EXHIBIT
      10.2

     

    TABLE
      OF
      CONTENTS

    


     

    I. THE
      SETTLEMENT AGREEMENT

     

    A. Outstanding
      Procedural Matters

    B. Legal
      Basis for Adoption of the Proposed Settlement Agreement as a Resolution on
      the
      Merits

    C. Terms
      of the Settlement

    1. Distribution
      of the $100 Million Refund

    2. Accounting
      Proposals Adopted from the ALJPO

    3. Hardship
      Reconnection Program

    4. Gas
      Reconciliation

     

    II. THE
      PROCEDURAL HISTORY OF THIS DOCKET

     

    A. Disclosure
      of Pertinent Information During Discovery

    B. The
      Protective Order

    C. The
      Applicable Legal Standards

    1. The
      Duty Imposed on PGL by Statute

    2. The
      Burden of Proof

     

    III. ENTITIES
      INVOLVED

     

    A. Findings
      of Fact

    1. enovate,
      LLC

    B. Conclusions
      of Law - Scope of this Proceeding

    1. PGL’s
      Argument

    2. The
      Position of the GCI

    3. Commission
      Analysis and Conclusions

    C. Conclusions
      of Law - Enron Profits

     

    IV. THE
      GAS PURCHASE AGENCY AGREEMENT

     

    A. Findings
      of Fact

    1. Background

    2. The
      Terms of the GPAA

    3. Economic
      Analyses Made of the GPAA Just Before it was Executed

    4. The
      Reasons Articulated by PGL for Entering into the GPAA

    B. Conclusions
      of Law

    1. Proposed
      Disallowances

    2. Ignoring
      Internal Unfavorable Economic Analyses

    3. Enron’s
      Ability to Change the Price of Gas: the Baseload Price Adjustment Clause and
      Articles 4.2(b) and 4.2(c) of the GPAA

    4. Baseload,
      SIQ and DIQ Gas

    5. Foregone
      Demand Credits

    6. Penalties
      for Resales of Gas

    7. Released
      Pipeline Capacity

    8. Eroding
      Basis

    9. The
      CERA Report and Other Reasons for Possibly Higher
      Basis

    9. Differing
      Economic Theories

    10. Staff
      Witness Dr. Rearden’s Dollar Values

    11. PGL’s
      Previous Reconciliation

    12. Proxy
      for Historical Gas Purchase Practices

    13. Market-Based
      Pricing with No Demand or Reservation Charges

    14. Flexible
      Pricing

    15. Load
      Flexibility

    16. Unquantifiable
      Benefits

    17. Conclusions
      Regarding the GPAA, in Total


    
      
         

        


        
        

      

      
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        01-0707

      

    


    V. Manlove
      Field

    A. Findings
      of Fact

    1. Background

    2. The
      Decline Point for Manlove

    3. Maintenance
      Gas or “Cushion Gas”

    4. Displacement

    5. Large
      Withdrawals from Manlove for Third-Parties at the Onset of
      Winter

    A. Conclusions
      of Law

    1. Staff’s
      Position

    2. PGL’s
      Position

    3. GCI’s
      Position

    4. Commission
      Analysis and Conclusions

     

    VI. UNACCOUNTED
      FOR GAS- “GLU”

     

    A. Findings
      of Fact

    B. Conclusions
      of Law

    1. Staff’s
      Position

    2. GCI’s
      Position

    4. PGL’s
      Position

    5. Commission
      Analysis and Conclusions

     

    VII. OFF-SYSTEM
      TRANSACTIONS IN GENERAL

     

    A. Findings
      of Fact

    B. Conclusions
      of Law

    1. Staff’s
      Position

    2. PGL’s
      Position

    3. GCI’s
      Position

    4. Commission
      Analysis and Conclusions

     

    VIII. SPECIFIC
      OFF-SYSTEM TRANSACTIONS

     

    A. Transactions
      16/22

    1. Findings

    B. The
      Trunkline Deal

    1. Findings
      of Fact

    2. Conclusions
      of Law

    C. Transaction
      103

    1. Findings
      of Fact

    2. Conclusions
      of Law

    D. Transaction
      19

    1. Findings
      of Fact

    2. Conclusions
      of Law

    E. The
      Storage Optimization Contract (“SOC”)

    1. Findings
      of Fact

    2. Conclusions
      of Law

    F. The
      Citgo Contract

    1. Findings
      of Fact

    2. Conclusions
      of Law

    G. Hedging

    1. Findings
      of Fact

    2. Conclusions
      of Law

     

    IX. FURTHER
      OBSERVATIONS ON PGL’S CONDUCT

     

     

    X. Other
      Issues

     

    A. Audits

    1. Staff’s
      Position


    
      
         

        


        
        

      

      
        2

        
          

        

      

      
        
        

        01-0707

      

    


    2. The
      Position of the GCI

    3. PGL’s
      Position

    4. Commission
      Analysis and Conclusions

    B. Other
      Non-Monetary Issues

    1. Compliance
      with the USOA

    2. Uncontested
      non-Monetary Issues

     

    X. FINDING
      AND ORDERING PARAGRAPHS

     

    


    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    


    STATE
      OF ILLINOIS

    


    ILLINOIS
      COMMERCE COMMISSION

    


    
      	
              Illinois
                Commerce Commission, 

              On
                Its Own Motion, 

              -vs-

              Peoples
                Gas Light and Coke Company, 

               

              Reconciliation
                of revenues collected under gas adjustment charges with actual costs
                prudently incurred. 

            	
               

              :

              :

              :

              :

              :

              :

              :

              :

              :

            	
               

               

               

               

               

              01-0707

            


    

    


    ORDER

    


    By
      the Commission:

    


    On
      November 7, 2001, the Commission commenced this docket requiring Peoples Gas
      Light and Coke Company (“PGL”) to reconcile the total revenue it collected from
      the ratepayers under its purchased gas adjustment clause (its “PGA”) with the
      total cost of gas it incurred. At that time, this Commission specifically
      required PGL to present evidence establishing what measures it took to insulate
      ratepayers from price volatility in the wholesale natural gas markets during
      the
      time period in question, which is October 1, 2000, through September 30, 2001.
      (See,
      Initiating Order, November 7, 2001). 

    


    Leave
      to
      Intervene was granted to the Citizens Utility Board, the Illinois Attorney
      General, the Cook County State’s Attorney and the City of Chicago. On
      March
      7, 2005, pursuant to a ruling made by the Administrative Law Judge, (the “ALJ”)
      the parties filed pre-hearing briefs stating their positions as to how 83 Ill.
      Adm. Code 525.40 applied to the facts at bar. Pursuant
      to proper notice, hearing in this matter convened before a duly authorized
      ALJ
      on April 18, 2005 and continued through April 21, 2005. Subsequently, the record
      was marked “Heard and Taken.” PGL and Commission Staff filed initial briefs on
      June 30, 2005. The City of Chicago, (the “City”) the Citizens Utility Board
      (“CUB”) and the Illinois Attorney General (the “AG”) filed one initial brief
      collectively on that same day.1
      Reply
      briefs were filed on August 19, 2005. These three parties filed Briefs on
      Exception on October 3, 2005 and Reply Briefs on Exceptions on October 11,
      2005.
      PGL requested oral argument, which the Commission granted on December 13,
      2005.2
      The
      Commission heard oral arguments on December 21, 2005.

    


    ____________________

    1   Reference
      is made herein to positions asserted in joint briefs filed by these three
      entities as the “GCI,” which is the Governmental and Consumer
      Intervenors.

    2   With
      its Brief on Exceptions, PGL also filed a document entitled “Exhibit 1 to Brief
      on Exceptions,” which is, essentially, the Administrative Law Judge’s Proposed
      Order (the “ALJPO”) rewritten. Many of the proposed changes therein were not
      substantiated by legal or factual argument, as is required by law. (83Ill.
      Adm.
      Code 200.830(b)-(e); (Fraley
      v. City of Elgin,
      251 Ill.
      App. 3d 72, 76, 621 N.E.2d 276 (2nd
      Dist.
      1993); In
      re
      Marriage of Thornquist,
      79 Ill.
      App. 3d 791, 798, 399 N.E.2d 176 (1st
      Dist.
      1979)). And, many of the proposed changes therein misstate the record. By
      failing to assert a legal or factual argument in support of changes PGL seeks,
      PGL has waived its right to have this Commission consider them. (Fraley,
      251 Ill.
      App. 3d at, 76). Except in on instance, we did not consider these contentions.
      (See,
      Section
      III(o) herein).


    
      
         

        


        
        

      

      
        4

        
          

        

      

      
        
        

        01-0707

      

    


    


    On
      January 17, 2006, PGL, North Shore Gas Company (“North Shore”) (collectively
“Peoples Companies”), the AG and the City of Chicago entered into a Settlement
      Agreement and Release (the “Settlement”). CUB formally signed on to the
      Settlement on February 27, 2006. A copy of the Settlement is attached hereto
      as
      Exhibit 1. In the Settlement, the Peoples Companies, the AG, the City, and
      CUB
      (collectively the “Settling Parties”) agreed to settle globally the outstanding
      reconciliation dockets pending for Fiscal Years 2001 through 2004 of both PGL
      (I.C.C. Docket Nos. 01-0707, 02-0727, 03-0705 and 04-0683) and North Shore
      (I.C.C. Docket Nos. 01-0706, 02-0726, 03-0704 and 04-0682) (collectively
“Reconciliation Dockets”).3
      Under
      the Settlement, the Settling Parties would settle the Reconciliation Dockets
      and
      the Peoples Companies would pay a $100 million refund, adopt certain
      forward-looking management and accounting measures proposed in the ALJPO, and
      meet other requirements defined in the agreement.

    


    On
      January 23, 2006, the Peoples Companies, the AG and the City filed a Joint
      Petition for Approval of the Settlement Agreement in each of the Reconciliation
      Dockets. At its February 8, 2006 Bench Session, after certain Commissioners
      raised concerns as to whether the terms of the Settlement were fair value in
      exchange for the settlement of all of the Reconciliation Dockets, the Commission
      asked that the Settling Parties meet with Staff and the Cook County State’s
      Attorney (“CCSAO”) to negotiate settlement terms that all parties could
      accept.

