ProLiance verdict to cost Citizens: Utility to pay at least $1.5M in fraud case

Citizens Gas & Coke is one of two Indiana utilities burned by a $33.5 million jury verdict, won under a federal racketeering law, against Indianapolis-based Pro-Liance Energy, an unregulated subsidiary of Citizens.

The city-owned Citizens has set aside $1.5 million as part of the hit it expects to take for its investment in ProLiance, which procures and manages more than 475 billion cubic feet of natural gas for 1,200 utility and industrial customers in North America.

Meanwhile, Evansville-based gas and electric utility Vectren Corp., which owns the other 61 percent of ProLiance, recently set aside $1.4 million. That’s already cost Vectren stockholders 2 cents a share-and could grow a lot higher through expenses and legal fees of an appeal.

Moreover, the Alabama utility that won the verdict against Pro- Liance now is seeking treble the compensatory damages, and its attorneys have filed for additional legal fees.

“We’ve never had any litigation like this,” said Briane House, chief counsel for ProLiance, who himself was ordered to pay $35,000 under the verdict. “I’ve been practicing law for 23 years and I’ve never seen such a situation.”

Huntsville Utilities, the city-owned gas utility in Huntsville, Ala., in February won the $33.5 million verdict against ProLiance and two employees in U.S. District Court for the Northern District of Alabama.

Broadly, the suit alleged that ProLiance through a complex scheme overcharged Huntsville Utilities for gas it supplied during the winter of 2000-2001, a period when gas prices soared-costing Huntsville more than $10 million.

ProLiance was found guilty of fraud, conspiracy to commit fraud and breach of fiduciary duty, among other charges. Huntsville sued ProLiance under a federal statute normally used to convict mobsters and crooked labor unions-the Racketeer Influenced and Corrupt Organizations Act, or RICO.

According to the suit, ProLiance in August 2000 agreed to provide Huntsville gas at a fixed rate of $2.26 per one thousand cubic feet during the Decemberthrough-February period of 2000-2001.

It alleges that ProLiance employee Harry Bush in mid-December informed Huntsville Gas Manager John DeMent that insufficient amounts of gas were available at the previously agreed price. Instead, gas was purchased for Huntsville at $5.95 per thousand cubic feet-later as high as $9.82, according to the suit.

The suit held that Bush and ProLiance attempted to conceal the company’s inability to provide gas at the lower price by sending two sets of invoices to Huntsville. The first bill was based on the actual, higher price of gas ProLiance bought for Huntsville and the second indicated the original, $2.26 price agreed to earlier.

Huntsville said DeMent lacked authority to agree to a modification and that he allegedly colluded with ProLiance by forwarding only the falsified invoices, indicating gas was delivered at $2.26, to Huntsville’s accounts payable department.

To recoup the difference between that lower amount and the higher price Pro-Liance actually paid for the gas, the Indianapolis company “then secretly over billed Huntsville Utilities on various changes on invoices, including transportation … to recoup the $10 million,” the suit alleged.

ProLiance denied the double-billing scenario. It argued that Huntsville had no legitimate contract claim at $2.26, House said.

The suit also alleges that Huntsville, while still unaware of the alleged scheme, entered into a long-term futures contract to buy gas at a fixed rate, but that ProLiance failed to inform it that market conditions weren’t favorable to a long-term purchase. Market prices for natural gas later fell.

House said ProLiance advised Huntsville against the long-term contract. The Indianapolis company also countered that it was trying to accommodate Huntsville by stretching payments over time for higher-cost gas.

ProLiance maintains that Huntsville still owes it about $6 million for gas that was to be purchased under the contract. The Alabama jury found that Huntsville did not breach its contract with ProLiance, which is likely to file a new claim to recover the $6 million.

In any case, the jury socked ProLiance with $8.2 million in compensatory damages and $25 million in punitive damages. In addition, attorney House was ordered to pay $35,000 and employee Bush $200,000.

House was hammered over allegations that ProLiance interfered with Huntsville’s contractual relations. According to House, when Huntsville Utilities indicated that it would not purchase the entire supply of gas that had been negotiated, ProLiance told Huntsville’s intended new vendor about Huntsville’s contract obligations to Pro-Liance.

The new supplier decided not to sell to Huntsville. House contends the letter to Huntsville’s prospective supplier was not interference and was a legitimate notification.

ProLiance plans to appeal the verdict in an Atlanta federal court. But, at the same time, it’s defending against possible treble damages allowable under RICO that Huntsville seeks on the $8.2 million compensatory award-possibly swelling the amount to nearly $25 million.

ProLiance contends that ambiguities in the verdict form, in which the jury assigned damages for particular misdeeds, make Huntsville ineligible to collect treble damages. “If you can’t determine what damages go to what claim, you can’t go the next step, so to speak,” said House.

To make matters worse, Huntsville Utilities’ law firm-Huntsville-based Bradley Arant Rose & White, is seeking $2.5 million for 11,094 hours of work on the complex case. That includes the cost of numerous trips to ProLiance’s Indianapolis headquarters to seek records and interview witnesses.

ProLiance contends that Huntsville’s lawyers incurred actual time and expenses worth closer to $1.6 million. House also noted that the Alabama utility initially sought $24 million in compensatory damages, but was awarded only $8.2 million, or one-third of that amount. Thus, he said, the lawyers are seeking a “bonus.”

All of which leaves ProLiance and owners Citizens Gas and Vectren on the hook for possibly more in damages and legal costs. ProLiance has established a reserve of $3.9 million stemming from the case.

“We’re not passing judgment, but would point out that similar disputes that arose from spiking gas costs in the 2000/01 time frame have created protracted and costly headaches for other utilities that engaged in gas marketing joint ventures during that time period,” Merrill Lynch analyst Sam Brothwell said in a recent report on Vectren. “At a minimum, these issues can drive up legal expenses.”

The report said Vectren has a $14 million exposure to the $33.5 million verdict, or 18 cents a share. If compensatory damages are trebled, plus adding the punitive damages and perhaps up to $4 million in legal costs, Vectren could have $22 million, or 29 cents a share, of exposure.

“The bigger risk would be if ProLiance suffers a loss of confidence/business, as it contributed 24 cents a share to 2004 [Vectren] results,” Brothwell said.

Vectren’s stock has been relatively untouched by the verdict, falling to just under $26 shortly after it was announced, from a recent high of $27.86 on Feb. 4. Late last week, the stock traded at around $26.25.

Citizens’ exposure is murkier. The utility is not publicly traded but rather is structured as a public charitable trust.

Citizens has 266,000 gas customers in central Indiana, while Vectren has 1.1 million gas and electric customers in Indiana and Ohio.

“It [the Huntsville verdict] should not affect our rates at all,” said Citizens spokesman Dan Considine. “ProLiance is part of our unregulated subsidiaries.”

“It would never be appropriate for those penalties to be recovered through rates, and our office would oppose it,” said Anthony Swinger, spokesman for the Indiana Office of Utility Consumer Counselor.

Swinger said his office will give a recently filed Citizens Gas rate case a “thorough and close review.”

A problem that often plagues regulators and consumer groups has been “whether they [utilities] tend to build in enough profit that subsidizes their joint ventures,” said Jerry Polk, who represents Citizens Action Coalition, a consumer watchdog group.

Polk said another concern is how Pro-Liance’s corporate behavior impacts utilities that buy gas from it-including Citizens and Vectren.

House said Huntsville was one of five utility companies in Alabama that hired ProLiance. “Those remaining cities are still customers today.”