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Jury Awards Huntsville Utilities $33.5M in Gas Contract Case Against ProLiance

February 14, 2005
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A federal jury has ordered ProLiance Energy LLC, an Indianapolis-based gas marketing affiliate of Vectren and Citizens Gas and Coke, to pay Alabama-based Huntsville Utilities $33.5 million in damages for breach of a gas contract, fraud, conspiracy and other charges. The jury found that ProLiance violated a natural gas supply agreement with Huntsville by charging higher prices than were promised and then attempting to cover it up.

The verdict awarded the municipal utility $8.2 million in actual damages (which could end up being tripled), and $25 million in punitive damages. An award from federal racketeering charges (RICO) has yet to be determined.

"We are extremely pleased with the outcome of our lawsuit against our former gas supplier, ProLiance," Huntsville Utilities said in a statement. "This is truly a victory for Huntsville Utilities customers. The decision of the jury sends a strong message that energy companies cannot operate in the manner that was done by ProLiance without consequences."

The case concerns a two-and-a-half-year portfolio management agreement signed in 2000 by the Tennessee Valley Supply Group (TVSG) of five municipal energy buyers, which included the City of Huntsville. According to the contract, ProLiance was obligated to deliver 15 Bcf of gas annually to the utilities while handling their commodity procurement, transportation and storage operations. About 2.2 Bcf of gas was to be provided to Huntsville Utilities during the winter of 2000-2001. The entire multi-year deal was to produce more than $200 million in revenues for ProLiance over the life of the contract.

ProLiance said the litigation arose when natural gas prices spiked during the winter of 2000-2001. "When Huntsville was unable to pay the higher prices, ProLiance allowed them to modify their contract and spread the payment of the higher costs over an extended period," the marketing company said. "Huntsville later contended that its utility manager lacked authority to sign the modification, and filed suit against ProLiance contending that it had defrauded Huntsville."

Huntsville Utilities spokesman Bill Yell said that the contract with ProLiance set the gas purchase price at $2.26/Mcf, but the utility ended up paying much higher prices. "When we went into the winter of 2000-2001, which was a very cold winter when the prices just went through the roof, we were paying much higher rates for gas. We were under the assumption that we were paying $2.26, but we were not. The bill came in to our gas manager and he said, 'This is not what you had promised us.' They said, 'Well we just couldn't do that,' and then they cooked up a billing scheme that covered it up.

"We were actually still getting bills that said $2.26/Mcf, but we were actually paying over $5/Mcf. They were putting on adders and things like that to cover it up. They came up with a winter levelization plan that was basically covering up that they were charging us more and they were selling our storage gas also and using that to cover the price of gas."

The jury, however, rejected Huntsville's claims that ProLiance illegally converted the city's gas reserves to its own use. And an independent investigation for the utility showed that its former gas manager actually knew of the billing scheme that resulted in the overbilling.

In March of 2002, the gas manager confessed to his superiors that he failed to execute the supply contract with ProLiance that had been approved by the utility company's gas board and admitted that he and ProLiance had colluded to mislead Huntsville Utilities' upper management and board members regarding the contract and the actual prices paid for the gas during the winter of 2000-2001.

ProLiance said it is evaluating the verdict and expects to appeal. "We are surprised and disappointed in the verdict reached and believe it is not consistent with the law or facts of the matter," said ProLiance President John Talley. "ProLiance operated in accordance with our contract with Huntsville Utilities and at the direction of the Huntsville Utilities gas manager. ProLiance fulfilled all pricing and supply commitments under the contract."

Vectren COO Carl L. Chapman also said he felt the verdict was unfounded. "ProLiance has a long track record of outstanding customer service to its over 1,200 customers, and since its formation in 1996 has done an outstanding job as a natural gas service provider. It has saved the customers of Vectren and Citizens Gas in excess of $130 million."

Huntsville Utilities said some of the damages awarded could end up in refunds or lower rates to the company's 47,000 natural gas customers. Some may also be used to replenish the utility's cash reserves or to complete natural gas projects.

Talley said he does not expect the financial impact of the jury award to adversely affect ProLiance's ongoing operations, which continue to include gas service to communities and businesses in the Huntsville area as well as to other customers in the Midwest and Southeast.

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