    


    During
      the next several weeks, Staff, the CCSAO and the Settling Parties met on several
      occasions. In addition, Staff issued several data requests to the Peoples
      Companies, which the Peoples Companies responded to on an expedited basis.
      Based
      on those responses, Staff developed an estimate of potential disallowances
      for
      reconciliation years other than 2001 that Staff asserted should be considered
      as
      part of the Settlement. Based on the above-mentioned discussions, the Settling
      Parties executed an Amendment and Addendum to the Settlement (the “Addendum”),
      which modified the terms of the Settlement to include these additional
      agreements and modifications that the Settling Parties would include if the
      Commission were to approve the Settlement. A copy of the Addendum is attached
      hereto as Exhibit 2. Staff and the CCSAO opposed both the Settlement and the
      Addendum.

    


    On
      February 28, 2006 and March 1, 2006, the Settling Parties filed statements
      advising the Commission of the revised settlement terms agreed to by the
      Settling Parties and requesting that the Commission approve the Settlement
      as
      revised by the Addendum. On March 2, 2006, the Commissioners issued data
      requests to the parties to obtain information about the Settlement and the
      Addendum. The parties filed verified responses to these Commission data requests
      on March 3, 2006. On March 6, 2006, the Commission held a special open meeting
      addressing the settlement during which Commissioners asked questions to, and
      received answers from, representatives of the parties and Staff. At that Special
      Open Meeting, the Commission generally approved the Settlement Agreement.


    


    


    


    ____________________

    3   The
      Settlement also addressed three circuit court cases.


    
      
         

        


        
        

      

      
        5

        
          

        

      

      
        
        

        01-0707

      

    


    


    Testifying
      on behalf of PGL were: Thomas Zack, Director of Gas Supply Services; David
      Wear,
      the Manager of Gas Supply Administration at PGL; William Morrow, the
      Vice-President of PGL, the Vice-President of Peoples Energy Corporation and
      the
      President of Peoples Energy Resource Company; Valerie Grace, PGL’s Director of
      Rates and Gas Transportation Services; Thomas Puracchio, PGL’s Gas Storage
      Manager: and Frank Graves, a Principal at the Consulting Firm of the Brattle
      Group. 

    


    Testifying
      on behalf of Commission Staff were Dr. David Rearden, a Senior Economist in
      the
      Commission’s Policy Division, Steven R. Knepler, a Supervisor in the Accounting
      Department of the Commission’s Financial Analysis Division, and Dianna Hathhorn,
      an accountant in the Accounting Department of the Commission’s Financial
      Analysis Division, Eric Lounsberry, the Supervisor of the Gas Section of the
      Engineering Department of the Commission’s Energy Division, and Dennis Anderson,
      a senior energy engineer in the Gas Section of the Engineering Department of
      the
      Commission’s Energy Division. 

    


    Testifying
      on behalf of CUB were Brian Ross, a Principal with CR Planning, Inc. and Jerome
      Mierzwa. Testifying on behalf of the City was John Herbert. Testifying on behalf
      of the AG was David Effron a regulatory consultant. Testifying on behalf both
      the City and CUB was Lindy Decker, an Audit Manager with Grant Thornton LLP.
      

    


     

    I. The
      Settlement Agreement 

     

    


     

    
      	 	
              A.

            	
              Outstanding
                Procedural Matters

            


    

     

    


    On
      October 7, 2005, PGL filed a Petition for Interlocutory Review of the Ruling
      on
      Staff’s Motion to Strike Reply Brief and Deny Other Relief. On January 17, 2006,
      the Peoples Companies, the AG, the City and CUB filed a Joint Motion to Stay
      Pending Presentation of and Decision on Petition to Approve Settlement. In
      light
      of the Commission’s approval of the Settlement, without addressing or ruling on
      the merits of these matters, the Commission denies the Petition for
      Interlocutory Review and the Joint Motion for Stay as being moot. On March
      16,
      2006, Staff filed a motion seeking leave to file Exceptions and a Brief on
      Exceptions. That motion is hereby granted.


    
      
         

        


        
        

      

      
        6

        
          

        

      

      
        
        

        01-0707

      

    


    


     

    
      	 	
              B.

            	
              Legal
                Basis for Adoption of the Proposed Settlement Agreement as a Resolution
                on
                the Merits

            


    

     

    


    The
      Illinois Supreme Court addressed the standard for the Commission’s approval of
      settlement agreements and for consideration and adoption of proposed settlement
      agreements in Business
      and Professional People for the Public Interest v. Illinois Commerce
      Commission
      (“BPI”),
      136
      Ill. 2d 192, 206-218 (1989). BPI
      holds
      that the Commission may approve a settlement agreement as a settlement agreement
      if there is unanimous support for it. Id.
      at
      217-218. However, if a settlement agreement lacks unanimous support, for the
      Commission to consider and adopt the proposed agreement as an appropriate
      resolution on the merits, three conditions must be met: 1) the provisions of
      the
      settlement agreement must be within the Commission’s authority to impose; 2) the
      provisions must not contravene the PUA; and 3) substantial evidence must exist
      in the record to independently support the provisions of the proposed
      settlement. Id.
      It may
      be observed that the requirements expressed by the Illinois Supreme Court in
      BPI
      concerning the Commission’s adoption of a non-unanimous settlement proposal as a
      resolution on the merits of a case are similar in substance to the standards
      found in section 10-201 of the PUA that apply generally to the judicial review
      of Commission orders and decisions.

    


    As
      noted
      above, the Settling Parties proposed to resolve eight open dockets with the
      Settlement and Addendum. The Settlement and Addendum received unanimous support
      from the parties in six of those dockets4,
      which
      the Commission will deal with in separate orders. For the remaining two dockets,
      01-0706 and the instant docket, CCSAO opposed the settlement. Given the lack
      of
      unanimous support for the proposed settlement agreement here, the Commission
      must analyze the proposed settlement as described in the above paragraph if
      the
      Commission is to adopt the proposal as a resolution on the merits.

    


    First,
      the Commission must determine if the provisions of the proposed Settlement
      and
      Addendum are within the Commission’s authority to impose. Several of the
      provisions—conservation program funding, debt forgiveness and hardship
      reconnection—do not require Commission approval to take effect. Because the
      Settling Parties constructed the proposed Settlement and Addendum so that these
      provisions will take effect even without Commission approval, the Commission
      need not analyze these provisions under BPI.
      However, only the Commission can issue an order imposing refunds in
      reconciliation proceedings (See
      PUA
      Section 9-220 and 83 Ill. Adm. Code 525). The refund provision will not take
      effect unless the Commission adopts the proposed Settlement and Addendum as
      a
      resolution on the merits. Since this provision rests solidly within the
      Commission’s authority, our adoption of this aspect of the proposed Settlement
      and Addendum meets the first condition of the BPI
      analysis.

    


    


    ____________________

    4   While
      Staff expressed opposition to the settlement agreement, Staff is not considered
      a party under the Commission’s Rules of Practice. 83 Ill. Adm. Code § 200.40
      (definition of a “Party”).

    



    
      
         

        


        
        

      

      
        7

        
          

        

      

      
        
        

        01-0707

      

    


    


    Second,
      the Commission must determine whether the provisions of the proposed Settlement
      and Addendum contravene the PUA. Upon review of these documents, the Commission
      discerns nothing that would violate any provision of the PUA. Therefore, the
      proposed Settlement and Addendum meet the second condition of the BPI
      analysis.

    


    Finally,
      the Commission must find that substantial record evidence exists to
      independently support the provisions of the proposed settlement. Substantial
      evidence is more than a scintilla, but less than a preponderance. (Citizens
      Utility Board v. Illinois Commerce Commission,
      291 Ill.
      App. 3d 300, 304 (Ill. App. Ct. 1997)).This requires the Commission to
      demonstrate that facts exist that, in turn, sustain the provisions of the
      findings and ordering paragraphs of an order that would adopt, as a resolution
      on the merits, the provisions of the proposed Settlement and Addendum. The
      Settlement and Addendum provide for a $100 million refund to be issued to PGL
      and North Shore customers. For the Commission to consider these documents,
      which
      lack the support of CCSAO, to be an adequate resolution on the merits of this
      docket, the Commission must evaluate the evidence and findings of imprudence
      in
      the ALJPO to ensure they support the $100 million refund. This evidence played
      a
      significant role in the proceedings and may not be ignored in a decision that
      considers and adopt the proposed settlement as a resolution on the merits,
      as we
      are required to do here. As set forth in the remainder of the order, the
      Commission finds substantial evidence in the record to support the provisions
      of
      this non-unanimous proposed Settlement and Addendum.

    


    The
      Commission hereby adopts the provisions of the proposed Settlement and Addendum
      as an appropriate resolution on the merits, finding that they meet the
BPI
      test.

    


     

    C. Terms
      of the Settlement

     

    


    The
      Commission finds that an appropriate settlement has been reached in this docket
      and in the other Peoples Reconciliation Dockets, the terms of the settlement
      areof which are set forth in the Settlement (Exhibit 1) and Addendum (Exhibit
      2). The Settlement Agreement and Addendum are hereby incorporated into and
      made
      a part of this Order and the similar orders entered for the other Peoples
      Reconciliation Dockets.

    


     

    1. Distribution
      of the $100 Million Refund

     

    


    The
      Settlement Agreement and Addendum provide the Commission with flexibility in
      determining how to refund the $100 million to customers in PGL's and North
      Shore’s service territories. The Commission finds that the $100 million refund
      should be apportioned to North Shore and PGL customers based on the substantial
      evidence in the records of Docket No. 01-0706 and Docket No. 01-0707. That
      evidence demonstrates that North Shore customers suffered significantly less
      harm than PGL customers. 


    
      
        


        
        

      

      
        8

        
          

        

      

      
        
        

        01-0707

      

    


    


    The
      Commission finds that the $100 million refund shall be allocated between North
      Shore and PGL customer accounts based on each utility’s approximate share of the
      total disallowances recommended by Staff in Docket Nos. 01-0706 and the instant
      docket. Staff recommended approximately $92 million in disallowances in the
      instant proceeding and approximately $4 million in disallowances in Docket
      No.
      01-0706. Using those numbers as indicators of the level of harm caused to
      consumers in each service territory, the Commission finds that $96,000,000
      of
      the $100,000,000 shall be refunded to customer accounts in PGL’s service
      territory.

    


    The
      Company shall distribute the $96,000,000 refund to customer accounts in PGL's
      service territory by refunding one hundred dollars ($100.00) to each customer
      account in Service Classification No. 1 - Small Residential Service ("SC No.
      1")
      that is receiving service from the Company upon the date this Order is entered.
      The $100 refund shall be provided to all SC No.1 customer accounts—both
      transportation and sales service. 

