points were resolved in time for auditors to start work Jan. 16, the correspondence, made public by the N.C. Utilities Commission, illustrates the natural tension between regulators and the corporations they monitor.

As a public utility, Carolinas regulators limit Duke Power's profits. If profits rise too high, the states can reduce consumer rates.

N.C. and S.C. regulators hired the Chicago-based firm of Grant Thornton last fall for a joint audit into the Carolinas' largest utility. They're hoping Grant Thornton will tell them why the underreporting happened, and whether deception was intended.

To do that, the accountants need Duke's help.

For its part, Duke says it is cooperating and already has welcomed auditors to Charlotte and given them 5,600 documents to peruse. Duke says it found no intentional wrongdoing in its own internal review. The company wants to aid auditors, but also needs to protect its corporate interests, said spokesman Tom Williams.

"Confidentiality agreements in audits such as this when proprietary information is being shared are very common," Williams said. "We mutually agreed to the confidentiality agreement Jan. 14, and the audit is now well underway.

"The agreement in no way limits the auditors access to any information they want to review. It only limits their ability to share that information with others."

Two outside accounting experts, however, said the conditions Duke sought seemed more restrictive than typical audits.

That's because unlike typical regulatory reviews, this is more an investigation than a routine accounting check. Grant Thornton's roster of auditors working in Charlotte includes several accountants who specialize in forensic work.

In its initial records request, Grant Thornton asked for all ledgers, spreadsheets, payroll registers, e-mails and internal memos related to the 1998 accounting changes. Auditors also asked for transcripts of all calls made to Duke's ethics hotline over the last five years.

Edward Ketz, an associate accounting professor at Penn State, said state-mandated audits such as this tend to involve more negotiations about access and procedure than routine audits. But he noted that the conditions sought by Duke were "the most restrictive I've ever heard about."

Paul Chaney, a former analyst, said Duke's position may reflect suggestions from cautious company attorneys.

"If you look at this as an individual would, it seems like they are hiding things, when in reality there may be no problems at all," said Chaney, now an associate accounting professor at Vanderbilt University. In a routine audit, accountants agree to a strict code of confidentiality with their clients. In exchange, they expect complete access, said Chuck Landes, director of audit and attest standards for the 330,000-member American Institute of Certified Public Accountants.

"In an audit conducted under generally accepted auditing standards, there should not be any restrictions placed on the auditor. If restrictions were placed, that would be a red flag," Landes said. "Recognize, though, that this audit sounds like something very, very different than an audit of historical financial statements."

Citing the need to protect corporate interests, Duke lawyers originally sought a blanket confidentiality agreement over documents -- an agreement that regulators and outside experts say could have made it difficult for Grant Thornton to do its job.

"Clearly to try to assume that everything is a trade secret is not something Grant Thornton could live with," said Gary Walsh, executive director of the S.C. Public Service Commission. "If they'd taken ... the original proposal, Grant Thornton would have been doing an investigation and then, when they turned something up, there's a chance they couldn't have told us."

Walsh said some of regulators' early negotiations with Duke over the conditions of the audit were "very difficult."

"We've never really had an audit like this, so it's hard to know what's standard," Walsh said. Early disagreements centered on these points:

• How many people have access to records:

In its first letter on the subject, dated Dec. 14, Duke proposed that all documents provided to auditors be treated as confidential. Access would be limited to five Grant Thornton representatives, who could not copy documents or show them to other people without Duke's approval.

Auditors rejected this. In a Dec. 20 letter, Grant Thornton lawyer Stephen Higgins said the company "isn't in any position to be executing any confidentiality agreements," since the N.C. and S.C. utilities commissions had both "already rejected Duke's request for a confidentiality agreement."

(The commissions rejected complete confidentiality with Duke last fall in responding to a public records request from The Observer.)

According to the compromise signed Jan. 14, a few select categories of documents -- including claims settlements, confidential contracts, non-nuclear insurance premiums and computer server addresses -- will be kept secret.

