Duke Power Co. Confirms Criminal ProbeFeb 19, 2003 | AP
An accounting controversy in which Duke Power Co. was accused of underreporting profits in North and South Carolina has become a federal criminal probe, the company confirmed.
Duke Power said it received a subpoena Friday from a federal grand jury seeking documents related to last year's audit of the utility's accounting between 1998 and 2000.
The audit, conducted by Grant Thornton LLP at the request of regulators from North Carolina and South Carolina, concluded that Charlotte-based Duke Power devised a plan to underreport earnings by nearly $124 million during the three-year period.
Last year, Duke Power paid a $25 million settlement to the two states. The settlement included no admission of intentional wrongdoing; the company has said only that it made some accounting errors.
"Now, it's being looked at at the federal level," Duke spokesman Tom Williams said Tuesday. "We're going to be fully cooperating. But having said that, we're going to fully defend our employees and our company if we have to."
Both U.S. Attorney Bob Conrad Jr. and the head of the North Carolina operations for the FBI, Chris Swecker, declined to comment Tuesday.
Gary Walsh, executive director of South Carolina's Public Service Commission, said he was interviewed by FBI agents on Jan. 31. He said he spent several hours detailing the accounting irregularities documented in the Grant Thornton audit.
The possibility that Duke intended to underreport its profits, "made it a criminal case, that's what I was told," Walsh said Tuesday.
"My view from the very beginning was that in fact Duke Power did implement a plan to ensure that they did not report earnings to the South Carolina Commission that were in excess of what was authorized," Walsh said. "In the information that I reviewed, they went so far as to calculate how many dollars of adjustment they had to make in order to insure they did not file in excess."
Jo Anne Sanford, head of the North Carolina Utilities Commission, declined to comment on the federal investigation, saying the commission has concluded its proceedings on the issue.
Shares in Duke Power's parent, Duke Energy, rose 28 cents to close at $14.43 each in Tuesday trading on the New York Stock Exchange.
Concerns about Duke's accounting practices were first raised by Duke accountant Barron Stone, who contacted South Carolina regulators in 2001. He said Duke excluded refunds it received from nuclear-plant insurance and included executive compensation and other costs that should have been charged to shareholders.
As a public utility, Duke Power's income is capped by regulators. If profits rise above a set return level, the states can reduce consumer rates. Duke is allowed a 12.25 percent return in South Carolina and a 12.5 percent return in North Carolina.
The bulk of the underreported $124 million involved $84 million in insurance rebates from Duke's nuclear power plants. In 1998, the company stopped including the rebates in utility accounts, effectively reducing its regulated returns.
In an audit released last October, Boston-based Grant Thornton concluded that "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 has disputed the "tone and presentation" of the Grant Thornton report, arguing that the company did not intend to mislead state regulators. "There are 'expert opinions' on both sides of complex issues, particularly the issue of nuclear insurance distributions," the company said in a response to the Grant Thornton report.
"The main reason why we settled is that we acknowledged we should have had better communications with the commissions, particularly when we made the (1998) change around nuclear insurance distribution," Williams said Tuesday. "We should have talked with the commissions."