Big question: Was there undue influence between Duke execs and IURC?
Private talks between Duke execs and IURC chief raise concerns that utility swayed regulator on costs
by John Russell
James Rogers, the chairman and chief executive of Duke Energy Corp., wanted a private meeting last February with Indiana’s top utility regulator to talk about soaring construction costs at the company’s Edwardsport power plant.
So one of his lieutenants — Duke Vice President James Turner — sent an e-mail directly to David Lott Hardy, then chairman of the Indiana Utility Regulatory Commission.
“Rogers and I would like to have breakfast with you this coming Thursday if you’re available,” Turner wrote.
The two men juggled their calendars and settled on a time. “Don’t tell the [other] utilities I’m being accommodating — bad for my reputation,” Hardy wrote to Turner.
Despite state law that sharply restricts private communication between regulators and company officials on pending cases, Rogers, Turner and another Duke executive met last February for breakfast with Hardy at the Capital Grille, a swanky Downtown restaurant where the menu features eggs Benedict with lobster for $21 and filet mignon hash for $15.
During the meeting, the Duke executives told Hardy that the power plant was facing a $530 million cost overrun — the second major overrun in less than two years. All told, that would push the price tag up nearly $1 billion more than the IURC originally approved in 2007.
It was an enormously significant bit of news for the utility. Opponents of the project would argue that the cost overruns were Duke’s fault and that the company should absorb the loss instead of being allowed to pass it along to customers in the form of a rate hike. If Duke were required to cover the cost, its profits and stock price would almost certainly take a hit.
Part of Turner’s job was to help persuade IURC officials to pass those costs along to customers — or to the contractor on the project. Incentives were built into his bonus, and e-mails from him indicated he took the task very seriously.
It was also critical news for Duke’s customers. The plant would require a double-digit percentage hike in electricity rates by 2013 for hundreds of thousands of Indiana customers, from households and schools to shopping centers and steel mills.
With such high stakes, experts in utility regulation say, it is imperative that utilities release such news to all stakeholders at the same time during open public hearings.
“Utility regulators decide cases that affect just about everyone’s wallet, and they need to make those decisions in a manner that gives the public confidence,” said Janice Beecher, director of the Institute for Public Utilities at Michigan State University. “Closed-door meetings or exclusive meetings aren’t conducive to that.”
The public, however, would not learn of the higher figure for seven weeks. Not until April would Duke make its regulatory filing with the IURC and issue a news release.
The breakfast meeting at the Capital Grille — and several others like it — are now raising serious questions about whether Duke’s top executives exerted undue influence on utility regulators to pass along steep overruns to ratepayers to bail out a project plagued by rising costs.
Duke officials called the meetings a “courtesy heads-up,” not meant to influence the process.
But e-mails obtained by The Indianapolis Star in recent months show that top executives at the utility and IURC had a long, cozy relationship that went beyond simple courtesies.
Hardy and Turner — who have both left their jobs in recent months as that coziness came to light — traded frequent e-mails on a wide range of topics, from cars and vacations to Duke’s personnel decisions and construction problems at Edwardsport. In one e-mail, Turner invited Hardy and his wife to vacation on his boat in Lake Michigan.
Now, other e-mails indicate that Rogers, the top executive at Duke, was involved in private conversations with regulators at key points during the Edwardsport project.
E-mails also show an awareness among Duke and IURC officials of a desire for secrecy in some of their communications.
Ethics experts, large industrial customers and consumer advocates say the frequent contact and secret meetings ran afoul of Indiana law. They say Duke, at the least, should have disclosed the private meetings as they say the law requires.
Whether the private communications were improper depends on what was discussed.
Duke says the meetings were allowed by law because they were purely informational and did not cross the line into attempting to persuade the commission to approve the cost overruns.
But Duke’s critics are reluctant to take the company at its word in the wake of a recent ethics scandal that revealed the commission’s then-top attorney was seeking a job at Duke while overseeing some regulation of the company.
It remains unclear how authorities will respond to questions about Duke’s private meetings and whether those get-togethers amounted to improper influence.
