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Audit   1 - Duke Energy Employee Advocate

Duke Power Audit - Page 8

"It is difficult to get a man to understand something when his salary depends upon his not understanding it." - Upton Sinclair

Whistleblower Awarded $1.5 Million

Employee Advocate – – September 9, 2005

The Honolulu Advertiser reported that a federal jury ordered the City of Honolulu to pay a whistleblower $1.5 million in damages. Tom Sun said the city retaliated against him for complaining about the hazards of asbestos and lead paint. He complained in 1997 of public health violations.

An interesting point is that Tom Sun was never fired or suspended from his job. He charged retaliation because he was denied leave, isolated, not assigned duties, and his supervisor wrote him up.

Tom Sun filed the federal lawsuit in 2000, charging the city violated his First Amendment rights and the state’s Whistleblowers Protection Act.

Whistleblowing for Fun and Profit

Duke Shielded From Rate Review

Employee Advocate – – March 8, 2005

In 2002, as Duke Power was being investigated for under-reporting earnings, an environmental lawsuit was also pending. Yesterday, in Carolina Journal, Paul Chesser provided insight into Duke’s environmental legal maneuvering.

The Environmental Protection Agency (EPA) filed a lawsuit against Duke for alleged emissions violations at seven coal-fired power plants. Duke entered into settlement negotiations with the EPA, but broke off the negotiations.

Bruce Buckheit, former EPA director of the Air Enforcement Division, said “We explained the details of what EPA and the Department of Justice were looking for, then Duke broke off settlement discussions while they looked into the Smokestacks legislation.”

The Smokestacks legislation provided Duke and Progress Energy with a five-year “rate freeze.” One may think that a rate freeze is to protect customers from price gouging. But this rate freeze actually protected the utilities from being forced to reduce rates. Duke and Progress Energy were spared a rate review by the N.C. Utilities Commission. Pollution controls were funded and excessive earnings were preserved.

Sharon Miller, of the Carolina Utility Customers Association, said “We believe that the goal of the Clean Smokestacks Act should be to protect the citizens and the environment, not the excessive profits of Duke.”

Documents obtained by Carolina Journal suggest the Smokestacks bill was driven more by political considerations than a real desire to improve air quality in the state.

On May 1, 2001, George Everett, Duke’s vice president for environmental and public policy, sent e-mail about the bill’s weakness. In it he stated: “The assessments of the impacts of our emissions included in the Clean Smokestacks Plan do not have a sound basis in my opinion.”

There were complaints that North Carolina customers would have to pay the total costs of the emissions controls and the South Carolina and wholesale customers would pay nothing.

The Smokestacks bill passed a month before the Duke under-reporting audit was completed in October 2002. The auditing firm, Grant Thornton, determined that Duke underreported $124 million in profits during 1998-2000. The Carolina Utility Customers Association (CUCA) appealed to the N.C. Utilities Commission to review Duke’s rates. But it was too late. The Smokestacks Act rate freeze shielded Duke from a rate review.

U.S. District Judge Frank W. Bullock Jr. ruled contrary to other courts and in Duke’s favor in the EPA lawsuit. The case is being appealed.

Duke Customers Seeks Bigger Credits

Duke Customers Appeal Deal

Whistleblowing for Fun and Profit

Employee Advocate – – November 30, 2004

Quorum Health Group Inc. attempted to crush an accountant who objected to phony bookkeeping, according to the Associated Press. Jim Alderson was fired by the hospital in 1990. Quorum no doubt thought that Mr. Alderson would slink away into oblivion and despair. The corporation later found that it had unwittingly roused a sleeping bear.

Mr. Alderson did not take too kindly to being fired for having more integrity than the corporation. He sued for wrongful termination. As he pursued his lawsuit he uncovered more and more unsavory business practices, including Medicare fraud. His lawsuit became False Claims lawsuits against Columbia/HCA and Quorum Health Group Inc.

The United States government thanked Mr. Alderson for helping recover $1.7 billion in Medicare fraud and gave him a few dollars for his trouble. Mr. Alderson split $100 million with whistle blower John Schilling, a former Columbia/HCA employee. He also received about $20 million in another settlement. Hey, whey you are on a roll, you are on a roll!

Mr. Alderson said "You risk everything when you do it."

Infinite risk is always acceptable when one knows that he is doing the right thing. The greater the risk, the greater the potential reward. And money is not always the greatest reward. Satisfaction can be priceless!

Duke Whistleblower Vindicated

Tricky Rate Cuts

Employee Advocate – – September 7, 2004

Last month, the Charlotte Business Journal reported that Duke Power was cutting rates. But the rate cut was only for South Carolina. In fact, the rate cut applied to only one industrial customer in South Carolina. Duke is trying to keep all the details hidden from the public.

Duke Cuts Rates?

The Journal reported that Duke has proposed more rate cuts in South Carolina. These rate cuts will not apply to only one customer. But they will apply only to industrial customers.

Duke was forced to make the last rate reduction by the S.C. Public Service Commission (PSC). Duke had exceeded its allowable earnings rate.

