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Illinois, Chicago File Suit Against Peoples Energy Charging Consumer Fraud

The long-simmering investigation over allegations that affiliates of Peoples Energy Corp. and Enron Corp. conspired to cause People's regulated utility, People's Gas, to buy higher-priced gas for Chicago area consumers hit the courts last Monday in separate lawsuits filed by the state of Illinois and the City of Chicago against Peoples in the Circuit Court of Cook County.

The suits allege that Peoples Energy and several of its affiliates devised a fraudulent scheme to bilk natural gas customers out of well over a $100 million. The suits came after Peoples Energy announced earlier this month that it had broken off settlement talks with the Citizens Utility Board over similar allegations and was prepared to have the matter decided in a trial-type proceeding by the Illinois Commerce Commission (ICC). Following the city and state filings, Peoples said court action would just duplicate the ICC proceeding.

The company has said it believes that its gas purchasing practices were consistent with ICC standards and that it conducted business prudently and in the best interest of customers within the established standards. Peoples said its purchasing practices were the same as in previous years and the only difference was an unexpected rise in natural gas prices. Most recently Peoples denied the allegations of $149 million in overcharges detailed in testimony by CUB and the City of Chicago (see NGI, Jan. 17).

Illinois Attorney General Lisa Madigan told a news conference that from 1999 to 2002, Peoples and its affiliates and Enron North America carried out a scheme to illegally divert assets from Peoples Gas, to Peoples Energy and Enron and to inflate Peoples Gas' and North Shore Gas' natural gas costs and pass those inflated costs on to Illinois consumers. The scheme involved fraudulent natural gas transactions, sham companies, illegal agreements, questionable accounting and misrepresentations to consumers, the attorney general said. She was joined at the news conference by City of Chicago Corporation Counsel Mara Georges.

"Peoples Energy and its affiliates did not think small when it came to fleecing Illinois consumers. We allege that their actions cost natural gas customers well over a hundred million dollars in increased natural gas costs," Madigan said. "State law prohibits regulated utilities such as Peoples Gas and North Shore Gas from profiting from the sale of natural gas to customers. To get around this law, Peoples Energy teamed up with Enron to weave a complicated web of natural gas transactions, profits and kickbacks."

Named in the Madigan suit as defendants are Peoples Energy Corp., Peoples Gas, Light and Coke Co., Peoples MW, LLC, Peoples Energy Resources Co. LLC, and North Shore Gas.

Madigan's complaint alleges Peoples Energy directed Peoples Gas to enter into a one-sided gas purchasing agreement with Enron from 1999 to 2004, under which Peoples Gas would buy approximately 70% of its natural gas from Enron. Prior to this agreement, Peoples Gas was able to purchase gas from numerous vendors and use competition and market fluctuation to obtain the most favorable prices for consumers.

Madigan's complaint alleges the gas purchasing agreement changed Peoples Gas' prior practice and gave Enron enormous power over when, how much and at what price Peoples Gas would buy natural gas. After allegedly reaping millions in profits from the gas purchasing agreement scheme, Enron, in return, paid kickbacks to Peoples Energy by entering into side agreements with Peoples affiliates and engaging in illegal natural gas transactions involving affiliates of Enron and Peoples Energy.

The alleged kickbacks paid to Peoples Energy started in 2000, when Peoples Energy and Enron entered into a separate agreement to form a gas trading company that would use the regulated assets of Peoples Gas to generate profits for Peoples Energy and Enron. Affiliates of Peoples Energy and Enron each held a 50% share in the entity, which was known as Enovate. During approximately 18 months of operation and with only $200,000 in capital, Enovate generated $23 million in net profits.

Madigan's complaint alleges that Enovate was able to profit by illegally obtaining, controlling and trading Peoples Gas' natural gas storage assets, known as Peoples Gas' "hub." Under the scheme Peoples Gas transferred gas from its hub to an Enron affiliate, Enron Mid-West (EMW), which served as a conduit to Enovate. Enovate then used the gas transferred from Peoples Gas to EMW by selling and trading that gas during the winter months when gas prices were high.

Enovate then would replenish the gas that EMW received from the Peoples Gas hub during the summer months when gas prices were low. Enovate "made massive profits off the difference between the winter sale price and the summer replacement prices," the complaints allege. Because Peoples Gas also supplies gas to North Shore Gas, North Shore Gas' customers also paid more for natural gas.

The profits generated by the winter gas sales and summer replacement buys were then split between affiliates of Peoples Energy and Enron. Peoples Energy and its affiliate attempted to conceal kickbacks received from Enron for the gas sales and buys through, among other methods, a side consulting agreement. Under that arrangement, the Enron affiliate paid the Peoples Energy affiliate for fabricated consulting services that were, in essence, kickbacks, the attorney general said.

In another example, under the gas purchasing agreement the price for a large portion of the gas Peoples Gas was required to purchase was based on either the daily or monthly market price index reported in Natural Gas Intelligence, an industry publication. During most of the agreement, Enron was able to unilaterally choose the highest price, Madigan said. As a result, Peoples Gas paid higher gas prices than it otherwise would have.

Peoples Gas has responded to the allegations saying that during the 2000-2004 period its gas charges were at 52 cents per therm on average vs. other Illinois utilities at 53 cents per therm. Peoples said its prices also closely tracked the primary pricing point for U.S. natural gas, known as the Henry Hub price, for that period.

As an example of its stewardship Peoples said prudent management has allowed it to avoid an increase in distribution rates for more than a decade while investing nearly $700 million in its infrastructure system. Additionally, from 1994-2004, the company said by restructuring pipeline transportation and storage services it reduced those costs by about $1 billion. These cost reductions were passed through to customers through the gas charge.

Madigan's complaint seeks to prohibit each defendant from engaging in acts or practices that violate the Illinois Consumer Fraud and Deceptive Business Practices Act. The complaints asks the court to order each defendant to pay a $50,000 civil penalty for each violation of the Consumer Fraud Act and an additional $10,000 civil penalty for each violation of the Consumer Fraud Act found by the court to have been committed by each defendant against a person 65 years of age or older.

The complaint also seeks an order requiring each defendant to account for all transactions between Peoples Energy, its affiliates and Enron that resulted in profits being diverted from Peoples Gas to Peoples Energy and Enron, and customers of Peoples Gas and North Shore Gas paying higher prices for natural gas. Finally, Madigan's complaint asks the court to order Peoples Energy and two of its affiliates to disgorge all profits made as a result of the illegal acts and to pay all costs of the prosecution and investigation of the case.

The case is being handled for Madigan's office by Paul Gaynor, Complex Litigation Counsel, David Adams, Assistant Attorney General in the Special Litigation Bureau and Mark Kaminski, Assistant Attorney General in the Public Utilities Bureau.

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