The IURC says the meetings were brought to its attention only a few weeks ago and it is still looking into the matter. The Marion County prosecutor’s office declined to comment. It would be responsible for investigating communications that violate the state’s “ex parte” law, which strongly limits what all parties with a stake in matters pending before the IURC can say outside the confines of official commission proceedings.
The state Inspector General and the FBI launched investigations into earlier ethical questions about the cozy relationships between Duke and the IURC but have declined to comment since then.
More private meetings
The breakfast meeting last February between Hardy and Duke executives was only one of many such meetings with government officials that apparently took place that week, according to e-mails.
A day earlier, Jim Stanley, then president of Duke’s Indiana operations, sent an e-mail to Hardy, asking if Turner could visit the IURC offices and “do a walk thru and reintroduce himself to folks.”
Hardy responded that Turner “cannot roam the halls willy-nilly, but he can see folks.”
“Does he have a target or two in mind?” Hardy asked.
Some Duke critics say such meetings, if they occurred, would have been improper. Such a visit probably was “carefully calculated to reinforce with the employees of the commission that Turner has a special personal relationship with Hardy, (and) Duke Energy has a special institutional relationship with the Commission,” Michael Mullett, a Columbus lawyer who is a longtime opponent of Duke, said in an e-mail.
Duke spokeswoman Angeline Protogere said she couldn’t confirm whether Turner actually ended up visiting the IURC offices that day.
And there apparently was another meeting that day, the contents of which required some level of secrecy. A few hours after the breakfast meeting at the Capital Grille, Hardy sent Rogers and Turner an e-mail, with the subject line: “terseness.” The e-mail said: “Who ever reports on the meeting might consider a one word characterization and a number where you can be reached.”
Turner responded: “Got it.”
Duke declined to comment on that mysterious exchange. “I don’t want to speculate on what Hardy might have been referring to, and I can’t find records of much of a response from us,” Protogere said.
It was not the first time Duke officials had taken regulators into their confidence, far out of public view, over the rising cost of the Edwardsport plant. Two years earlier, on March 17, 2008, company executives met privately with Hardy.
They told him the plant’s cost had risen from an originally approved amount of $1.985 billion to $2.35 billion. They would not share that figure with customers, consumer groups or other interested parties for another two months.
Large industrial customers, who buy millions of dollars worth of Duke’s electricity per year, say they have big problems with Duke meeting privately with regulators to discuss Edwardsport.
“At the start of the case back in 2006, Duke elected to have the commission provide ongoing review of the project. From that point on, there should have been no private conversations about the project between anyone at Duke and anyone at the commission,” said Tim Stewart, a lawyer at Lewis & Kappes, which represents industrial customers.
He added: “It’s especially bad when the heads of Duke and of the commission are having secret meetings, the sole purpose of which can reasonably be assumed to be to ensure that Duke recovers the massive cost overruns from its ratepayers.”
He said Duke should bear the costs of the overrun, and not pass it along to ratepayers. He said “a convincing case” could be made that Duke knew or should have known that the original estimate of $1.985 billion was “significantly understated.”
A collection of grass-roots consumer groups that oppose the Edwardsport plant want the IURC to start an investigation to determine whether the e-mails and behind-the-scenes meetings amount to undue influence in the agency’s regulatory oversight of the Edwardsport plant. Some compare it to pleading a case in private with a judge, far from his chambers, away from the public eye.
“It’s like a defense attorney talking to a judge without the jury or prosecutor present. You just can’t do it,” said Kerwin Olson, program director for Citizens Action Coalition of Indiana, one of the groups that object to the private meetings. The others are Save the Valley, Valley Watch, and the Hoosier chapter of the Sierra Club.
In a recent filing with the IURC, the groups say secret communications, also known as ex parte contacts, “show an ongoing pattern and not simply an isolated incident or two.”
The IURC said it is still considering the motion and will examine evidence presented by Citizens Action and other parties.
Duke defends its actions
The legal filing includes responses from Duke Energy, in which the company said it was “aware of two meetings” where the Edwardsport project was discussed: two private meetings with Hardy over the cost increases.
