The prospect of agreement on how to pay for the huge cost overruns on Duke Energy’s Edwardsport IGCC project is now in doubt following revelations about an improperly close relationship between staff members at Indiana’s utilities regulator and employees of Duke Energy. The scandal came into the public domain when e-mails between the state and Duke Energy officials were published by the Indianapolis Star, revealing close personal relationships between Duke executives and state regulators. In some e-mails, both sides poke fun at the regulatory process.

Duke Energy Indiana, the Indiana Utility Consumer Counselor, the Duke Energy Indiana Industrial Group, and Nucor Steel have jointly notified the Indiana Utility Regulatory Commission that they are withdrawing their 17 September settlement on cost increases associated with the Edwardsport coal gasification power plant near Vincennes, Indiana. The parties are now set to restart negotiations on how best to pay a bill – a substantial portion of which will come from the public purse – that has risen dramatically from original estimates of a $1.9 billion cost to build the 630 MW facility that was intended to replace several older plants. Its projected costs have risen to $2.88 billion from the figure in place when it was first approved less than two years ago.

“This action is the best path forward for the Edwardsport project at this time,” said James E. Rogers, Duke Energy chairman, president and ceo. “While we are disappointed the original settlement is being withdrawn, we understand the parties’ desire to negotiate a new settlement that is separate and apart from recent events.

“The support and co-operation of the settling parties is important to us, so we have agreed to re-examine and renegotiate the terms of the cost settlement. The merits of the Edwardsport plant are strong and construction continues to move forward. The total project is about 80 percent complete and we are on track to finish the plant by the fall of 2012.”

The cause of all this is an ethics scandal that has cost some state regulators and Duke Energy executives their jobs and has also raised questions about the financing of Edwardsport. David Stippler, the Indiana utility consumer counsellor, said that “due to recent revelations about communications between Duke Energy and the former IURC chairman, our office has called into question the integrity of the process that led to the settlement agreement. For these reasons, it is appropriate to reopen the negotiation process and take a fresh look at the issues addressed in this case.”

It’s the latest development in a scandal that also cost Duke’s second highest-paid executive, James Turner, his job, although Turner reportedly left with a $10 million severance package.

The situation started weeks ago, when government watchdog groups questioned the propriety of Scott Storms, then the Indiana Utility Regulatory Commission’s administrative law judge, moving into Duke’s legal department. Storms had overseen cases involving Duke’s Edwardsport plant.

State governor Mitch Daniels fired David Hardy, the head of the regulatory commission, and ordered a review of decisions involving Storms and Duke after the administration’s internal investigation found Storms was negotiating his job with Duke while overseeing cases that involved the utility, and that Hardy knew about it.

Meanwhile, Duke fired Storms as well as Michael Reed, a former Daniels administration official who headed its Indiana operations. Duke also fired Turner (officially he resigned) after it was revealed that he, too, had what the company decided was an unprofessional relationship with state regulators. The e-mails showed Hardy and Turner were in constant contact as Duke was hiring Reed and Storms.

Finally, although Jim Turner is leaving Duke Energy Corp. he won’t be done with the company’s troubles in Indiana, but will have to face further investigations. The Indiana Utility Regulatory Commission has ordered him to submit to questioning from opponents of the building of the gasified coal plant in the form of a deposition.