All Grant Thornton employees working on the audit will have access to Duke records. Auditors will be able to copy whatever they chose.

• Use of computers:

Duke also resisted giving investigators the right to download information from its files. Grant Thornton wanted the ability to run Duke's numbers through its own auditing software.

A compromise allows Grant Thornton to run its software using a Duke terminal, but not to retain a hard copy of Duke's accounting ledger.

• Access to employees:

Initially, Duke said a single employee would be available to answer Grant Thornton questions. As to other employees, "Grant Thornton may not interview or otherwise question any Duke Power employee outside the presence of Duke Power's counsel," wrote Duke lawyer Homer Deakins.

That's a sticky point. Regulators learned of the accounting irregularities from a whistle-blower, whose identity remains unknown to most Duke officials.

After several rounds of negotiations, Duke agreed to allow Grant Thornton to interview employees without a Duke lawyer in the room. But if a Grant Thornton lawyer is present, a Duke lawyer must be too, said Duke's Williams.

Also under the agreement, Grant Thornton must contact a designated Duke official to arrange access to employees, a restriction Walsh said is common.

The auditor and regulators have retained the right to depose employees if they can't arrange more formal access.

Auditors began their work on Jan. 16, in a conference room in the First Citizens building, a few blocks away from the accounting offices in the Duke Power building.

In an early conversation with Duke, Grant Thornton auditors asked for a tour of the accounting department. In a letter, Duke lawyer Deakins said they could walk through the department, with two conditions: Only two auditors could visit, and two Duke employees must accompany them. They would not be allowed to speak to any Duke employees except for those accompanying them.

The auditors haven't asked to schedule a tour of the accounting department yet, Williams said.

Today is Not Fluff Day

Employee Advocate – – December 16, 2001

Less than a week ago, in Fluff for Christmas, we mentioned how The Charlotte Observer likes to pamper Duke with a fluffy article, only to set them up for the knockout.

It’s just like Charley Brown kicking the football; it just keeps happening! Duke swells with pride over their fluff article, and figures that they finally have The Observer under their command and control. Then, Duke gets clobbered again. It’s just like clockwork.

The last Duke fluff article avoided any mention of the two-state audit of Duke’s books. It was avoided even though the writer had written several of the audit articles. Well, yesterday The Observer blasted Duke with both barrels (two audit articles). And the writer of the fluff article, helped write one of the new audit articles!

When a Duke fluff article appears, it is almost like waiting for the other shoe to drop. You can start counting the days until Duke gets a pie in the face.

The figure of $100 million seems to come up a lot. This is the figure that Duke says they are owed by Enron. It is also the figure that Duke allegedly fudged in their bookkeeping.

The $100 million figure accumulated from 1998 through last year. That is an interesting time frame. Duke really started cutting employee benefits in 1997. Did Duke reap so much money from the employee’s retracted benefits that they could not find slots to put it all? Was money crammed into closets and falling out of file cabinets? Duke was rolling in so much money that it exceeded the amount of profit that they could legally claim, as a regulated monopoly.

They literally had more money that they knew what to do with! From the allegations, it seems that Duke was looking for places to “hide” some of the profits. Duke had Enron’s problem in reverse. Enron allegedly “massaged” the books to hide losses. Duke’s “manipulations” were to hide excess profits. As money problems go, Duke had the preferable one.

Having too much profit is generally not a problem. If Duke had reported the excess profits to their regulators, there would have been no investigation. If Duke had said “we exceeded our allowable profit, what should we do about it?” There would have been no problem to investigate. The way it appears, this course of action wan never considered!

The mighty will fall because of their weaknesses. And, greed is unquestionably Duke’s weakness. Of all the problems Duke has faced in the last five years, greed has been the common denominator.

The employees pensions and benefits were only the first casualty of corporate greed. And, the dust has not settled from that fiasco yet. More dust storms continue to be raised.

