Illinois Attorney General Lisa Madigan has called for Nicor Gas to refund customers at least $160 million for overcharges in 2000, 2001 and part of 2002 through Nicor’s purchased gas adjustment (PGA) mechanism.

The Chicago utility, however, has denied any deliberate wrongdoing and is sticking to the findings of an internal investigation last year that identified “errors” resulting in only $15 million in overcharges.

The year-old investigation was prompted after the Citizens Utility Board received an anonymous letter from a whistle blower in 2002 detailing a manipulation scheme at the utility company that allegedly increased already record high natural gas prices from 2000 through 2002.

Testimony in the case was due last week at the Illinois Commerce Commission (ICC). The attorney general alleges that Nicor deliberately manipulated the PGA to pocket unearned profits from Illinois customers by selling low-priced back-up gas supply.

Madigan said that prior to Nicor’s PGA filing in 1999, the company built up a large reserve of cheap gas. Under the PGA mechanism, if Nicor is able to beat a benchmark cost for storage, transportation and commodity charges, it can pocket half of the savings. However, Nicor did not inform the ICC during the last PGA approval proceeding of its intent to access and sell its low-cost gas reserves, the attorney general said in testimony.

“Thus, while pitching to the ICC that its savings-sharing plan was good for consumers, in fact, Nicor’s ‘incentive’ plan actually allowed it to keep more savings for itself instead of passing on the full amount of savings to customers,” Madigan said in a statement. “The testimony also offers an explanation of how Nicor needlessly exposed Illinois customers to the record high gas prices of 2001 so that Nicor itself could protect its own profits under the savings-sharing arrangement.”

The Citizens Utility Board (CUB) said earlier this year that it believes the utility should be fined $27 million for “lying” to state regulators in an alleged effort to hide the PGA scheme.

Nicor conducted its own internal audit following the whistle blower’s letter and ended up restating its earnings. Its board also commissioned an independent report by former U.S. Attorney Scott Lassar and accounting firm KPMG LLP that found that it did not engage in any criminal or fraudulent conduct, but made errors resulting in overcharges of $15 million to its customers from 1999 through 2001, during which time it purchased and delivered $2.8 billion of natural gas.

In its own testimony last week, Nicor said that in 2002, the final year of the PGA, it saved its customers $53 million, and its gas costs were the lowest in the state.

However, the Madigan’s testimony states that Nicor’s self-correcting efforts came up short. The attorney general charges that Nicor took advantage of its PGA savings-sharing program in 2000 and 2002 and made gas supply decisions in 2001 that preserved its savings under the program at a cost of at least $160 million to customers. The ICC’s investigation is scheduled to continue into 2004.

In its third quarter financial report to the Securities and Exchange Commission, Nicor said that due to the uncertainties surrounding the PGA investigation it has not recognized a $26.9 million pretax gain from its 2002 PGA plan year.

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