How many customers are affected? Duke will not say. If you think it’s hard to get a straight answer out of Duke, just ask what happened to your promised retirement benefits.

Randy Watts, of the PSC, said "I don't recall ever seeing such a filing specifically for a particular class."

Duke does not want the PSC to get too involved in this evolution. Duke wants the PSC to approve the proposal and then go away, "without notice and hearing."

The issue of rates is not going smoothly in North Carolina. The Carolina Utility Customers Association (CUCA) filed a lawsuit to have Duke’s rates formally reviewed by the N.C. Utilities Commission. The N.C. Supreme Court dismissed the suit last month.

CUCA charges that Duke profits have exceeded the allowed amount by hundreds of millions of dollars. CUCA further charges that Duke’s political influence ensures soft regulations.

Sharon Miller, CUCA executive director, said "While our current appeals options are exhausted, CUCA will continue to scrutinize Duke's earnings and press the NCUC to initiate a rate-case investigation upon further evidence that Duke continues to materially exceed allowed returns."

Duke excludes half of its earnings from bulk power sales to neighboring utilities. This is one tactic for reducing the reported rate of return. It is a method that the North Carolina Attorney General does not approve of.

N.C. Attorney General Roy Cooper feels all profits should be part of Duke's regulated earnings because the power is generated in plants financed by ratepayers. Duke also plans the same deal for South Carolina.

Hiding profits through tricky accounting has bitten Duke before. Duke Power was found to have underreported $124 million in profits from 1998 to 2000. This resulted in settlements in North and South Carolina.

Duke Understated Profits

Duke to Provide Less Information

Employee Advocate – – May 31, 2004

Stan Choe reported in The Charlotte Observer that industrial customers have accused Duke Power of trying to wriggle out of a possible rate reduction. Duke decided to no longer include bulk sales of power to neighboring and out-of-state utilities in its earnings reports to state regulators.

Is it a good idea for Duke to provide regulators with less information, considering the recent compliance problems? Only last year, the South Carolina regulator forced Duke to return $30 million dollars to ratepayers, because of exceeding the allowed rate of return.

Duke Takes a Hit in South Carolina

In 2002, Duke made settlements in North and South Carolina for understating profits between 1998 and 2001.

NC Regulators Approve Duke Settlement

Grand Jury Investigation Closed

Employee Advocate – – March 11, 2004

The Department of Justice closed the grand jury investigation of Duke Power Company, according to today's company press release.

The grand jury reviewed the 2002 audit of Duke Power by the North Carolina and South Carolina utility commissions. The audit investigated allegations of underreporting regulated profits reporting from 1998 to 2000.

The audit found: "Duke undertook a coordinated effort to identify and record (entries) which would lower Duke's net utility operating income reported to the state commissions."

Duke Understated Profits

The press release stated: “The company fully cooperated with the investigation.” But the article, linked below, details the onerous restrictions that Duke tried to place on the auditor.

Duke Power Investigation

Federal Probe of Duke Continues

Employee Advocate – – December 29, 2003

The Charlotte Observer reported that federal prosecutors may reach a decision with weeks on whether to indite Duke Power. The FBI and federal prosecutors have been probing Duke’s accounting practices for a year.

Thousands of documents have been obtained and Duke employees have been questioned in the investigation, which includes possible mail fraud and wire fraud.

The federal grand jury subpoena stemmed from an investigation by regulators into underreporting regulated profits allegations. Independent auditing firm, Grant Thornton, found that Duke Power did underreport $124 million in regulated profits over three years. Duke made a settlement with regulators in North and South Carolina, which included giving customers $25 million in credits.

This year, Duke Power was ordered to return $30 million to customers by the S.C. Public Service Commission. This was because of overearnigs in 2002-03.

Duke Takes a Hit in South Carolina – by Melissa Davis - September 10, 2003

The brightest spot on Duke's earnings report is about to get dimmer.

Beginning next month, Duke must cut electricity rates for customers in its second-largest market. In a unanimous decision on Tuesday, the Public Service Commission of South Carolina effectively shaved $30 million from Duke's bottom line in the 12 months going forward. The ruling comes less than two months after South Carolina regulators discovered that Duke had significantly exceeded its so-called allowed rate of return earlier this year.

"I'd characterize this as a prospective rate reduction, because that's what it is," said Gary Walsh, executive director of the commission. "Beginning Oct. 1, there will be a new, lower rate for all of South Carolina."

Duke had hoped to dodge a rate cut by securing an accounting order that would allow the company to book $50 million worth of long-term financing costs in a single quarter and, thus, lower its regulated profits to acceptable levels. But the commission declined even to meet the company halfway. Instead, the regulators permitted Duke to accelerate only $16 million of debt costs and return nearly twice that amount to customers through a rate cut going forward. Walsh said the commission will continue to monitor Duke's profits to make sure they do not exceed maximum levels again.

Duke shares slipped 20 cents to $17.40 before news of the ruling on Tuesday.

Hitting the Ceiling

Duke Power -- which ranks as the company's most profitable division -- relies on South Carolina for roughly 25%, or $400 million, of its annual earnings before interest and taxes. So the rate cut should reduce South Carolina profits by around 10% in the coming year.

