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Gas Attack

Citizens Utility Board researcher David Kolata dug through thousands of dull documents to find what may be explosive evidence of wrongdoing at Peoples Energy.

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One day last summer David Kolata, an obscure researcher for the Citizens Utility Board, was sifting through mounds of boring documents on arcane energy matters when he found records he says suggest that Peoples Gas and Enron engaged in questionable transactions during the winter of 2000-'01. "You always hope you find some decent information when you go through materials," he says. "But in my wildest dreams I never imagined I'd discover this."

Since late January, Kolata's discoveries have been at the center of an Illinois Commerce Commission investigation and the subject of numerous articles in local and national media. And they've led CUB, Attorney General Lisa Madigan, and Mayor Daley to demand that Peoples refund consumers up to $200 million.

The controversy has spun around 34-year-old Kolata, but he barely caught the spotlight--except in the CUB office on South LaSalle. "David is already a legend around here for what he discovered," says Martin Cohen, the executive director. "It just shows you what one guy can do with a computer."

Kolata earned his PhD in political science from Vanderbilt, where his dissertation was titled "Genetic Engineering and Political Philosophy: The Limits of Liberalism." In 1997 he and his wife--also a political philosopher--moved to Chicago, where he found a job doing research for the Environmental Law & Policy Center, another watchdog group. In 2001 CUB hired him as director of policy and government affairs. "It's a busy job because not only does he do a lot of research, but he's also our chief lobbyist," says Patricia Clark, CUB's associate director. "Around here, we all wear a lot of hats."

By the summer of 2002 Kolata was up to his eyebrows in the complicated details of the natural gas price hikes during the long, brutally cold winter of 2000-'01. Gas bills had doubled, and Peoples Gas had cut off service to hundreds of poor and working-class Chicagoans who couldn't pay their bills. "Peoples took a firm line on what was causing the hike," says Kolata. "They said it's not their fault. It's the market's fault. It was just a colder than normal winter following a warmer than normal summer, and so that combination led to a shortage of gas. They said it was a result of the law of supply and demand. They had to buy when demand was high, which meant they had to pay higher rates." And so consumers had to pay too.

In the fall of 2001 the ICC launched a "prudence review" of Peoples' rates to determine if the high gas bills had been warranted--under its ICC charter, Peoples has a duty to keep rates as low as possible. CUB fed the ICC the documents it had. It also pressed the ICC to investigate some of Peoples' other business dealings, whose effect on consumers wasn't clear. CUB knew, for example, that Peoples had made a five-year, $650-million gas-purchase agreement with Enron in 1999. "Under the terms of that agreement," says Kolata, "Enron would provide nearly two-thirds of the total gas needed to serve Peoples customers." Enron became a middleman, buying gas from suppliers and then selling it to Peoples. "This was before Enron went bankrupt and became a dirty word, but the agreement raised eyebrows because it's unusual for a utility to subcontract so much of its gas-purchasing operation out to a third party," he says. "Generally it's their own employees who procure the gas."

CUB also knew that in early 2000 the parent company of Peoples Gas, Peoples Energy, had joined with Enron Midwest, an Enron affiliate, to create Enovate. "It's all very complicated, with affiliates and joint affiliates," says Kolata. "We knew about the bare existence of this affiliate, but we didn't know the details of the agreement or what they really were doing. We wanted the ICC to look into this."

The discovery phase of the prudence review dragged on until March 2003, when an ICC judge, Erin O'Connell-Diaz, cut it off. This was seen as a big victory for Peoples. "The ICC staff deserves a lot of credit, because they were aggressive," says Kolata. "But they were basically ordered to close down the case even though there were all these remaining questions about Enovate, Enron Midwest, and Peoples." They still knew only that there were agreements, not how they worked.

Early that summer the ICC decided that Peoples hadn't managed its resources well during the winter of 2000-'01 and recommended that it refund consumers about $30 million. "That was a lot less than we wanted," says Kolata. "We felt that consumers had been overcharged well over $100 million." Peoples contested the amount of the refund.

At this point Kolata had spent over two years investigating the matter, but he wasn't about to quit. "I wanted to take a closer look at the Enron connection," he says. "I knew there were documents available relating to Enron's bankruptcy. I wanted to see what I could find that might shed light on the Peoples deal."