The Capital Grille breakfast lasted approximately an hour, of which “5 -10 minutes was spent on Edwardsport cost estimate update,” Duke said in the legal response to the CAC filing.
The company said the other meeting was at a conference in New Mexico that lasted 15 to 20 minutes, of which the Edwardsport cost issues were discussed for 5 to 10 minutes.
Duke officials say they routinely give a “courtesy heads-up” to regulators on cost increases. In November, Rogers, the Duke chairman and chief executive, submitted testimony to the IURC with his views on the matter:
“I have had a practice throughout my 22 years as CEO not to surprise any of the commissions having jurisdiction over our regulated utilities with significant filings or new developments on major projects or initiatives,” he testified. “Consistent with that practice, we gave then-Chairman Hardy a courtesy heads-up on each of our project cost increases on the project and our intent to make filings with the commission regarding those cost increases.”
None of these contacts would be improper, provided they weren’t meant to influence the IURC. And Protogere, the Duke spokeswoman, said the company did not cross that line.
But some open-government advocates aren’t buying that explanation — especially in light of recent stories in The Indianapolis Star that showed that several Duke executives had cozy relationships with Hardy, and traded hundreds of compromising e-mails with him in recent years.
Turner, for one, frequently e-mailed Hardy on a wide range of topics. Turner, Duke’s second-highest-paid executive, resigned in December after his relationship with Hardy came to light.
Last July, as he was riding a boat on Lake Michigan, Turner wrote to Hardy: “Would the ethics police have a cow if you and the woman came up some weekend?”
Hardy shot back: “Probably — we might ‘be in the area’ some afternoon, but I won’t be doing this forever.”
A few months later, on May 6, Hardy sent Turner a message: “Is there a number where you would get a fax without the world seeing it?”
Turner replied: “My home fax isn’t working, so it could be tricky. How about a scan and e-mail?”
Julia Vaughn, policy director of Common Cause Indiana, said Duke’s cozy relationship with the IURC makes it hard to believe the company was not trying to plead its case with Hardy over the cost overruns.
“You can call it education, or you can call it advocacy, but clearly the information (that Duke gave to Hardy) was meant to influence the process,” Vaughn said
Duke’s need to give a periodic “heads-up” to state regulators shows how much the utility felt it needed a good working relationship with those who would make billion-dollar decisions on its projects, critics say.
In January 2010, Turner confided to his boss, Rogers, in an e-mail that he intended to give plenty of attention to the Edwardsport plant and try to shift costs away from the utility.
“One of my top priorities this year is to reduce the regulatory risk associated with Edwardsport,” he wrote.
He said he would do that by “putting pressure” on the company’s major contractors, General Electric and Bechtel Corp., “to own up to some of the construction cost issues.” He also was interested in “seeking partners” from major industrial customers “to absorb some of the investment.”
“I will feel better about overall Indiana strategy when I feel like Edwardsport is in smoother waters,” Turner wrote.
The Edwardsport plant, for all its cost and construction problems, remained on course until Duke entered an ethics storm in the second half of last year with a series of questionable hiring decisions.
In June, the utility hired Mike Reed as president of its Indiana operations. Reed previously served for about a year as commissioner of the Indiana Department of Transportation, and before that for three years as executive director of the IURC.
In September, Duke hired Scott Storms, the IURC’s top attorney and chief administrative law judge, to become a regulatory lawyer in its Plainfield office. Critics charged that the move was a conflict of interest, noting that Storms was overseeing regulation of Duke even as he sought a job with the company.
Within months, Duke fired both Reed and Storms.
Hardy, for his part, was fired as IURC chairman in October by Gov. Mitch Daniels, for overlooking ethical conflicts at the commission.
Months before those conflicts came to light, Hardy and Turner were bantering in e-mails about their future.
In January 2010, a month before the Capital Grille breakfast and three months before Hardy’s term as IURC chairman was set to expire unless Daniels reappointed him, Turner sent Hardy an e-mail: “You’re not planning to go anywhere in April 2010, are you?”
Hardy responded: “Is that a job offer?”
Turner replied: “Could be. But I was thinking you have miles to go at the IURC before you sleep.”