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Contractor says Duke took risks at Edwardsport plant in Indiana; Letters show rift over work at $2.9B facility February 1, 2011

Posted by Laura Arnold in Duke Energy, Edwardsport IGCC Plant, Indiana Utility Regulatory Commission (IURC), Uncategorized.
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12:53 AM, Jan. 29, 2011  | 

Written by John Russell

Letter from Bechtel to Duke Energy Drop. about Edwardsport project

Last fall, as costs and accidents were mounting at Duke Energy Corp.’s massive power plant in Edwardsport, the project’s engineering contractor warned that Duke was taking “significant risks” with the way it was managing the $2.9 billion construction project.

In a confidential letter to Duke dated Oct. 5, Brian Hartman, project manager for engineering giant Bechtel Corp., raised sharp questions about the project, which has since become embroiled in an ethics scandal. Hartman wrote that Duke, in violation of its contract with Bechtel, had:

» Shuffled supervisory staff, “demobilized” certain Bechtel workers and severely limited oversight of Bechtel’s support and engineering service.
» Stopped monthly project reports and monthly review meetings.
» Consolidated certain engineering functions.
» Sharply limited Bechtel’s overtime.
» Took personnel action against Bechtel management’s recommendation.
» Reduced documentation of certain work.

“The precipitous speed with which you intend to implement these transitions will almost certainly have a detrimental impact on the work, and potentially the long term interest of the project,” Hartman wrote in the letter addressed to Mike Womack, a Duke vice president and Edwardsport project director.

The letter is one of dozens of letters and e-mails between the companies in a new filing made Friday afternoon at the Indiana Utility Regulatory Commission.

The exhibits reveal a growing unhappiness between Duke and its engineering partner as they sharply disagreed over who has responsibility for the plant’s rising price tag and several accidents that delayed construction.

The filing was made by a collection of consumer and environmental groups that have opposed the plant for years, saying it is not needed, uses unproven technology and is too expensive.

The groups — Citizens Action Coalition of Indiana, the Sierra Club, Save the Valley and Valley Watch — want the state to investigate whether Duke mismanaged the project, committed fraud or concealed vital facts. If the groups can prove that, Duke would have to swallow a large portion of the construction costs, without passing them along to ratepayers.

A Duke spokeswoman on Friday said the plant’s opponents have taken documents out of context, and that Duke will address the issues fully in proceedings before the commission in coming months.

“In most large construction projects, there are disputes with contractors,” Duke spokeswoman Angeline Protogere said in an e-mail to The Indianapolis Star. “While we continue to have disagreements over costs, the issues outlined in that letter have been resolved.”

San Francisco-based Bechtel, one of the largest engineering and construction companies in the world, declined to comment Friday.

The price tag for the Edwardsport plant has ballooned to $2.9 billion from an original estimate of $1.6 billion in 2006.
The plant is one of the most expensive projects in Indiana history. It would be the first commercial-scale gasification plant in the country when it starts operating in 2012.

With every delay or setback, the project’s price tag has climbed higher, and the company has won permission to pass along much of that increase in the form of higher electric bills to hundreds of thousands of customers, from households to steel mills.

The 630-megawatt plant is sorely needed, Duke said, to keep up with growing energy needs, and it would replace several older, coal-fired power plants. Duke, based in Charlotte, N.C., is the largest electric utility in Indiana, with 780,000 customers in 69 of the state’s 92 counties.

Duke repeatedly has denied that it has hidden the true costs of Edwardsport. The company said it has managed the project properly and let regulators know about cost and construction problems as they arose.

Whatever their relationship today, Duke and Bechtel have clearly had some rocky moments, based on the correspondence contained in the new filing.

According to the minutes of a Nov. 12, 2009, meeting between the two companies, Duke rated Bechtel’s performance at Edwardsport as “very low” in engineering, procurement and other “home office activities.” Duke rated Bechtel’s construction management as “acceptable to good, but without a lot of data at this point.”

Duke concluded that Bechtel “should contribute commercially to the significant increased costs.” Bechtel, for its part, took issue with performance problems, although its concerns were not spelled out in the minutes of that meeting.

Several e-mails between Duke and government officials suggest the utility was putting pressure on Bechtel to keep the project under control.

“We’re throttling Bechtel,” James Turner, then Duke’s second-highest-paid executive, wrote to David Lott Hardy, then chairman of the IURC, on Sept. 2, 2009. “More work to do on that score.”

Despite the throttling, the Edwardsport plant has spiraled into a huge problem for Duke. Earlier this month, a group of large industrial customers demanded that Duke renegotiate terms of an agreement over the latest round of cost overruns, worth about $530 million. Duke reluctantly agreed to reopen the settlement.

The plant also has been rocked by revelations in recent months of chummy, inappropriate communications between key players. Several officials at Duke and the IURC have come under fire for their cozy relationships, which were revealed in numerous compromising e-mails published in The Star.

Three officials at Duke have been fired or have resigned in recent months, and Gov. Mitch Daniels sacked Hardy as chairman of the IURC last fall for his role in the matter.

Now, the new material filed by the citizens groups raises questions about how well the construction project was managed.

“We say the project has been grossly mismanaged, and important information has been concealed from the public,” said Kerwin Olson, program manager at Citizens Action. “These communications reveal a lot of problems that have never been publicly discussed.”

The confidential documents, obtained by Citizens Action, show tensions between Duke and Bechtel that stretch back more than a year.

Many of the e-mails focus on several construction accidents at the plant and who was to blame for them. One was in November 2009, when a 20-ton column that was being raised at a steam boiler fell to the ground. Another occurred in August 2010, when an erection contractor damaged the shell of a heavy steam turbine while flipping it over. No one was hurt in either incident.
“We need an exorcist on this job,” Richard W. Haviland, a top Duke executive, wrote to Womack, another Duke executive.

They discussed who should be charged for the August accident, which caused damage to a steam nozzle and other external components. Womack told Haviland in an Aug. 9, 2010, e-mail that the damaged equipment might have to be shipped to Chicago for repair, which could delay work on that part of the plant for months.

As for who should pay for damage, Womack wrote that the erection contractor, Graycor, should pay for up to $500,000. The project would then pay the excess up to $10 million, and the insurance company would pay any balance. Graycor could not be reached for comment Friday.

“I suspect you are bracing for the onslaught of questions as to why the project took the first $10 million and not the contractor,” wrote Dennis Zupan, another Duke official.

On Feb. 17, 2010, Bill Dudley Jr., president of Bechtel, wrote a two-page letter to Duke Energy, saying it was time to get together and clear the air on disagreements over the project.

“As we stated in our meeting last November, and we reassert here, Bechtel does not share your view of our performance to date on the project,” Dudley wrote. “We believe that we have performed within the requirements of our contract.”

He pointed out that the project initially was structured as a “lump sum turnkey project.” He did not mention what the “lump sum” was. Duke Energy, he wrote, had insisted on structuring the contract on a “cost reimbursable basis.”

“Rather than relying on Bechtel’s proposed structure, execution plan and pricing, Duke substituted its own in its submission to the IURC,” Dudley wrote.

He continued: “The project has considerable additional risks going forward. . . . This is not a ‘cookie cutter’ natural gas power plant, and we all knew there were significant risks in delivering such a project.”

Duke responded that it was never offered a lump sum turnkey proposal. The company entered into the type of contract it has with Bechtel because it was “the most reasonable and prudent approach given the circumstances at the time,” said Protogere, the Duke spokeswoman.

Call Star reporter John Russell at (317) 444-6283.



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