    


    After
      $100 dollars is allocated to each SC No. 1 customer account, the remainder
      of
      the $96,000,000 shall be allocated to all remaining Service Classifications
      (“Non-residential Service Classifications) based on each Non-residential Service
      Classification’s share of the total PGA gas consumed by all Non-residential
      Service Classifications during the 2001, 2002, 2003, and 2004 reconciliation
      periods (“Reconciliation Periods”). 

    


    Each
      Non-residential Service Classification’s allocation, with the exception of the
      allocations to Service Classification No. 3 - Large Volume Service ("SC No.
      3")
      and Service Classification No. 4 - Large Volume Demand Service ("SC No. 4"),
      shall be divided by the total number of customer accounts (both transportation
      and sales) receiving service under that Service Classification on the date
      this
      Order is entered. The result for each Service Classification shall be refunded
      on a per capita basis to each customer account receiving service under that
      Service Classification on the date this Order is entered. Refunds to all
      Non-residential Service Classifications shall be provided to both sales and
      transportation customer accounts with the exception of SC No. 3 and SC No.
      4
      customer accounts as outlined below. 

    


    Refunds
      to SC No. 3 customer accounts shall be allocated to individual SC No. 3 customer
      accounts based on PGA gas usage during the Reconciliation Periods. The amount
      allocated to SC No. 3 shall be refunded to each individual SC No. 3 customer
      account, which received service at any time during the Reconciliation Periods
      and purchased PGA gas at any time during the Reconciliation Periods, based
      on
      each customer account’s share of the total PGA gas used during the
      Reconciliation Periods. If any of these entities are still a going concern
      but
      no longer a customer of the Company, then the Company and the customer shall
      arrive at a mutually acceptable method of administering the refund. Refunds
      to
      SC No. 4 customer accounts shall be calculated in the same manner as refunds
      to
      SC No. 3 customer accounts. 


    
      
        


        
        

      

      
        9

        
          

        

      

      
        
        

        01-0707

      

    


    


    The
      Commission finds that the allocation methodologies for the different Service
      Classifications approved herein are equitable and take into consideration the
      administrative difficulties associated with providing refunds to nearly one
      million customers with vastly different usage characteristics and levels of
      service.

    


    Within
      seven days of the date this Order is served to the parties, PGL shall file
      an
      informational filing with the Commission's Chief Clerks Office describing the
      amount to be refunded to each customer in each Service Classification based
      on
      the methodology described herein and a plan for administering the refunds.
      

    


    The
      informational filing shall include the following information:

    


    
      	 	
              §

            	
              the
                number of customers receiving service on each Service Classification
                as of
                the date this Order is entered; 

            


    

    


    
      	 	
              §

            	
              the
                usage of PGA gas by each Service Classification during the Reconciliation
                Periods;

            


    

    


    
      	 	
              §

            	
              the
                amount to be refunded to each customer account in each service
                classification;

            


    

    


    
      	 	
              §

            	
              the
                number of current and former customers that held customer accounts
                on
                Service Classification No. 3 and Service Classification No. 4 during
                the
                Reconciliation Periods and consumed PGA gas at any time during the
                Reconciliation Periods;

            


    

    


    
      	 	
              §

            	
              the
                amount of PGA gas consumed during the Reconciliation Periods by each
                current and former customer that held a Service Classification No.
                3 or
                Service Classification No. 4 account during the Reconciliation
                Periods;

            


    

    


    
      	 	
              §

            	
              an
                indication of whether former SC No. 3 and SC No. 4 customers are
                still a
                going concern, the amount to be refunded to customers in each service
                classification; and, 

            


    

    


    
      	 	
              §

            	
              the
                amount to be refunded to each current and former customer account
                that
                received service under Service Classification No. 3 and Service
                Classification No. 4 during the Reconciliation
                Periods.

            


    

    


    The
      refund shall be issued in one installment and shall be considered a credit
      to
      each customer account. The credit shall be plainly designated on customers’
bills as a refund credit provided as a result of a Settlement and Addendum
      agreed upon by the City of Chicago, the Illinois Attorney General, the Citizens
      Utility Board, Peoples Gas, and North Shore and approved by the Illinois
      Commerce Commission.


    
      
         

        


        
        

      

      
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        01-0707

      

    


    


    Refunds
      shall be issued to all customer accounts within thirty days of the date this
      Order is entered. Within forty-five (45) days of the date this Order is entered,
      the Company shall file an informational filing describing how the refund process
      was administered, the speed at which the refund process was completed, any
      problems that were incurred during the refund process, and any other issues
      associated with the refund process. The filing will also include the total
      numbers of customers receiving the refund, and for all Service Classifications
      except for SC 1, the refund amount for each customer.

    


     

    2. Accounting
      Proposals Adopted from the ALJPO

     

    


    In
      the
      Settlement and the Addendum, the Settling Parties agreed that the Peoples
      Companies would adopt and incorporate into the Settlement several of the
      accounting provisions set forth in the ALJPO. Section III.A.2 of the Settlement
      includes a statement paralleling Finding (13) of the ALJPO. Section III.A.2.
      states:

    


    For
      a
      period of five years, Peoples Gas and North Shore Gas each shall perform an
      annual internal audit of gas purchasing and submit a copy of the audit report
      to
      the Manager of the ICC’s Accounting Department.

    


    (Settlement
      at 8.)

    


    Amendment
      Section A of the Addendum states that the Peoples Companies will account future
      HUB and third party non-tariff revenues in accordance with 83 Ill. Admin Code
      525, stating:

    


    Upon
      approval of the settlement agreement, Peoples Gas and North Shore Gas and all
      Peoples Companies shall account for all of their HUB revenues and third party
      non-tariff revenues, and any other revenues referred to as HUB revenues or
      non-tariff revenues (as those terms have been used in ICC Docket 01-0707) in
      accordance with 83 Ill. Admin Code 525.40(d). All such revenues shall serve
      to
      offset “recoverable gas costs” to arrive at the “gas charge” as those terms are
      used in Illinois Commerce Commission rules part 525.40(d) and in accordance
      with
      the Public Utilities Act. 83 Ill. Admin. Code 525.40(d); 220 ILCS 5/101
et.
      seq.
      The
      Peoples Gas and North Shore Gas and all Peoples Companies agree that this
      accounting of these revenues shall apply to all future Purchased Gas Adjustment
      reconciliation case and rate case filed by Peoples Gas and North Shore
      Gas.

    


    (Addendum
      at 1-2.). Therefore, Peoples Gas and North Shore must account for all of their
      HUB revenues and third-party non-tariff revenues as is set forth
      above.


    
      
         

        


        
        

      

      
        11

        
          

        

      

      
        
        

        01-0707

      

    


    


    The
      text
      of those findings from the ALJPO incorporated into the Settlement by the
      Addendum are:

    


    
      	 	
              (7)
                

            	
              Peoples
                Gas Light and Coke Company shall update its operating agreement,
                which was
                approved by this Commission in Docket No. 55071,
                prior to filing its petition with the ICC for its next rate case
                or within
                sixty days after the date a final order is entered in this docket,
                whichever occurs first;

            


    

    


    
      	 	
              (8)
                

            	
              Peoples
                Gas Light and Coke Company shall account for all gas physically injected
                into Manlove Field by including the cost associated with maintenance
                gas
                in the amount transferred from purchased gas expense to the gas stored
                underground account, Account 164.1;

            


    

    


    
      	 	
              (9)
                

            	
              Peoples
                Gas Light and Coke Company shall account for the portion of gas injected
                into the Manlove Storage Field to maintain pressure, as credits from
                Account 164.1, Gas Stored Underground, as charges to Account 117,
                Gas
      Stored Underground, in the case of recoverable cushion gas,
                or to Account
                101, in the case of non-recoverable portions of cushion
                gas;

            


    

    


    *  *  *

    


    
      	 	
              (11)
                

            	
              Peoples
                Gas Light and Coke Company shall revise its maintenance gas accounting
                procedures related to gas injected for the benefit of the North Shore
                Gas
                Company and third-parties to require those entities to bear the cost
                of
                maintenance gas, and it shall revise its maintenance gas accounting
                procedures to ensure that all customers/consumers bear equal
                responsibility for maintenance gas;

            


    

    


    
      	 	
              (12)
                

            	
              Peoples
                Gas Light and Coke Company shall submit its revised maintenance gas
                accounting procedures to the Commission’s Chief Clerk with a copy to the
                Manager of the Accounting Department within 30 days after the date,
                upon
                which, a final Order is entered in this
                docket;

            


    

    


    *  *  *

    


    
      	 	
              (14)
                

            	
              Peoples
                Gas Light and Coke Company shall submit quarterly reports reflecting
                its
                use of journal entries regarding maintenance gas to the Manager of
                this
                Commission’s Accounting Department within 45 days of the end of each
                quarter, after the date of a final order is entered in this docket,
                through the quarter ending September 30,
                2009;

            


    

    



    
      
         

        


        
        

      

      
        12

        
          

        

      

      
        
        

        01-0707

      

    


    
      	 	
              (15)
                

            	
              Peoples
                Gas Light and Coke Company shall engage outside consultants to perform
                a
                management audit of its gas purchasing practices, gas storage operations
                and storage activities. The firm selected to perform the management
                audit
                shall be independent of Peoples Gas Light and Coke Company, its
                affiliates, Staff, and all parties in this docket, and approved by
                this
                Commission. Monthly reporting of the progress of the conduct of the
                management audit shall be submitted to the Bureau Chief of the
                Commission’s Public Utilities Bureau, with a copy to the Manager of the
                Commission’s Accounting Department, until the management audit report has
                been submitted. Completion of this management audit shall occur no
                later
                than eighteen months after the date, upon which, a final order is
                entered
                in this docket. Upon completion, copies of the management audit reports
                shall be submitted to the Commission’s Public Utilities Bureau Chief and
                the Manager of the Commission’s Accounting
                Department.

            


    

    


    (ALJPO
      at
      135-136.)

    
      	 	
              3.

            	
              Hardship
                Reconnection Program 

            


    

    


    The
      Peoples Companies agreed to instate a Hardship Reconnection program to allow
      certain customers who have been disconnected for non-payment to be reconnected
      and their debt forgiven. The Commission applauds this program and the Companies’
pledge to permanently instate it. The Commission has high hopes for the
      program’s success. To keep ourselves informed of the success, the Commission
      finds that the Peoples Companies should file quarterly reports on the progress
      of the program.

