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Ethics scandal costs Duke Energy in 2 rulings

Chris O'Malley
October 20, 2011
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A 2010 ethics scandal involving the chief legal counsel for the state’s utility regulatory agency, who presided over cases favorable to Duke Energy Corp. in the months prior to taking a job at the utility, has come back to bite the state’s biggest electric utility.

The Indiana Utility Regulatory Commission on Wednesday reversed a ruling made by former chief counsel and administrative law judge Scott Storms. It would have allowed Duke at its next rate case to seek to recover from ratepayers $12 million in costs the utility incurred during a 2009 ice storm.

Also on Wednesday, the commission dismissed a case handled by Storms in which Duke sought permission to tap ratepayers to install "smart" electric meters in central Indiana to help better regulate loads. That project was estimated to cost $22 million.

The case in which Duke sought to collect storm damage costs is most notable. It was the only Scott Storms case the commission decided to reopen for further review after the ethics scandal came to light last year.

It was the also the only proceeding involving Storms in which one of the parties — the Indiana Office of Utility Consumer Counselor — had appealed to the state Court of Appeals.

The OUCC argued that Duke’s attempts to recover the ice storm damages during a future rate case amounted to retroactive ratemaking, which is only permitted in the case of extraordinary financial events. Charlotte-based Duke reported 2010 operating earnings of $14.2 billion.

“We are pleased with the outcome. ... We think that it’s commendable that the commission reconsidered,” Anthony Swinger, spokesman for the OUCC, said of Wednesday’s IURC ruling on the storm cost case.

“It’s been our position all along that we did not believe the facts supported Duke’s request.”

Swinger said Duke is already authorized to collect $2.6 million a year from ratepayers for storm damage costs.

Two IURC commissioners, Kari Bennett and David Ziegner, dissented from the decision to reverse the storm damage case handled by Storms.

They wrote that, “upon reopening this cause, no evidence was offered concerning allegations of [Storms having] undue influence associated with the original proceeding.”

Bennett and Ziegner said the majority views the decision to reopen the case to mean that it is authorized “to reconsider and reweigh” all the evidence and reach a different outcome despite the fact that none of the resubmitted evidence is materially different than the original.

“We do not agree that such an expansive reconsideration is appropriate.”

Duke officials said late Wednesday they continue to believe that its storm damage costs were “prudently incurred” and will address the issue in its next rate case.
Although it now cannot seek to recover the $12 million in 2009 storm damage in a lump sump, per se, it is possible Duke could instead seek to increase the current $2.6 million a year it’s permitted to collect for general storm costs.

As for the other ruling Wednesday — the dismissal of Duke’s request to invest in smart grid features such as advanced metering — the spectre of the Scott Storms scandal loomed large.

The commission said Storms presided over the 2010 evidentiary hearing in the case after he accepted a job offer from Duke as an attorney for its Indiana operations.

The Indiana Ethics Commission in May said the move was in violation of state ethics laws, although Storms has appealed the ethics board’s final report in Marion County Circuit Court.

“The ethics case  … which relates directly to this cause, has resulted in and continues to cause, substantial delay in the commission’s ability to review and decide the merits of this case,” the IURC said Wednesday.

The delay means that cost estimates presented in Duke’s smart grid case may havebecome outdated.

“In addition, the commission has concerns about rendering an opinion on the current record in light of the Indiana Ethics Commission’s factual finding in its final report,” the  IURC said, adding that it is thus “not in the public interest” to decide the merits of Duke’s smart grid deployment.

Duke Energy spokesman Lew Middleton said the utility respects the commission’s decision given the passage of time. He noted that the IURC did not dismiss the case based on the merits in the smart grid proposal.

 “We will evaluate our next steps,” he said.

Kerwin Olson, interim executive director of utility watchdog group Citizens Action Coalition, said he was still trying to make sense of the IURC rulings late Wednesday.

Olson noted that the commission in these two cases made decisions that centered on orders involving Storms. Yet the commission isn’t taking into consideration Storms’ rulings involving Duke’s controversial Edwardsport coal-gasification plant, which has $530 million in cost overruns.

“I fail to understand the difference,” Olson said.

The Storms scandal proved an embarrassment for both Duke and the IURC.

Duke later fired Storms, along with Michael Reed, the head of Duke’s Plainfield-based Indiana operations.

Another casualty was IURC chief David Hardy, who Gov. Daniels fired last fall. Emails revealed Hardy knew Storms was handling Duke cases even after immersed in job discussions with the utility. They also showed Hardy making light of a routine state ethics panel hearing triggered after Storms announced his intention to seek work at Duke.

Emails also show that Hardy was chummy with Duke Energy executives to the point it may have tainted commission decisions involving Duke, including those of the controversial Edwardsport project.

This story originally ran on IBJ.com Oct. 19, 2011. The Indianapolis Business Journal is a sister publication of Indiana Lawyer.

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