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Former Parent of Utility-Affiliated Retail Supplier To Pay $81 Million in Settlement To Resolve Lawsuit Related To C&I Contracts

October 22, 2015

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Copyright 2010-15 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

Duke Energy has reached an $81 million settlement agreement to end a 2008 lawsuit related to contracts between former Duke Energy subsidiary Duke Energy Retail Sales and certain large electric customers located within the utility service area of Duke Energy Ohio.

In the suit, certain customers alleged that the entity then-known as Cinergy Retail Services, LLC offered payments (via alleged "side deals") to certain large customers in exchange for such customers withdrawing opposition to a Cincinnati Gas & Electric (CG&E, later renamed Duke Energy Ohio) rate increase (which instituted several nonbypassable charges) pending before the PUCO.

Plaintiffs alleged that Cinergy Retail Services offered "option agreements" to these large customers that provided that Cinergy Retail Services would, "kick back to these companies the equivalent of certain defined charges that the companies were required to pay to CG&E."

"The amount kicked back under these side deals represented all or substantially all of the rate increase that CG&E had requested and that the PUCO had approved," plaintiffs had alleged.

Plaintiffs alleged that such alleged agreements violated federal anti-trust and anti-corruption laws, as well as Ohio laws requiring non-discriminatory treatment of utility customers

Duke, however, countered that plaintiffs offered no evidence that Cinergy Retail Services (CRS) should be treated as if it were the same entity as its regulated affiliate, CG&E, rather than as a separate, PUCO-certified competitive provider.

"Plaintiffs' fraud claims rest on CG&E statements about certain CG&E charges being 'nonbypassable'; their price-discrimination claim concerns CG&E sales of electricity; and their claims based upon Ohio utility statutes apply only to a public utility like CG&E. It is undisputed that CG&E itself never failed to collect the tariff rate for these 22 customers. For Plaintiffs' claims to be sustained, CRS's option payments must be treated as payments made by CG&E -- even though CRS was a separately incorporated and PUCO-certified competitive provider," Duke had said in a prior motion for summary judgment

"It is also undisputed that CG&E did not transfer funds either to CRS's option customers or to trade groups acting on their behalf. And the money used to pay CRS option payments came from Cinergy Investments and Cinergy Corp., not from CG&E," Duke had previously said.

Duke explained that the payments to the CRS options customers resulted from obligations arising from contractual negotiations with such customers which were disrupted by various modifications and rehearing orders by PUCO concerning the CG&E rate case. In short, contracts between CRS and the customers, whose pricing was based on the tariff initially adopted in the rate case and therefore disrupted by later PUCO changes in the rate case decision, contained a renegotiation clause stating that if such PUCO action rendered invalid or ineffective any provision of the agreement to the economic detriment of the customers, then Cinergy would provide the same economic value to the impacted customer(s) through some other mutually acceptable process.

As a result of various changes to the rate case order, CRS negotiated contracts that gave CRS the right to compel the customers to purchase electricity service from CRS at a predetermined "strike price," which was lower than the regulated tariff rate. If market prices fell below the strike price, CRS could require the option customers to purchase power at the strike price, allowing CRS to earn a profit. In exchange, CRS was bound to make periodic payments to the customers until the option was exercised or terminated (hence the at-issue payments).

In entering the settlement, Duke Energy, which sold Duke Energy Retail Sales to Dynegy, Inc. earlier this year, denied the allegations and maintained it complied fully with state and federal laws. Duke asserted that the contracts, in effect from 2005 through 2008, were legal under state and federal laws.

Duke Energy also asserted that all Duke Energy Ohio electric customers were treated equally and fairly, and paid appropriate rates as approved by the Public Utilities Commission of Ohio during the years in dispute.

Duke Energy agreed to settle the case to avoid the costs and uncertainties of continued litigation, the company said. Duke Energy shareholders, not customers, are to cover the cost of the settlement agreement.

Under the agreement, the $81 million settlement would be allocated as follows:

• Up to $25 million to residential customers who received electric generation from Duke Energy Ohio, or from Duke Energy Ohio's subsidiaries or affiliates and who were located within the Duke Ohio service area, who were customers at any time during the period beginning Jan. 1, 2005 and ending Dec. 31, 2008.

• Up to $25 million to non-residential customers who received electric generation from Duke Energy Ohio, or from Duke Energy Ohio's subsidiaries or affiliates and who were located within the Duke Ohio service area, who were customers at any time during the period beginning Jan. 1, 2005 and ending Dec. 31, 2008.

• $8 million to fund energy-related programs to benefit Duke Energy Ohio customers who were customers at any time during the period beginning Jan. 1, 2005 and ending Dec. 31, 2008. Program details would be determined at a later date.

• Remaining funds to pay plaintiffs' legal fees, settlement fund distribution costs and other expenses.

For residential customers, payments will be based on the number of days the customer paid the tariffed rate, and potentially will be in the range of $40 to $400 and may be subject to change depending on the total number of "claim days" calculated for the class (days in the relevant period where the customer paid the tariffed rate). For non-residential customers, payments will be based on the number of days the customer paid the tariffed rate as well as usage, and potentially will be in the range of $300 to $6,000 and may be subject to change depending on the total number of claim days.

The settlement remains subject to court approval

Case: 1:08-cv-00046-EAS-NMK

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