The Observer is not making unfounded accusations. They obtained over 3,600 Duke documents through the Freedom of Information Act.

Read on for latest two Duke audit articles from The Observer.

Duke Power Accounting Shifts Documented

The Charlotte Observer – by Stella Hopkins, Ted Reed – December 16, 2001

Without those changes, profits would have exceeded N.C. limits

Duke Power documents obtained by The Observer show the Carolinas' largest utility may have developed an accounting strategy to avoid exceeding the profit it is allowed to earn from consumers.

As a public utility, the amount of profit Duke can earn is set by regulators. If a utility exceeds that profit, called allowed return, regulators can cut what the utility charges consumers.

Last summer, an employee whistle-blower notified Carolinas regulators of Duke accounting changes that reduced profits reported to regulators by $100 million from 1998 through last year. In response, regulators from North and South Carolina have chosen a global accounting firm for an unusual joint audit to determine whether the changes were appropriate.

Duke says it made accounting changes and some were mistakes. But the company denies wrongdoing and says it never intended to mislead regulators.

The documents, obtained under the Freedom of Information Act, indicate Duke knew it had exceeded its allowed N.C. profit in 1998, and that prompted it to consider accounting changes.

"For the last two quarters in 1998, Duke Power has been earning a higher rate of return than allowed," says one document. "We have come up with the following strategies to reduce Duke Power's current rate of return."

That document lists three accounting changes that would reduce regulated profits by nearly $50 million. The changes - involving insurance payments, executive pay and rental lease expenses - were made although in different amounts than listed on this document.

During 1999 and 2000, Duke continued the change for insurance payments totaling $58 million.

Duke characterizes the documents as "working papers" created by accountants making "notes to each other and themselves."

"To draw a conclusion (from the documents) and characterize it as an official decision is a mistake," said Cathy Roche, a spokeswoman for Duke's parent company, Duke Energy Corp.

Duke's accounting changes followed a precedent-setting case involving an S.C. utility that exceeded its allowed profit level in 1998. On Dec. 8, 1998, S.C. regulators cut the utility's customer rates by 1.5 percent, a reduction still in effect and costing the utility $23 million a year in reduced revenues.

Handwritten notes from a Dec. 17, 1998 meeting at Duke indicate a discussion of the S.C. case, and the "red flag" of excess earnings. Two pages of notes list seven potential accounting changes. At least three were made.

Ellen Ruff, a Duke Energy senior vice president, called the S.C. regulators' ruling "an unexpected reaction." Following that case, she said employees were "asked to look at costs and whether they were classified correctly."

But Ruff, formerly Duke Power's top lawyer, denied those requests were a strategy to reduce regulated profits. Ruff, a leader in the company's investigation, said management did not direct employees to make accounting changes with the goal of reducing its allowed profit.

"We did not say `Go out and find dollars that will lower the allowed return,'" Ruff said in an interview Thursday.

But Duke did make changes that lowered its allowed return, as outlined in the documents.

"I can't for the life of me figure out how they can say there wasn't a strategy," said Gary Walsh, executive director of the S.C. Public Service Commission, who began reviewing the documents during the summer. "They are not simply working papers."

The whistle-blower has said he believes Duke intentionally misled regulators.

"Accountants don't just go off on their own and say `Let's reclassify some costs today,'" he said, speaking on condition of anonymity.

Duke has said decisions about the changes were made several levels below Duke Power President Bill Coley. The documents provided to The Observer don't show who was involved because N.C. regulators allowed Duke to black out all names.

Copies of three e-mails obtained earlier indicate Sandra Meyer, then Duke Power's vice president of finance, was the highest-ranking executive aware of the accounting discussions. One 1999 e-mail to Meyer says two managers are looking at accounting changes to "help with our allowed return problem."

Duke has turned down Observer requests to talk with Meyer, but Ruff said the e-mail's language was "not alarming" after she reviewed everything as part of the company's internal investigation.

