Duke Energy review beyond commission's scope?

07/17/2012 12:00 AM

07/19/2012 9:03 AM

As the N.C. Utilities Commission’s investigation of Duke Energy enters its second week, the six political appointees who regulate the state’s electric utilities are expected to bring in outside investigators.

The complexity of the Duke Energy probe is beyond the scope of the utilities commission’s routine work, which involves issuing certificates and reviewing rates of ferry operators, moving companies and utility companies.

“They don’t have expertise in investigations of corporate malfeasance,” said Robert Gruber, who directs the state’s Public Staff consumer advocacy agency. “Aggressive cross-examination is not something they are accustomed to doing.”

The last time the commission turned to outside auditors – a decade ago in a case that also involved Duke – the review took 10 months, resulted in a $25 million order against the company for fudging its books, and led to a lengthy federal probe.

The current Duke investigation is doubly complicated for its tangle of personal relationships. Many of the commissioners and utility executives came up through North Carolina’s elite ranks in business and politics, worked together in past years, and maintain professional and personal connections. The former chair of the utilities commission, Jo Anne Sanford, is now billing her hours for legal services to Duke, while the current commission chairman, Edward Finley Jr., used to practice law with Duke’s ousted chief executive, Bill Johnson.

On Thursday, Johnson will appear in Raleigh to testify about his abrupt July 2 dismissal, which took place mere hours after Duke consummated its merger with Raleigh-based Progress Energy. The North Carolina commission had approved the $32 billion merger just days before, on the understanding that Johnson, then chief executive at Progress, would lead the combined company.

Johnson has been directed to give his side of the story after Duke CEO Jim Rogers testified last week that Duke’s board lost faith in Johnson. Afterward, some Progress employees and members of the public grumbled that the commissioners gave Rogers a televised platform to malign Johnson, with a tightly scripted version of events clearly intended to absolve the company.

“It’s difficult, too, for the commission to be both the judge and the prosecutor,” said Gruber, who has led the Public Staff for three decades.

He predicted the commission would soon retain a high-powered law firm with experience in investigating corporate governance.

Commission chairman Finley and general counsel Sam Watson did not return phone calls and emails.

Two Duke board members who came from the Progress board as part of the merger and voted against Johnson’s ouster will also testify Thursday. Then on Friday, the commission will hear from a pair of Duke board members who were involved in Johnson’s removal.

Some online comments have noted that the commission seems overly concerned with keeping jobs in Raleigh rather than helping electricity customers. Much of the questioning of Rogers focused on how the capital city would be affected by the departure of Johnson, whose leadership was seen as a measure of protection for the Triangle.

Some point to a cozy relationship between Progress executives, the commission and state politicians as a problem.

John McArthur, one of three executives who quit Duke after Johnson’s dismissal, is a former senior adviser to former Gov. Mike Easley and used to practice at Hunton & Williams, the same firm that included Johnson and Finley, both of whom specialized in representing utility clients.

McArthur has also worked for the N.C. Attorney General’s office, supervising utilities and other matters. The N.C. Attorney General has opened his own investigation into Johnson’s dismissal.

Johnson’s lawyer, Wade Smith, is a law partner with the son of Utilities Commissioner Lucy Allen, who will weigh evidence on Johnson’s removal.

‘A swirling mess’

All six commissioners were appointed by Easley or Gov. Bev Perdue. They have held elected office or appointments to various state commissions, panels and agencies.

“It’s such a swirling mess,” said Jim Warren, director of N.C. Waste Awareness and Reduction Network, a Durham group that opposed the merger. “The one thing that is clear is that it works against the public and in favor of the utilities.”

Support for Johnson is hardly universal. Some environmental activists and economic developers prefer doing business with Duke, and view Rogers as a bold innovator who is raising Charlotte’s profile.

“Duke should be applauded for making this courageous move,” R.D. Broome, of Broome Consulting & Development in Charlotte, emailed the commission. “Ratepayers and communities will be much better off without the Progress executive team in charge.”

In approving the Progress-Duke merger, the commission weighed the benefits and the costs, and the costs included eliminating a Fortune 500 corporate headquarters in Raleigh and erasing 1,860 jobs from the economy.

Ultimately the commission decided that the benefits were worth it but only after Duke agreed to a number of conditions, including putting Johnson at the helm, a move that would help ensure that Duke stuck to its agreement to maintain a “significant presence” in Raleigh.

Such protectionist conditions are not unusual in utility merger deals. A merger between Northeast Utilities and Nstar, approved earlier this year and forming one of the nation’s biggest utilities, limited job losses to 350 through attrition and retirements, and kept dual headquarters in Hartford, Conn., and Boston, Mass., among other conditions.

Gruber said the commission’s job isn’t to micromanage corporate affairs, but to protect the public.

“You have a monopoly on these services and in exchange you have to abide by some regulation,” Gruber said. “When you say you want to merge or do something significant and have to get approval of the commission, you can’t just blow them off.”

The utilities commission has its own staff of lawyers, accountants and engineers. It brings in outside investigators only for the most serious and complex matters, and under state law can bill the company that’s investigated for the work.

In 2001, the commission – then made up of different appointees – and the S.C. Public Service Commission hired Grant Thornton, a Chicago-based accounting firm , after receiving a tip from a whistleblower that Duke had committed accounting irregularities.

The auditors found that Duke underreported its profits over three years to keep the commission from reducing the company’s rates. As a regulated utility, Duke cannot exceed its allotted rate of return.

The commission’s investigation prompted the U.S. Attorney to conduct a 13-month probe of its own. The feds found no criminal wrongdoing.

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