August 16, 2008
22 firms got Duke discount
GE, P&G, AK Steel among 'side deals'
By Dan Horn
dhorn@enquirer.com
Some of southern Ohio's largest companies saved millions of dollars on their electric bills during the past three years while residential customers saw a 30 percent increase in their rates.
Documents obtained Friday by The Enquirer show that Duke Energy has paid 22 companies - including Procter & Gamble, AK Steel, General Electric and several major hospitals - a total of about $22 million a year since 2005.
Duke describes the payments as option agreements that ensured that the companies would continue to buy electrical power from Duke instead of a competitor.
But two lawsuits, one of which goes to trial Monday, claim the payments are kickbacks that rewarded the companies for dropping opposition to a proposed rate increase in 2004.
"The big users get a huge discount, and the people who are not in position to negotiate are harmed financially," said Randy Freking, one of the lawyers suing Duke. "Goliath wins, and David loses."
He said the payments are improper because Ohio law bars utilities from giving rebates to one group of customers at the expense of another.
Duke officials, as well as some of the customers who signed the deals, say the payments are legitimate business transactions that did not affect rates for any other customers.
"We believe these contracts are fully lawful and proper," Duke spokesman Steve Brash said.
The list of companies that received the payments from Duke had remained secret since they were signed in late 2004 and early 2005. Duke said the contracts, which expire at the end of this year, contain trade secrets and should remain confidential.
The Enquirer challenged that assertion this week in Hamilton County Common Pleas Court, arguing that the contracts now are part of a court record and should be opened to the public. Judge Robert Ruehlman agreed, clearing the way for the release of hundreds of pages of documents Friday.
A wide range of companies are on the list.
They include automakers, such as Ford and General Motors; hospitals, such as Christ Hospital, Jewish Hospital, Drake Center, the Tri-Health hospitals and the Mercy hospitals; and industrial customers, such as AK Steel, General Electric, Procter & Gamble, BP North America and Marathon Petroleum.
All of the companies do business in southern Ohio, where Duke dominates electric service, and all of them are big energy consumers.
The contracts include a formula for calculating the annual payments but do not specify how much each company received from Duke. Other court documents show the payments total about $22 million a year.
Most of the companies contacted Friday either declined comment or did not respond to interview requests. But those that did respond said the deals made good business sense and did no harm to other Duke customers.
"There have been accusations that these option agreements caused someone else's rate to go up. That's simply not true," Alan McCoy, a spokesman for AK Steel, said. "These option agreements were not impacting other ratepayers."
Brash said the agreements, also known as "side deals," are common in the utility industry and arose in this case from Ohio's venture into a competitive market system in 2004.
He said Duke, which was Cinergy at the time, created an independent spinoff company in 2004 that now is known as Duke Energy Retail Sales. The unregulated company, like those created by other utilities, was supposed to compete for customers on the open market.
When some of Duke's big customers objected to the proposed rate increase and started shopping for a better deal, Duke Energy Retail Sales offered them service contracts with lower rates.
But Brash said those contracts fell apart in late 2004 when officials at Duke Energy Retail Sales became concerned that they were too risky.
As an alternative, the company offered the 22 big customers "option agreements," which gave Duke Energy Retail Sales the option of selling power to the companies if competition drove down rates.
If rates remained high, Brash said, the companies would keep buying from Duke and would receive annual payments from the utility.
Because the rates never fell, Duke kept writing checks to the companies.
"The option agreement was essentially an insurance policy," Brash said.
He said the Public Utilities Commission of Ohio reviewed the side deals and approved them, confirming that they were legal.
Freking and others dispute that contention because the commission did not approve the deals when they were signed. It did conclude in 2007 that the deals did not influence rates, but Freking said that's different from declaring them legal.
"The PUCO did not approve them," Freking said. "It took no position on the legality of the agreements."
The Ohio Consumers' Counsel, a state agency that represents the interests of residential customers, also has opposed the side deals and thinks that they discriminate against residential customers.
Freking said in-house e-mails at Duke prove that the payments were made to win the companies' support for the rate increase.
One e-mail exchange describes the companies' initial opposition to the rate increase as a "roadblock" to approval. Duke cut a deal to "eliminate this roadblock," the e-mail states.
The payments are the focus of both lawsuits against Duke. One suit alleges antitrust violations and is pending in federal court.
The other involves former Duke employee John Deeds, who claims that he was fired after he raised concerns about the payments. Deeds' case is set for trial Monday before Ruehlman.
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