Illinois Charges Gas Company Bilked Consumers

March 22, 2005
Illinois Attorney General Lisa Madigan and the City of Chicago filed separate lawsuits in the Circuit Court of Cook County against Peoples Energy and several of its affiliates, alleging they devised a fraudulent scheme to bilk natural gas customers out of well over a hundred million dollars.

Madigan said that from 1999 to 2002, Peoples and its affiliates and Enron North America carried out a scheme to illegally divert assets from the regulated natural gas utility, 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.

“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.”

“The actions of Peoples Gas went beyond imprudent decision-making,” Georges said. “Peoples Gas engaged in deceptive business practices to enrich the company at the expense of consumers. By filing this lawsuit, we are sending a message that their first priority should be the consumers of Chicago and Illinois.”

Named in the Madigan suit as defendants are Peoples Energy Corporation, an Illinois corporation; Peoples Gas, Light and Coke Company, an Illinois corporation; Peoples MW, LLC, a Delaware limited liability company; Peoples Energy Resources Company, LLC, an Illinois limited liability company; and North Shore Gas, an Illinois corporation.

Madigan’s complaint alleges that Peoples’ relationship with Enron North America began in 1999. At that time, Peoples Energy and Peoples Gas engaged in discussions with Enron to find ways to make more money from the regulated assets of Peoples Gas, which is prohibited from profiting from the sale of natural gas to consumers.

To sidestep this prohibition, Peoples Energy directed Peoples Gas to enter into a one-sided gas purchasing agreement with Enron that gave Enron huge benefits, Madigan charged. From 1999 to 2004, that agreement required Peoples Gas to buy approximately 70 percent 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.

For 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. As a result, Peoples Gas paid higher gas prices than it otherwise would have. These higher prices were passed on to Illinois consumers.

Madigan’s complaint alleges that after 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 percent 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 make these enormous profits by illegally obtaining, controlling and trading Peoples Gas’ natural gas storage assets, known as Peoples Gas’ “hub.” The transactions through which Enovate obtained, gained control of and traded the hub assets occurred from 1999 through 2002.

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