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Audit   1 - Duke Energy Employee Advocate

Duke Power Audit - Page 5

Who Takes Financial Hit From Storm?

Triangle Business Journal – by Leo John – December 20, 2002

(12/13/02) – RALEIGH – Ice storm 2002 could cost Charlotte-based Duke Power about $50 million, while the cost to Raleigh's CP&L probably will be in the $46 million range, a study of the companies' past storm experiences reveals.

Progress Energy, CP&L's parent, plans to write off the amount as an operating expense over a few years – essentially passing the costs to shareholders. Duke Energy, Duke Power's parent, is expected to request a rate increase and pass the expense to residential and business customers.

If Progress takes the entire cost in the current year, it could clip per-share earnings by less than a penny. Should Duke change its mind and decide to absorb the costs in its current fiscal year, per-share earnings would fall by about five cents.

Duke's statement that it might seek a rate increase could run into some rough weather on its own, say energy officials, because the State Utilities Commission could rule that Duke is providing a healthy return to shareholders and does not need to pass costs to consumers.

Duke also might face problems because the Clean Smokestacks Act approved by the General Assembly this year prohibits any rate increases for the next five years. Duke has indicated that it might ask the commission to consider an exemption because the event qualifies as a "force majeure" or "act of God."

But not everyone thinks a rate increase would be justified. "Extreme weather is not an unexpected phenomenon," says Allyson Duncan, a utilities lawyer in Raleigh and a former member of the utilities commission.

The utilities commission looks closely at returns on equity – the profit earned as a ratio of the amount invested – in making decisions on rate increases. The commission in November 1991 ruled that a 12.5 percent return on equity for Duke's common shareholders from its North Carolina retail electric operations was "fair."

With interest rates at much lower levels now, the commission likely would consider a lower rate as a "fair" return now.

In a Sept. 30 filing with the utilities commission, Duke reported its return on equity to be 12.43 percent.

"The return on equity of a company is perhaps the most controversial issue when it comes to a request for a rate change," says Don Hoover, director of operations for the commission.

Besides interest rates, the commission would consider a host of issues, including the competitive environment, the levels of risk and the operating costs of a company in making a decision on a rate increase, Hoover says.

The month's ice storm is far from the first time that debates have emerged over whether shareholders or consumers should bear the cost of storm repairs. In fact, they typically occur after any hurricane or serious winter storm.

Hurricanes typically are much more costly for energy companies because of the extent of damage. But the damage inflicted on power lines on Dec. 4 and Dec. 5 may set a new record for ice storms.

In the wake of Hurricane Fran in September 1996, CP&L had to repair or reinstall about 5,500 poles, 2,800 transformers and about 3,000 miles of lines. With 792,000 people out of power, the total cost at the time added up to $100 million. In Sept. 1999, damage from Hurricane Floyd cost the company $65 million.

By comparison, an ice storm in February 1996 left about 61,000 people without power, and repairs cost the company only $6.1 million.

This year's ice storm repairs, though, have proved to be much more extensive and time-consuming to repair. The largest expense will involve wages to workers who had to work overtime.

A company is able to amortize non-labor costs over a period of three to four years – a move that would lessen the impact on earnings. But labor costs must be treated as operating expense and taken only in the year in which they were incurred.

"The cleanup may not involve much replacement, but the labor expense will be much higher," Terry Francisco, a financial manager at Duke, says of the ice storm.

After Hurricane Hugo hit in September 1989, Duke expensed about $44 million, while the company amortized an additional $20 million over five years. Following the February 1996 ice storm, Duke wrote off the entire $23 million cost as an operating expense.

PMPA says Duke owes $500,000

The Greenville News – by Rudolph Bell – December 5, 2002

Greer utility says it was overcharged for power

(12/4/02) - Duke Power continues to experience fallout from an outside audit of its books that concluded it had improperly accounted for nearly $124 million.

Duke settled its differences with South Carolina regulators last month, but now Piedmont Municipal Power Agency says it believes Duke overcharged it $500,000 for supplemental power.

PMPA, based in Greer, supplies wholesale power to 10 South Carolina municipalities that sell retail electricity. It has extensive business dealings with Duke as a result of its purchase of part of the Catawba Nuclear Station built by Duke in York County.

Each year, PMPA spends tens of millions of dollars buying supplemental power from Duke, with the price determined, in part, by how much Duke says it spent to generate the electricity.

Duke spokesman Tom Williams said his company couldn't comment on PMPA's claim because it hasn't heard from PMPA about the matter.

Don Ouchley, PMPA's general manager, said his agency reviewed its power purchases from Duke in light of the findings of the outside audit and now believes it's owed $500,000.

"Unless Duke can show us something that refutes what our engineers say, we're entitled to about a half-million-dollar refund," Ouchley said.

Suzanne Armendariz, PMPA's finance director, said about $70 million of PMPA's estimated $185 million budget for 2003 will go to Duke, most of it to buy power.

