Duke Energy 2011 Annual Report Download - page 29

PART I
IGCC project of $2.35 billion (including $125 million of AFUDC) and
for approval of plans to study carbon capture as required by the
IURC’s CPCN order. On January 7, 2009, the IURC approved Duke
Energy Indiana’s request, including the new cost estimate of $2.35
billion, and cost recovery associated with a study on carbon capture.
Duke Energy Indiana was required to file its plans for studying carbon
storage related to the project within 60 days of the order. On
November 3, 2008 and May 1, 2009, Duke Energy Indiana filed its
second and third semi-annual IGCC riders, respectively, both of
which were approved by the IURC in full.
On November 24, 2009, Duke Energy Indiana filed a petition
for its fourth semi-annual IGCC rider and ongoing review proceeding
with the IURC. As Duke Energy Indiana experienced design
modifications, quantity increases and scope growth above what was
anticipated from the preliminary engineering design, capital costs to
the IGCC project were anticipated to increase. Duke Energy Indiana
forecasted that the additional capital cost items would use the
remaining contingency and escalation amounts in the current $2.35
billion cost estimate and add $150 million, excluding the impact
associated with the need to add more contingency. Duke Energy
Indiana did not request approval of an increased cost estimate in the
fourth semi-annual update proceeding; rather, Duke Energy Indiana
requested, and the IURC approved, a subdocket proceeding in which
Duke Energy Indiana would present additional evidence regarding an
updated estimated cost for the IGCC project and in which a more
comprehensive review of the IGCC project could occur. An interim
order was received on July 28, 2010 and approves implementation
of an updated IGCC rider to recover costs incurred through
September 30, 2009. The approvals are on an interim basis pending
the outcome of the sub-docket proceeding involving the revised cost
estimate as discussed further below.
On April 16, 2010, Duke Energy Indiana filed a revised cost
estimate for the IGCC project reflecting an estimated cost increase of
$530 million. Duke Energy Indiana requested approval of the new
cost estimate of $2.88 billion (including $160 million of AFUDC)
and for continuation of the existing cost recovery treatment. A major
driver of the cost increase included quantity increases and design
changes, which impacted the scope, productivity and schedule of the
IGCC project. On September 17, 2010 an agreement was reached
with the Indiana Office of Utility Consumer Counselor (OUCC), Duke
Energy Indiana Industrial Group and Nucor Steel – Indiana to
increase the authorized cost estimate of $2.35 billion to $2.76
billion, and to cap the project’s costs that could be passed on to
customers at $2.975 billion. Any construction cost amounts above
$2.76 billion will be subject to a prudence review similar to most
other rate base investments in Duke Energy Indiana’s next general
rate increase request before the IURC. Duke Energy Indiana agreed to
accept a 150 basis point reduction in the equity return for any project
construction costs greater than $2.35 billion. Additionally, Duke
Energy Indiana agreed not to file for a general rate case increase
before March 2012. Duke Energy Indiana also agreed to reduce
depreciation rates earlier than would otherwise be required and to
forego a deferred tax incentive related to the IGCC project. As a result
of the settlement, Duke Energy Indiana recorded a pre-tax charge to
earnings of $44 million in the third quarter of 2010 to reflect the
impact of the reduction in the return on equity. Due to the IURC
investigation discussed below, the IURC convened a technical
conference on November 3, 2010, related to the continuing need for
the Edwardsport IGCC facility. On December 9, 2010, the parties to
the settlement withdrew the settlement agreement to provide an
opportunity for the parties to the settlement to assess whether and to
what extent the settlement agreement remained a reasonable
allocation of risks and rewards and whether modifications to the
settlement agreement were appropriate. The IURC granted the
motion and scheduled a new evidentiary hearing to begin March 17,
2011. Management determined that the $44 million charge
discussed above was not impacted by the withdrawal of the
settlement agreement.
During 2010, Duke Energy Indiana filed petitions for its fifth and
sixth semi-annual IGCC riders. Evidentiary hearings are set for
April 24-25, 2012, respectively.
The Citizens Action Coalition of Indiana, Inc. (CAC), Sierra Club,
Inc.,SavetheValley,Inc.,andValleyWatch,Inc.filedmotionsfor
two subdocket proceedings alleging improper circumstances, undue
influence, fraud, concealment and gross mismanagement, and a
request for field hearing in this proceeding. Duke Energy Indiana
opposed the requests. On February 25, 2011, the IURC issued an
order which denied the request for a subdocket to investigate the
allegations of improper communications and undue influence at this
time, finding there were other agencies better suited for such
investigation. The IURC also found that allegations of fraud,
concealment and gross mismanagement related to the IGCC project
should be heard in a Phase II proceeding of the cost estimate
subdocket and set evidentiary hearings on both Phase I (cost
estimate increase) and Phase II beginning in August 2011. After
procedural delays, hearings for Phase I began on October 26, 2011
and for Phase II hearings begin on November 21, 2011.
On March 10, 2011, Duke Energy Indiana filed testimony with
the IURC proposing a framework designed to mitigate customer rate
impacts associated with the Edwardsport IGCC project. Duke Energy
Indiana’s filing proposed a cap on the project’s construction costs,
(excluding financing costs), which can be recovered through rates at
$2.72 billion. It also proposed rate-related adjustments that will lower
the overall customer rate increase related to the project from an
average of 19% to approximately 16%. The proposal is subject to the
approval of the IURC in the Phase I hearings.
On June 27, 2011, Duke Energy Indiana filed testimony with
the IURC in connection with its seventh semi-annual rider request
which included an update on the current cost forecast of the
Edwardsport IGCC project. The updated forecast excluding AFUDC
increased from $2.72 billion to $2.82 billion, not including any
contingency for unexpected start-up events. On June 30, 2011, the
OUCC and intervenors filed testimony in Phase I recommending that
Duke Energy Indiana be disallowed cost recovery of any of the
additional cost estimate increase above the previously approved cost
estimate of $2.35 billion. Duke Energy Indiana filed rebuttal
testimony on August 3, 2011. On November 30, 2011, Duke
Energy Indiana filed a petition with the IURC in connection with its
eight semi-annual rider request for the Edwardsport project.
Evidentiary hearings for the seventh and eighth semi-annual rider
requests are scheduled for August 6 and August 7, 2012.
In the subdocket proceeding on July 14, 2011, the OUCC and
certain intervenors filed testimony in Phase II alleging that Duke
Energy Indiana concealed information and grossly mismanaged the
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