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Duke's Indiana Headache

Compliance Sketch

IT'S ONE THING FOR A UTILITY company to cultivate a good relationship with regulatory authorities, but is it appropriate for a top official with a giant utility to e-mail the chairman of a state regulatory commission, asking "Does anyone know if a desire to `bitch slap a chairman' violates any state's hate crime laws?"

Apparently not.

That e-mail between James Turner, at the time the second-highest-paid executive at Duke Energy, and David Hardy, then chairman of the Indiana Utility Regulatory Commission, was quoted in an article written by John Russell and published in the Nov. 28, 2010, issue of the Indianapolis Star. There were hundreds of similar e-mails, and Russell wrote a series of articles that suggested the possibility of an inappropriate relationship between Duke and the commission. Those articles resulted in the removal of Chairman Hardy by Indiana's governor, Turner's resignation and the firing of the president of Duke's Indiana subsidiary, Michael Reed, for unspecified reasons.

That fallout, painful as it has been for senior executives at Duke and some Indiana regulators, has even larger implications for the company and threatens funding for the Edwardsport coal-gasification plant, one of Duke's largest capital projects, which was already under attack because of serious cost overruns.

At 618 megawatts, the proposed Edwardsport plant would be by far the largest coal-gasification plant in the United States. When the Indiana commission first approved the plans in 2007, total costs were estimated at $1.9 billion. Duke went back to the commission early last year with a revised estimate of $2.35 billion. In April, it raised that figure by another $500 million, to $2.85 billion.

The increased estimate was met with resistance by Duke's industrial ratepayers and by various Indiana environmental and citizens' action groups. In September, Duke, a coalition of its large industrial customers and the commission reached an agreement to move forward with construction. But with the release of the secret e-mails, the fragile agreement collapsed.

The various parties to the agreement including Duke filed a petition on December 9 asking that the commission re-examine the agreement because the e-mails "raise questions as to the relationships between and among . individuals, Duke Energy and the former chairman of the commission during the period . that the settlement agreement was being negotiated and submitted."

Timothy Stewart, an attorney with Lewis & Kappes, which represents the industrial customers, contends the e-mails raise questions about whether all the parties were negotiating the cost overruns in good faith. David Schlissell, a consultant hired by the law firm, went much further in his testimony before the commission, claiming there was evidence of "fraud, concealment and gross mismanagement."

Duke, naturally, is reticent about the e-mails. Angeline Protogere, a company spokesperson, was reluctant to go into details about the Duke people involved. "Let me just say the individuals involved are no longer with the company," she said. Jim Rogers, Duke's chairman, is on record as saying that he agrees the settlement should be reopened and believes a new settlement would be the best path forward for the plant.

But not everyone is convinced the plant should go forward. Jerome Polk of Polk & Associates represents a coalition of environmental and citizens' action groups, including the Citizens Action Coalition, Sierra Club Hoosier Chapter, Valley Watch and Save the Valley, that simply doesn't think the plant is necessary or that the technology is ready for prime time. Furthermore, Polk contends that Duke concealed the technological risks involved. According to Polk, Duke presented the Edwardsport plant as a scaling up of its Tampa integrated gasification combined cycle plant. "They claimed it was proven technology," Polk said. "We said it wasn't. It turned out assumptions they made were simply wrong. Ratepayers should not be stuck paying for a science project."

The release of the e-mails was crucial in bringing to light these issues, according to Polk. "It's very likely that a lot of this information never would have been brought to light if it hadn't been for the release of these e-mails," he said.

At this point, the path forward is anything but clear. According to Indiana Star reporter John Russell, it's an ongoing story. The Indiana commission has already scheduled additional hearings and lawyers representing both the industrial and citizens' groups believe litigation is inevitable.

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