Two other municipal power agencies in North Carolina that also buy supplemental power from Duke also are reviewing their purchases but haven't reached a conclusion, said Bryan Moore, a spokesman for ElectriCities, a group that provides management services to the power agencies.

Regulators in the Carolinas ordered the outside audit of Duke's books last year after a Duke accountant alleged his company had deliberately underreported earnings. As a regulated monopoly, Charlotte-based Duke is allowed to keep only a certain percentage of its revenues as profit and, if it goes over the limit, must reduce rates.

The outside audit by accounting firm Grant Thornton concluded Duke had deliberately "managed" its earnings, improperly accounting for nearly $124 million. Duke, the Upstate's dominant power company, has admitted accounting mistakes but denied it intentionally misrepresented earnings.

Duke also has said it would not have exceeded its allowed rate of return in South Carolina of 12.5 percent even if it hadn't made the accounting mistakes.

North Carolina regulators approved a settlement agreement with Duke in October, and the South Carolina Public Service Commission followed suit last month. The settlement, among other things, calls for Duke to pay $6.25 million in fuel charges it would otherwise be allowed to pass on to its 500,000 electric customers in South Carolina.

SC Wants to Levy Energy Fines

Columbia State – by Dave L’Heureux - December 3, 2002

(11/27/02) -South Carolina regulators want the ability to levy fines directly against utilities, a power they believe could prevent companies from filing fraudulent financial reports.

Now, the S.C. Public Service Commission is one of the few such regulatory bodies in the nation without the power to levy fines. Members said Tuesday they will ask lawmakers to give them that power in 2003. Commissioner Nick Theodore proposed the authority to fine last week, leading commissioners to discuss the matter further on Tuesday.

Commissioners also are interested in requiring top utility executives to personally attest to the accuracy of quarterly financial reports filed with the commission.

Both the Securities and Exchange Commission and the North Carolina Utilities Commission recently adopted such requirements for quarterly reports.

The new requirement, if adopted in the state, would apply to South Carolina Electric & Gas Co., Carolina Power & Light, Duke Power, S.C. Pipeline Corp. and Piedmont Natural Gas Corp.

In each case, the chief executive officer and chief financial officer would have to personally attest to the accuracy of their quarterly financial filings.

SCE&G spokesman Robin Montgomery said Tuesday that the utility would have no objection to such a filing to the commission.

Commissioner Buddy Atkins hopes to go one step further, and have utilities submit to the commission the same exact quarterly fiscal information they now have to submit to the SEC.

The discussion of fines and executive accountability closely follows a Grant Thornton LLC audit that found Duke Power underreported profits by $124 million in 1998-2001.

A Duke Power accountant, who last year blew the whistle on the company, claimed the underreporting was deliberate. The Grant Thornton audit cast no blame on Duke Power, which had said it never intended to defraud regulators in the Carolinas.

Utility regulators in both states recently approved a $25 million settlement with Duke Power, a subsidiary of Charlotte-based Duke Energy.

Duke Customers Appeal Deal

The Charlotte Observer – by Stan Choe – December 1, 2002

Major users argue against N.C. settlement and seek complete audit

(11/30/02) - Some of Duke Power's biggest customers are appealing a settlement that closed N.C. investigations into accounting errors at Duke.

The Carolina Utility Customers Association, which represents about 50 N.C. manufacturers, is arguing the N.C. Utilities Commission didn't follow proper procedure when it approved the settlement, which will save N.C. residential ratepayers $4.32 on average next year.

The settlement came last month, after an independent audit said Duke Power underreported $124 million in profits to Carolinas regulators between 1998 and 2000.

Those profits would have pushed Duke above its allowed profit margin in North Carolina at least one of those years, regulators say, and could have led to lower power rates.

The customers' association wants a full-blown audit of Duke's books to search for any more accounting changes.

It's also seeking a formal hearing, where interested parties could depose witnesses and conduct their own investigations.

"Due process was not served," said Sharon Miller, executive director of the association, which filed its appeal with the N.C. Court of Appeals late Wednesday.

By refusing to hold a formal hearing, the commission "effectively shielded the public from the facts," the customers' association said in its filing. The commission also did not give the required 10 days of notice before voting on the settlement, which includes $25 million to cover fuel-cost increases for customers, the association said.

Utilities Commission members or staff could not be reached for comment Friday.

The commission heard many of the same arguments last month before voting on the settlement, when the customers' association pleaded with commissioners to take more time. The commission spent two days deliberating, before voting unanimously to accept the settlement.

Duke, a unit of Charlotte's Duke Energy Corp. and the Carolinas' largest utility with 2.1 million customers, said there is no need for a deeper investigation of its books.

The independent auditor hired by regulators pored through more than 13,000 Duke documents and reams of electronic data, Duke spokesman Tom Williams said.

In the settlement with regulators, Duke did not admit wrongdoing. It has said it made accounting errors but said they were unintentional. The audit said Duke's accounting changes were intended to show lower profits.