    


     

     


    
      
         

        


        
        

      

      
        13

        
          

        

      

      
        
        

        01-0707

      

    


     

    
      	 	
              4.

            	
              Gas
                Reconciliation

            


    

     

    


    A
      reconciliation of Peoples Gas’ total gas revenues with total gas costs for the
      reconciliation period October 1, 2000, through September 30, 2001 is shown
      in
      Appendix A hereto. This Appendix A contains an independent reconciliation for
      each of the following; Commodity Gas Charge, Non-Commodity Gas Charge and Demand
      Gas Charge, and Transition Surcharge. Below is an aggregation of the above
      referenced reconciliations. 

    


    
      	
              1. Unamortized
                Balance at 9/30/00 per 2000 reconciliation
                (Refund)/Recovery

            	
              $30,466,781.15

            
	
              2. Factor
                A Adjustments Amortized to Sch. I at 09/30/00 per 2000 reconciliation
                (Refund)/Recovery 

            	
              13,153,581.51

            
	
              3. Factor
                O (Refunded)/Recovered during 2000

            	
              _______0_______

            
	
              4. Balance
                to be (Refunded)/Recovered during 2001 from prior periods

            	
              43,620,362.66

            
	
              5. 2001
                PGA Recoverable Costs

            	
              883,501,818.75

            
	
              6. 2001
                PGA Actual Recoveries

            	
              958,580,973.43

            
	
              7. Interest

            	
              801,015.36

            
	
              8. Other
                Adjustments

            	
              0

            
	
              9. Pipeline
                Refunds 

            	
              ___(614,882.34)__

            
	
              10. 
                (Over)/Under Recovery for 2001

            	
              (74,893,021.66)

            
	
              11. 
                PGA Reconciliation Balance at 9/30/01 

              (Over)/Under
                Collected

            	
              (31,272,659.00)

            
	
              12. 
                Factor A Adjustments unreconciled at 9/30/01

              (Refund)/Recovery

            	
              (10,342,032.56)

            
	
              13. 
                Unamortized Balance at 9/30/01

              (Refund)/Recovery

            	
              ($20,930,626.44)

            
	
              14. 
                Requested Ordered Reconciliation Factor to be (Refunded)/Recovered
                [Factor
                O]

            	
              0

            


    

    



    
      
         

        


        
        

      

      
        14

        
          

        

      

      
        
        

        01-0707

      

    


    


    
      	
              II.

            	
              The
                Procedural History of this
                Docket

            


    

    


     

    
      	 	
              A.

            	
              Disclosure
                of Pertinent Information During
                Discovery

            


    

     

    As
      is
      often the case in litigation, the ALJ assigned to this docket set a cut-off
      date
      of March 17, 2003 for completion of all discovery, except for the prefiling
      of
      testimony.5
      (See,
      e.g., Mann v. Upjohn Co.,
      324 Ill.
      App. 3d 367, 373, 753 N.E.2d 452 (1st
      Dist.
      2001); Besco
      v. Henslee, Monek & Henslee,
      297 Ill.
      App. 3d 778, 781, 701 N.E.2d 1126 (3rd
      Dist.
      1998)). On February 10, 2004, however, discovery was reopened. In Motions to
      Compel brought by several parties, parties contended that in discovery, PGL
      was
      asked to provide information about its business dealings with an affiliate,
      enovate. Recently-released information on the website of the Federal Energy
      Regulatory Commission (“the FERC”) about Enron’s relationship with PGL and its
      affiliates indicated that PGL entered into transactions with enovate that were
      not disclosed in discovery. (See,
      e.g.,
      CUB
      Motion to Compel, February 3, 2004). In fact, PGL contended that it had no
      business dealings with enovate. (See,
      e.g.,
      CUB
      Motion to Compel, February 3, 2004). enovate is described below. When reopening
      discovery, the ALJ permitted the movants to seek additional information through
      discovery from PGL about its relationship with its affiliate, enovate, but
      ruled
      that the discovery requests the movants sought to enforce were vague and
      overbroad. (Tr.132-33). 

    


    Also
      on
      February 10, 2004, the ALJ required parties to adhere to discovery practices
      in
      the Ill. Supreme Court Rules, as opposed to the discovery practices in the
      Commission’s rules.6
      The Ill.
      Supreme Court Rules require verification of answers to discovery requests.
      (See,
      e.g.,
      S. Ct.
      Rule 213(i)). While ultimately PGL did respond to discovery requests asking
      for
      information about its relationship with enovate, those records are not complete.
      Throughout the course of discovery, PGL maintained that Enron North America,
      a
      co-owner of enovate, had that information. (See,
      e.g.,
      GCI
      Init. Brief at 30). 

    


    


    ____________________

    5   Administrative
      Law Judge Erin O’Connell-Diaz was originally assigned to this docket. It was
      reassigned to Administrative Law Judge Claudia E. Sainsot on April 30, 2003.
      

    6   Commission
      rules require full disclosure of all information that is relevant and material.
      (See,
      e.g., 83
      Ill,
      Adm. Code 200.340). Commission rules do not require any person to verify
      discovery responses. And, Commission rules provide no penalties for failure
      to
      provide discovery or for inaccurate discovery responses. 


    
      
         

        


        
        

      

      
        15

        
          

        

      

      
        
        

        01-0707

      

    


    


     

    
      	 	
              B.

            	
              The
                Protective Order

            


    

     

    


    Another
      contested item in this docket was the Protective Order, which was entered after
      the parties fully briefed this issue.7
      At that
      time, PGL maintained that highly confidential information about its gas-buying
      practices was being tendered in discovery and these documents needed to be
      kept
      under seal to protect PGL from unscrupulous use of information in this docket
      in
      the marketplace. In response, Staff, CUB, the City and the AG maintained that
      the information PGL claimed was confidential was “stale;” that is, it was too
      old to be used against PGL in the marketplace. Except for the obvious lapse
      of
      time, these parties did not provide factual support for this factual conclusion.
      

    


    There
      is
      evidence in this proceeding concerning PGL’s and its affiliates business
      dealings with Enron which, if revealed in a competitive setting could cause
      harm
      to PGL or an affiliate.8
      Therefore, the protective order remains in place. However, the Commission
      concludes that the information set forth herein discussing certain terms in
      the
      business dealings among PGL/PGL affiliates and Enron Midwest/Enron
      North

    


    America
      is not protected by the protective order, as it is not information that, if
      revealed in a competitive setting, would cause harm to PGL or an affiliate.
      This
      information does not divulge PGL’s gas buying needs, its buying practices, or
      like information that could be used against PGL or an affiliate in the
      marketplace. 

    


    The
      Commission additionally notes that the contracts in question were executed
      in
      September of 1999, over six years ago, and they created a highly unique business
      arrangement. The full consideration (what is given up or taken pursuant to
      a
      contract,
      i.e., money
      or
      services) cannot necessarily be ascertained by analyzing any one contract,
      or
      even all of the contracts, as some of the contracts were inter-dependent. Also,
      some of the contracts were verbal. And, some of the consideration provided
      is
      not mentioned in the contracts. 

    


    Finally,
      the contractual arrangements amongst PGL/PGL affiliates and Enron North
      America/Enron Midwest were designed to avoid Commission detection. Thus,
      consideration for the transactions represents what personnel at the parties
      thereto were willing to give up in these transactions, while still avoiding
      Commission scrutiny. In other words, the consideration in these transactions
      is
      not representative of any true market value or true purchasing need on the
      part
      of PGL or a PGL affiliate.

    


    


    


    


    ____________________

    7   In
      an Interlocutory Appeal filed on behalf of the People of the State of Illinois,
      the AG maintained, essentially, that this order was entered without the parties
      having briefed the issue. (01-0707, Petition of the People of the State of
      Illinois for Interlocutory Review, August 11, 2004). This simply is not correct.
      (See,
      e.g.,
      Comments
      of City and CUB Regarding Issuing a Protective Order, July 20, 2004).


    8   The
      protective order only protected the confidentiality of documents subject to
      the
      attorney-client privilege and trade secrets, which is, information that, if
      revealed in a competitive setting, could cause harm. (See,
      01-0707,
      Protective Order, July 21, 2004). 


    
      
         

        


        
        

      

      
        16

        
          

        

      

      
        
        

        01-0707

      

    


    


    As
      to
      information about Manlove Field which could be considered to be proprietary,
      PGL
      divulged that information about Manlove Field in the public version of its
      briefs. That information, therefore, is not subject to the protective order.
      

    


     

    C. The
      Applicable Legal Standards

     

    


     

    1. The
      Duty Imposed on PGL by Statute

     

    


    Generally,
      base rates include a utility’s administrative costs and its Commission-approved
      rate of return, which is the cost of investor capital. (See,
      e.g., Ill. Power Co. v. Ill. Commerce Commission,
      339 Ill
      App. 3d 425, 434, 709 N.E.2d 377 (1st
      Dist.
      2003)). This proceeding, however, is a reconciliation, which determines the
      propriety of PGL’s purchased gas adjustment tariff(“PGA”), which allows it to
      pass its gas costs on directly to consumers.9
      (Id.
      at 427).
      Those charges are the cost of gas supplied to consumers, as well as the related
      expenses incurred, including but not limited to, expenses related to assets
      used
      by PGL in supplying gas to consumers. (83 Ill. Adm. Code 525.40(a)). With
      respect to gas costs, consumers pay PGL whatever price PGL paid for gas, with
      no
      markup for profit on the gas. (Tr. 782). 

    


    Recoverable
      gas costs include the cost(s) of gas, cost(s) of storage, transportation costs
      and other non-commodity costs. (83 Ill. Adm. Code 525.40(a)). If PGL derived
      revenues from any transactions with costs associated with costs recoverable
      under the above-mentioned section, any associated revenues must be used to
      offset those costs. (Id.
      at
      525.40(d)). When engaging in such transactions, PGL must “refrain” from doing
      anything that would increase the gas charge. (Id.).

    


    Although
      PGL’s tariff allows it to pass on the cost of gas to consumers without
      Commission approval, the Commission is required annually by statute, to
      determine whether the charges PGL imposed reflect the cost of gas and to
      determine whether such purchases were prudent. (220 ILCS 5/9-220). In this
      context, prudence has been defined as [t]hat standard of care which a reasonable
      person would be expected to exercise under the same circumstances encountered
      by
      utility management at the time decisions had to be made. (Illinois
      Power Co. v. Ill. Commerce Comm.,
      245 Ill.
      App. 3d 367, 371, 612 N.E.2d 925 (3rd
      Dist.
      1993)). Thus, only what PGL’s decision-makers actually analyzed, or should have
      analyzed, can be considered here. (Id.).
      

