Ten years ago, the Citizens Utility Board, a watchdog group, received a 15-page fax in the middle of the night that outlined how Nicor Gas allegedly was ripping off customers through an elaborate accounting scheme.
“They almost got away with this, but for the whistle-blower,” said David Kolata, executive director of CUB, which alerted state regulators.
Both internal and external investigations ensued that indicated the scheme had been orchestrated from the top of the Naperville-based company.
In 2007, the Securities and Exchange Commission brought civil fraud charges against Thomas Fisher, Nicor’s former chairman, president and chief executive, as well as the former chief financial officer and treasurer. Fisher personally paid a fine of $825,000 without admitting fault.
Nicor paid $10 million to settle charges, fired four employees engaged in “potentially fraudulent conduct” and settled a shareholders suit for $39 million. The company, acquired by Atlanta-based AGL Resources Inc. last year, never admitted wrongdoing.
“Nicor Gas customers benefited from the company’s gas purchasing activities,” Annette Martinez, a company spokeswoman, said last week, denying that the company’s activities were illegal.
Regardless, consumers are set to see their payday.
The company is offering a settlement that would reimburse about $29 per customer; CUB is pushing for an approximately $136-per-customer rebate that would likely come as a credit on natural gas bills. A judge at the Illinois Commerce Commission is expected to render a decision soon, possibly by year’s end.
The pending settlement comes as key correspondence, reports and testimony have recently been made public. The documents show the scope of the alleged scam and how the utility engaged in accounting tricks as well as denying the existence of key documents consumer advocates later turned up.
The heart of the alleged scam turned on what sounded like a win-win for the company and its 2.2 million customers. Nicor makes its money from gas delivery and is supposed to only charge customers the same price it paid to obtain the gas.
In 1999, Nicor had convinced the commerce commission, which regulates utilities, that it would strive to get customers the cheapest natural gas prices available under a “performance-based” rate plan. In short, the better it did for consumers, the more richly the company would be rewarded.
To determine the utility’s performance under the plan, Nicor’s natural gas prices would be measured against a “benchmark” price established according to a formula. Beat the benchmark, and Nicor could split those savings equally with consumers. Miss the benchmark, and the additional costs would be shared.
“What Nicor told the commission at the time was that they were going to become more efficient, ‘We’re going to do a better job purchasing natural gas, and that’s going to benefit everyone,'” Kolata said. “In fact, they had a plan from the get-go that they hid from the commerce commission where all they really did was, they manipulated the benchmark, they manipulated the whole process to profit at consumers’ expense.”
In gaining approval for the rate plan, Nicor insisted it could not manipulate the benchmark. But documents show the company was able to control certain elements used in determining the benchmark, allowing it to more easily meet its goals.
The most frequently used method was to keep gas it was removing from storage off the books. Gas companies routinely tap cheaper gas from storage during cold months to prevent price spikes. Under the benchmark formula, hiding the withdrawals worked in Nicor’s favor by increasing the price Nicor was attempting to undercut.
It was to Nicor’s advantage to undercut the benchmark by as wide a margin as possible. If it could inflate the benchmark price, it would earn an even greater profit.
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Employees told investigators they were pressured to conceal storage withdrawals as “in-field transfers,” which would make it appear as if the natural gas was being used to maintain pressure in the company’s storage aquifers rather than being distributed to customers, according to outside investigators.
Nicor denied those accusations, saying those arguments were “based on assumptions, not facts.”
Beyond manipulating the benchmark, the company also figured out a way to further undercut the benchmark. The easiest way was to tap old, cheap gas it had in storage.
The utility isn’t supposed to tap old gas until the newer gas is gone. Some of its oldest stored gas dated to the 1950s.
But in 2000 and 2001 Nicor wanted to be able to profit from the older gas, priced far below that of more recently purchased gas, according to documents that have recently been unsealed. To get to the cheap gas, the company devised ways of disposing of the higher-priced gas, which was purchased from 1984 to 1996 and cost $2.88 to $3.23 per million British thermal units, compared with as little as 19 cents per million Btu for the older gas.
Nicor managed to offload the newer gas through a variety of means. For example, Nicor sold off a significant amount of gas to another company at a loss of $13.5 million, according to a subsequent internal investigation. That loss was paid by Nicor’s customers.
Nicor transferred title to more of the gas to a third party while continuing to keep the gas on-site, something it called “storage prefills,” according to the same investigation.
At the same time, consumer advocates claim that in summer 2000, in order to access more of the low-priced gas, Nicor reduced the typical levels of gas it kept in storage.
In January 2001, after profiting off the low-priced gas, consumer advocates claim Nicor needed more gas and was forced to go to market at a time when natural gas prices were at their height. That led to unprecedented price spikes for consumers, who that winter paid $155 million more for natural gas than they would have if Nicor had withdrawn the typical amount of gas from storage, according to CUB.
Nicor disputes that description. Federal agencies who investigated the program, according to Nicor, failed to find that the company engaged in improper, fraudulent or criminal activity in its storage activities.
When the allegations in the fax were revealed, a special committee of Nicor’s board hired former U.S. Attorney Scott Lassar of the law firm Sidley Austin Brown & Wood and accounting firm KPMG LLP to investigate. Lassar’s report revealed accounting missteps and said employees were pressured to facilitate the alleged scam. Documents uncovered by CUB revealed internal memos and reports that highlighted the importance of hiding the scheme from regulators.
The result of that investigation led the company to restate its financial statements for 1999, 2000, 2001 and 2002, and Nicor’s stock slumped. In January 2003, the company voluntarily abandoned the performance rate plan.
While a settlement appears imminent in the Nicor case, Illinois Attorney General Lisa Madigan’s office said it will continue to fight for higher rebates than Nicor is offering.
“We’ve argued that one of Nicor’s jobs as a public utility is to provide its customers the lowest available rates for gas, not to cheat ratepayers so that the company’s shareholders could profit,” said Natalie Bauer, a spokeswoman for Madigan’s office. “Essentially, the attorney general’s job is to ensure that Nicor’s ‘experiment’ in deregulation doesn’t treat its customers as pricing guinea pigs but instead returns its customers the money they are rightly owed. We think that’s worth fighting for.”
CUB also wants Nicor to credit consumers $6.8 million annually for the higher natural gas prices Nicor customers continue to pay because of the company’s allegedly improper offloading of cheaper natural gas from storage.
For operational reasons, all natural gas customers pay for so-called cushion gas, which is used to maintain pressure in pipelines to bring gas into homes. That cushion gas, CUB claims, is now more expensive because of offloading of the older gas in the scheme.
Nicor disputes that claim.
“Nicor gas has had two rate cases before the ICC and demonstrated that the company is the low-cost provider of natural gas distribution services in the state,” Martinez countered. “The commission is aware that Nicor Gas works hard to manage its costs.”
These days, Nicor says the case is ancient history and that it is looking forward to a conclusion. But even now, the name of the whistle-blower and the original fax outlining the scheme remains under seal. The Tribune is asking that that information be disclosed.
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