At first he thought he was on a wild-goose chase. Enron's bankruptcy had produced millions of pages of documents, most of which had nothing to do with the price of natural gas in Chicago, but he kept slogging through them online. "I remember I was sitting at my desk here in my office reading some really boring Enron bankruptcy stuff, and there was this citation at the bottom of a brief that referred to a Federal Energy Regulatory Commission Web site," he says. "I thought, oh, that might be interesting. I went to the FERC site, but I couldn't find it directly." He did a Google search and came up with a Web address. "Lo and behold it takes me to this page where you not only have a database of 1.6 million Enron e-mails and documents but you also have unbelievable amounts of other information. We're talking hundreds of gigabytes of Enron transaction data."

The site also had a search engine. "I started punching in keywords, and stuff came pouring out," he says. "For instance, I punched in 'Enovate' and found about 1,200--1,203 to be exact--references. Within a couple of hours I realized I had really good stuff. I was printing and downloading. It was exhilarating and nerve-racking. I kept thinking, I better download this stuff fast, just in case someone destroys it."

Together, Kolata claims, the documents show that during the winter of 2000-'01 Peoples Gas arranged to lend about half of its gas reserves--gas it had most likely bought cheap the previous spring or summer--to Enron Midwest and other Enron entities, though it needed the ICC's permission for such a transaction and didn't have it. Enron Midwest then sold the gas on the open market to utility companies all over the country--at a big markup because the unusual cold had sent prices soaring. Without its reserves Peoples didn't have enough gas for its own customers, so it had to buy gas on the open market. The documents show that it often bought that gas, at high rates, from Enron Midwest--perhaps some of the same gas it was lending Enron Midwest. (Enron Midwest apparently repaid the loan in gas it bought in the spring, when gas prices had dropped again.)

"Peoples is required by law to keep large amounts of surplus gas to carry them through the winter," says Kolata. "Well, during the cold winter of 2000-2001, when everyone desperately needed to heat their homes, Peoples was effectively giving away gas so that Enron Midwest could sell it for top dollar."

Kolata also found profit-loss statements he claims indicate that "Enron Midwest was sharing profits with Peoples Energy. These were profit-sharing arrangements for which they needed ICC approval--but they didn't have ICC approval."

In January CUB decided to go public with its findings. The staff called in Melita Marie Garza, a business writer for the Tribune, and on January 30 her story, headlined "Peoples Energy profited in secret winter gas deal," hit the street.

"In a series of complex transactions hidden from state regulators, Peoples Gas transferred or sold natural gas intended to heat Chicagoans' homes to a venture of its parent company and Enron Corp., internal documents show," read her lead. "As a result, the utility was forced to replenish gas supplies at high prices on the open market, contributing to record heating bills for customers during the brutally cold winter of 2000-2001." Over the next few days Garza followed up with stories that delved deeper into the documents Kolata had uncovered.

Public officials reacted quickly. On February 5 the ICC reopened its investigation into gas prices during the winter of 2000-'01. On February 9 Madigan announced that her office was issuing subpoenas seeking documents and testimony from Peoples officials. On February 24 Daley joined in. "If the Illinois Commerce Commission determines that CUB's allegations are true," he told reporters, "we will insist that Peoples refund to its customers all the money it made at their expense through their dealings with Enron."

Peoples spokesmen contend there was nothing illegal or even unusual about the company's arrangements with Enron. In a March 25 letter to the Tribune, Peoples Energy CEO Tom Patrick wrote that he wanted to "reassure our customers that we did not benefit at their expense." He stated that it would be "prohibitively expensive and not prudent" to buy enough gas in the summer to meet winter demand, then said that Peoples had contracted with Enron to use some of Peoples' excess storage capacity and that the ICC knew of the arrangement.

Kolata says that while Patrick's statements about prudent gas buying and the excess-storage contract are true, they're beside the point--they don't address the questions he's raised about the Enron Midwest gas loans or the profit sharing.

Asked whether Peoples had ICC permission to lend its gas reserves, Rod Sierra, a Peoples spokesman, says, "We did not lend our gas reserves." He then repeats Patrick's point about the excess-storage contract with Enron. Asked about the profit-sharing charges, he says they're not true.

Sierra also says, "We have always worked very aggressively over the years to get the best possible price for gas for our consumers. In the winter of 2000-2001 we had a heavy demand and a low supply. It wasn't just a Chicago problem--it was a nationwide problem. Prices went through the roof, and customers all over the country paid for it. It's that simple."

Now it's up to the ICC and Madigan to sort through all the conflicting claims. In his letter Patrick wrote, "This case is about events of three years ago, and it is time for the process to move ahead in an expeditious manner." But given the number of documents that have to be sorted through, it will be a long process.

"This is not over," says Kolata. "I don't think we've heard the end of this."

Art accompanying story in printed newspaper (not available in this archive): photo/Jon Randolph.

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