    


    If,
      after
      a hearing, the Commission finds that a utility has not established that the
      costs it passed on to consumers in a PGA clause were prudently incurred, the
      difference determined by the Commission must be refunded, along with any
      interest or carrying charge authorized by the Commission. (83 Ill. Adm. Code
      Sec. 525.70(b)). Section 9-220 and its predecessor, Section 36 of the previous
      Public Utilities Act, confer a broad grant of authority on this Commission.
      (Business
      and Professional People for the Public Interest v. Ill. Commerce
      Comm.,
      171 Ill.
      App. 3d 948, 957, 525 N.E.2d 1053 (1st
      Dist.
      1988)). 

    


    ____________________

    9   The
      word “consumer” is used here to mean PGL’s rate-paying customers, including both
      residential customers and businesses.

    



    
      
         

        


        
        

      

      
        17

        
          

        

      

      
        
        

        01-0707

      

    


    


     

    2. The
      Burden of Proof

     

    


    The
      Commission commenced this reconciliation proceeding, as it does every year.
      However, the burden of proof is on PGL to establish the prudence of its costs
      of
      gas purchases and related costs. (220 ILCS 5/9-220(a)). PGL has the burden
      to
      prove this by a preponderance of the evidence. (5 ILCS 100/10-15). Preponderance
      of the evidence has been defined as the evidence that is more probably true
      than
      not. (See,
      e.g., Witherell v. Weimer, 118
      Ill.
      2d, 321, 336, 515 NE2d 68 (1987)).

    


     

    III. Entities
      Involved

     

    


     

    A. Findings
      of Fact

     

    


    As
      the
      record demonstrates, several entities are involved in this rather complicated
      fact pattern. Of primary importance is PGL, a local distribution company (“LDC”)
      and the subject of this reconciliation proceeding. It distributes gas to
      consumers that are within its service territory, chiefly located in the City
      of
      Chicago. It must purchase the gas that it distributes to consumers. (Tr. 871,
      887). Next, Peoples Energy Corporation (“PEC”), PGL’s parent company, is a
      player in several scenarios discussed later in this order. Affiliated with
      PGL
      and PEC are Peoples Energy Resources Company (“PERC”) and North Shore Gas
      Company. (PGL Ex. L at 3). Additionally, Enron North America Corp. (“Enron NA”)
      was wholly-owned by Enron Corp. (Staff Ex. 2.00, Attachments, Guaranty, at
      1).
      The list does not stop here.

    


    PGL
      furnished Staff and the parties with two letters of intent (“First LOI” and
“Second LOI”) between PEC and Enron NA. The First LOI was executed on September
      16, 1999 by PEC and Enron NA.10
      

    


    The
      First
      LOI outlined Enron NA’s and PEC’s intent to pursue a joint venture. In this LOI,
      Enron NA and PEC stated a desire to enter into Hub and marketing services to
      the
      Chicago wholesale marketplace, including: parking, balancing, exchange and
      title
      tracking services, risk management services, asset optimization services to
      PEC
      and affiliates, wholesale bundled services to PEC in power and gas, and
      investment in and monetization of capital improvement of PEC’s Chicago
      infrastructure. (Id.
      at
      ST-PG
      192)). To effectuate these dealings, PEC and Enron NA were to form a new company
      in the form of a joint venture.

    


    


    


    


    


    


    ____________________

    10   The
      First LOI was executed on the same day as the GPAA. The signatories to this
      LOI
      were William Morrow, Vice President of PEC, and David Delainey, Managing
      Director of Enron NA, the same as the signatories to the GPAA.

    



    
      
         

        


        
        

      

      
        18

        
          

        

      

      
        
        

        01-0707

      

    


    


    The
      Second LOI outlined profit-sharing of hub revenues between PEC and Enron NA,
      sharing of peaking service between the two parties and sharing of Enron NA’s
      revenues. Though this document was apparently not executed (signed by the
      parties), the actual relationship between the parties was very similar to what
      the First LOI provided. It provided that the terms of a definitive contract
      between the two were to specify the terms of conditions of the business
      arrangements and the sharing of profits and losses. (Id.
      at
      192).
      No
      written contract was actually ever executed by these parties; instead, they
      proceeded to do business based on a verbal commitment. (Staff Ex. 9.00,
      Attachment G). 

    


    Enron
      NA
      and PERC each formed a subsidiary for the purpose of owning interest in another
      limited liability company. Enron NA formed Enron Midwest, LLC (“Enron Midwest”
or “Enron MW”); PERC formed Peoples Midwest, LLC (“Peoples Midwest”). (Staff Ex.
      7.00 at 8). These two entities then formed enovate, LLC11
      to
      facilitate a profit-sharing arrangement that gave PEC/PERC 50% of all of the
      profits Enron Midwest gleaned through various business dealings with PGL.


    


     

    1. enovate,
      LLC

     

    


    Peoples
      Midwest and Enron Midwest formally created enovate, LLC (”enovate”) by a Limited
      Liability Company (“LLC”) Agreement dated April 26, 2000. (PGL Ex. N at 3).
      According to the agreement, Peoples Midwest and Enron Midwest each invested
      approximately $100,000 in enovate. In return, each entity received, 50% of
      the
      profits from enovate. (PGL Ex. N at 3, Staff Ex. 9.00 at 9, Attachment C; Tr.
      800). When Enron Midwest transacted business with PGL during the time period
      in
      question, 50% of Enron Midwest’s profits were credited to enovate. Thus PEC/PERC
      received that 50% of Enron Midwest’s profits. (Staff Ex. 9.00 at 15-16; 7.00 at
      11). Enron Midwest was the managing partner of enovate because it possessed
      the
      skills, resources and expertise to operate enovate efficiently and profitably.
      (Tr. 812-13).

    


    enovate
      had few tangible assets or expenses of its own. enovate owned pipeline
      transportation rights with Trunkline Gas Company, interruptible services that
      it
      purchased from interstate pipelines and local gas distribution companies, as
      well as physical gas supply agreements with Northern Illinois Gas Company and
      Northern Indiana Public Service Co. (PGL Ex. N at 4-5). enovate also claimed
      to
      have 30 Bcf of storage.12
      (See,
      City-CUB
      Ex. 2.00 at 18). The record demonstrates that Enron NA and PERC provided
      operations and management needs. enovate used office space rented by Enron
      NA
      and other facilities, computer systems and training systems provided by Enron
      NA. The personnel who ran enovate were employed by and paid by PERC. (Tr. 793,
      795). enovate had no payroll. (Tr. 794-95). Because PERC and Enron NA each
      bore
      the labor costs associated with enovate, there was no need for enovate to have
      a
      payroll. (PGL Ex. N at 6). enovate had no administrative costs and no cash
      on
      its books. (City-CUB Ex. 1.0 at 65). 

    


    


    ____________________

    11  enovate,
      LLC was originally named Midwest Energy Hub, LLC.

    12   A
      Bcf of gas is one million MMBtus; a MMBtu is one million Btus. (Staff Ex. 2.00,
      Attachments, GPAA, at 5; Tr. 1004). Also, a decatherm, or a Dth, is one million
      Btus. (NYMEX.com\glossary). A Btu is a British thermal unit, which is the amount
      of energy required to raise the temperature of one pound of pure water the
      one
      degree from 59 degrees to 60 degrees, Fahrenheit, at sea level pressure. (Staff
      Ex. 2.00, Attachments, GPAA, at 2). 


    
      
         

        


        
        

      

      
        19

        
          

        

      

      
        
        

        01-0707

      

    


    


    On
      November 28, 2000, PGL filed an application pursuant to Section
      7-10113
      of the
      Public Utilities Act (“PUA” or “the Act”) for Commission permission to enter
      into a contract with an affiliate, enovate, LLC. In that verified application,
      PGL averred that PGL and enovate entered into a contract, subject to Commission
      approval, which governed the terms of purchases and sales between PGL and
      enovate. This contract was for the purpose of “optimizing” the use of PGL’s gas
      supply and capacity assets. (Application
      of Peoples Gas Light and Coke Co. for Authority under Section 7-101 of the
      Ill.
      Pub.
      Utilities
      Act to enter into a Master Natural Gas Agreement with enovate, LLC,
Docket
      No. 00-0760, at 2). On March 21, 2001, PGL filed a motion to dismiss its
      application, stating that PGL no longer desired to expend the resources
      necessary for the proceeding. (Motion
      to Dismiss,
      March
      21, 2001, Docket No. 00-0760). The Commission granted the Motion to Dismiss
      on
      May 9, 2001. However, PGL continued to directly transact business with enovate.
      PGL also transacted business with enovate indirectly, through Enron NA/Enron
      Midwest. At no time did the Commission approve any affiliate interest agreement
      between PGL and enovate.

    


    Evidence
      adduced during this reconciliation proceeding outlines transactions between
      PGL
      and enovate. PGL witness Mr. Morrow14
      testified that during the time period in question, enovate purchased “Hub
      services” from PGL pursuant to an operating statement on file with the Federal
      Energy Regulatory Commission (“FERC”). (PGL Ex. N at 5). enovate also used PGL’s
      gas distribution system. Without PGL’s gas distribution system, enovate would
      not have been able to conduct the transactions set forth herein. enovate also
      sold gas directly to PGL in the “Trunkline Deal” and Transaction 16/22. These
      transactions will be discussed below. enovate further conducted other
      transactions with PGL through Enron Midwest. To reiterate, none of enovate’s
      transactions with PGL were made with Commission approval of an affiliated
      interest contract. 

    


    According
      to Mr. Morrow, to keep track of transactions between enovate and Enron, enovate
      issued a series of daily reports that recorded and valued activity every day,
      year-to-date, and it valued what might have occurred that day. (Tr. 798). Those
      reports were distributed among PEC personnel in its risk and credit areas,
      and
      to the PERC employees who worked at enovate. (Id.;
      Tr.
      804). enovate also distributed all of the accounting data that was needed to
      record its income. (Tr. 798). Additionally, if PEC accountants needed details
      on
      a daily basis or on a monthly basis, Enron provided this information to those
      accountants. (Tr. 798-99). These reports were also published and circulated
      daily; they tracked information from trades and other activity. (Tr. 804).
      

