Agency: Duke customers shouldn’t pay $530M in overruns

The Indiana Office of Utility Consumer Counselor has filed a blistering rebuke of Duke Energy Corp. for the high cost of its Edwardsport coal-gasification plant and has asked regulators to deny Duke’s request to charge ratepayers $530 million for cost overruns.

The state agency told the Indiana Utility Regulatory Commission that records it has reviewed raise questions of  “imprudent project management” and whether Duke’s actions “constituted fraud, concealment and/or gross mismanagement.”

“Duke has not demonstrated any budgetary constraints on this project,” testified Barbara A. Smith, director of OUCC’s resource planning and communications division. "There appears to be a lack of responsibility or accountability on the part of those causing these multimillion-dollar cost overruns."

"The escalating costs have been borne solely by ratepayers, with the benefits going to the [Duke] shareholders,” Smith added.

The OUCC’s stance is a stark reversal from last September, when it and industrial customer groups reached a settlement with Duke that would cap project costs at $2.9 billion. Duke had originally pegged the cost of the high-tech plant at $1.98 billion, or 45 percent less than current estimates.

But the OUCC and industrial customers pulled out of a deal weeks later. That’s when Gov. Mitch Daniels fired then-IURC chairman David Hardy after it become known he failed to pull administrative law judge Scott Storms from the Edwardsport case even after learning Storms had applied for a job at Duke. E-mails showed Hardy appeared to have a cozy relationship with Duke executives. The OUCC said such improper communications raised the possibility that Duke had not negotiated the settlement in good faith.

The OUCC now says Duke should not be able to recover from ratepayers anything more than $2.35 billion. It faulted Duke’s oversight of construction and said some cost increases were due to changes in design while others were the result of funds being shifting from one project cost category to another.

In one misstep, the OUCC alleges, Duke changed how it would treat so-called gray water produced by the plant. It switched plans from a zero-liquid discharge plant to one that involved injecting the water into deep wells, despite hazards and a high probability of not being approved for a permit for the latter method. The change resulted in a cost overrun of about $100 million, the OUCC told regulators.

Duke has not formally replied to the OUCC’s testimony. Duke spokeswoman Angeline Protogere on Friday morning said the utility has “prudently and diligently managed Edwardsport costs.”

“We recognize the importance of managing the cost impact for customers, which is why we’ve proposed capping the plant’s construction costs that customers pay," Protogere said in an e-mail. "If our proposal is approved by regulators, the near-term rate impact to customers would be approximately the same level as it would have been under the previous cost estimate."

She said the plant is about 90-percent complete and that Duke plans to begin commercial operations in September 2012.

On average, Duke Energy’s coal-fired plants are 47 years old. Charlotte, N.C.-based Duke hasn’t built a major new power plant in its Indiana system in three decades.

“With new environmental regulations pending, the Edwardsport project helps modernize our system with cleaner power and ensures we can provide the energy our customers need while still using a local, Indiana resource—coal,” Protogere said.

Smith said there is little incentive for Duke to be cost-conscious because the risk of overruns is born squarely by the ratepayers.

“Duke should no longer have a direct and endless line of project funds supplied solely by the ratepayers. Duke shareholders should bear some of the risks,” the OUCC’s Smith told the commission.

The OUCC has been generally supportive of the project from the start. Gov Mitch Daniels has as well, considering Edwardsport a jewel of his Hoosier Homegrown Energy Strategy to find cleaner uses of Indiana’s resources. The coal-gasification plant will convert coal to a gas, strip out pollutants and burn the gas—instead of dirtier, pulverized coal.

Duke helped win support for the project among regulators and legislators by touting that the gasification technology was ideal for capturing the greenhouse gas carbon dioxide in the combustion process. Duke proposed injecting the gas deep below the plant in underground rock formations.

However, after receiving IURC approval to begin construction, Duke said the underground formations were not suitable for carbon sequestration. It proposed piping the gas elsewhere for sequestration, or for use in helping recover more oil from oil wells.

Such changes, as well as growing cost overruns, have raised concerns at the OUCC. “We are not recommending shutting down the project,” however, said OUCC spokesman Anthony Swinger.

That view is not shared by critics of the plant, including utility watchdog Citizens Action Coalition.

“It is evident that Duke had to mislead the public and the state of Indiana, and corrupt the entire process to enable this fiasco. From our perspective, this is an illegitimate power plant that should be stopped immediately,” said Kerwin Olson, CAC’s executive director.

CAC’s own expert has opined that Duke’s maximum recovery from ratepayers for the Edwardsport project should be capped at $2.35 billion—the same as the OUCC’s analysis.

Duke estimated previously that average retail electrical rates could rise as high as 19.2 percent in 2014, about a year after the plant is expected to be in operation.

The company serves 4 million electric customers in North Carolina, South Carolina, Ohio, Kentucky, and Indiana, along with 500,000 natural gas customers in Ohio and Kentucky.