Group Appeals Duke Accounting Settlement

Associated Press - November 29, 2002

North Carolina Trade Group Appeals Duke Power's $25 Million Settlement Over Accounting Practices

RALEIGH, N.C. (AP) -- A trade group Wednesday appealed a state panel's decision to reach a $25 million settlement with Duke Power Co. over its accounting practices, saying the deal was unlawful. The Carolina Utility Customers Association, which represents 50 business and industrial electricity customers, filed its appeal with the North Carolina Utilities Commission. The case will be heard by the state Court of Appeals.

The commission last month agreed to the settlement after its independent auditor determined that Charlotte-based Duke didn't report $124 million in profits between 1998 and 2001 due to an accounting change.

The association cited several reasons for its appeal, saying the commission privately agreed to the settlement before a public presentation. The trade group called that presentation a "sham proceeding."

"The commission's settlement agreement approval process essentially shielded the public from the facts," Sharon Miller, the association's executive director, said Wednesday.

Duke Power, a subsidiary of Duke Energy Corp., has two million customers in the Carolinas. The South Carolina Public Service Commission also approved the settlement last week.

Duke settles with S.C.

The Charlotte Observer – by Stan Choe – November 21, 2002

(11/20/02) - COLUMBIA - Duke Power's customers in South Carolina could soon see lower rates, after regulators accepted a settlement offer from the Charlotte-based utility on Tuesday.

The settlement is identical to one approved by N.C. regulators last month in Raleigh. But it could be worth more to S.C. rate-payers.

One part of the settlement -- a $25 million credit from Duke -- gives residential rate-payers in both states about $4 next year. Another part of the agreement could result in lower S.C. rates a year or so from now.

North Carolina customers' rates, however, are frozen until 2007 as part of an agreement to lower coal emissions from power plants.

The agreement ends a 15-month investigation by the two states, where an independent auditor alleged Duke Power and its parent, Duke Energy Corp., intentionally underreported $124 million in profits to avoid a possible rate decrease.

Commissioners in both states wrangled over the proposed settlement, calling it one of the most difficult votes in their careers. South Carolina delayed its hearing for three weeks to mull the proposal; North Carolina debated for two days before voting.

Both commissions said Duke broke the trust essential in regulation by changing its accounting methods without first notifying them.

As a monopoly, Duke Power is allowed a set profit margin. If it goes over, regulators can lower rates.

Duke went over the limit at least one year between 1998 and 2000 in North Carolina, regulators say. It stayed under in South Carolina.

By moving money out of its regulated books to unregulated accounts, Duke Power appeared to have lower profits than it actually did, regulators charge.

Duke acknowledged accounting errors but called them unintentional.

Only one of the seven S.C. commissioners voted against the settlement. James Atkins said the proposal was insufficient and called for a "full-blown" audit to dig for any more accounting irregularities.

"I am exceedingly concerned there was an effort to cook the books," he said.

The S.C. Public Service Commission, though, had few options, other commissioners said. South Carolina is one of the few states that don't allow their regulators to levy fines on companies.

The commission was unlikely to draw any more cash from Duke than the settlement's $25 million, commission Executive Director Gary Walsh said.

The settlement also imposes strict rules on Duke, which will help re-establish the trust needed between company and regulators, they said. Duke agreed to sit down each year with the commissions to discuss operations, accounting issues and changes in accounting applications. It has previously not done so.

"Everybody's going to be a little unhappy," said Chairwoman Mignon Clyburn. "Herein is the nature of settlement."

Duke, with 2.1 million customers the Carolinas' largest utility, agreed to absorb $25 million in fuel cost increases next year for the two states. That will send $6.25 million to South Carolina, and translate into the $4 a year savings.

The company also agreed to move $50 million back into the books of its regulated utility, Duke Power. Duke had shifted that money to the books of a Duke Energy unit that sells unregulated, wholesale power across the country.

With the reinstated $50 million, Duke will have relatively higher earnings next year, which could lead to a S.C. rate decrease, Walsh said. Duke's S.C. residential rates are already 14 percent lower than its N.C. rates.

S.C. regulators will also vote Tuesday on a new rule requiring Duke senior officers to certify financial documents filed with the commission. It would be similar to rules recently enacted by the Securities and Exchange Commission and N.C. Utilities Commission. Walsh expects the measure to pass, predicting a "slam-dunk" vote.

The investigation began when a Duke accountant in Charlotte, Barron Stone, called Walsh last summer after discovering accounting irregularities.

Duke Power said it is pleased the dispute is resolved after the long investigation.

"This is something that has preoccupied us," Duke Power spokesman Tom Williams said. "This is something that's been draining."

The company faces a federal complaint filed recently by Stone under a new law protecting whistleblowers. Stone says Duke retaliated when it shifted him to a new job, which Duke called a lateral move.

Whistleblower Complains Under Sarbanes-Oxley

Dow Jones Newswires – by Mary Ellen Lloyd – November 21, 2002

(11/19/02) - CHARLOTTE -(Dow Jones)- The Duke Energy Corp. employee whose questions over accounting led to a $25 million settlement between the company's electric utility and state regulators in the Carolinas has filed a complaint under a new federal law protecting whistleblowers.

