Nicor Inc. on Friday reached a tentative agreement with the enforcement staff of the Securities and Exchange Commission (SEC) and agreed to pay a fine of $10 million to settle an investigation related to the accounting methods subsidiary Nicor Gas Co. used to determine natural gas costs under its performance-based rate (PBR) plan. The PBR was in effect from 2000 through 2002, and according to state officials, Nicor Gas overcharged consumers and misled regulators about it (see Daily GPI, Dec. 11, 2003; April 12, 2002).

Nicor Gas’s PBR was approved in 1999 by the Illinois Commerce Commission. Following an investigation, the Citizens Utility Board (CUB), the Illinois consumer watchdog group, urged state regulators in early 2002 to scrap Nicor’s PBR because CUB said it had allowed the gas distributor to charge customers at least $27 million more than they would have paid under standard ratemaking rules, but CUB alleged that the plan set a benchmark price for gas that allowed Nicor to keep 50% of the savings it achieved if its costs were below that price.

The company’s problems with its PBR program came to a head in July 2002, when Nicor announced that it would have to reverse all of its 1Q2002 earnings and exclude all of its 2Q2002 earnings for the PBR program at Nicor Gas. The Nicor board appointed a special independent committee to investigate the subsidiary’s natural gas purchases, sales, transportation and storage, and after the investigation, Nicor restated four years of financial results. Nicor also agreed to pay $38.5 million to settle a class-action lawsuit related to the PBR program in April 2004 (see Daily GPI, April 10, 2004).

The SEC launched a formal investigation in 2002 of both the PBR program as well as Nicor Energy, which was a joint venture with Dynegy Inc. (see Daily GPI, Aug. 10, 2004).

According to Nicor, the staff of the enforcement division of the SEC agreed to a tentative settlement that subjects Nicor to a disgorgement of $1, a monetary fine of $10 million and an injunction. Nicor will neither admit nor deny any wrongdoing under the agreement. Nicor said it already has deposited $10 million in escrow pending final approval of the settlement by the SEC and entry of a final judgment by a federal court.

“We are pleased to be taking another step in the direction of a final resolution regarding this matter,” said Paul Gracey, Nicor’s general counsel. “Most importantly, since these events surfaced nearly four years ago, the company has taken significant actions to improve the internal controls and oversight of our gas supply area and to prevent a recurrence of the activities that led to this investigation.”

The company expects to record a $10 million charge to its 2Q2006 earnings in connection with this matter. Nicor said it does not expect the $10 million fine to be deductible for federal or state income tax purposes.

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