When the audit is complete, Duke Energy Chief Executive Rick Priory said, "You'll find that Duke dealt fairly with all parties."

What's in the documents

Most of the more than 3,600 documents The Observer obtained - and which Duke had to give N.C. and S.C. regulators this summer - contain tables of accounting transactions such as money received and paid. At least 40 documents, some handwritten, specifically discuss the accounting changes and how they would affect regulated profits and diagram the needed accounting entries.

The documents also show Duke staff asking such questions as how other companies handled similar expenses and whether changes should be retroactive.

Notes on one document, for example, question whether a change to insurance payments, first made for 1998, should be applied to two prior years to "keep integrity of the provision." Duke didn't make the retroactive changes.

Duke made 14 accounting changes, 10 of which it has said it handled correctly. Four changes, the company says, were mistakes that have been corrected. Some of those mistakes were bookkeeping errors, such as two people both recording the same expense.

One mistake - listed on documents as a way to reduce regulated profits - involves the closing of Duke's retail appliance stores in 1998. Duke recorded about $5 million in expenses from closing those stores as a utility expense, thereby reducing profits.

Duke's Roche said the company originally thought the classification was acceptable because the stores shared space with the utility's customer service offices.

The whole case provides a look inside the complexities of utility accounting.

Utilities have two sets of books. The one for regulators deals only with utility operations. The more comprehensive set covers the whole business, including the utility accounts.

Duke Power, for example, would not report income from Duke Energy's gas pipelines in its utility accounts.

The accounting changes in question involve the utility accounts reported to regulators. These accounts cover income and expenses regulators have approved as directly related to utility operations. Income includes money customers pay for electricity. Expenses include such items as fuel and plant workers' wages.

A utility's allowed profit is calculated from income and expenses in the utility accounts. Duke's accounting changes shifted expenses from non-utility to utility accounts. Under other changes, Duke credited income, such as the insurance payments, to non-utility accounts.

Those actions reduced regulated profit. The changes didn't affect stockholder profits because all income and expenses are accounted for in the final bottom line.

Moving insurance payments

Duke's largest change, which it defends, involved putting into nonutility accounts three years of insurance payments totaling $84.5 million from Nuclear Electric Insurance Limited. The mutual insurance company provides the required insurance for nuclear plant operators.

Language may be the heart of this debate.

Among the documents are letters to Duke, from the insurer, referring to the payments as "distributions" and "distributions to policyholders."

Federal rules, also copied among the documents, require utilities to put "dividends distributed by mutual insurance companies" in the utility accounts. That would reduce expenses - and increase profits.

In several documents, Duke refers to the payments as policyholder distributions. On others, the company calls them refunds. That may be significant because a note on a Duke document says that federal regulations "do not state how to recognize insurance refunds."

The document, labeled "Strategy 2," shows how to move the "insurance refunds" through the accounting process.

Discussing the rationale for the change, Ruff said there was no guarantee the company would continue receiving the insurance payments. Based on what Ruff called the payments' unpredictable future, accounting employees decided they weren't dividends and so, not subject to those accounting rules.

"You had a good-faith discussion," Ruff said of the decision-making process. "At the end of the audit, it will be decided whether it was right or wrong."

Pending the audit's outcome, Duke says this year it has placed $34 million of insurance payments in a holding account.

Raleigh-based CP&L and South Carolina Electric & Gas - both nuclear plant operators in the Carolinas - say they credit the insurance payments to the utility accounts. Regulators from other states, while not commenting on Duke, said that's usually the right way to handle returns of utility expenses.

"The general practice would be to bring the money back to (utility accounts)," said Denise Parrish, who heads the accounting committee for the National Association of Regulatory Utility Commissioners.

2-State audit under way

Last month, Carolinas regulators selected Chicago-based Grant Thornton LLP, a major accounting firms, to audit Duke.

Duke will pay for the audit, which Walsh said would cost between $200,000 and $400,000 and be complete by spring. The audit will determine if Duke acted correctly when it made $100 million in accounting changes.

