The ethics of a “boondoggle”

The case this review will deal with is that of Duke Energy Indiana’s coal gasification plant. I surmise what can be learned here is that the best laid plans to protect the public’s interest can be easily derailed by ‘clubby’ behavior from individuals in power. Further, this case sheds light on the importance of our system of laws that work to maintain separation between regulatory bodies and those industries they regulate. In this case, the violation of these revolving door policies leads to over 1 billion dollars in additional cost to be absorbed by electricity rate payers in the state of Indiana.
Starting with some background information would be useful to understand the breaches here. Duke Energy operates a large electric utility service covering much of Indiana’s population, mainly in south and central Indiana. Duke Inc. originates from North Carolina and purchased the Cinergy/PSI assets over a decade ago. Most of the power plants acquired in Indiana are coal fired and date from the early seventies on their oldest units. Duke and the other electric utilities in the entire Midwestern region have been looking for ways to covert from dirty, greenhouse gas emitting coal to other forms of energy for quite a while now. Duke chose to pioneer a new technology still using coal, but processing it first before incineration to claim the natural gas component and only burn it. The process known as coal gasification was hoped to reduce particulate emissions by over 50%. (Energy, 2014)
Duke Energy chose to invest heavily in this new technology and replace an aging coal fired plant in Edwardsport, IN with a new gasification plant. The original plant was demolished starting in 2006 to be replaced by the new units with a price tag of 1.8 billion dollars. By the time of the ethics scandal, this total would grow to over 2.6 billion.
With this background in place, we move into the ethics violation and its aftermath. The case revolves around four gentlemen either working for Duke or employed by the Indiana Utility Regulatory Committee (IURC) during this period. David Lott Hardy was chairman of the IURC from 2005 until his termination by Governor Mitch Daniels in October of 2010. Hardy had been in frequent email communication with Duke executives via email where topics ranged from the Edwardsport plant, to future staff changes at IURC and even to shared interest in sports events. The first two items were wholly in violation of the IURC convents as a regulatory body to Duke and the other electric providers in Indiana. Two quick excerpts from a later indictment of Hardy better illuminate the issue: (Nelson, 2014)
On or about and between April 2010 and August 3, 2010, DAVID LOTT HARDY, Chairman of the Indiana Utility Regulatory Commission and supervisor of Scott Storms, did knowingly aid and abet Scott Storms by communicating with employees of Duke Energy regarding Scott Storms’ prospective employment while allowing Scott Storms to perform an act that Scott Storms was forbidden by law to perform, that is: Scott Storms, an administrative law judge with the Indiana Utility Regulatory Commission, had a conflict of economic interest (I.C. [§] 4-2-6-9), in hat he knowingly participated in decisions and/or votes when Scott Storms had a financial interest in the outcome of the matter arising from prospective employment as counsel for Duke Energy

On or about and between March 17, 2008, and October 5, 2010, DAVID LOTT HARDY, a public servant, to wit: the Chairman of the Indiana Utility Regulatory Commission, did knowingly perform an act that DAVID LOTT HARDY was forbidden by law to perform, that is: DAVID LOTT HARDY received a communication in violation of I.C. [§] 8-1-1-5(e), to wit: communications from Jim Turner and/or Jim Stanley on or about March 17, 2008, regarding revised cost estimates of the Edwardsport IGCC Project, and failed to disclose such communication in the manner required by 170 IAC 1-1.5-6, to wit: by failing to tender to the record of the proceeding a memorandum stating the substance of the oral communications received, all oral responses made and the identity of each person from whom the communication was received and advise all parties that such items had been tendered to the record;

What we see here from both Mr. Hardy’s day in court and the court of public opinion is a group of individuals knowingly violating the rules and procedures set forth by the industry they work in and the government bodies they represent. In the first excerpt we see Scott Storms getting preferential hiring treatment by Duke, almost as a favor to Commissioner Hardy. Storms had been working with Duke on an offer of employment for months during critical cost overrun hearings with the IURC. Email tracked it all as these parties worked together to defraud Indiana rate payers. For his part, Storms paid fines and is barred from further employment by the state of Indiana. (Russell, 2014)

A settlement agreement set a hard cost cap for the project at $2.595 billion (as of June 30, 2012), which prohibits Duke Energy from recovering project construction costs above this amount from retail electric customers. It also requires the utility to absorb nearly $900 million in cost overruns given the plant is now projected to cost approximately $3.5 billion. Through a modification to the settlement agreement, the IURC also provided $28 million in additional value to ratepayers by directing Duke Energy to credit customers for cost control incentive payments found to be unwarranted, given the delays that arose from the project cost overruns. While better than nothing, Indiana rate payers will be footing this bill for years to come.
We come back to what is had now and what that will cost. The rate payers of Indiana do have an operational power plant at Edwardsport. However, even Duke’s subcontractor Bechtel admits that Duke took an exceptional amount of risk with the untested gasification technology and still cannot run the facility at even a fraction of design capacity. That said the democratic system of checks and balances against abuse in the private sector did work. By all accounts, Edwardsport has been a boondoggle for everyone involved. What will never be known is how much of that billions in overrun are related to the gross mismanagement and ethics violations that took place right up the chain of command at Duke.

Works Cited
Energy, D. o. (2013, May 18). Gasification. Retrieved from Energy.gov: http://energy.gov/fe/science-innovation/clean-coal-research/gasification
Nelson, W. J. (2014,April 29). State of Indiana v. David Lott Hardy - 04291402rrp. Retrieved from IN.gov: http://www.in.gov/judiciary/opinions/pdf/04291402rrp.pdf
Russell, J. (2014, February 6). Lawyer reprimanded in utility ethics scandal. Retrieved from Indystar.com: http://www.indystar.com/story/news/politics/2014/02/06/lawyer-reprimanded-in-utility-ethics-scandal/5260111/