Company tries to explain cost overruns to IURC

Original article http://www.indystar.com/article/20111027/NEWS14/110270360/star-watch-duke-energy-Edwardsport-iurc?odyssey=tab|topnews|text|News

Written by John Russell Indianapolis Star, 11:33 PM, Oct. 26, 2011

Duke Energy CEO James Rogers testified before the Indiana Utility Regulatory Commission in Indianapolis on Wednesday about cost overruns at the company's coal-gasification plant in Edwardsport. / Joe Vitti / The Star

Duke Energy Corp.'s troubled power plant in Edwardsport now ranks as the company's most expensive project ever built per kilowatt of electricity generated, the utility's chairman admitted under questioning Wednesday.

The massive plant, originally billed as a producer of low-cost energy, has run into numerous construction problems that have pushed its price tag above $3 billion, from an original estimate of $1.9 billion.

Company officials, including Chairman James Rogers, found themselves on the defensive Wednesday, trying to explain how the costs got so out of hand and who should pay the bill.

It's an issue the Indiana Utility Regulatory Commission will decide in coming weeks, as it hears from more than a dozen witnesses. The agency will determine whether Duke was prudent in managing the project and should be allowed to bill customers for much of the costs.

So far, the IURC has ruled that customers should pay $2.35 billion of the plant's cost. Duke wants the commission to increase that to more than $2.7 billion, raising monthly electricity bills for more than 700,000 Indiana households and businesses.

Rogers faced a barrage of questions about the plant's problems, such as its wildly wrong estimates on the amount of steel, piping and concrete needed to construct the facility, along with labor productivity issues and a costly, unforeseen water-disposal system.

Rogers acknowledged, under questioning by Randall Helmen, chief deputy at the Indiana Office of Utility Consumer Counselor, that the cost of the Edwardsport plant per kilowatt has climbed to $5,593, up from $3,364 when the regulators originally approved the project in 2007. [Emphasis added.]

That figure takes in the capital costs of the plant, not the annual costs of running it once it goes online. Many of Duke's other plants or units were built at a fraction of the cost per kilowatt generated by those facilities.

"How is this low-cost energy?" Helmen demanded.

Rogers said he has been disappointed by the soaring costs but maintained that the plant, when completed, will produce cleaner electricity for decades to come.

"Yes, it's expensive," Rogers said. "But it will be the cleanest plant in Indiana."

He said the project is 96 percent complete and should be in service a year from now, adding much-needed generating capacity to Indiana households and businesses as Duke begins to retire other, aging plants.

But Helmen hammered Rogers on the costs, much of which Duke wants customers to pay in the form of higher electricity bills.

"Is there any plant in the whole Duke family anywhere near $5,000 a kilowatt?" Helmen asked. [Empasis added.]

"No sir," Rogers replied.

Among its vast fleet, Duke owns 14 coal plants, three nuclear plants and more than a dozen oil or gas plants.

Despite the grilling, Duke officials did not budge Wednesday from their position that they prudently managed the project and costs, and that the plant will be good for Indiana, using about 1.5 million tons of coal per year, much of it mined in Southern Indiana, to generate about 618 megawatts of electricity at its peak.

The company said the challenges of building such a large plant -- the biggest coal-gasification plant in the world -- took it by surprise each time there was a setback. But Duke has said it relied on its outside contractors and engineers for expert guidance.

"With the benefit of hindsight, of course, different choices might have been made as the project unfolded, but that does not equal imprudence under the law," Kelley Karn, a Duke attorney, said in her opening statement.

She added: "The company is not required to make perfect decisions or even optimal decisions. Rather, as long as the decision falls within the range of reasonable choices at the time it is made, it is a prudent decision."

The commission also will consider, in a separate hearing, whether Duke hid vital information from regulators, committed fraud or grossly mismanaged the project.

Rogers told the commission Wednesday he has worked hard to get the plant finished, despite the problems. He said he urged the major contractors, Bechtel and General Electric, to "stop pointing fingers" and get the job done.

"I said, let's finish with the least cost possible and then we'll sort out who owes what," Rogers said. "My first priority was to finish the project."

But a group of large industrial customers wants the commission to hold Duke's feet to the fire over costs. The utility's position is "it's someone else's fault," said Jack Wickes, a lawyer at Lewis & Kappes, representing the industrial customers.

"Duke's assumptions were too rosy," he said.

A group of public-action groups said the project was a novelty that presented special risks in overall planning and management, and Duke failed to manage the risks.

"Many of those risks have come to fruition," said Jerry Polk, attorney for Citizens Action Coalition of Indiana, one of the public-action groups.

During more than three hours on the witness stand, Rogers repeatedly deferred questions about the project's engineering setbacks to other executives, who will testify in coming days. He could not describe, for example, where the plant's main components were located on the property, or the basic layout of the project, even though a huge image of the plant was set on an easel near him.

"I think it's painfully clear I'm not an engineer, based on my testimony so far today," he said, eliciting laughter in the room.

Helmen grilled Rogers relentlessly, asking him whether he was familiar with Bechtel's other projects worldwide, including the Hoover Dam, and about the qualifications of Duke's early team of engineers.

Rogers said he was familiar with some of Bechtel's work and said Duke later hired more qualified managers to take over the project.

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