Law puts utilities under microscope

Law puts utilities under microscope

July 7th, 2011 by The Knoxville News Sentinel in News

CLOSER TO HOME

Cagle-Fredonia Utility District: In June, the comptroller's office reported nearly $33,000 had been misappropriated between April 2009 and January 2011. Office Manager Charlotte Turner was indicted on a charge of theft over $10,000.

Sewanee Utility District: In July 2009, an audit showed nearly $66,000 missing. A former district office manager was indicted on 11 counts, including theft over $60,000, forgery, passing forged instruments and official misconduct.

Calhoun-Charleston Utility District: In 2006, more than $6,000 was discovered missing. A case against the district bookkeeper was referred to the grand jury.

Watts Bar Utility District: In May 2006, auditors criticized what they called an "apparent conflict of interest" between the district, Holiday Shores Water Services and C.R. Barger Construction Co. leading to no-bid contracts and payment of private-company expenses outside the provisions of contract.

City of Dunlap: A former clerk was indicted on one count of theft over $1,000 after a 2005 audit found nearly $3,800 missing from property tax payments and natural gas collections.

Crab Orchard Utility District: Several indictments followed an audit in February 2005 showed falsified records, excessive expenditures and lack of financial controls and documentation.

The former general manager was indicted on charges of conspiracy to commit theft over $10,000, conspiracy to commit theft over $60,000, theft over $60,000, forgery over $60,000, official misconduct and two counts of money laundering.

The former assistant general manager's charges included conspiracy to commit theft over $60,000, theft over $60,000, forgery over $60,000, official misconduct and two counts of money laundering.

The former Cumberland County Commission chairman was charged with conspiracy to commit theft over $60,000, theft over $60,000, forgery over $60,000 and official misconduct.

Cumberland Utility District: The former office manager of the utility district in Harriman, Tenn., was indicted on a charge of theft over $1,000. A May 2004 audit accused her of diverting $1,338 from utility payments to herself.

Griffith Creek Utility District: An audit in October 2003 criticized the office for employing just one clerk with no supervision and noted improper posting of receipts and improper use of collected funds for expenses.

Cities of Whitwell, Dunlap: More than $2,000 in customer payments to Dunlap for natural gas service was not deposited in the city's bank account after collection by Whitwell city employees, according to a May 2002 audit.

South Cumberland Utility District: The former general manager of the district office in Crossville was indicted on 14 counts of theft, forgery, money laundering and official misconduct. The audit in May 2002 showed more than $111,000 diverted in cash, checks and improper purchases.

City of Crossville: An audit in April 2001 showed more than $8,000 embezzled through manipulation of records. A city clerk was indicted on charge of theft over $1,000.

By Bob Fowler / Knoxville News Sentinel

A tough new law imposing stricter state oversight of Tennessee's 182 utility districts - which serve hundreds of thousands of customers and collect millions of dollars in rates - quietly went into effect Friday.

More reform is on the way, according to state Comptroller of the Treasury Justin P. Wilson, who ushered the legislation through the General Assembly.

Wilson said he was crafting the new law before recent investigative audits uncovered flagrant misuse and thefts of ratepayer money in several East Tennessee utility districts.

"The need for transparency and accountability in this area we had before these investigations were completed and before we knew what they would turn up," Wilson said.

But those scandals grabbed lawmakers' attention, he said, and provided impetus for last-minute tweaks of the bill.

"When you're dealing with the General Assembly, it's better to deal with concrete examples that you can see," he said. "The bill was modified in response to these accusations."

Misuse and thefts of ratepayer money uncovered by those special audits were "an illustration of the need for the bill," said state Sen. Ken Yager, R-Harriman, who sponsored the legislation in the Senate.

There were the junkets to a fancy Costa Rican resort on ratepayers' tabs - nearly $150,000 worth - for employees of five natural gas utility districts: Sevier County, Powell-Clinch, Oak Ridge, Jefferson-Cocke County and Hawkins County.

Then there were separate cases of excessive travel expense claims, utility district credit card abuse, improper employee clothing purchases and outright theft that also were uncovered through audits.

Utility district fraud and thefts have been recurring problems for years, state documents show.

And legislators for years have been aware of those issues, ordering studies in 1993 and 2003 of utility districts and needed reforms.

In the last decade and before the latest investigative audits, records show that more than $1.2 million was stolen from 11 utility districts by various fraudulent means.

And those are involving just thefts and frauds of more than $10,000.

"Kings, nobles and inherited titles"

Those nabbed dipping their fingers in utility tills often resorted to creative techniques to rob ratepayers, according to state documents.

