Sunday, May 17, 2015

How Management Produced Massive Toxic Coal Ash Spill

Charlotte Business Journal reported:

Duke Energy’s glaring failure leading to its massive coal-ash spill and other environmental violations is the company's repeated decision against conducting a $20,000 video pipe inspection at the Dan River Steam Station.
GE's Jeff Immelt, said in 2010, four years before Duke Energy's 39,000 ton toxic coal ash spill.:

We are at the end of a difficult generation of business leadership, and maybe leadership in general. Tough-mindedness, a good trait, was replaced by meanness and greed, both terrible traits.
Rewards became perverted. The richest people made the most mistakes with the least accountability. In too many situations, leaders divided us instead of bringing us together.
Consider what knowledgeable employees repeatedly recommended to Duke's management:

In May 2011, the engineers assigned to review coal-ash operations at the plant first recommended the video examination of the pipes. When they were overruled for budget reasons, the plant manager warned the person who made that decision that the inspection was necessary, that Duke did not know the condition of the pipes and that “if it failed there would be environmental issues,” Rangarajan said.
The same engineers made the same recommendation in 2012 and again were overruled
Thus, they were trained not to make the recommendation a third time.  Senior executives denied the request for money.

The decision was bounced around because of the corporate policy at Duke — which took many plant decisions away from engineers who knew the local operations. And it got tangled up in Duke's unexpectedly difficult merger with Progress Energy, which clearly absorbed a lot of corporate attention.

The final decision against running a camera through the pipes at Dan River in both 2011 and 2012 was made by the vice president at Duke in charge of plants that were closing during the merger and integration. 
Duke has declined to identify the person who made that decision, or those who advocated for the inspection, except by title.
Substitute ignorance and greed.  How much bonus money did this Vice President receive from 2011 to 2014?  That number is not included in Duke Energy's SEC filings, however Chief Financial Officer Lynn Good, the one who ensured budget performance, got nearly $1.85 million in non-equity performance awards and $3.5 million in stock awards from 2010-2012.  

Consider what Duke said about the merger in its 2011 10-K.  First up is fear of job loss:

Employee retention and recruitment may be particularly challenging prior to the completion of the merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company. If, despite Duke Energy’s retention and recruiting efforts, key employees depart or fail to accept employment with Duke Energy because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, Duke Energy’s financial results could be affected. 
Second is the prime directive:  Money:

The pursuit of the merger and the preparation for the integration of Progress Energy into Duke Energy may place a significant burden on management and internal resources. The diversion of management attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could affect Duke Energy’s financial position, results of operations or cash flows. 
Duke Energy's 2012 Annual Report lists a Vice President who is no longer with the company:

Lee T. Mazzocchi -- Senior Vice President and Chief Integration and Innovation Officer
Charlotte Business Journal reported Mazzochi took this role in early 2011.  It's ironic the media source that interviewed him could not connect the dots.  An additional irony comes from Duke Energy receiving an award five months before the Dan River toxic coal ash deluge.

“Sustainability continues to be a priority for Duke Energy. It helps us create value throughout the company, and do business in ways that balance the interests of customers, shareholders and the environment,” said Lee Mazzocchi, senior vice president and chief integration and innovation officer. “The plans, decisions and actions of our 28,000 employees demonstrate our commitment and lead to our sustainability achievements.”
Mazzochi made the 2013 Annual Report photo but not the 2014 report.  Duke Energy had a year to explore the executive decision making chain that resulted in the massive coal ash spill.  They won't say who did it, but corporate priorities are the clear cause.

Changeover at the top occurred July 1, 2013 with the appointment of Lynn Good as President and CEO.

"I have a high degree of confidence in the strength of our company's leadership and dedicated employees." "I will work to ensure Duke Energy is positioned to continue its track record of outstanding customer service and operational and financial excellence," Good added.

Good, 54, has served as Duke Energy's executive vice president and chief financial officer since July 2009.
Good created the budget that overruled the inspection of the pipes.  The coal ash spill happened February 2014.  Fortune dinged Good's silent response to the event, but told other hero stories about her intelligence and decision making abilities.

"Suddenly, it was all about crisis management,” Good says. “It’s something that never should have happened. That’s not what Duke Energy is about.”
Three months after the spill Good spoke to MBA graduates at UNC.  She highlighted everyday heroes:

Every one of you has the capacity to be a courageous leader. And although there is no magic formula – for me, it is built on a sense of purpose, conviction to do the right thing, a call to action to shape your future, and a call to empower those around you.
Good's Duke Energy did none of those things in response to potentially heroic engineers.  Duke Energy's mean and greedy leaders spewed toxic coal ash into the Dan River, doing so under the guise of continuous improvement.  The Justice Department press release stated:

“Duke Energy's crimes reflect a breach of the public trust and a lack of stewardship for the natural resources belonging to all of the citizens of North Carolina,” said U.S. Attorney Thomas G. Walker for the Eastern District of North Carolina.  “The massive release at the Dan River coal ash basin revealed criminal misconduct throughout the state – conduct that will no longer be tolerated under the judgment imposed by the court today.”
Good rotated Lee Mazzocchi off the leadership team in time for the $102 million EPA settlement. Heroes tell the truth, accept responsibility and make things right.  This is not the case in the Dan River coal ash spew, not from Duke Energy or the EPA.  Duke Energy cleaned up a mere 7.7% of the spill, while the EPA defined coal ash as nonhazardous.

Frankly, it has the feel of misplace management priorities and bad leadership, signature aspects of private equity underwriters.  That is punctuated by another Duke Energy settlement of $146 million.  Bad faith is bad faith and Duke Energy will pay nearly $3.8 for its series of management misdeeds.