Bigger Role Seen for CEO James Rogers in Duke Energy Scandal

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Jim Rogers photoDuke Energy’s business approach has been to reap favors, tax breaks and advantages by virtue of its cozy relationship with government, with benefits that have redounded to them in the form of subsidies, tax shelters, government grants and mandates for wind farms (despite its failure to provide energy on a broad scale, even though it has been around forever) and other unproven cockamamie ideas.

But one of those schemes has got Duke in big trouble. In May NLPC reported how its coal gasification plant under construction in Edwardsport, Ind., suffered approximately $1 billion in cost overruns and led to Duke’s pursuit of a (too-)friendly rate recovery deal, as well as the recruitment of the top lawyer at the Indiana Utility Regulatory Commission. At the same time that lawyer, Scott Storms, took part in cases Duke had before IURC, and his behavior drew fines and punishment from the Indiana State Ethics Commission. The scandal cost Storms his Duke job as well, in addition to the jobs of James Turner, former president and COO of Duke’s U.S. Franchised Electric and Gas business, and Mike Reed, president of Duke Energy-Indiana and previous executive director of IURC. Indiana Gov. Mitch Daniels also fired IURC chairman David Hardy, because he knew about Storms’s conflict of interest but failed to do anything about it.

Now the plot thickens over how much cost recovery Duke will get from ratepayers for the overruns, but even more, filings by citizens groups and industry associations with IURC indicate a deeper involvement by Duke CEO James Rogers in off-the-record negotiations than earlier indicated. Questions arose about how much Rogers knew about the improper private discussions between the company and Indiana regulators over Edwardsport and recovery of costs, which Rogers initially denied, then amended in March. Communications between Turner and Hardy were particularly chummy, with invitations on boat trips and discussions about personnel issues, as the Indianapolis Star reported:

“Would the ethics police have a cow if you and the woman came up some weekend?” Turner wrote on July 2, while riding a boat on Lake Michigan. Hardy wrote back: “Probably — we might ‘be in the area’ some afternoon, but I won’t be doing this forever.”

In a new development last week, Turner was ordered to submit to a deposition about his dealings with IURC regulators in the Edwardsport case. Meanwhile according to Indianapolis Business Journal, Citizens Action Coalition filed copies of several emails that showed Rogers and other top Duke management – at least one including Rogers – in meetings with Hardy, the IURC chairman. IBJ reported:

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.

In expert testimony filed for CAC, a former utility regulator in Maine accused Duke of spending too much time with Hardy and not enough time with subcontractors who were experiencing the cost overruns. IBJ reported, “E-mails showed Hardy has been chummy with top Duke executives for years, holding private discussions with Duke’s top management.” Revelations of the relationship caused an industrial utility association and the state’s utility customers’ agency to withdraw from the $2.88 billion settlement. Now both groups believe Duke should receive significantly less for Edwardsport, citing “gross mismanagement” and attempts to hide problems in their filings with IURC.

Another expert witness for CAC, David Schlissel, alleged that coal gasification technology was not advanced enough to produce electricity on a large scale, and “that a 2007 study supporting the concept was based on a preliminary design, with little detailed engineering,” IBJ reported. Was the attraction of potential government grants and subsidies, including $1 million from the Department of Energy to research carbon dioxide storage, too much for Duke to resist? The plant was originally expected to also benefit from $133.5 million in tax credits, and Duke later announced the Edwardsport plant would bring in more than $460 million in federal, state and local tax incentives. With the willingness of public bodies to offer other goodies like accelerated depreciation, research and development grants, and mandates, Duke probably expected to make money on the coal gasification experiment like they do with wind.

In addition Duke seemed to feel confident it could recover its investment in unproven technology via its ratepayers. The company managed many aspects of the project itself, despite its inexperience. Barbara Smith of the Indiana Office of Utility Consumer Counselor said that because Duke assumed all the risk, “it could transfer that risk to its ratepayers.” Again, Duke depended on government to force its customers to save its behind.

Paul Chesser is an associate fellow for the National Legal and Policy Center and is executive director of American Tradition Institute.