Consumer group accuses Duke of ‘gross mismanagement’

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Duke Energy Corp. executives seemed to spend more time trying to manage the then-chairman of the Indiana Utility Regulatory Commission than they did the Edwardsport coal-gasification plant now plagued by nearly $1 billion in cost overruns, opponents allege in new regulatory filings.

Indianapolis-based uitility watchdog Citizens Action Coalition on Thursday filed copies of e-mails pointing to numerous meetings between top Duke executives and former IURC chairman David Hardy, including one at “the chairman’s favorite downtown-Indianapolis watering hole,” the Capital Grille.

That meeting included no less than Duke Chairman Jim Rogers and Duke’s former president of regulated electric and gas utilities, Jim Turner.

CAC alleges the Duke executives secretly informed Hardy that costs for the coal-gasification plant, initially projected at $1.9 billion, had escalated to $2.88 billion. Such back-channel, “ex parte” communications with the head of regulatory agency are considered highly inappropriate, if not illegal, CAC officials said.

The $2.88 billion cost estimate wasn’t formally filed with the commission “or otherwise disclosed publicly” until April 16, 2010—seven weeks after the Hardy meeting, said Kerwin Olson, interim executive director of CAC.

“If Mr. Turner, the second highest official at Duke Energy, had maintained nearly as close a level of contact with his counterparts at General Electric and Bechtel as he did with chairman Hardy, it is hard to imagine that Duke would have received as much unanticipated bad cost news as it did,” said Peter Bradford, former chairman of the Maine Public Utility Commission and a former commissioner of the U.S. Nuclear Regulatory Commission. He filed testimony on behalf of CAC.

Hardy was fired by Gov. Mitch Daniels late last year after it was learned IURC administrative law judge Scott Storms was presiding over Duke cases even after he’d applied for a job with Duke. Storms was eventually hired by Duke but soon after was fired, as was former Duke Indiana chief Michael Reed. Turner later resigned.

E-mails showed Hardy has been chummy with top Duke executives for years, holding private discussions with Duke’s top management.

After Hardy’s relationship with Duke came to light, Duke industrial customers and the Indiana Office of Utility Consumer Counselor pulled out of a settlement agreement that would have capped construction costs that could be passed to ratepayers at $2.8 billion.

Last week, as IBJ first reported, the OUCC told the commission that Duke should not be allowed to tap customers more than $2.35 billion for trouble-prone plant.

On July 14, a group representing Duke’s industrial electric customers told the commission that ratepayers' bill for the plant should not exceed $1.98 billion.
Both the industrials and the OUCC, along with the CAC, have alleged in this week’s filings that Duke’s conduct in the Edwardsport project amounts to “gross mismanagement.”

The groups filed evidence of what they also allege is an attempt to conceal problems at the plant that resulted in higher costs.

A witness for CAC—Massachusetts-based utility consultant David Schlissel—pointed to an e-mail that the Duke project manager sent to other senior Duke leaders in which he was concerned that management was publicly disclosing that that construction was further along than it actually was.

“My recommendation for the earnings call was to stay away from the details and just say that the [percentage] complete is based on commitments as well as progress, and leave it at that. If someone asked for details, we say they will be provided later,” stated the e-mail to other executives from Richard Haviland, Duke's senior vice president of construction.

Schlissel also said Duke failed to disclose that the gasification technology for the scale of Edwardsport was not as far along as indicated and that a 2007 study supporting the concept was based on a preliminary design, with little detailed engineering.

Much of the criticism by consumer groups is that Duke took on too much of the overall supervision of the project itself rather than hiring an outside group to manage construction of what amounts to as the largest coal-gasification generating plant of its kind.

When completed, the 630-megawatt plant will convert coal to gas, strip the gas of pollutants, and burn the gas. Most general plants burn pulverized coal directly.

“Duke personnel were [and are] woefully unqualified to manage the construction of this extremely complex multi-billion dollar project, which is the largest [integrated gasification combined cycle] facility ever built in the world,” Barbara Smith, director of resource planning at OUCC, told the commission on Thursday.

Duke unwisely believed that because it had managed construction of numerous pollution-control projects that it could tackle the Edwardsport project, Smith said.

“That assumption was short-sighted and resulted in excessive cost overruns that have plagued this project,” she said.

Among mistakes, Smith said, was rejecting a plan proposed by a contractor to deal with so-called grey-water disposal. Instead the utility designed its own system to inject the water deep underground. The OUCC said the water-disposal misstep alone added $100 million in additional costs.

By taking management control, Duke voluntarily assumed all the risk, “knowing it could transfer that risk to its ratepayers.”

Smith and the other consumer parties in the case also deemed back-channel  communications Duke held with former IURC chair Hardy as part of the concealment.

CAC’s Olson alleges Hardy had been meeting with Duke executives privately about the project as far back as 2007, including a lunch with Duke CEO Rogers and an invitation to Hardy to attend a “strategic retreat” of Duke’s board, at the corporate mansion of Charlotte-based Duke.

Failure to disclose private discussions and not disclosing and sharing information with other parties in the case “is concealment at its worst,” Olson said. “Material decisions were being made by the commission that involved a mandate on captive ratepayers’ to foot the bill for a massively expensive project. The commission deserved no less than full disclosure and representation of the facts when deliberating on this historic and enormously expensive proceeding.”

The CAC also presented e-mails that show Duke sought Indiana Gov. Mitch Daniels’ help with the grey-water disposal problem. Daniels wrote a letter to the Environmental Protection Agency supporting exemption to help Duke deal with the problem, CAC said.

The governor’s letter to EPA is a “perfect example” of the utility’s pattern, “where it is more concerned with managing its regulators than it is its project,” Olson told the IURC.

Yet, he alleges, it appears such information and much of the information Hardy received during private meetings was never disclosed to the commission or to the other parties in the case.

Former Maine regulator Bradford noted that it is not uncommon for technologically sophisticated generating projects to involve a high degree of uncertainty. He noted that nuclear plants, for example, often cost twice their original estimates and that nearly half of such projects wind up being cancelled. Among them was the Marble Hill nuclear plant in downstate Indiana cancelled by PSI Energy in the 1980s after $2.7 billion was spent. Duke later acquired the remnants of PSI Indiana.

Against that backdrop, Bradford said, Duke continued to assert to the commission “high confidence” that it could predict the cost of the Edwardsport plant even as its own internal e-mails showed its managers and major contractors had declining confidence in the project.

“The company had a clear duty to pass these concerns on to the commission and the parties through on-the-record channels considerably sooner and more fully than it did. Instead, it concealed them,” Bradford said.

The CAC, which has long warned of problems with the coal-gasification technology, wants Duke to cancel the Edwardsport project.

The OUCC, on the other hand, said construction should proceed to completion, saying that the plant is 90-percent finished.

Duke has not yet filed testimony in response to the recent flurry of allegations from consumer groups.

Utility spokeswoman Angeline Protogere said the company has “prudently and diligently” managed the project, which is set to begin commercial production next year.

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