A spokeswoman with the Occupational Safety and Health Administration in Washington confirmed the agency is investigating the complaint and said it is among the first filed under the Sarbanes-Oxley Act, which took effect July 30.

OSHA has received 14 other complaints under the act's whistleblower provisions, the spokeswoman said. Section 806 of the act protects any employee providing information to the federal government or a supervisor regarding what the employee believes constitutes a violation of federal securities law or any provision of federal law relating to fraud against shareholders.

Barron Stone, a senior forecast analyst at Duke Power, said in his complaint, filed late last month with the federal Labor Department's Occupational and Safety Health Administration, that he was "harassed and demoted" as a result of his report of Duke's accounting changes to authorities, including the Securities and Exchange Commission.

A two-state audit ordered by energy regulators and completed in October found Duke Power failed to report about $123 million in pretax income from 1998 to 2000. The audit, conducted by accounting firm Grant Thornton LLP, blamed a coordinated effort by the utility's top management to avoid a regulatory review of its rates.

Duke has denied intentional wrongdoing, saying it corrected some honest mistakes and disagreed with other findings by the auditor.

Stone, 39, said he was moved from his job in financial forecasting to handle special projects, of which Duke initially provided none, he said in the complaint. Stone also said he has received several "grueling interrogations" by Duke Energy personnel in connection with his reports to regulators and has been rejected for alternative positions for which he is qualified.

Duke spokesman Terry Francisco said the company denies Stone was demoted or that his transfer in February was influenced by the employee's reporting of accounting concerns to regulators.

"In February, we didn't know his identity, so it had no bearing" on Stone's transfer, which Francisco said was based on a reorganization of the controller's office that affected 13 positions. He said Stone was given a position at the same compensation level and that the reorganization is among several that Duke has carried out internally as its business has changed in recent years.

As for Stone's later efforts to change jobs, Francisco said Duke is studying the issue and couldn't comment on each effort.

Stone wasn't chosen for one position on Aug. 9, but he went public with his identity on Aug. 18, Francisco said. "From the best we can tell, the people making that decision did not know the identity of the whistleblower," he said.

Lawyers tracking the new whistleblower law, too, said Stone's case is the first they have heard of and assumed it is one of the first, given that the law is so new. They said, however, that cases may not even become public unless a plaintiff takes it to the federal courts, which they can do after six months if the Labor Department's OSHA fails to render a decision.

The whistleblower provisions of the Sarbanes-Oxley Act go far beyond current statutes, lawyers said. For the first time, the law applies to every publicly traded company. It also shifts the burden to employers to prove it would have taken its actions regardless of the complaint, said Anthony Haller, an attorney with the Philadelphia law firm, Pepper Hamilton LLP.

In a related issue, South Carolina's Public Service Commission on Tuesday approved that state's $6 million settlement with Duke to settle the allegations. In a 6-1 vote with Commissioner Blake Atkins dissenting, the commission agreed to a deal reached by Duke and its staff, commission Executive Director Gary Walsh said. North Carolina regulators approved a similar $19 million settlement late last month and Duke expects to take a fourth-quarter charge of $19 million in connection with the settlement.

Under the agreements, Duke's settlement payments will be credited against future fuel costs, which could mean lower electric bills for customers.

Walsh said the commission, which postponed voting on the settlement earlier this month as members considered seeking a larger settlement, also directed him to pursue legislation that gives the commission authority to levy monetary fines against companies it regulates.

Given that the commission lacks that authority, Walsh said, his hands were " tied behind my back" in negotiating a settlement. In addition, he said, the commission cannot call Duke in for a rate review now because the utility's earnings never exceeded South Carolina's 12.25% allowed rate of return - even if it had followed all of the auditor's recommended accounting practices.

Duke has said its return would have exceeded North Carolina's 12.5% maximum, but it would have been "within a reasonable range."

Whistleblower Sues Duke Energy

Reuters – by Gary Hill – November 19, 2002

If we could just ride it through, not get quote 'caught,' then at that point (deregulation), it wouldn't matter

(11/18/02) - NEW YORK (Reuters) - The accountant who alerted regulators that Duke Energy Corp. fiddled its books to keep electricity rates high has filed a federal complaint against his employers, he told Reuters on Monday, under a new law protecting corporate whistleblowers.

Barron Stone, who questioned new accounting practices when he worked at the forecasting unit of Duke's regulated electric utility Duke Power, says he wants his old job back or restitution in the complaint filed late last month with U.S. Department of Labor. The department told Stone last Thursday that it was starting an investigation into the matter, Stone told Reuters.

Stone still works for Duke for the same pay and benefits but, he says, at a lower-level job with no chance of advancement.

Duke has not yet seen the complaint or heard from the Labor Department, company spokesman Terry Francisco told Reuters on Monday. Stone's job change, made in February, was part of a larger reorganization, he said, adding that the executive who ordered it did not know Stone was a whistleblower.

