Duke CEO on turnover turmoil: Hey, it happens

July 11, 2012, 3:41 PM UTC

Jim Rogers, back on top.

FORTUNE — The fine print is everything.

When Duke Energy and Progress Energy agreed to merge in July 2011, the companies also agreed that Duke CEO Jim Rogers would become executive chairman and cede day-to-day management of the company to Bill Johnson, his counterpart at the much smaller Progress. Johnson would take over upon the completion of the merger, which happened July 2, 2012.

But there was nothing in the agreement detailing just how long Johnson would remain CEO. So minutes after approving the merger, the new board, still weighted with legacy Duke directors, voted along party lines to oust Johnson and bring back Rogers to run what is now the nation’s largest utility.

Typically, this is the sort of boardroom maneuver that gets hidden behind the legal boilerplate of severance packages — in Johnson’s case, about $7.4 million. Nobody talks, especially on the record. But regulators in North Carolina were so steamed about the wheeling and dealing that they ordered Rogers to Raleigh to testify about the company’s actions. For nearly four hours Tuesday, in a cramped hearing room in the basement of a squat government building, Rogers walked the members of the N.C. Utilities Commission through his account of the fall of Bill Johnson and what caused Duke’s board to revolt against the company’s chosen leader.

Although the commission has important regulatory powers, this hearing was an act of political and corporate theater, with each side playing its role. The commissioners at times were like Captain Renault in Casablanca – shocked, just shocked to find out that a corporate board could actually fire somebody. For his part, Rogers was alternately contrite and politely combative, apologizing for the board’s inability to tell the commission what it was considering and asserting time and again that regulators can set rates but they don’t get to tell a company whom to hire.

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The commission is supposed to act as a statewide referee, but its sympathy for Johnson was obvious. For one, Progress is the hometown utility here, and the combined headquarters of the merged company is in Charlotte, a move that will eventually eliminate 1,000 jobs in Raleigh. Chairman Edward Finley used to practice law with Johnson, and he and other commissioners frequently referred to testimony that Johnson and Rogers gave in September 2011 outlining the management structure when the companies merged.

Rogers response, stripped to its essence: The board honored its commitment to make Johnson CEO. The length of service is secondary. Nobody was misled. What we said was the truth when we said it.

According to Rogers, Duke’s board had been losing confidence in Johnson’s ability to lead the combined company for much of 2012. The why is a bit murkier.

The $32 billion Duke-Progress deal had been struck as a merger of equals, but of course it wasn’t. Duke (DUK) was bigger and it had a stronger balance sheet. As part of the horse-trading, Johnson would get to be CEO but Duke’s directors would fill 11 of the 18 slots.

There’s some speculation that the 18 months that it took to close the merger – some of it due to the seemingly endless reviews of state and federal regulators – may have been part of Johnson’s undoing. It gave Duke’s directors a bit too much time to second-guess what they had agreed to.

During that period, employees at both companies were working on integration issues, Rogers said, and Duke employees were griping that Johnson’s autocratic style and his team’s unwillingness to listen to other opinions made it feel like Duke was being taken over. Progress’ financials were lagging, undermining Johnson’s credibility. And there were serious problems concerning the Progress nuclear fleet, particularly the Crystal River nuclear facility 90 miles north of Tampa, Fla. It has been idle since 2009 and is in need of significant investment if it is to come back on line. Duke’s board, Rogers said, believed that Progress wasn’t transparent enough on the situation to allow a proper analysis of whether to repair or retire the plant.

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Duke and Progress both have major nuclear holdings, more than many other utilities, and these generators act as baseline production that make the whole system run efficiently. “Our board,” said Rogers, “was deeply concerned with the ability of Progress to improve the operations of these plants.”

The hitch was that Duke’s board couldn’t get rid of Johnson. He didn’t work for them. So they had to wait until he did. But in the meantime, they could plot. On June 23, Ann Gray, the lead director of pre- and post-merger Duke, told Rogers of the Duke board’s concerns. The next day, she and director Michael Browning asked Rogers whether he would return as CEO. Rogers insisted that he played no part in the maneuvering, other than telling Gray and Browning that he would do what the board asked.

Four days later, Johnson signed his employment contract to become CEO. The wheels were turning, but nothing could be done until the merger closed. “The decision wasn’t made until it was made,” Rogers said.

Under questioning, he acknowledged that he made no effort to salvage Johnson’s job. “My board made it crystal clear to me that they didn’t want my opinion on what to do.”

For all its outrage, the utilities commission is highly unlikely to blow up the merger. Its concern is really focused on balancing rates and return. The challenge for Duke is that rate cases – in North Carolina and elsewhere – can be as much about trust as they are about fuel prices.

At the end of his testimony, his voice a little ragged from talking, Rogers was asked about whether the commission could trust Duke. He took a while to frame his response, talked about the benefits of the deal to customers, and never quite answered the question. What he eventually said was this: “Corporations change leadership. That’s the nature of things.”

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Johnson didn’t attend the hearing on Tuesday, but he’s hired an attorney who issued a brief statement extolling his client’s leadership and business skills. Johnson’s associates said that Rogers’ descriptions of Johnson’s behavior didn’t square with the man they know, an executive who in his spare time practices yoga, reads Plato and bakes bread.

Rogers was able to throw Johnson under the bus Tuesday because of a loophole in the non-disparagement clause of the severance agreement that allows either side to make public disclosure of the events if done as part of a legal proceeding. There’s a good chance that the Utilities Commission will invite Johnson to the basement hearing room where he will get to give his version of what happened.

Rogers is back on a different hot seat today. He’s speaking to Progress employees at a hotel in downtown Raleigh. The reception is likely to be chilly. Johnson is gone, and three of his direct reports abruptly resigned Tuesday rather than work for Rogers. Duke’s stock is down, as investors worry about instability and the depth of the company’s management bench. Before the commission, Rogers was sharply critical of Progress’s corporate culture and style. So now his task is to move everyone past the wreckage and keep the focus on cutting costs, growing the business and making peace with the bureaucrats in Raleigh and elsewhere who help set the price of power.