RALEIGH—Despite strong evidence that Duke Energy intentionally fudged its accounting in order to preserve its level of earnings, the North Carolina Utilities Commission agreed to allow the utility to freeze its rates for five years through the Clean Smokestacks Act.
Barron Stone, a Duke Power accountant, reported on numerous occasions to his supervisor, and to his employer’s ethics line, that the company was unethically adjusting its accounting to show lower earnings than it really had. Duke is allowed only a 12.5 percent return on equity in North Carolina, and a 12.25 percent return in South Carolina.
Stone finally got the attention of the South Carolina Public Service Commission in mid-July 2001, and subsequently the North Carolina Utilities Commission. Both agencies required an audit of Duke’s accounting practices, which began in January 2002.
Stone first reported his findings to then-SCPSC Executive Director Gary Walsh, who started as an auditor himself for the agency in the 1970s. Walsh said Stone gave to him memos from Duke executives that explained what needed to be done to accounting entries in order to maintain their higher earnings ratio.
He said he knew what the auditors were likely to find, and informed two officials at the North Carolina Utilities Commission (NCUC) about Duke’s problems.
“Certainly (NCUC general counsel Robert) Bennink, (operations director) Don Hoover and I, when I met with them, I expressed to them what I felt the documents demonstrated,” Walsh said.
Auditors from accounting firm Grant Thornton LLP, after wrangling with Duke for access to documents, determined that the company hid $124 million in excessive earnings by moving money from its regulated business to its unregulated business. Grant Thornton was hired jointly by both states’ utility regulatory agencies to perform the audit. Duke agreed to pay its customers in both states $25 million as part of a settlement with both utilities commissions.
The audit process began in January 2002, after the Clean Smokestacks bill had been left in limbo in the North Carolina House. Complicating the negotiations of the bill was the fact that the Carolina Utility Customers Association had wanted the Utilities Commission to initiate a general rate case review for Duke, because they believed the utility had repeatedly exceeded its 12.5 percent allowed rate of return on its equity. But the legislation was revived again in spring 2002, and signed into law by Gov. Mike Easley June 20.
According to Walsh, the North Carolina Utilities Commission staff understood the seriousness of the Duke violations, and was aware of difficulties Grant Thornton had in obtaining information from Duke.
Carolina Journal asked what the nature and content of the N.C. Utilities Commission officials’ discussions with Thornton’s auditors was prior to the Smokestacks bill’s passage. The commissioners’ responses were vague. Commissioner Sam Ervin IV responded by reciting official documents and reports issued publicly by the commission, without revealing what discussions Utilities Commission officials had with auditors.
CJ also asked N.C. Utilities Commission chairwoman Jo Anne Sanford, Ervin, and Bennink in an e-mail how much the Utilities Commission understood what the findings of the audit would be before the bill’s passage.
“Not only did we not know what the findings would be before the field work was done and after the bill was passed,” Sanford said, “I’d be hard-pressed to figure out how even [Grant Thornton] would have known, since they hadn’t finished their research.”
But Walsh said he and Bennink had bi-weekly discussions with Thornton’s auditors throughout the entire process, and even more frequently as the audit wound down. He said the auditors updated him and Bennink on problems they were running into, but did not divulge their conclusions until their study was complete in July.
But Walsh said he knew the information provided by Stone was damning for Duke. After the audit report was released, though, Duke vehemently denied intentional wrongdoing. A federal investigation produced no indictments.
“I had been in the business, (so) I had my own views of the documents that I had in my hands,” Walsh said. “[Grant Thornton’s] audit confirmed in my mind how I took the documents I had in my hands.”
Part 1: Smokestacks Bill Helped Utilities
Part 2: Smokestacks Built on Dubious Data
Part 3: Duke Doubted Smokestacks’ Merits
Paul Chesser is associate editor of Carolina Journal. Contact him at [email protected].