Stone's allegations, made last summer, led to audits and as a result, North Carolina last month agreed to a $25 million settlement under which Duke set aside $19 million to compensate North Carolina ratepayers.

South Carolina's seven-member Public Service Commission board will discuss on Tuesday morning whether to accept the $6 million it would get under the settlement, commission executive director Gary Walsh told Reuters.

The Charlotte, North Carolina-based power company has seen its stock price cut in half since the start of the year, as it has been hit with government probes over its trading practices and an industrywide credit crunch.

Stone filed a complaint dated Oct. 30 under the Sarbanes-Oxley Act, the landmark corporate reform law passed in July, which offers protection to employees alerting authorities to corporate malpractice.

The complaint alleges that "As a result of his demotion and harassment by Duke, Stone's career has been shattered." It calls for reinstatement in his former position or restitution.

The matter began in 1998, when Stone said Duke was scared by state regulators' order of a cut in the rates customers could be charged by another regional energy company, SCANA Corp. Duke then understated profits at its regulated electric utility so as to stay below the trigger level for a rate review, he said.

Walsh, the South Carolina official, agreed that Stone's accusations of Duke accounting tricks had been borne out by the audits: "Absolutely, and what triggered that was the rate reductions the commission ordered for SCG&E (South Carolina Electric and Gas, or SCANA) in December of 1998."

Stone said the new practices, which he called "very inconsistent with what we had done the last umpteen years," were successful in preserving high rates. In his opinion, Duke planned to hang on until hoped-for deregulation: "If we could just ride it through, not get quote 'caught,' then at that point (deregulation), it wouldn't matter."

Stone said he raised his concerns within the company but "the key response I got every time was that the decisions were made, and it really wasn't a whole lot of concern on their part that anything was wrong."

"Disappointed" that Duke was not living up to its own code of ethics "honestly and morally and with integrity," Stone scheduled a meeting with regulators, and anonymously called Duke's ethics hotline to say he was doing so.

The Duke spokesman said the company investigated Stone's complaints and responded to the North and South Carolina commissions, which then called for an independent audit that lasted over a year.

"Since that audit became public last month we've worked with the various commissions and come to a settlement. So we have definitely addressed his concerns," he said.

Dennis Russell, the Labor Department contact named by Stone and his lawyer, could not immediately be reached to confirm he had begun an investigation. No other such complaints under the new law are yet known to have been lodged.

Whistleblower Says Duke Retaliated

The Charlotte Observer – by Ted Reed – November 16, 2002

The whistleblower who triggered a two-state audit of Duke Power Co. has filed a complaint with the U.S. Department of Labor, saying he was "harassed and demoted."

Barron Stone of Rock Hill, who continues work at Duke, filed the complaint under the Sarbanes-Oxley Act of 2002, enacted last summer to tighten oversight of corporate-governance polices. The act includes whistleblower protections.

"As a result of his demotion and harassment by Duke, Stone's career has been shattered and he now demands reinstatement in his former position and restitution," the complaint said.

Gerry Bos, Stone's attorney, said the case has been assigned to an investigator for the Occupational Safety and Health Administration, a division of the Labor Department. He said the case was filed Oct. 30, and the investigation began this week.

An OSHA spokeswoman could not immediately confirm whether the Stone case is being investigated. If so, it would be among the first to be filed under the Sarbanes-Oxley Act, she said.

The spokeswoman said the Labor Department can act against the company and can impose penalties, including fines or imprisonment for up to 10 years for any person who retaliates against a whistleblower.

If no action is taken, a plaintiff can file a case in federal court.

Last month, an audit initiated by utilities regulators in North Carolina and South Carolina found that Duke underreported $124 million in profits. The audit was concluded three years after Stone first questioned a supervisor about Duke accounting practices. He later told S.C. regulators of his concerns, triggering the audit.

In February, Stone was moved, against his will, from one senior analyst's job in the controller's office to another. He said his prior job put him on a better career path. The transfer meant he was moved from a private office to a cubicle.

Duke spokesman Tom Williams said Friday that Duke has not been contacted by the Labor Department.

Williams said Stone's previous job was eliminated in an overhaul of the controller's office that involved moving 13 people. He said the executive overseeing the change knew nothing of Stone's identity as a whistleblower.

"He was not demoted, his salary was not reduced and we hired a lawyer to protect his rights," Williams said. The lawyer is no longer being paid by Duke, Williams noted.

SC Not Happy with Duke’s Offer

Associated Press - November 5, 2002

GREENVILLE, S.C.(AP) - Some state utility regulators say they are not satisfied with the $25 million Duke Power has agreed to pay after an audit revealed that the company underreported earnings.

North Carolina regulators approved the settlement Tuesday that will save the company's 2 million customers in the Carolinas about $4 to $5 a year.

The state Public Service Commission postponed a vote on the settlement scheduled for the same day.

Commissioner Clay Carruth said the state's public service commission is likely to reopen negotiations with the power company.

