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Duke Energy’s Corporate Incompetence – or Fraud? — News Release from NC WARN

News coverage of the hearings

NC WARN’s case against Duke Energy-regulators’ secret deal-making on rates

DURHAM, NC – A watchdog group charged today that either Duke Energy’s accountants are grossly incompetent or the corporation has deliberately sought to improperly charge North Carolina customers hundreds of millions of dollars each year. NC WARN also said it will argue at evidentiary hearings beginning today that the NC Utilities Commission’s Public Staff – instead of penalizing Duke after catching millions in improper charges – gave $48 million of that money back to the utility, along with another $100-200 million in excess, guaranteed annual profits. The group says those give-backs were made during backroom negotiations in order to settle the case and avoid full-blown hearings.

NC WARN will press the NC Utilities Commission to penalize Duke millions of dollars for the attempted overcharges. Among the overcharges are $13 million in costs from last year’s merger with Progress Energy that had been explicitly forbidden by the Commission. The group will also call on the Commission to order its Public Staff not to secretly negotiate deals in future utility cases.

The Public Staff contends the settlement is good for customers because the Staff caught most of Duke’s improper charges. But NC WARN said that hardly reduces the need for penalties. “If the cops make an arrest outside the bank, they take the money away … but the robber doesn’t get to go home for dinner with his family,” said Jim Warren, executive director of NC WARN, today.

In addition, NC WARN says Duke sought to charge NC customers nearly $100 million a year to pay for laid-off employees, vacant offices and other phantom expenses that Duke admits will not recur during future years covered by the rate increase.

NC WARN also argues that the proposed settlement would allow the utility to unfairly force small customers to pay $152 million more than they should each year for new power plants that serve Duke’s largest customers, and excess costs of power lines that should be paid for by larger customers. The watchdog group says this “rate-rigging scheme” is designed by Duke to perpetuate construction of unneeded and climate-wrecking power plants by offering rock-bottom rates to recruit large data centers, which use massive amounts of power while creating only a handful of jobs.

The improper charges are so voluminous (and Duke is still withholding data), NC WARN said it will make a strong case that Duke’s already rate-weary customers should receive a cut in rates instead of the increase being sought. Below is a look inside the sausage-making process that sets electricity rates for monopoly-captive North Carolina customers – a reversal of how rates are set in competitive markets.

OVERVIEW OF NC WARN’S CASE

1) DUKE ENERGY SOUGHT TO OVERCHARGE NC CUSTOMERS FOR $10s OF MILLIONS OF ANNUAL OPERATING EXPENSES

The attempted overcharges fall into three categories – and very few can be excused as differences in interpretation between honest parties. If approved, all these expenses (except the merger costs) would be locked in for annual customer-gouging until the next rate case. A few examples:

A) Expenses Duke apparently tried to slip past regulators, then conceded when caught:

The regulators called many of these Duke’s “errors,” all of which were in Duke’s favor. Many are the same bogus expenses Duke attempted in previous rate cases.

  • $13 million in one-time merger costs – buried within at least four different accounts
  • Over $1 million a year in corporate jet travel unrelated to NC electricity customers
  • $60 million a year in improper depreciation and taxes
  • $2 million a year in lobbying expenses

B) Expenses other monopoly-utility states disallow because they don’t benefit ratepayers:

  • $25 million per year in stock options for executives. NC WARN witness Bill Marcus emphasizes that such compensation creates an incentive for Duke executives to raise rates while cushioning shareholders from poor executive performance.
  • $1.5 million per year in directors and officers’ insurance
  • $2 million in annual trade association dues
  • $8 million a year that Duke seeks to charge households, small businesses and local governments for account representatives who service only large industrial and commercial customers. (Despite repeated requests, Duke refuses to divulge how much is spent wining and dining its largest customers.)

C) Political favors and more (NC customers were billed for 70% of these amounts; 30% to SC):

  • $621,000 a year to groups in affiliation with both major political parties
  • $250,000 a year for sponsorship of the Charlotte Bobcats basketball team
  • $2,700 a year for a former CEO’s country club dues
  • $62,000 a year to Washington charities, including “charity” dinners with politicians
  • $18,000 for four tickets to a posh Kennedy Center event

NC WARN’s complaint does not even address Duke’s exorbitant salaries and other gold-plated expenses passed along to monopoly-captive customers.

2) IS IT CORPORATE INCOMPETENCE OR FRAUD?

