Duke Energy Corp. has agreed to cap the cost of its troubled coal-gasification plant in southwestern Indiana at $2.6 billion, or about $700 million less than the expected cost of construction, as part of a proposed settlement announced Monday.

Duke Energy and the Indiana agency representing utility ratepayers, the Office of Utility Consumer Counselor, announced they had reached an agreement with the Duke Energy Industrial Group, which consists of six of the utility's large industrial customers, and Nucor Steel. The agreement still must be approved by the Indiana Utility Regulatory Commission.

Under the plan, customers' rates will increase by 14.5 percent, Duke Energy said. Without the deal, rates would have increased by 22 percent.

Kerwin Olson, executive director of the Citizen Action Coalition, said the settlement came as a shock to him. He said the power plant should never have been approved.

"The settlement on the surface appears to give Duke Energy far too much. The terms appear to be completely unacceptable to CAC," he said.

The Office of Utility Consumer Counselor had previously criticized Duke, saying it had concealed vital information from regulators about the plant, which has been beset by nearly $1 billion in cost overruns the company has sought to pass along to its customers. Duke has argued that it has managed the project prudently and should be allowed to pass on the cost overruns.

Critics have said emails obtained by The Indianapolis Star in August show an inappropriately close relationship between Indiana regulators and Duke Energy. The emails showed the Indiana Utility Regulatory Commission chairman recommended that Duke Energy hire his personal choice to lead its operations in the state.

The relationship spurred a criminal investigation. Former regulatory commission chairman David Lott Hardy was indicted in December on charges he allowed the panel's top lawyer to keep overseeing cases involving Duke Energy even though he knew the attorney was trying to land a job at Duke.

Hardy has filed a motion in Marion Superior Court to dismiss an amended indictment against him, claiming he did nothing criminal.

Duke Energy Indiana President Doug Esamann says the agreement meets two objectives, reducing what Indiana customers will pay in rates and resolving uncertainty for Duke Energy shareholders.

"We're now in the home stretch of completing a facility that will modernize our electric system and provide Indiana with cleaner power to meet increasingly strict federal environmental regulations," he said.

The massive coal-gasification plant near the southwestern Indiana town of Edwardsport will convert coal into a synthetic gas processed to remove pollutants such as mercury and sulfur. The gas is then burned in a traditional turbine power plant to produce electricity.