``Otherwise, we ... would already have approved it,'' Carruth said. ``It just follows that we intend to negotiate for something a little different.''

Commissioners Nick Theodore and Randy Mitchell have also said they'd like to modify the proposal to provide more relief for the company's 500,000 customers in South Carolina.

Duke spokesman Tom Williams said the company would not object to talks.

``We would hope that South Carolina would choose to consider the settlement their staff developed,'' Williams said.

Commissioners plan a vote on the settlement later this month.

An independent auditor determined that a change in Duke's accounting method resulted in not reporting $124 million in profits between 1998 and 2001.

Duke Power has denied intentional wrongdoing, but admits it failed to adequately explain significant changes to its accounting practices.

NC Regulators Approve Duke Settlement

Associated Press – October 30, 2002

(10/29/02) - RALEIGH, N.C. -- North Carolina's utility regulator approved a $25 million settlement with Duke Power Co. after an audit determined it had understated profits between 1998 and 2001.

With no dissension, the state Utilities Commission on Tuesday agreed to the deal reached between its staff and Duke. A company accountant alerted regulators to a changed accounting method that lowered the reported profits.

Commission members were disappointed with Duke Power, but didn't believe its errors rose to the level of requiring further investigation beyond an outside audit.

"The regulatory compact between [the commission] and Duke has been damaged but has not been broken," Jo Anne Sanford, chairwoman of the commission, said before the vote. "I believe it is time to resolve this, and I believe that time is today," she said.

Under the agreement, the settlement would be credited against future fuel costs, meaning that average residential consumers would see about 36 cents a month in reduced bills for a year. South Carolina regulators still must approve the deal.

The settlement's approval came the day after Duke's accountant told commissioners he believed the accounting differences were deliberate, not mistakes as the company contends.

Barron Stone, who still works for Duke, said his company underreported quarterly income to avoid a rate decrease. If a regulated company doesn't hit target incomes, the commission can adjust its rates.

The company has denied intentional wrongdoing, saying that an accounting firm it hired disagreed with an independent auditor who determined that Duke's practices resulted in not reporting $124 million in profits between 1998 and 2001.

The independent auditor was hired by regulators in North Carolina and South Carolina, where Duke Power provides electricity. Duke paid for the auditor at a cost of $800,000.

Its audit said Duke officials were concerned about the threat of a rate reduction in 1998 after the South Carolina Public Service Commission reduced rates charged by another utility.

A company spokesman acknowledged there were mistakes and acknowledged Duke Power should have communicated better with state regulators.

In addition to the settlement money, Duke has agreed to shift $50 million back to a nuclear insurance reserve fund. More than $80 million of Duke's underreporting involved money in the fund.

Mr. Stone and a group representing about 50 business and industrial electricity customers asked for a full hearing and further investigation to determine more closely what occurred. The commission Tuesday rejected that request by the Carolina Utility Customers Association.

James West, an attorney representing the association, told the commission that Duke may have overcharged customers $1 billion between 1999 and 2001 had the profits been reported properly in 1998. The higher profits would have prompted a rate reduction, he said.

Commissioner Sam Ervin IV said he didn't believe the panel's ratemaking authority allowed it to funnel every dollar earned beyond the regulated rate of return back to consumers.

"We can't say what would have happened had the correct accounting gone forward," Mr. Ervin said.

The association plans to appeal the ruling to the state Court of Appeals.

SC Regulators Delay Duke Vote

Dow Jones – by Mary Ellen Lloyd - October 30, 2002

(10/29/02) - CHARLOTTE -(Dow Jones)- The Public Service Commission of South Carolina didn't take action as scheduled Tuesday on a proposed agreement with Duke Energy Corp.'s Duke Power unit to settle allegations the company understated profits between 1998 and 2001 by almost $124 million to avoid having to cut electricity rates.

"We met, but there was no discussion of the Duke settlement today," commission Executive Director Gary Walsh said.

Walsh said commission Chairwoman Mignon Clyburn on Friday told him that several commissioners were concerned "about moving so quickly" on the settlement, announced Oct. 22 by Duke and staff at commissions in North Carolina and South Carolina.

Walsh said he is awaiting instruction on whether to place the item on the agenda for the commission's Nov. 6 meeting.

Earlier Tuesday, the North Carolina Utility Commission approved the pact, which requires Duke to pay $25 million. That amount would be credited against future fuel costs and restore a nuclear insurance reserve account to levels it would have reached had the company not changed its accounting for insurance distributions in 1998.

Duke expects to take a fourth-quarter charge of $19 million in connection with the settlement, if approved.

Utilities Board Delays Duke Ruling

The Charlotte Observer - by Stan Choe – October 29, 2002

(10/28/02) - RALEIGH - The N.C. Utilities Commission delayed a vote Monday on a proposed settlement by Duke Energy Corp. for allegedly underreporting $124 million in profits.

Through an all-day hearing, the commission heard customers' pleas to order a comprehensive audit of Duke's finances to discover if more accounting irregularities exist, before voting on the settlement.