    


    


    


    


    


    


    


    ____________________

    13   Section
      7-101 of the PUA governs transactions between affiliated interests.

    14   In
      addition to being the Vice President of PEC, Mr. Morrow is also the Vice
      President of PGL, the President of PERC, member of the Board of Managers for
      enovate, and Peoples Midwest’s representative on enovate’s Board of
      Directors.


    
      
         

        


        
        

      

      
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        01-0707

      

    


    


    Mr.
      Morrow testified generally as to the types of transactions enovate engaged
      in.
      He testified that as a wholesale gas marketer, enovate entered into physical
      and
      financial gas purchases and sales, as well as speculative trading.15
      ( PGL
      Ex.
      N at
      4).
      enovate concentrated its business in the Upper Midwest. (Id.).
      Mr.
      Morrow also testified as to the nature of enovate’s transactions with Peoples
      and enovate's sources of revenue. He stated that, although he received daily
      reports about enovate’s business activities, he did not know what percentage of
      enovate’s activities were devoted to speculative trading. (Tr. 804-806). He
      testified that because Enron Midwest was the managing partner of enovate, Enron
      kept all of the books. (Tr. 806). According to Mr. Morrow, the data provided
      by
      Enron to Peoples Energy was not “fine cut” enough to be able to calculate how
      much of enovate’s activities concerned speculative trading. (Tr. 806). Peoples’
personnel did not feel that it was necessary or required of them to have a
      sub-split of enovate’s business activities. (Id.).
      There
      is no evidence in this record that any of enovate’s revenue came from sources
      other than the revenue-sharing of Enron Midwest’s profits gleaned from PGL.
      (See,
      e.g.,
      PGL Ex.
      N at 4; Tr. 805). 

    


    PEC
      had
      an audit performed of enovate to determine that the correct procedures and
      monitoring practices were in place to protect PEC in its new venture with
      enovate. (Tr. 808-09)._ This audit was conducted by an internal group and an
      outside consultant who specialized in derivatives in energy trading.
      (Id.).
      In
      this audit, the auditors expressed concern that revenue-sharing between PEC
      and
      Enron “related to the optimization of the PGL Hub” and the activities of Enron
      Midwest were not formally documented. The auditors noted that Enron Midwest
      revenues were being transferred quarterly to enovate through an “annuity trade”
(quotes in original text) between the two entities, but because nothing was
      in
      writing, PEC exposed itself to higher financial risk than it would have if
      there
      were written contracts memorializing its profit-sharing agreement with Enron.
      (Staff Ex. 9.00, Attachment G at 2). 

    


    enovate
      was in existence for only a short period of time when Enron filed for
      bankruptcy.16
      After
      Enron’s bankruptcy filing, PEC bought Enron’s share in enovate for approximately
      $2 million. (Tr. 814, 817). PEC sent a “team” to Houston after that to retrieve
      any record that was necessary to wind down enovate’s business for that year.
      (Tr. 815). PEC personnel did not gather all of enovate’s documents. enovate
      discontinued operating in 2002. (Id.).
      

    


    The
      following represents significant financial milestones in enovate’s history:
      Enron Midwest and PEC each contributed $100,000 paid-in capital to enovate.
      (See.,
      e.g., City-CUB
      Ex. 1.0 at 65). On September 30, 2000, which was the end of enovate’s first year
      of operation, enovate reported revenues of $4,319,083. enovate did not receive
      capital contributions from PEC/Enron until October of 2000. During the
      reconciliation period, enovate gained $100 million in revenues and approximately
      $20 million in profits. (See,
      e.g.,
      City-CUB
      Ex. 1.0 at 64-65). During the reconciliation period, PEC garnered $9,052,823
      in
      revenues from enovate. Enron garnered an additional $10,630,817.17
      (Staff
      Exs. 5.00 at 27; 9.00, Attachments, Scheds. 9.05 and 9.06). City of Chicago/CUB
      witness Ms. Decker opined that such astronomical earnings are not commonplace
      in
      the midstream gas industry. (City-CUB Ex. 1.0 at 65). 

    


    ____________________

    15   Speculative
      trading is the act of engaging in buying or selling natural gas at a definite
      price, where the entity engaged bears the risks and opportunities associated
      with continual changes in price. (PGL Ex. N at 4).

    16   The
      Commission takes judicial notice of the fact that Enron Corporation filed for
      bankruptcy on December 2, 2001.


    
      
         

        


        
        

      

      
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        01-0707

      

    


    


     

    B. Conclusions
      of Law - Scope of this Proceeding

     

    


     

    1. PGL’s
      Argument

     

    


    PGL
      argues that the scope of this proceeding should not include transactions
      involving enovate because those operations are only relevant if and to the
      extent that they affected recoverable gas costs. PGL states that because the
      actions of enovate had no effect on recoverable gas costs, the Commission cannot
      consider those transactions here. PGL maintains that Business
      and Professional People for the Public Interest v. Ill. Commerce
      Comm.,
      171 Ill.
      App. 3d 948, 525 N.E.2d 1053, (1st
      Dist.
      1988), does not apply here because that case concerned a FAC reconciliation
      and
      was governed not only by Section 9-220 of the PUA, but also by the federal
      Public Utilities Regulatory Policies Act of 1978 (“PURPA”). According to PGL,
      PURPA required the utility in that case, Commonwealth Edison Company (“ComEd”),
      to insure maximum economies in those operations and purchases that affect the
      rates to which such clauses apply. Because the transactions in question here
      are
      not subject to PURPA, PGL avers that the ruling in Business
      and Professional People for the Public Interest v. Ill. Commerce Comm.,
does
      not
      apply here. (PGL Reply Brief at 9-11). 

    


     

    2. The
      Position of the GCI 

     

    


    The
      GCI
      contend that the scope of this proceeding is broad, citing Business
      and Professional People,
      171 Ill.
      App. 3d at 958. The GCI argue that the scope of any reconciliation proceeding
      encompasses the non-procurement actions of a utility that have both direct
      and
      indirect impact on utility charges when those charges are passed on to
      consumers, which they allege is the case here. The GCI aver that in Business
      and Professional People,
      the
      Appellate Court rejected an argument that a $70 million refund ordered by the
      Commission due to the poor performance of a nuclear power plant was outside
      the
      scope of ComEd’s FAC reconciliation, even though the costs incurred regarding
      nuclear power plants were in base rates, not in a FAC reconciliation. ComEd
      incurred this $70 million charge because the nuclear power plant was supposed
      to
      operate at 60% capacity, but it only operated at 18% capacity, requiring ComEd
      to purchase additional power and pass the cost of that power on to consumers
      in
      its FAC. (See,
      GCI
      Reply Brief at 19). 

    


    When
      rejecting ComEd’s argument that the Commission exceeded the authority conferred
      on it by the statutory predecessor to Section 9-220, the Appellate court ruled
      that “To rule otherwise would result in an extremely narrow interpretation of a
      broad grant of statutory power and would also defy common sense.” The GCI posit
      that the enovate and hub-related transactions had an effect on what consumers
      paid. (Id.).

    


    


    


    ____________________

    17  
      These amounts do not include profits from the Trunkline Deal and the SOC. (Staff
      Ex. 9.00, Attachments, Scheds. 9.05, 9.06). 


    
      
         

        


        
        

      

      
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        01-0707

      

    


    


    The
      GCI
      also cite Ill.
      Commerce Commission, on its own Motion, Revisions of Part 525,
      1995
      Ill. PUC Lexis 579, in which the Commission ruled that reconciliation
      proceedings are the proper venue for examining utilities’ design-day planning
      and the way that utilities have used their system supply and capacity in
      off-system transactions and in exchanges. In the Part
      525
      Order,
      the Commission also concluded that prudent management and gas supply and storage
      capacity could include economic use of PGA assets or costs, to reduce PGA
      charges imposed on consumers. The GCI reason that here, under a variety of
      arrangements between PGL and Enron affiliates, opportunities to realize revenues
      that could offset PGA costs were either foregone or they were diverted to a
      PGL
      affiliate. (GCI Init. Brief at 23).

    


    The
      GCI
      maintain that hedging activities are among the Section 9-220 recoverable costs,
      as those activities are price management costs. Also, 83 Ill. Adm. Code Section
      525.40(d) requires that all gas costs recovered by a utility must be offset
      by
      the revenues derived therefrom, if any of the associated costs regarding that
      transaction are recoverable PGA gas costs. (Id.).
      

    


     

    3. Commission
      Analysis and Conclusions

     

    


    As
      shall
      be set forth herein in the section entitled “enovate,” the record evidence
      establishes that in several instances, PGL’s affiliates used enovate to
      artificially inflate costs borne by consumers in a manner that unfairly
      conferred profits on Enron and PGL affiliates. In the face of this evidence,
      PGL
      argues that the Commission should not be determining whether those profits
      artificially inflated costs borne by consumers in its PGA. The Commission
      disagrees. PGL cites no law that requires us to ignore transactions that raised
      gas costs, either by passing on unnecessary costs through enovate, or by
      engaging in transactions with enovate at less than market value, depriving
      consumers of the true market value of the transactions. 

    


    We
      also
      note that discovery was reopened in February of 2004 in order to determine
      what
      transactions involving enovate affected PGA gas costs. Since at least that
      time,
      with regard to enovate transactions, counsel for PGL was on notice that evidence
      regarding enovate’s business, which impacted PGL’s gas costs, could be an issue
      at the hearing. The hearing convened over a year later, in April of 2005. Yet,
      during the hearing, PGL made no attempt to exclude the evidence it now contends
      is extraneous to this proceeding. PGL, therefore, has waived its right to do
      so.
      (See,
      e.g., Smith v. Department of Professional Regulation,
      202 Ill.
      App. 3d 279, 287, 559 N.E.2d 884 (1st
      Dist.
      1990), ruling that failure to raise issues such as due process, at hearing,
      constitutes waiver of that issue.).

    


    PGL’s
      construction of Business
      and Professional People,
      171 Ill.
      App. 3d at 958, does not aid it. In Business
      and Professional People,
      the
      Appellate Court concluded that ComEd was subject to the same requirements under
      the PUA as it was under PURPA. However, it noted that the PUA conferred a broad
      grant of authority on the Commission to inquire into production management,
      in
      order to determine whether ComEd’s fuel purchases were prudently made.
      (Business
      and Professional People,
      171 Ill.
      App. 3d at 958). In so ruling, it stated: 


    
      
        


        
        

      

      
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        01-0707

      

    


    If
      in a
      fuel reconciliation proceeding, the Commission could not examine the reasons
      that necessitated a fuel purchase, the (statutory) prudence standard would
      have
      no effect . . . a utility could generate electricity in any manner it chose,
      efficiently, or inefficiently. 

