Duke

(DUK) - Get Report

hasfound a new way to solve its "earnings problem."

In recent quarters, Duke Power -- the company's big utility division --has exceeded its allowed rate of return in its core North Carolina and SouthCarolina markets. Previously, the company has been accused of downplayingits utility profits to keep its electricity rates intact.

But now it is simply planning to subtract certain wholesale powerprofits from its regulated earnings. As a result, critics say, Duke'sutility earnings will be "significantly understated," thus diminishing thethreat of a rate cut that could hurt the company's overall profits.

To be fair, Duke is offering to pocket just half of the wholesaleprofits and then use the rest for local economic improvements that couldinclude a 2% rate cut for industrial consumers. Already, Duke says, thecompany's electricity prices are 20% lower than the national average. Butthe company now plans to become more competitive by employing an"out-of-the-box" strategy to help big power customers who have been hammeredby the tough Carolina economy.

Still, some of those very customers are now crying foul. The CarolinaUtility Customers Association, also known as CUCA -- suspicious of Duke'stactics for years -- claims that Duke is, once again, using accountingtricks in an attempt to reward shareholders at ratepayers' expense.

"The

bulk power marketing sales are made fromgenerating plants that are included in Duke's North Carolina jurisdictionalrate base and paid for by North Carolina ratepayers," the association arguedin a petition to the North Carolina Utilities Commission on Friday. "If Dukewere to exclude BPM revenue from North Carolina jurisdictional regulatedearnings and allocate the profits derived from BPM sales to itsshareholders, Duke's ratepayers, who are already paying grossly excessiverates, would effectively be providing a massive subsidy to Duke'sshareholders."

Tom Williams, a spokesman for Duke Power, insiststhat the change will benefit the company and its customers alike. He pointsout that neither the North Carolina attorney general nor the utilitycommission staff opposes the strategy. And he says that plenty of customers-- including big industrial users -- are welcoming the deal.

"We feel very, very good about it," Williams said. And "we've made the

reporting change -- period."

Duke's stock, up 30 cents to $19.88 on Monday, failed to register thebrewing controversy.

Heated Debate

In the background however, CUCA has called for the utility commission toblock Duke's accounting change and launch a full-blown review of thecompany's books. But it remains unclear whether Duke even needs regulatorypermission to make the switch in its bookkeeping.

The company has portrayed its decision to include BPM profits in pastreports as merely voluntary. It now plans to change its reporting practicesin both of its major markets. The profit-sharing and rate-reductionagreements would then take effect 60 days after their official approval.

In the meantime, CUCA is shouting. The association complains that Dukerevealed its accounting change in a single sentence of a recent applicationthat instead highlighted the company's plans to use half of its BPM profitsfor special relief programs, the community college fund and a modest ratecut. For its part, however, Duke insists that it met with CUCA several timesprior to its official application to regulators and that the change was notcarried out "in any surprise fashion."

Regardless, CUCA was quick to pounce.

"On the surface, Duke's proposal ... appears to be a laudable plan thatwill benefit all customers," the association stated. But "CUCA maintainsthat Duke customers shouldn't be tempted to buy into this."

The group instead believes that utility customers should receive a ratecut of up to 20%. It says that Duke has "substantially and persistently"exceeded its allowed return in recent quarters and is now looking for waysto dodge a justifiable rate reduction.

Government leaders did note some weak spots inDuke's proposal. The North Carolina attorney general said that a mere halfof wholesale power revenue "is a low share for ratepayers" to receive underthe profit-sharing arrangement. But he will not oppose the measure, he said,because it offers a voluntary rate cut -- during a rate freeze that extendsthrough 2007 -- that is better than no cut at all. Similarly, the utilitycommission staff has withheld its own opposition to the proposal even thoughit "does not agree with this reporting change."

The commission staff just last year requested, and received, Duke'sagreement to start including the wholesale profits in its regulatedearnings. But the company has now decided to stop that reporting practice,Williams said, because "it distorts our

return on equitycalculations."

Fine and Dandy

CUCA has long questioned Duke's numbers anyway. Last week, the groupreminded the utility commission that Duke has already been fined for itsaccounting practices in the past, after an independent audit by GrantThornton, and urged the regulators to protect consumers against any futureabuses.

"The commission announced in response to the findings of the GrantThornton audit that the commission 'must act to deter any similar conduct

by Duke in the future,'" CUCA stated. "Duke's announcedunilateral exclusion of BPM revenue from its reported North Carolinajurisdictional regulated earnings is particularly egregious in light of thefact that this type of earnings manipulation conduct was only recentlyreprimanded."

Duke considers CUCA's comments "very inflammatory and ... way off base,"Williams says. The company has blamed the past accounting scandal on errors,rather than fraud, and it was essentially cleared of criminal wrongdoing ina federal probe that followed the Thornton report.

Looking ahead, Duke says its BPM profits will still be disclosed toregulators -- although excluded from ROE figures - and could be studied onceagain under any rate review.

"People will be able to see" the BPM profits, Williams stressed. "Sowe're not hiding anything.

Regardless, CUCA is now urging the utility commission to launch openhearings ahead of any accounting changes "given Duke's well-establishedhistory of accounting manipulations." It warns that lack of action on behalfof regulators could lead other utilities, including

Dominion

(D) - Get Report

and

Progress Energy

(PGN)

, to start excludingwholesale profits from their regulated earnings as well. It also cautionedthat Duke's accounting change, once implemented, would be difficult to undo.

The group is now waiting for the commission to decide whether it willin fact intervene and host the requested hearings.

"We call upon the utilities commission to follow their mission to'provide fair regulation of public utilities in the interest of the public'and reject what we view as an attempt by Duke to mask its profit level andminimize the risk of being called in for a general rate investigation," theassociation stated. "Accepting Duke's proposed decoupling plan amounts toeconomic protectionism for Duke and could create a crisis of confidence inour regulatory system."

But Duke itself remains confident.

"We feel very good about our legal footing on this," Williams said. "Wefeel this is a very solid, very fair approach."