By Monday evening, the commission decided to reconvene at 11 this morning. A vote on the proposed settlement may come today, said commission Chairwoman Jo Anne Sanford.

The S.C. Public Service Commission has indefinitely postponed its hearing on the settlement, which had been scheduled for today. Executive Director Gary Walsh said several commissioners requested the delay.

The proposal calls for $25 million in credits to help offset the increase of fuel costs next year for Carolinas power customers. That would save the average N.C. homeowner about 36 cents per month for a year, the commission staff said.

Charlotte-based Duke also would restore $50 million in its nuclear insurance reserve fund, the source of many of the alleged accounting improprieties. The commission could use that to lower power bills the next time it calls a rate case for Duke.

The accounting shifts came to light after Duke accountant Barron Stone reported his suspicions in-house and later to Walsh. Regulators ordered an audit of the accounting changes, and it was released last week by accounting firm Grant Thornton LLP. It found that Duke's regulated utility, Duke Power Co., developed a "coordinated effort" from 1998 to 2000 to underreport earnings in an effort to avoid possible power-rate cuts.

Duke acknowledges accounting errors were made but said there was no intentional wrongdoing by any employee.

Duke and both staffs of the Carolinas commissions have approved the proposed settlement. In negotiations, the state staffs' goals included ensuring the integrity of the financial reporting process. They also wanted Duke Energy shareholders -- not Duke Power customers -- to bear the cost of the settlement and guarantee direct savings to Duke customers.

One of the seven N.C. commissioners, Robert Owens, called the sum a pittance and said he is not entirely satisfied with the proposal. With the savings, N.C. ratepayers could afford one cup of gourmet coffee next year, he said.

But Owens, who has stayed up until 4 or 5 in the morning recently reading documents related to the case, said he doesn't think a delay would accomplish much.

"It will be the same thing in six months or in 12 months," he said. He didn't elaborate, but several observers said they feel the commission will approve the settlement.

The Carolina Utility Customers Association Inc., which represents 55 N.C. manufacturers, asked the commission for a deeper investigation into Duke's accounting.

It has said it finds the $25 million settlement a token sum compared to the $124 million that could have lowered power rates. Its member include R.J. Reynolds Tobacco Holdings Inc. and Continental Tire.

The association's attorney, James West, said the settlement was rushed and that he was appalled the case did not include a formal hearing, where interested parties could depose witnesses and conduct their own investigations.

"So much of our regulation depends on some degree of trust," he said. "That trust has been broken."

Duke spokesman Tom Williams said a deeper investigation isn't warranted because no employees intentionally manipulated accounting.

Stone, who drove 3 1/2 hours from his Rock Hill home to address the commission, said he wanted the commission to take more time before deciding.

"I don't feel you have all the information to make a decision," he told commissioners.

Several of them told him they admired his courage for blowing the whistle on Duke.

Also Monday, the commission voted to require regulated utilities to certify documents they submit, similar to requirements the Securities and Exchange Commission recently imposed for federal filings. The changes was in response to many of the accounting scandals that have surfaced across the country recently, chairwoman Sanford said.

Duke’s Accounting Practices Troubling

Charlotte Business Journal – October 29, 2002

(10/25/02) - The auditor's report on Duke Power Co.'s past accounting practices raises troubling concerns about regulation of the utility.

As a monopoly provider, Duke surrenders the right to pursue profits the way unfettered businesses do. It's limited to a profit margin of 12.5% in North Carolina and 12.25% in South Carolina.

The arrangement is designed to balance the need for profits with the need to protect the public from excessive energy prices. In this regulated environment, excess profits present headaches for a utility, since it could be compelled to lower electric rates.

Indeed, a 1998 rate case before S.C. regulators involving another utility led to such a rate cut. Accounting firm Grant Thornton, which was hired by N.C. and S.C. utility commissions to examine Duke's books, said in its report that the rate case set Duke executives and staffers into a concerted effort to reclassify various earnings and expenses to meet the approved rates of return.

Duke insists it did nothing wrong and hired an outside accounting firm that sanctions its accounting. Grant Thornton's report makes it clear the company departed from past accounting practices in its dealings with regulators. It did so without notifying authorities of the changes in accounting; Grant Thornton says Duke underreported some $124 million in profits during 1998-2000.

A proposed settlement will cause some financial pain for the company - it will provide $25 million in relief to consumers and take a $19 million charge to fourth quarter earnings - but we hope these adjustments will not mark the end of this matter.

What's needed is a change in the way Duke and its regulators interact, if the public is to have confidence in the system. One step that would restore trust would be to require utilities to provide notice of any accounting changes. In the proposed settlement, Duke "regrets that communications with the commissions failed to adequately detail significant changes to prior accounting practices," and separately promises a better exchange. This should be clearly established.

The utilities commission should also exercise more oversight in reviewing the financials. Were it not for a Duke Power whistleblower, its accounting may well have gone unnoticed. The commission shouldn't have to rely on outsiders to do its job.