    


    (Id.
      at 958).
      Thus, in Business
      and Professional People,
      the
      Appellate Court did not apply PURPA, as PGL suggests. A FAC reconciliation
      is
      subject to the same statutory requirements as a PGA. (See,
      e.g., Ill. Power v. Ill. Commerce Comm.,
      245 Ill.
      App. 3d 365, 612 N.E.2d 925 (3rd
      Dist.
      1992)). Even if PGL did not waive its right to contest the propriety of this
      evidence, PGL has failed to establish that evidence regarding enovate
      transactions is not relevant. 

    


     

    C. Conclusions
      of Law - Enron Profits

     

    


    
      	 	
              a.

            	
              Staff’s
                Position

            


    

    


    Staff
      recommends that the Commission disallow $19,683,640 for PGL’s involvement with
      enovate, approximately $9.1 million of which is the profit PEC garnered through
      enovate during the year in question, and approximately $10.6 million of which
      is
      Enron’s profit for the year in question. (Staff Ex. 5.00 at 6-7). Staff posits
      that since Enron shared profits with PEC through enovate, PGL personnel had
      an
      incentive to use Enron/Enron affiliates, as opposed to other entities, for
      gas
      supply, irrespective of PGL costs. This profit-sharing agreement provided both
      PGL/PEC and Enron affiliates with the motive to manipulate the prices PGL paid
      to Enron/Enron affiliates for gas, so that profits would be allocated to PEC
      shareholders, instead of consumers through PGL’s PGA. Dr. Rearden opined that
      without such an intention, it would be difficult to understand why PGL entered
      into transactions that were so transparently imprudent. (Staff Ex. 12.00 at
      2-3). 

    


    According
      to Staff, the “enovate P & L” statement establishes that some, if not all,
      of enovate’s transactions were recovered through the PGA. Transactions such as
      the “38 Special” and other 3PSEs were recorded as credits to PGL’s PGA gas
      charge. Staff also takes issue with PGL’s statement that Staff does not have
      more concrete evidence regarding enovate’s activities. PGL did not tender
      documents in discovery regarding enovate, stating that Enron kept these
      documents. (Staff Reply Brief at 68, 69). Staff additionally contends that
      a
      lack of documentation regarding enovate’s business transactions is prohibited by
      General Instructions Nos. 2, and 14, of Part 505 of the Commission Rules, which
      require PGL to keep all records needed to develop the history or facts regarding
      a transaction. (Id.
      at
      75).

    


    Staff
      points out that both agreements, the GPAA and the LOI, were executed on the
      same
      day. According to Staff, it defies logic to maintain that two parties executed
      two agreements on the same day, without having the parties consider both
      contracts as part of the same arrangement. (See,
      e.g.,
      Staff
      Ex. 7.00 at 8). Staff acknowledges that it does not matter that the entity
      involved in the profit-sharing was Enron, which, filed for bankruptcy subsequent
      to the reconciliation period. Rather, what is important to Staff is the nature
      of the transactions at issue that PGL entered into. (Staff Ex. 12.00 at 2-3).
      

    



    
      
        


        
        

      

      
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        01-0707

      

    


    Staff
      maintains that it presented evidence establishing that enovate could not have
      done business without using PGL’s PGA assets, such as interstate transportation
      and leased storage. Staff provided documents, like PGL’s list of “annuities” it
      paid to Enron Midwest/enovate. Staff concludes that PGL presented no evidence
      refuting that which Staff presented. (Staff Reply Brief at 70). 

    


    
      	 	
              b.

            	
              GCI’s
                Position

            


    

    


    The
      GCI
      concur with Staff. (See,
      CUB
      Ex.
      1.0 at 8). GCI points to additional transactions that show PGL’s improper
      dealings with enovate, Enron and PGL’s parent. The GCI contend that when PEC
      assumed the Citgo Contract and sold gas to PGL through Enron Midwest, PEC
      structured this transaction to avoid Commission scrutiny under Section 7-101.
      Also, the Trunkline Deal was not an arm’s-length transaction. According to the
      GCI, the Trunkline Deal involved Enron Midwest in a manner that conferred no
      benefit on ratepaying consumers, as Enron Midwest was only involved to avoid
      the
      Commission’s scrutiny, in an attempt to conceal an unapproved affiliate
      transaction. (GCI Init. Brief at 70, 72-73). The record contains various e-mails
      to William Morrow. The GCI argue that these e-mails establish that PEC
      deliberately avoided filing for Commission approval of enovate pursuant to
      Section 7-101 of the PUA. (GCI Init. Brief at 60; City-CUB Exs. 1.32, 1.33,
      2.0
      at 14). 

    


    The
      GCI
      point out that PGL never presented evidence that refuted Ms. Hathhorn’s
      testimony that 100% of Enron Midwest’s activities flowed to enovate, 50% of
      which was shared with PERC/PEC. They maintain that once evidence establishing
      a
      nexus between PGA assets and enovate profits was revealed, PGL had the burden
      to
      rebut that evidence. Instead, PGL offered a vague assertion that enovate had
      a
      variety of assets. Some amount of enovate’s income came from speculative trading
      and enovate purchased non-tariff services from Nicor and Northern Indiana Public
      Service Co. In support, the GCI cite PGL Ex. N at 5. (GCI Reply Brief at
      49-51).

    


    The
      GCI
      contend that enovate used PGA assets-PGL’s owned and leased storage, its gas
      supply and system injection and withdrawals. They aver that the only explanation
      in this record for enovate’s astronomical profits was enovate’s preferential use
      of PGL assets. (GCI Init. Brief at 59-61). 

    


    
      	 	
              c.

            	
              PGL’s
                Position

            


    

    


    PGL
      concedes that enovate was its affiliate. Nevertheless, it contends that
      affiliates can purchase services at the regulated rates and PGL can enter into
      transactions with affiliates without Commission approval, if those transactions
      are made in the ordinary course of business, citing 220 ILCS 5/7-101 and 83
      Ill.
      Adm. Code 310. PGL further claims that neither enovate nor any other affiliate
      bought or sold gas from it, citing PGL Ex. C, 37-38. (See,
      also,
      PGL
      Init. Brief at 86). Allegedly, PGL had no other contact with enovate; enovate
      did not manage PGL’s Hub and enovate costs and revenues did not flow through
      PGL’s PGA. Thus, according to PGL, any transaction PGL entered into with enovate
      was not subject to Section 7-101 of the PUA. Citing no fact of record, PGL
      further argues that any enovate transaction on PGL’s system, or through
      association with PGL, has “no bearing on (PGL’s) costs.” (PGL Init. Brief at
      87-88). However, PGL admits that enovate purchased hub services from PGL in
      the
      reconciliation period. (PGL. Init. Brief at 86, PGL Ex. C at 37-38).



    
      
         

        


        
        

      

      
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        01-0707

      

    


    PGL
      further contends that enovate had a variety of assets, even if those assets
      were
      not physical things. PGL concludes that Staff has unjustly maintained that
      enovate’s profits were derived solely from its association with PGL. PGL lists
      various assets enovate had, such as office space, capital contributions from
      PEC
      and Enron Midwest, parent guarantees, and firm pipeline capacity from Trunkline.
      PGL does not mention one instance in which enovate generated income from using
      these assets. (PGL Init. Brief at 86-88). PGL believes that its witnesses Zack
      and Morrow rebutted Staff’s and the GCI’s recommended disallowances.
      (Id.
      at 88;
      PGL Ex. K at 11-13). 

    


    PGL
      concedes that enovate used its gas supply system, but contends that the fact
      that enovate profited from that use is no basis for a cost disallowance. PGL
      cites no law or facts in support of this argument. Instead, PGL argues that
      businesses always intend to “make money.”  PGL
      asserts that Staff and the GCI failed to prove that there was a tie between
      enovate’s income and the prudence of its recoverable gas costs. Moreover, there
      is no evidence that the lawful business dealings between PEC and enovate harmed
      consumers. According to PGL, Staff and the GCI did not present any actual proof
      that enovate made profits through use of PGL’s system. (PGL Reply Brief at
      56-57, 89).

    


    Also,
      according to PGL, it was unable to quantify the amount of money enovate
      generated from speculative trading, citing Mr. Morrow’s testimony that the data
      PEC had regarding enovate was not “fine cut” enough to precisely calculate this
      amount. (Tr. 805-06). PGL also had no burden to respond to Staff’s and the GCI’s
      allegation about enovate generating profits from PGL’s ratepaying consumers
      because those allegations were unsupported. (Id.
      at
      58-59).

    


    
      	 	
              d.

            	
              Commission
                Analysis and Conclusions

            


    

    


    1) Lack
      of Evidence Regarding enovate’s Operations 

    


    PGL
      claims that it did not conduct business with enovate. It asserts that enovate
      had assets through which it gained profits that have nothing to do with PGL.
      However, at hearing, Mr. Morrow admitted that PGL supplied no proof as to how
      much, if any, of enovate’s profits were gained from these other sources. (Tr.
      805-06). Conspicuously absent from this record is any documentation, on the
      part
      of PGL, as to what business enovate, its affiliate, actually conducted. For
      example, Mr. Morrow, who received daily reports as to enovate’s activities,
      testified that enovate engaged in speculative trading. He could not say,
      however, how much of this trading occurred, because Enron had all of the
      documentation. (Id.).
      It is
      noteworthy that both the SOC and the GPAA required Enron North America to
      provide PGL with documentation, which is some indicia that generally, Enron
      was
      contractually required to provide PEC/PGL with appropriate documentation. Yet,
      often PGL did not have documentation regarding enovate’s
      operations.

    



    
      
         

        


        
        

      

      
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        01-0707

      

    


    On
      two
      occasions, PGL successfully retrieved documents from Enron regarding enovate’s
      business activities. (See, e.g.,
      Tr.
      610-611; 617-18; 814-819). Yet, even in the face of outstanding discovery
      requests, PGL never tendered evidence in discovery or at hearing regarding
      enovate’s operations.18
      PGL has
      provided no explanation as to why enovate records were still with Enron after
      PEC purchased Enron’s half of enovate and continued to wind up enovate’s
      business. The Commission finds PGL’s lack of documentation regarding its
      dealings with enovate to be imprudent.