Forged checks were issued to relatives, a $5,905 all-terrain vehicle was purchased for a boyfriend, utility district credit cards were used to pay for a cruise and a trip to Disney World, and employees working on utility district time put in improvements at managers' homes.

In the South Cumberland Utility District in Cumberland County, for instance, former General Manager Gail Prewett, also called Linda S. Prewett, stole more than $111,000. That includes $22,417 swiped after she confessed to utility commissioners about her earlier thefts, state officials said. South Cumberland serves 4,000 customers.

Much of that embezzled money was used to buy "toys for her boyfriend," wrote Dennis Dycus, director of the state's municipal audit division, in a fraud examiners' newsletter.

Today, Prewett still is making reimbursement, said current South Cumberland Utility District General Manager Sandy Brewer. "She (Prewett) sends us a check for $200 a month through the courts," Brewer said.

Utility districts are "a unit of local government," said Blake Fontenay, spokesman for the Comptroller's Office. And they have authority to issue debt to fund construction of infrastructure for providing utilities and set the rates to be charged.

Among the new law's broader provisions:

* Utilities can't spend money except for utility-related purposes.

* Travel expenses must be published annually.

* The self-appointment of utility commissioners in 41 districts is abolished.

* Natural gas districts must charge enough to cover expenses and debt.

* There must be a standardized system for reporting unaccounted-for water. "It's surprising how much water is lost," Wilson said.

Over the years, amendments exempted several utility districts in East Tennessee counties from the law. Those exemptions "were not done uniformly and didn't quite make sense anymore," said Jason Mumpower, Wilson's executive assistant. Those exemptions disappear in the new law.

During the run-up to passage of the new bill, "I was surprised a couple of utility districts called me and didn't want to publish the travel expenses," said state Rep. Ryan Haynes, R-Knoxville, who sponsored the bill in the House.

Fontenay noted that when the bill was introduced, there were a number of groups that had questions.

This summer, Wilson said, he'll tackle additional reform to wipe out what's left of the system where commissioners reappoint themselves to utility boards.

Some commissioners have remained on utility boards for decades, and then see that the position is inherited.

"We've seen boards that have stayed in a family for generations," Wilson said.

The new law abolishes self-appointed utility boards in 41 districts, each with a single-county charter, and gives county mayors input on future appointees.

Mayors are provided the names of three nominees by the current board and can either appoint someone from that list or reject all candidates and request up to two more three-candidate lists from which to make an appointment.

Wilson said that's one of the key provisions of the new legislation.

"This avoids the cliques, the same people continuing to make decisions that affect all the people," he said. "In the United States, we don't have kings, nobles and inherited titles."

Distressed districts

"The new law giving county mayors appointing authority is good oversight for all utilities," said Everett Bolin, general manager of Crab Orchard Utility District in Cumberland County, which serves 7,500 customers.

Bolin was named manager after his predecessor was indicted for stealing $500,000 from the utility district and received a 10-year prison sentence.

Self-appointed boards "are usually run by one person, either the manager or the chairman," Bolin noted.

"Then they pick people for appointment that they can control and usually friends and family as employees."

Bolin said when various frauds were in progress at Crab Orchard Utility District, board members were self-appointed.

He explained that the county mayor then learned that he actually had the authority to appoint the board. "That's how Crab Orchard Utility got new board members and the previous fraud was discovered," Bolin said.

According to Wilson, there are seven other utility districts in the state that are self-perpetuating but chartered in more than one county.

Wilson said he would be looking at those utilities this summer to see how best to change the way those commissioners are appointed.

Sen. Yager said utility districts "are very important to the development of the state."

But with so many districts, commonly located in rural areas, regulatory supervision has been difficult. The state's Utility Management Review Board handles customer gripes and oversees finances.

When utilities' finances run awry, they're declared "distressed." Recently, 42 of the state's 182 utility utilities were listed as distressed.

Utilities are placed on that list after two consecutive years with a negative change in net assets, defaulted debt, negative total net assets or excessive water loss.

The review board has "authority through Chancery Court to force actions to remedy the reportable criteria," according to Stephanie Shackelford, a spokeswoman for the comptroller's office.

Audited information about utility districts goes to the comptroller, while water quality concerns fall under the auspices of the Department of Environment and Conservation.

The state's utility districts for years fell under the Utility District Law of 1937. Over the years, that law, more than 80 pages in length, "had become a hodgepodge of amendments," Yager said.

Bob Fowler may be reached at 865-481-3625.