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Sunday, August 15, 2010

Ind. Gov't. - "Indiana Office of Utility Consumer Counselor says it has "serious concerns" about Duke Energy Indiana's construction of 630-megawatt coal gasification facility at Edwardsport

Here is the Office of Utility Consumer Counselor (OUCC) press release from August 9, 2010. Some quotes:

Duke Energy Indiana's construction of a new power plant in Knox County should continue but only with new ratepayer safeguards in place, according to the state agency representing consumer interests in utility regulatory cases.

While the Indiana Office of Utility Consumer Counselor (OUCC) continues its support for Duke Energy's plan to operate a new 630-megawatt coal gasification facility at Edwardsport, the OUCC has serious concerns regarding the project's cost overruns and inaccurate, unreliable cost estimates from the utility. The OUCC's concerns are detailed in testimony recently filed with the Indiana Utility Regulatory Commission (IURC). * * *

In a docket now pending before the IURC, Duke Energy is requesting authorization to increase its projected cost estimate again to $2.88 billion, a 45 percent increase over the utility's original estimate. The utility also expresses an "85 percent" certainty that no additional cost increases will be needed beyond the current request to complete the project.

"My staff has closely examined Duke Energy's most recent request including current data on the Edwardsport project," stated Indiana Utility Consumer Counselor David Stippler. "While the OUCC recognizes the importance of this project and the state's need for the additional generating capacity, it is deeply concerned about the dramatic rise in the project's costs in this short period of time. The OUCC is equally concerned with Duke Energy's apparent inability to constrain its budget for this project, whose costs are being borne by the utility's ratepayers."

"Utilities have a responsibility to demonstrate that rate-recovered costs, including increases to approved costs, are reasonable, necessary and prudent," continued Stippler. "Unfortunately, Duke Energy has not met this burden of proof in its pending request to increase the project's cost estimate by more than a half-billion dollars."

The OUCC's testimony in the pending docket recommends that the IURC cap the project's overall costs at an amount significantly lower than the $2.88 billion Duke Energy is currently requesting. If the cap is exceeded, the utility would then be required to seek any additional cost recovery through a base rate case filing rather than through the semi-annual cost tracking mechanism currently in use. (The tracking mechanism allows the utility to incrementally recover project costs through rates as they are incurred.)

In addition, the OUCC is recommending that the IURC discontinue a financial incentive that is allowed in Duke Energy's cost tracker filings. The utility is currently allowed to exclude deferred income taxes from its capital structure. That incentive has resulted in increased earnings for Duke Energy - on costs up to the project's original $1.985 billion estimate - that are significantly higher than what would normally be allowed under traditional ratemaking practices. While discontinuing this incentive would nonetheless allow Duke Energy to continue receiving its authorized 10.5 percent return on equity from its last base rate case, removing this incentive would save ratepayers tens of millions of dollars in the near future. * * *

The OUCC's testimony in this case, along with other key documents in the IGCC proceedings, can be found online at www.in.gov/oucc/2625.htm.

By way of background, Indiana's Marble Hill Nuclear Power Plant project was abandoned at the beginning of 1984, because of continuing cost over-runs related to the special requirements of nuclear facilities and to the double-dip inflation during that period. In addition, at that time Indiana law did not allow a return on investment on plants as they were being constructed (CWIP)* -- rather plants were required to carry capital costs for the plant until completion. The result, in the end, would have been severe rate-shock for all ratepayers, including business and industrial users as well as homeowners. All of this was highlighted in a report to Governor Robert Orr by a special task force he had appointed made up of business and industrial CEOs. (See this ILB entry from March 18, 2005.)

As for Marble Hill costs, according to this Jan. 30, 1984 Time Magazine article:

Public Service began constructing Marble Hill in 1978. The original cost estimate for the plant, situated near the small town of Madison, was about $1.4 billion.
At the time of its cancellation: "Marble Hill has already eaten up some $2.5 billion, making it the most expensive nuclear power project ever to be dropped." Its cost of completion: "The task force, set up by the Governor, estimated Wednesday that the cost of completing the plant would be $7.7 billion, and said it could go higher." (NYT, Dec. 24, 1983)
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*For more on CWIP, see this opinion letter by Kerwin Olson in the FWJG, dated April 22, 2010.

Posted by Marcia Oddi on August 15, 2010 02:58 PM
Posted to Indiana Government