Regardless of the outcome, regulators say they are likely to consider stricter reporting requirements to prevent similar situations. The case also raises issues of a public utility's obligations.

Duke is a monopoly, allowed to charge customers a rate set by regulators to provide a double-digit profit. In North Carolina, Duke is allowed a 12.5 percent return. In South Carolina, the allowed profit is 12.25 percent.

In exchange for the monopoly privileges, Duke must provide power to everyone in its territory and cooperate with regulators.

"The reason you have a regulated public utility is because there is huge potential for abuses when you only have one company that's providing you with a necessary service," said Anna Aurilio, legislative director at the U.S. Public Interest Research Group, referring to utilities in general. "If they're not being adequately regulated, then they will try to get away with anything they can."

Ruff said the company feels "a very strong responsibility to be transparent to our regulators and our customers." She added, "Moving money around in accounts - that's not something we do and think it doesn't matter."

Yet Duke didn't talk with N.C. regulators about changes that brought its N.C. profits under the level set by those regulators. Regulators from both Carolinas say they could not have detected the changes during reviews of Duke's quarterly reports. Those reports are less detailed than the accounting documents now under scrutiny.

"We monitor their earnings," Walsh said of the reports. "That's how we protect Duke's consumers. If in fact there was manipulation of those returns, that is a major concern to me."

Even if there isn't a specific requirement that a utility discuss such changes with regulators, Parrish - also supervisor of rates and pricing for the Wyoming Public Service Commission - said doing so "is probably good business."

Ruff said the company's policy is "full and open discussions with regulators." Following this case, she said, "We'll focus on being even more clear."

Speaking of "lessons learned," Ruff said the company is working to improve communications among departments involved in accounting and regulatory issues, and on better documentation and "approval channels" for any future changes.

In South Carolina, Duke would have been under its allowed profit even without the accounting changes it made, but regulators there still consider the matter serious.

"It is important to us because of what I deem as violating our regulatory compact," Walsh said. He added that Duke "absolutely" should have discussed the changes with regulators.

Duke says it didn't need to.

"We maintain that what we were doing is responsibly managing costs," Roche said.

Responded Walsh: "Managing Duke's earnings is the commission's job, not Duke Power's job."

Profit variances common

According to the N.C. Utilities Commission, Duke in 1998 reported a second-quarter profit of 12.89 percent, more than its allowed 12.5 percent.

In the previous four years, Duke exceeded its allowed N.C. profit in four of sixteen quarters, once by nearly a full percentage point.

Regulators say variances are common. Utilities can't earn precisely their allowed profit because of variations, such as demand spikes brought on by hot or cold weather. Exceeding the allowed profit doesn't necessarily trigger a rate review or the more severe action of a rate cut.

Regulators will consider such variables as the size of the excess and the frequency, said N.C. Utilities Commissioner Sam Ervin.

"It's a matter of exercising judgment," he said, agreeing with other regulators that there is no "safe zone" for excess earnings.

"It's really subjective," Wyoming's Parrish said. "If you're within a few (hundredths of a percent), we're not going to bother."

If Duke hadn't shifted its insurance payments, it would have slightly exceeded its allowed N.C. profit in 1998, 1999 and 2000. Such a pattern of consistent excesses "is relevant but not conclusive," said Ervin, adding that he couldn't say whether it would have prompted a rate review.

As Duke faced excess earnings in December of 1998, there also was the S.C. warning sign.

South Carolina Electric & Gas Co. had exceeded its third-quarter profits because record summer heat drove up air conditioning use. On Dec. 8, the company reported a return of 13.04 percent, more than 1 percentage point above its allowed rate of 12 percent. Within days, S.C. regulators cut customer rates by 1.5 percent.

Regulators acted without the customary hearing in which a utility pleads its case. Their action seemed to indicate that quarterly fluctuations above the profit level were no longer acceptable.

