Audit ordered of Cumberland Valley Electric

A local electric provider will be allowed to raise rates to its over 23,000 customer, but will have to undergo an independent audit of its management, financial procedures and the role of its Board of Directors in the wake of rate hearings that uncovered what Kentucky’s Attorney General is contending are questionable business practices.
The Kentucky Public Service Commission granted a 4.92 percent rate increase to Cumberland Valley Electric Cooperative, Inc. (CVE), the company’s first in 26 years, in the wake of contentious hearings in April where General Manager Ted Hampton was questioned about possible nepotism at the company, suspicious contracts and improper cost accounting during the 2004 fiscal year. The audit will be conducted by an independent agency and paid for by the company.
Hampton, who has served as General Manager of CVE for 42 years, said he did not object to the audit and was confident that it would find no evidence of wrongdoing. He said CVE offers the lowest electrical rates of any power cooperative east of the Mississippi River and pointed to the fact that the company had not asked for a rate hike in over two decades as proof that it is well managed.
“We are a very conservative operation,” Hampton said. “We try to do things very frugal for the customers of eastern Kentucky. I think our rates are quite remarkable considering the terrain we are in. We are very proud of it.”
CVE applied through the PSC for a rate increase July 22, 2005. During the rate process, the Attorney General’s Office of Rate Management intervened saying discovery information had uncovered questionable practices. Following depositions, legal filings and hearings, Kentucky Attorney General Greg Stumbo filed a 16-page motion with the Public Service Commission May 10 asking for a complete financial, operational and management review of the company. It is common for the Attorney General to intervene in rate cases.
In the motion, Stumbo wrote that the evidence compiled and cross-examination of Hampton revealed “numerous questionable business practices and conflicts of interest that cast significant doubt upon the reliability of CVE’s test year accounting figures provided to the Commission.”
Most utility companies in the state must petition the Commission for permission to increase rates. Accounting figures from a “test year” are used to determine if the company needs a rate increase to help revenue keep pace with expenses and to stay within financial guidelines established by the Rural Utility Service (RUS), a federal agency which provides low-interest loans to rural electric cooperatives.
Stumbo claims CVE’s management “has not only condoned and tolerated questionable practices, but actively fosters a culture and environment in which such practices flourish.”
Among the laundry list of accusations in the motion:
• The company employs four of Ted Hampton’s relatives and that his family members dominant CVE’s management and “have used their influence to award contracts to other family members.”
• The company has a propensity to undercharge, or not charge at all, for electrical work affecting family members, friends or associates.
• Purchased miscellaneous equipment, at inflated prices, from a company in which Hampton’s relatives have a financial stake.
• Purchase of a bulldozer from a company owned by an ex-CVE employee for over $60,000. Stumbo claims the equipment could have been bought for much less.
• Flagrant violation of the companies anti-nepotism policy, called “a meaningless fiction” in the Stumbo’s motion.
• Bidding policies “heavily weighted” toward incumbent contractors and claims that the “Hampton family management” have steered company contacts to benefit other family members and friends. Most at issue are right-of-way clearing contracts.
Through Barbourville attorney Pat Hauser, Cumberland Valley Electric provided responses to each of the charges, rebutting all of them.
Hauser claims nearly all of the allegations made by Stumbo actually originate from a former “disgruntled employee,” Joe Carroll, who was an engineer for the company.
Only Hampton and his first-cousin, Jay Hampton, are in company management. Both were in place before CVE’s Board of Directors adopted an anti-nepotism policy a decade ago. Hauser said failures to charge the Whitley County School District for movement of some lines followed the companies procedures, something the Commission has said it can no longer do.
He added that all equipment purchases and contract work followed a fair bidding process. Stumbo had contended that CVE allowed some contractors to submit bids for right-of-way work that excluded equipment costs while requiring it from others, allowing an unfair advantage. The company produced letters sent to potential bidders showing all of them were instructed to exclude the cost of equipment because the company would provide it.
Hampton said the bulldozer, singled out in Stumbo’s motion, came equipped with extra hydraulic equipment and a specialized gearbox, justifying the $60,000 price tag.
“There is no corruption there,” Hauser said. “It was fair. Cumberland Valley could provide the equipment cheaper than if the person that bid on it charged them more. They actually saved money for their customers.”
Through legal filings with the PSC, Hauser contended many of the allegations did not impact CVE’s test year figures.
In its June 2 order allowing the rate increase, the PSC acknowledged that Stumbo “raised concerns” about Cumberland Valley Electric and exposed some “legitimate questions regarding some of Cumberland Valley’s business an operating policies”, but “failed to provide adequate evidence to support his arguments that these practices have affected the accuracy of Cumberland Valley’s test-year financial information,” and therefore granted a ruling on the rate request.
The increase will mean that average monthly residential bills will go from $71.66 to $76.76, up 7.1 percent. The order approved proposed increases already put into effect by CVE Feb. 4. The company has customers in Bell, Harlan, Knox, Laurel, Leslie, Letcher, McCreary and Whitley Counties.
Hampton said he is not sure who will conduct the audit or when it will be conducted. After the audit is complete, the PSC can take action to remedy any potential problems at the company if necessary.
It is not uncommon for the PSC to order audits of electrical utility companies following rate reviews.