Jo Anne Sanford, chair of the N.C. Utilities Commission, says "we're looking at the adequacy of our reviews" but notes that with thousands of ledger items in a utility's books, "we can't look at all entries." That's a weakness that appears easily exploitable, and with limited state funding, it's not easily remedied. That's not a source of comfort.

Duke Whistleblower Vindicated

The Charlotte Observer – by Ted Reed - October 25, 2002

Analyst who reported profit understatement says it hurt his career

(10/24/02) - Duke whistleblower Barron Stone read about the audit that vindicated him just after noon Tuesday, staring at a computer terminal in his cubicle. There were no pats on the back, no high-fives, no words of congratulations from anybody.

The audit, which found that Duke Power Co. underreported $124 million in profits, came three and a half years after Stone first questioned a supervisor about accounting practices. Duke acknowledged accounting errors but denies intentional wrongdoing.

Tuesday evening, as Stone walked from his Church Street office to a parking lot, a Duke employee he knew approached. "He said he had been thinking about me and what I went through," Stone said. "He said he hoped things worked out for the best."

So far, Stone said, things have worked out about as well as could be expected. "I didn't go into this thinking I would get any benefit," said the 39-year-old Rock Hill resident, a Duke employee since 1985. "I went into it full-well expecting Duke would do pretty much what it's done."

Stone's work situation has changed for the worse since he alerted regulators to Duke's accounting errors.

In February he was moved, against his will, from one senior analyst's job in the controller's office to another. He says his prior job put him on a better career path: It was in a sensitive area, evaluating pending acquisitions and the company's future plans, including earnings projections.

And although he had occupied an office since 1992, he was moved to a cubicle in April.

Stone said he is "exploring all legal actions," to contest what he considers retaliatory actions by Duke. But he intends to continue working at Duke until he retires.

Duke spokesman Tom Williams said Stone's previous job was eliminated in an overhaul of the controller's office that involved moving 13 people. He said the executive overseeing the change knew nothing of Stone's identity as a whistleblower.

As for Stone's future at Duke, Williams said: "He will be treated just like any other employee, whose future is based on their job performance and on economic and market conditions."

If Stone's career has suffered as a result of his whistleblowing, his situation is not unusual, said James Fisher, director of Emerson Center for Business Ethics at St. Louis University.

"The whistleblower may in some sense feel vindicated, but he knows that he cannot be restored to his prior situation," said Fisher, who has studied dozens of whistleblower cases.

Being a whistleblower "is a sobering kind of experience," Fisher said. "In some ways it is in line with the ancient philosophy of stoicism: the way of things is difficult, and to know that is to make one wiser, with a truer understanding of the way the world works."

The audit by accountant Grant Thornton said Duke underreported $124 million in profits between 1998 and 2000, fearing full disclosure could lead to rate cuts.

Two-thirds of the underreporting relates to Duke's 1998 decision to reverse its method for reporting insurance rebates on its nuclear power plants. Instead of crediting them to regulated accounts, it put them in unregulated accounts, which are not considered in setting rates.

Stone began challenging the change around January 1999. He first went to his supervisor, who "offered no real explanation," he said. Resigned at first, he began agonizing in mid-1999 about how to respond to a situation he believed was morally wrong.

Stone consulted with an S.C. utilities commissioner, accounting organizations and an attorney. He looked up "whistleblower" on Yahoo, researching legal protections. After adding everything up, he decided the harm from going public outweighed any potential benefit.

In 2000, Duke repeated its method of accounting for the rebate. Stone complained again to a manager, who "shrugged it off," he said. But a confidant advised him not to pursue the matter.

In 2001, when the 2000 rebate was handled the same way, Stone finally decided to go to regulators. He called Gary Walsh, executive director of the S.C. Public Service Commission. At first, he spoke anonymously. Then the two arranged to meet.

Stone tried again to resolve the problem in-house. He called Duke's ethics line and was told to expect a response in seven days. He called three days later and was given the number of an attorney hired by Duke to investigate his complaint. Despite repeated calls, he said, he couldn't reach the attorney until after a formal investigation was under way.

Stone said he would advise companies dealing with whistleblowers to "be attentive to what employees are telling you: be able to explain and defend your position." And if a company has an ethics line, Stone said, its responses should be prompt.

Williams said Duke is proud of the way its ethics process worked. "We immediately looked into his concerns and contacted the utilities commissions" in both Carolinas, he said. A report requested by the commissions was completed in 10 days. Later, the two commissions called for the audit.

"The report basically confirms the allegations the whistleblower brought to me in the summer of last year," Walsh said. "But Grant Thornton also expanded on that to include other issues as well."

Stone said he is pleased with the response of Duke employees since he went public in an Observer story in August. About 100 people have contacted him in person or through e-mails and phone calls, he said, noting: "The message has been that they thought I did the right thing."

Asked if the ordeal was worth it, Stone said he would "absolutely" do the same thing again. "It's been somewhat of a strain, professionally more so than personally," he said. "But I sleep well at night."

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