Is it plausible that the world’s largest corporate utility has an incompetent accounting department whose staff led senior executives to legally certify that its rate application is accurate? Or is Duke intentionally including the same unrecoverable expenses in every rate case in hopes it won’t get caught, or that it will create a higher starting point for negotiation with the Public Staff?

3) REGULATORS GAVE BACK MILLIONS TO CLOSE THE DEAL

The Commission’s Public Staff caught many of Duke’s attempted overcharges (NC WARN’s expert witness found others). But the Staff then gave back $48 million in sweeteners so Duke would close the deal: “The Stipulation includes a portion of these expenses for purposes of settlement (PS witness Fernald p. 10).”

In addition, the public staff agreed to set Duke’s guaranteed minimum profit (ROE, or return on equity) at a level $110 million higher than the upper range that the Staff’s own expert witness had argued for. Dr. Ben Johnson contended that market forces called for an ROE as low as 7.8% (other monopoly state regulators use federal bonds – currently around 3.5% – as a key factor, and Hawaii officials recently ordered an ROE to be set at 9.0%). But the public staff settled at 10.2%, based mainly on the NC commission having given that ROE to other NC utilities.

These give-backs challenge the legitimacy of the settlement: Both sides publicized an intense negotiation over specific expense reductions, then the public staff gave back millions in customers’ annual dollars in order to avert a full-blown, unprejudiced proceeding (while hiding the way they cinched the deal).

Such regulatory deal-making is an abuse of the people already being harmed by serial rate hikes.

4) DUKE HAS RIGGED ITS RATES AGAINST FAMILIES, SMALL BIZ & LOCAL GOVERNMENTS

Duke is using a rate-making system not allowed in many states because it allocates the costs of power plants based solely on how much electricity each customer class uses during the single hottest hour of the year. During that hour, small customer usage tends to be at its highest level of the year.

But Duke isn’t building plants for such “peak” periods. It’s building large plants needed full-time, especially by data centers and other customers that use high loads around the clock and throughout the year. Making small customers pay for new power plants needed mainly by giant users allows Duke to keep attracting low-jobs data centers (server farms), to keep driving up demand, to keep building power plants, and to keep raising rates on families, small businesses and others suffering from serial rate hikes.

NC WARN expert witness Bill Marcus calculates that a fair rate allocation – charging different customer groups based on which ones actually cause construction of new plants and distribution lines – would assign residential customers $152 million less each year than Duke proposed. Marcus’ fairer cost distribution would, on its own, reduce the rate increase for all small customer classes to nearly zero.

After vigorously opposing the “hottest hour” rate method for two decades, public staff management chose, without explanation, to support Duke’s “hottest hour” scheme in this rate case. And the staff’s internal expert on this issue has been silenced in this case.

5) ISN’T DUKE JUST WORKING THE REGULATORY SYSTEM?

In the proposed settlement, Duke agreed to drop its initial request of $446 million in additional annual revenue by more than half. While the Public Staff claims this proves their rigor, NC WARN calls it bogus horse-trading – the fourth time in four years the Staff has cut such a deal with Duke.

Each time, Duke walks away content with the proposed deal. Otherwise, it would never have given up over $200 million annually; if it deserved more, Duke would have fought for it in front of the Commission and the interveners.

NC WARN does agree, however, that a less rigorous public staff could allow Duke to bilk customers of even more millions each year.

Such corporate practices are disallowable in any other sector of the economy. If Duke Energy Carolinas had to compete for customers, it would keep operating expenses down and pass on the savings to customers in order to enhance its competitiveness.

As long as Duke is granted monopoly status, the NC Utilities Commission needs to assess heavy penalties so this corporate giant will stop trying to slip the same unallowable expenses past customers in each rate case. And the Commission must order the public staff to stop settling rate cases in backroom negotiations.

Selected news coverage of the Duke Energy rate hike evidentiary hearings:
Regulators Begin Hearings On Duke Rate Increase, WFAE
As regulators hear Duke rate case, advocacy groups cite corporate greed, News & Observer
2 from WNCN:
Duke Energy admits to more mistakes in rate hike case
Duke Energy faces accusations of overcharging customers
4 from the Charlotte Business Journal:
Group frustrated as Duke Energy rate hike hearing ends
Four agendas at play in Duke Energy’s NC rate hearing
Duke Energy witnesses defend propriety of most customer charges
NC WARN: Duke Energy should pay penalty for improper charges
4 from the Charlotte Observer:
Duke Energy defends rate charges, settlement
Duke Energy critic disputes rate charges
Duke Energy’s profit margin is questioned
Duke cites errors in rate filing

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