Environment and Utilities

Ex-IPL officer fights utility: Claims wrongful termination, financial trickery

July 25, 2005

Not even a lineman at Indianapolis Power & Light Co. has more nerve than Dwane Ingalls.

Floored that IPL's CEO, Ann Murtlow, didn't share his concerns that IPL was sending excessive cash to parent AES Corp. at the expense of electric-service reliability, the IPL vice president scheduled a meeting in mid-2003 at the Maryland home of AES CEO Paul Hanrahan.

Hanrahan apparently didn't see things Ingalls' way. Within a year of the meeting, Murtlow terminated the 14-year AES employee. Now, when he's not teaching vacation Bible school at his church, Ingalls is trying to convince the Indiana Utility Regulatory Commission and federal regulators to investigate his claims of accounting trickery by the city's electric utility and parent AES. He makes a similar case in a wrongful termination suit he filed in January in Marion Superior Court.

Ingalls' core allegations that IPL deceived regulators and withheld maintenance with the chief goal of maximizing cash flow to AES are broadly denied by the local utility and by AES.

"We are aware of Mr. Ingalls' lawsuit and believe his claims have absolutely no merit," said Robin Pence, vice president of communications for AES.

Ingalls, 44, filed a complaint this month with the IURC-making him the first executive of the utility to publicly allege the $2.2 billion merger in 2001 was

harmful to IPL's 460,000 residential and commercial customers.

He alleged IPL failed to disclose to state regulators a tax-sharing agreement with AES that "greatly reduced actual taxes paid on behalf of IPL as federal and state income tax returns are consolidated with AES to [offset] AES losses."

He also alleged that IPL has understated its revenue by tens of millions of dollars a year by not reporting income from its "Elect Plan." That plan allows commercial customers to lock in a rate for a set period in return for a discount, avoiding possible fuel cost adjustments that can drive up bills.

"This manipulation is an attempt to shield these amounts from the purview of the IURC by having the effect of managing IPL's [profit] so as not to draw attention to IPL's true earnings relative to the earning cap set by the IURC."

The complaint also alleges that AES had such a voracious appetite for IPL dividend income that the utility postponed maintenance projects in 2002 and 2003. He suggests that may have contributed to a number of electrical explosions downtown in January that left dozens of businesses without power.

The IURC last week responded to Ingalls' complaint, saying he has no standing because he lives in Greenwood, which is outside IPL's service territory.

Meanwhile, Ingalls has applied for one of two IURC commissioner seats being vacated.

In the wrongful dismissal suit he filed against AES, IPL and Murtlow, he seeks reinstatement of his $110,000-a-year job, along with lost income and bonuses.

"Ingalls was wrongfully terminated in retaliation for exercising a statutorily conferred right and/or for refusing to commit an unlawful act for which he could be personally and criminally liable as an officer under the Federal Power Act," states his lawsuit.

Motives questioned

Murtlow and the companies broadly deny Ingalls' allegations in their response filed in March.

"Mr. Ingalls' claims are without merit," said Crystal Livers-Powers, communications manager for IPL.

"In fact, IPL's service quality has continued to improve over the last three years and is the best of the five investor-owned utilities in Indiana. In addition, IPL's residential rates continue to be the lowest of the top 20 cities in the United States served by investor-owned utilities.

"IPL leadership remains committed to serving our customers and is extremely proud of our record," added Powers.

Ingalls' termination and his live-wire approach might raise questions about his motives in asserting misdeeds by IPL and AES. In his lawsuit, Ingalls faults Murtlow for not honoring a plan to grant "valuable" AES stock options to all IPL officers under a long-term-incentive compensation plan. Murtlow decided in 2003 that the longterm compensation for IPL officers would be in the form of cash, instead, based on IPL's performance.

While not aware of the specifics of his allegations, attorneys representing IPL customer groups say such allegations from a former senior officer of a utility shouldn't be dismissed out of hand.

"If somebody comes forward I wouldn't just chalk it up to being 'an angry person,'" said Jack Wickes, a director of the Indiana Industrial Energy Consumers Inc.

Excessive dividends to an unregulated utility parent "is always an issue with one of these multistate holding companies," said Jerry Polk, an attorney who represents the Citizens Action Coalition on utility matters.

IPL a cash cow?

What is clear is that IPL is sending tens of millions of dollars each year to Virginiabased AES. Last year, IPL sent to AES dividends of $119.1 million, according to a filing with the Securities and Exchange Commission.

In the first three years after the merger, IPL sent more than $990 million to AES in dividends and other distributions, said Paul K. Connolly Jr., a Boston energy law attorney, in a presentation to the Harvard Electricity Policy Group.

Connolly's research found that the drain on a local utility may be especially profound when a parent company is under financial distress because it provides "an incentive to divert [cash] to the parent, which would, over time, reduce the quality of service."

Certainly, AES was under financial distress in recent years. About a year after its merger with IPL parent IPALCO, AES' stock fell 90 percent, to $1.56 a share. Its debt levels soared and credit ratings dived as it dealt with trouble at some of its operations in 26 other countries.

"There is no doubt in my mind that AES is harvesting IPL. It is essentially squeezing the guts out of IPL," Ingalls said in an interview.

He said he stated his concerns to Murtlow in 2002 and again in 2003.

That was the same year the IURC began to place controls on IPALCO's long-term debt and required that the utility provide financial data related to its proposed future dividends to the Virginia parent, citing an increased debt-to-capitalization ratio.

Yet, according to IPALCO's 2004 financial report, the IURC subsequently has neither initiated proceedings over its proposed dividends nor blocked their approval.

There has been "nothing to raise any eyebrows," said IURC spokeswoman Mary Beth Fisher.

Ingalls contends that some of IPL's revenue went to dividends rather than into capital accounts needed to maintain the quality of electric service.

In early 2004, before his departure, Ingalls kept drumming home his concerns to AES' Hanrahan. He told the CEO a continued lack of capital investment could amount to violations of the Federal Power Act.

This time, he did not hear back from Hanrahan.

Ingalls alleges that Murtlow stated he was fired "because he had lost faith in the company's leadership."

Utility counters

Besides denying Ingalls' allegations of financial wrongdoing and diminished service quality, Murtlow and the companies say it was Ingalls who sent Hanrahan a letter in early 2004, before his dismissal, stating "it now seems to be in the best interests of all that we reach terms for my departure."

Moreover, Murtlow and the companies allege Ingalls "breached his fiduciary duty of loyalty and trust owed to IPL by, among other things, improperly using and taking away IPL's confidential and proprietary information."

They seek an injunction prohibiting the misappropriation of trade secrets and that the utility be awarded unspecified damages.

Ingalls claims he turned down two severance offers that would have required him to shut up.

"I had fiduciary responsibility and I took that very seriously," said the former executive vice president and general manager of IPL's Harding Street generating plant. "Integrity comes foremost."

Pending an investigation by the IURC, Ingalls' allegations will remain just that.

This is not the first time Ingalls has alleged problems at AES. He said he discovered irregularities in the reporting of water tests in the early 1990s when he worked at the company's Shady Point, Okla., generating plant. The head of the plant's water treatment department claimed the plant manager was aware of the situation, Ingalls said.

Soon after, nine technicians were found by the company to have falsified water test results reported to Oklahoma regulators and the Environmental Protection Agency.
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