"The S.C. decision certainly heightened everyone's interest in being very, very precise," Duke's Roche said.

Gary Walsh, Fair-minded Regulator

The Charlotte Observer – by Ted Reed – December 16, 2001

S.C. regulator known for balancing interests of utilities, customers

COLUMBIA -- At the middle of the investigation of alleged accounting irregularities in Duke Power's reports to regulators is a 30-year bureaucrat whose life was changed by a phone call.

In June, Gary Walsh, executive director of the S.C. Public Service Commission, got the call about accounting changes from an anonymous Duke employee. Walsh learned the employee's identity, met with him repeatedly and took on his cause - which has consumed much of his time for the past six months. "This was not something I relished getting into," said Walsh, 54. "I was put in this position when I was contacted anonymously.

"It's the most difficult thing I've had to deal with in 30 years in this job, but when this informant contacted me, I took on the obligation to make sure these issues are properly aired," he said.

The whistleblower's call to Walsh triggered a two-state investigation into whether Duke acted appropriately in making about $100 million of accounting changes. The S.C. Public Service Commission and the N.C. Utilities Commission set rates for utilities operating in their states. Walsh works for the seven S.C. commissioners, overseeing a staff of 88 and a budget of $6.5 million. He earns $89,000 annually. Like many staff executives who work for an elected board that turns over regularly, his influence is considerable.

And like other utility regulators, he has to walk an even line, doing what's best for customers without damaging utilities financially.

In the Duke investigation, Walsh finds himself having to protect the whistleblower's identity, while representing interests of both ratepayers and Duke.

He denies the accusation, which he has heard, that he has a "vendetta" against Duke.

Duke, he said, is: "Without a doubt the finest utility in the world at generating electricity and building plants; they do it faster and cheaper than anyone."

A Duke spokesman said it would be inappropriate to comment on the utility's view of one of its regulators. Walsh is capable, intelligent and has good institutional knowledge, said S.C. Rep. Harry Cato, R-Greenville, who has headed the legislature's deregulation effort.

"So the commissioners give Gary and the staff a lot of leeway to do things, and the utilities regulated by the commission feel that maybe Gary has too much influence," Cato said.

Commissioner Phil Bradley said Walsh can be demanding, noting "he puts in a lot of long hours and borders on being a workaholic." Bradley said he sometimes disagrees with Walsh, but "nothing that would cause heartburn."

Bradley said he has had second thoughts about a key commission ruling: the 1998 order to cut rates of S.C. Electric & Gas. It came after the utility reported it had exceeded its allowable rate of return by $26 million because record summer heat ramped up demand for air conditioning. Utilities, which had previously been permitted to occasionally exceed the allowable return for a quarter, thought the ruling represented a dramatic change in policy. The change costs the utility $23 million annually.

Said Bradley: "If we had it to do over again, I would have preferred we would have watched their earnings a couple of quarters and see where they were and then reduce them. But when somebody makes a motion to reduce rates It was unanimous."

Walsh said he took no position on whether to cut rates or not, though he calculated the amount of the rate reduction at the commission's request. S.C. Electric & Gas didn't like the ruling, but didn't blame Walsh, said Roger Schrum, former spokesman for SCANA, the parent of the utility.

"Gary speaks his mind, always with the customer in mind, but last winter when natural gas prices were peaking, he stood up for the utilities when the public was probably saying that doesn't make sense," Schrum said. "He recognized the utilities were simply passing on increased costs."

The investigation has been stressful for Walsh, said Nancy Walsh, his wife of 32 years. "He's not sleeping real well," she said. "It's been disconcerting to him because, from a personal standpoint, he knows so many of the people at Duke who are involved."

She said her husband's ethics are so strong that about five years ago, "he went to a wedding of a friend who worked for Bell South, and he wouldn't eat or drink at the wedding. That's the kind of thing he does."

Walsh joined the commission after graduating from the University of South Carolina in 1972 and worked his way up through supervisory roles.

