Duke ignored water issue at Indiana plant, consultant says

July 29, 2011-by Chris O’Malley in the Indiana Business Journal

Duke Energy's mismanagement of their Edwardsport "new" coal plant has caused costs to rise to levels 2.5 times what they projected when they gathered political support for their project from 2004 to 2007. Among those enlisted for that support were Governor Mitch Daniels as well as David Lott Hardy, then chair of the Indiana Utility Regulatory Commission. Daniels even went so far as to write a letter to the USEPA seeking favor for Duke to get an exemption from federal hazardous waste rules so Duke could by pass treating their hazardous water waste and instead inject it deep underground. EPA denied the Governor's request and Duke had to pony up an extra $100 million to build a waste water treatment plant to handle the waste. That expense was one the the things that caused the cost of the plant to rise. Photo © 2011 John Blair

Regulatory filings alleging Duke Energy Corp. grossly mismanaged construction of its Edwardsport plant contend the utility ignored warnings for seven months over potential problems with federal regulators if it disposed of plant water deep underground.

David Lott Hardy declares his support for Duke's then proposed plant at the "Energy Summit of Southwest Indiana" the day after he presided over a public hearing in Bloomington that discussed the plant's future. Photo © 2007 John Blair

Missteps in how to dispose of “grey water” produced in the coal-gasification process have been cited by consumer groups as among major reasons for $1 billion in cost overruns at the plant. Nearing completion, the facility is now estimated to cost more than $2.8 billion.

Earlier this month, the Indiana Office of Utility Consumer Counselor alleged that Duke bungled the water disposal system to the tune of $100 million in cost overruns.

A report filed in recent weeks by OUCC’s consultant, Houston-based Accumyn Consulting, contends that Duke embraced deep-well injection disposal despite problems with the technology at another of its projects.

Duke officials in 2006 assumed that the grey water produced in the production process would be non-hazardous, according to Accumyn. A year later, Duke’s own engineers expressed “serious concerns” and recommended that partner General Electric “firm up” the analysis of the water content.

Two months later, in November 2007, GE’s report indicated the water likely would have elevated concentrations of arsenic and selenium—high enough to be characterized as hazardous under federal law.

Indiana Governor, Mitch Daniels also appeared at the Energy Summit, praising the ill-fated Duke plant as the energy of the future in Indiana. He later fired Hardy in an attempt to distance himself from the cost overrun scandal that has developed during the plant's construction. Photo© 2007 John Blair

About one month after acknowledging the results, Duke received approval from the Indiana Utility Regulatory Commission to build the plant. But Duke’s management “had evidently failed to reveal important information discovered before the commission decided on approving the project,” Accumyn states in its report.

Moreover, citing documents turned over by Duke, the consultant said records don’t indicate “any significant reaction” by Duke’s project team to the GE report that water would be deemed hazardous—until about seven months later, “when the Duke Energy environmental department became involved.”

The utility expressed concern at that point that the deep-water injection plan would be disallowed by the Environmental Protection Agency, or would subject the Edwardsport plant to substantial corrective action with “huge implications” to the coal-gasification plant.

In mid-2008, even as Duke proceeded with the underground injection work, the Charlotte-based utility “wrongly believed” that it could overcome the problem by asserting an exemption under the so-called Bevill Amendment.

In early 2009 Duke officials asked Gov. Mitch Daniels, who has been a supporter of the Edwardsport coal-gasification plant, to write a letter to the EPA, urging it to apply Bevill to make the plant exempt from the hazardous waste classification under the Resource Conservation and Recovery Act, or RCRA.

“Alternative design options resulting from EPA’s failure to acknowledge the exemption would increase Duke Energy’s estimated capital cost by $30 million,” Daniels stated in his letter to EPA.

That was in addition to increased operating costs that would “have the potential to increase costs to Duke’s customers,” Daniels added.

But, in late 2009, EPA denied the application of the Bevill exemption. Duke abandoned the deep-injection process, for which it had already begun work, including the drilling of wells thousands of feet deep. It instead began work on a water-treatment process originally recommended by consultants.

The Accumyn report faulted Duke for ignoring evidence of the increased hazardous characteristics of grey water and the high risk of permitting.

Duke “failed to notify the commission of these risks and gambled millions of dollars on a highly doubtful outcome,” it stated.

Duke is still working on its own regulatory filing to counter the mismanagement allegations filed with the commission this month by the OUCC, watchdog group Citizens Action Coalition and by a group of Duke industrial customers.

The groups seek to block Duke from recovering from customers hundreds of millions of dollars of cost overruns.

Citizens Action Coalition officials said they were aware of concern about  the grey-water issue but were not made privy to the extent, nor that Duke asked the governor to write to EPA.

Contact with Daniels was one of numerous back-channel communications Duke made with state officials, particularly with former IURC chairman David Lott Hardy.

Such “ex parte” dialog is forbidden under the commission’s regulatory process.

Daniels fired Hardy last year after it was disclosed that Hardy knew that former IURC administrative law judge Scott Storms, who was presiding over Duke regulatory cases, had applied for a job with Duke.

Storms later got the job but Duke eventually fired him, along with two executives who frequently communicated with Hardy in an attempt to win favorable rulings from the commission.

Duke’s chairman, Jim Rogers, met with Hardy at Indianapolis restaurants on at least two occasions to discuss the Edwardsport plant progress, according to e-mail evidence provided by the CAC and the industrial customer group.

Some of the information discussed during those meetings was not formally disclosed to the commission or to parties in the Edwardsport case until weeks later, according to email evidence presented by the groups.