"We expect it to [cost] $46 million before taxes," said Duke spokesman Terry Francisco. "But even with this, we still expect to hit the low end of our [full-year] $1.35 to $1.60 range."

On a per-share basis, the earnings hit should be a modest 3 cents annually. But the company was already struggling to meet earnings targets even before the rate cut. And excess utility profits -- like those that pleased Wall Street in the first quarter -- may not be allowed to help out.

"This sends a clear message to Duke that there's a ceiling on regulated earnings," said F. Barron Stone, an internal accountant who blew the whistle on the company for understating its regulated profits in the past. "They cannot completely pay the mortgage on their bad investments in unregulated businesses on the backs of North and South Carolina ratepayers. ... If they earn too much, they're going to have to give it back."

Stone fully expects Duke to keep bumping up against -- and even through -- its regulated profit ceiling going forward. He says the company significantly exceeded its allowed return at a time when the Carolina economy was suffering and some of its regulated power plants were under maintenance. So he sees Duke's regulated profits going up, not down, in the future.

Late Charges

In the meantime, he points to one big reason -- beyond those offered by Duke -- for the sudden jump in regulated profits. Thus far, Duke has credited a cold snap and heightened demand for its cheap electricity for the surge in power earnings. But Stone says the company is benefiting even more from the absence of a charge that's forever gone away.

In the final quarter of 1999, Duke took an $800 million hit to earnings when it established a reserve for potential asbestos claims. But instead of reporting the same one-time hit to regulators, the company secured permission to amortize the charge over a three-year period that was scheduled to end around the time the Carolinas would deregulate their electric utility industries. As a result of that accounting order, Stone says, Duke was able to consistently report regulated profits that fell beneath the cap established in South Carolina.

Duke's asbestos payments ultimately ended last year without the deregulated power industry -- and the uncapped utility profits -- many had expected.

On Tuesday, Duke described the asbestos arrangement as beneficial to both the company and the regulators because it provided the stable earnings reports that both parties prefer. But Duke has come back and asked the same regulators for permission to take a one-time hit, accelerating rather than delaying payments, so that it can eliminate excess profits.

In both cases, Stone says, the company sought accounting changes that could shield it from a rate cut. Moreover, he adds, Duke sought permission to amortize the asbestos payments only after it saw that secret accounting changes -- like those criticized in an independent audit by Grant Thornton -- would not be enough to keep regulated profits under allowable limits going forward.

Even today, Duke continues to take deliberate steps to protect its power rates. For example, the company recently indicated that it will make little effort to cut expenses in its regulated businesses despite pledges to slash costs by more than $100 million companywide.

"One of the challenges that we do have is where we are in the Carolinas with the earnings we have approaching their allowed return on equity," Duke President Fred Fowler told analysts this month. "That does limit us somewhat on cost-cutting in the power company. ... But [cutting] will be across all the other businesses."

Stone, for one, questions Duke's priorities.

"This is the fundamental problem with having a company with large regulated and unregulated assets," he said. "There is absolutely no incentive for the management of this company to look for savings and efficiencies in the regulated electric company. ... From the company's perspective, shareholders are going to always come first."

Carolina Critics

And customers in both Carolinas are complaining. In Tuesday's meeting, South Carolina's consumer advocate group recommended against the $50 million accounting change and instead requested a full-blown rate review.

"Duke's rates and rate structures have not been thoroughly examined since its last rate case 12 years ago," said group representative Elliott Elam. "Therefore, the Consumer Advocate requests that the commission issue a notice of investigation of Duke's electric rates in South Carolina, which would allow interested parties to intervene. ... This investigation should not be limited to a staff examination closed to public view and participation."

Duke customers have been unhappy since an independent audit, initiated by Grant Thornton after Stone blew the whistle, turned up evidence that the company had been intentionally understating its regulated profits to authorities for years. The company paid a modest sum to settle with the two states, but federal authorities have since taken over with a criminal probe that could turn up indictments. Meanwhile, customers in Duke's largest market of North Carolina -- where Duke Power generates the bulk of its profits -- are still calling for justice.

Sharon Miller, executive director of the Carolina Utility Customers Association, refers to Duke's $25 million settlement with state authorities as "minuscule." Like the South Carolina watchdog organization, Miller's group is calling for the first full-blown review of Duke's rates in more than a decade. And Miller is hoping that South Carolina's latest move might finally push North Carolina regulators to act.

"We believe that the Grant Thornton report, on its own, should have given the commission enough concern to initiate a rate case," Miller said. "Perhaps this second event in South Carolina will give the commission enough cause."

Duke says its North Carolina rates are protected by a seven-year rate freeze implemented last year. But Miller disagrees.

"There is language in that bill that gives the commission leeway to initiate a rate case if circumstances dictate it," she said. "It doesn't prohibit the commission from carrying out its mandate to protect ratepayers." For now, Miller is applauding the developments in her neighboring state.

"I certainly commend the South Carolina commission," she said. "I would hope that the North Carolina commission would do the same thing."

Duke Power Audit - Page 7