Charles Ballentine, the 38-year commission staff member who was executive director from 1960 to 1998, said that early on he spotted Walsh as an up-and-comer.

"Gary is very precise," Ballentine said. "He wants things done correctly. I hope he learned that from me."

Auditors to Comb Duke Books for Overcharges

The State – by Dave L’Heureux – November 29, 2001

A worldwide accounting firm will investigate charges that Duke Power overcharged its customers by $150 million or more through a series of accounting irregularities.

Grant Thornton LLC won the job this week after separate votes by the S.C. Public Service Commission and the N.C. Utilities Commission.

The Chicago-based firm is one of the Big Seven accounting firms in the United States, with 2,700 employees, 48 U.S. offices and U.S. revenues of $326 million in 2000. The company also operates in 106 countries.

Grant Thornton will look into 14 alleged irregularities that a Duke Power accountant brought to regulators' attention earlier this year.

Such irregularities could have kept utility regulators from recognizing opportunities to cut Duke Power's electrical rates in both Carolinas, said Gary Walsh, the PSC executive director.

Duke Power has denied any deliberate wrongdoing, but has pledged to cooperate with auditors and regulators. Duke Power also will cover the full cost of the audit, which could run to several hundred thousand dollars, Walsh said.

Grant Thornton accountants can start next week by examining 3,500 documents Duke Power turned over to regulators.

A final report on the findings should be ready for regulators by late April or early May, Walsh told commissioners on Tuesday.

The Public Service Commission voted unanimously Tuesday to hire Grant Thornton. The N.C. Utilities Commission made the same choice on Monday.

Alleged overcharges identified with the accounting irregularities 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 compensation in 1998.

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

The accountant, who spoke to regulators on condition of anonymity, alleged Duke Power shifted money between regulated and unregulated accounts in order to protect both earnings and employee incentives.

Of the 14 alleged irregularities, Duke Power considers nine were proper. Four others were "inadvertent" errors, and the last was justifiable, even though it differed from standard practices, said Joe Maher, spokesman for Duke Power in Charlotte.

Point Taken

Employee Advocate - - September 25, 2001

When we first read “Whistle-blowing is risky business” (The Charlotte Observer), we thought it was very weak. It seemed whining, sniffling, and apologetic. The timid title contributed to the weakness.

The executive director of the nonprofit National Whistle-blower Center seemed to offer nothing but caveats.

Even a legal veteran seemed petrified of the prospect of whistle-blowing.

Every legal precedent in favor of the employee going public was downplayed.

But after reflecting upon the article, we understand their cautious tone. They simply did not want to inspire any employee to take on work which they had no temperament for. Considering this, we can forgive the wishy-washy manner of presentation. They do not want people calling them up in six-months, saying “Hey! You got me into this; what do I do now!

So, they accomplished their objective. The relevant information was provided, but it was not glorified. It was not a recruitment article. And, anyone who could bluffed out by anything in the article, has no business in the game.

We concur that most employees are just not cut out for it. That is not a problem; it only takes a few to do what needs to be done. Many people are very uncomfortable with any type of controversy or confrontation. It is part of their emotional make up, and nothing to be apologetic about.

Many employees are burdened with outside pressures: debt, children in school, family problems, etc. Those already under pressure, do not usually need to take on more.

Those who are ready will know it. No one will have to tell them what they need to do. Indeed, no one can. When such a person finds the present situation intolerable, they will have nothing to lose by pressing for justice. It will be of little consequence whether they actually obtain it or not. They only need to know that they did everything within their power to correct the situation. Then their conscience will be clear, no matter where the chips may fall. They will not be intimidated or distracted from their purpose. They will not expect an easy or quick victory. They will only ask for a chance of victory. They will not reject support, but will gladly stand alone.

When the worst thing the company could possibly do to you, is preferable to suffering in silence – then you are ready. And no matter what the outcome is, you will be victorious.

Whistle-blowing is risky business

Duke Power Audit - Page 2