    


    PGL’s
      failure to produce such documentation has other ramifications. A trier of fact
      can draw an inference, when a party has failed to produce evidence within its
      power to produce, that this evidence if produced would be adverse to that party.
      (Schaffer
      v. Chicago and Northwestern Co.,
      129
      Ill. 2d 1, 25-26, 541 N.E.2d 643 (1989)). However, this inference may be drawn
      only when: a.) the evidence was under the party’s control and could have been
      produced through reasonable diligence; b.) a reasonably prudent person would
      have offered the evidence, if he believed that it would have been favorable;
      and
      c.) no reasonable excuse for failure to produce the evidence has been shown.
      (Kersey
      v. Rush Trucking Co., 344
      Ill.
      App. 3d 690, 696, 800 N.E.2d 847 (2nd
      Dist.
      2003)). 

    


    Part
      505
      of the Commission’s Rules requires PGL to keep documents verifying the reasons
      for its transactions. The fact that PGL later acquired documents from Enron
      on
      more than one occasion, establishes that PGL was able to access those documents.
      The fact that PGL could obtain these documents establishes that these records
      were under PGL’s control. (Berlinger’s
      v. Beef’s Finest,
      57 Ill.
      App. 3d 319, 325, 372 N.E.2d 1043 (1st
      Dist.
      1978); Fentress
      v. Triple Mining,
      261 Ill.
      App. 3d 930, 938, 633 N.E.2d. 102 (4th
      Dist.
      1994)). A reasonable person would offer documentary evidence establishing what
      transactions enovate entered into, with specificity, if that evidence supported
      a contention that enovate conducted business that had nothing to do with use
      of
      PGL’s PGA assets. This is especially true here, as Staff presented documentary
      evidence showing enovate’s profits were derived from use of PGL’s PGA assets and
      those profits unnecessarily raised PGA gas costs. In fact, Ms. Hathhorn
      testified that her review of various enovate records led her to believe that
      100%
      of
      enovate’s profits were derived from PGA gas costs. A reasonable person would
      proffer evidence to rebut or explain this very serious contention. 

    


    Also,
      the
      fact that Enron still had these documents even after PEC bought Enron’s share of
      enovate and wound up enovate’s business and even after information was requested
      in discovery is a flimsy excuse for PGL’s failure to keep track of its own
      business records. This is especially true, when as Staff points out, Section
      505
      of the Commission’s rules requires PGL keep records explaining the nature of and
      need for its transactions. 

    


    


    


    


    


    


    _____________________

    18   Apparently,
      however, after Staff’s request for enovate’s general ledger was ruled to be
      overbroad, Staff did not tender a narrower discover request on this matter.
      (Tr.
      608-10). 


    
      
         

        


        
        

      

      
        27

        
          

        

      

      
        
        

        01-0707

      

    


    


    In
      Berlinger’s
      cited
      above,
      Mr.
      Mizaur, the defendant, testified as to what his business sold. He never produced
      sales slips, but he testified that the proceeds from these sales were used
      to
      pay bills. Mr. Mizaur produced no documents to support this testimony. On
      appeal, Mr. Mizaur argued that the trial judge should not have drawn the
      inference that these documents, if produced, would be unfavorable to him. He
      averred that the Internal Revenue Service (the “IRS”) was in possession of these
      documents; he did not have them. The Appellate Court disagreed, ruling that
      Mr.
      Mizaur had the ability to request these documents from the IRS; thus, these
      documents were under his control. (Berlinger’s,
      57 Ill.
      App. 3d at 325). 

    


    The
      same
      legal reasoning applies in this case. PGL made no showing that it was unable
      to
      acquire pertinent enovate documents. To the contrary, on two occasions, PGL
      asked for and received enovate documents from Enron. As Staff points out, these
      documents were required to be in PEC/PGL possession pursuant to the USOA. The
      Commission can, therefore, draw the inference that if PGL had produced these
      records, they would have been adverse to PGL. If PGL had produced these
      documents, they would have established that enovate’s profits were garnered from
      its relationship with PGL.

    


    2) Section
      7-101 and 7-102 of the PUA

    


    An
      “affiliated interest” is a corporation that owns or holds, directly or
      indirectly, ten percent or more of the voting capital stock of a public utility.
      (220 ILCS 5/7-101(a)). The Act provides that:

    


    No
      management, construction, engineering, supply, financial or similar contract
      and
      no contract or arrangement for the purchase, sale, lease or exchange of any
      property or for the furnishing of any service, property or thing, hereafter
      made
      with any affiliated interest, . . . shall be effective unless it has first
      been
      filed with and consented to by the Commission or is exempted . . . Every
      contract or arrangement not consented to or excepted by the Commission as
      provided for in this Section is void. 

    


    (220
      ILCS
      5/7-101(d)(3)). (Emphasis added). Section 7-102 of the Act, which is entitled
      “Transactions Requiring Commission Approval” provides that: 

    


    No
      public
      utility may use, appropriate, or divert any of its moneys, property or other
      resources in or to any business or enterprise which is not, prior to such use,
      appropriation or diversion essentially and directly connected with or a proper
      and necessary department or division of the business of such public utility
      . .
      .

    



    
      
         

        


        
        

      

      
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    (220
      ILCS
      5/7-102(g)). It further provides that: 

    


    Every
      assignment, transfer, lease, mortgage, sale or other disposition or encumbrance
      . . . of the . . . plant, equipment, business or other property of any public
      utility, or any merger or consolidation thereof, and every contract, . . .
      or
      other transaction referred to in this Section and not exempted . . . made
      otherwise than in accordance with an order of the Commission authorizing the
      same . . . shall be void. 

    


    (220
      ILCS
      5/7-102(h)(E)). (Emphasis added). Any contract that confers benefits, whether
      directly or indirectly, upon affiliates is prohibited by law, unless a utility
      obtains Commission approval. If a utility enters into a contract with an
      affiliate without Commission approval, that contract is void, unless it is
      specifically exempted. PGL claims no such exemption here. (Id.).

    


    On
      September 16, 1999, the same two persons, David Delainey and William Morrow,
      executed both the GPAA and a letter of intent to divide profits between PEC
      and
      Enron NA, each to receive 50% of the profit from certain business dealings
      outlined in the letter of intent (the”1999 LOI”). (Group Ex. 1 at ST-PG-194). As
      PGL has contended, at the time these documents were executed, Enron was a very
      large and powerful company. There is no evidence that this large, powerful
      entity had any other need—except one, that would compel it to accept only 50% of
      the profits it garnered from PEC and its affiliates. 

    


    PGL
      contends, essentially, that enovate’s business transactions were unrelated to
      PGL. The record clearly shows otherwise. As is evidenced by the 1999 LOI, the
      intent of parties in that document was to confer profits on Enron, half of
      which
      would be shared with PEC through enovate. It defies common sense to contend
      that
      Enron would be willing to share half of the profits Enron North America gained
      through enovate with PEC, unless Enron North America was dependent on PGL/PEC
      for profits. Otherwise, Enron could simply take its business elsewhere and
      enter
      into a contract with another company, whereby Enron would provide services
      and
      not be subject to sharing 50% of the profits with an affiliate of that
      entity.

    


    The
      credible evidence does not establish that the transactions set forth herein
      benefited PGL. The only explanation left, based on the credible evidence, for
      PGL’s willing compliance in deals that did not gain it profit, and indeed, often
      lost
      money
      when compared with what it could have received on the open market, was that
      PGL
      acquiesced so that PEC/PERC could benefit through its 50% of enovate’s
      profits.

    


    The
      record is replete with evidence that enovate was just a shell company formed
      to
      glean profits from PGL’s PGA consumers without conferring any benefits. For
      example, PGL’s accounting records regarding the “Trunkline Deal” make no mention
      of Enron Midwest, even though Enron Midwest sold the gas to PGL in that
      transaction. This is some indicia that PGL personnel did not view Enron
      Midwest’s role in this transaction as consequential. (Group Ex. 1, ST-PG-75-76).
      What PGL personnel did find important enough to mention in PGL accounting
      records was PERC’s 50% profit from this deal--through enovate. (Id.).
      Also,
      Ms. Hathhorn testified that 100% of Enron Midwest’s activity flowed first to
      enovate, for a subsequent 50/50 sharing with PERC/PEC. (Staff ex. 9.00 at 9).
      

    



    
      
         

        


        
        

      

      
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    Further,
      the evidence shows a systematic pattern of transactions using PGA assets with
      Enron Midwest that conferred 50% of Enron Midwest’s profits on PEC/PERC through
      enovate, at PGA customers' expense. As has been set forth herein, Transactions
      16/22; Transaction 103; the “Hub Blowout;” “Manlove Jumpstart,” and other
      transactions conferred profits on PEC/PERC that were paid for by consumers.
      There is no evidence that PEC/PERC performed any consideration to earn the
      profits gleaned through enovate. In addition to reaping profits at consumers’
expense, these transactions brazenly made little, if any, economic sense. For
      example, “Manlove Jumpstart” was a loan of gas to Enron Midwest, while at the
      same time, Enron Midwest sold gas back to PGL at a higher price. (Staff Ex.
      7.00
      at 53-54; Staff Ex. 3.00 at 56). Profits from the sales of gas flowed to
      PEC/PERC through enovate, not to consumers as required by the PUA and Commission
      rules. 

    


    While
      typically, in the context of prudence, the fact that a service could have been
      acquired for less cost does not necessarily make a transaction imprudent, it
      does here. Enron North America, or Enron Midwest took a profit for its part
      in
      the shell game, with an additional profit passed on to PEC/PERC at the expense
      of PGL, and ultimately at the PGA consumers’ expense. enovate was nothing more
      than subterfuge for PEC or PERC reaping profits from PGL, which is prohibited
      by
      Section 7-101(d) of the PUA. 

    


    At
      a
      minimum, these transactions were all conducted in such a manner as to confer
      profit on PGL affiliates at the expense of PGL, the regulated utility. Often,
      Enron Midwest was the contractual “straw man,” performing nothing in exchange
      for services or payment rendered, but acting as a third-party so that the
      PGL/PGL affiliate transactions could evade Commission detection. Sections 7-101
      and 7-102 do not provide for an exception for business dealings with affiliated
      interests that are effectuated through third-parties. (220 ILCS 5/7-101, 7-102).
      What was accomplished by effectuating the transactions here through Enron North
      America or Enron Midwest, was escaping Commission detection. Use of a
      third-party did not make these transactions legal. All enovate contracts
      involving PGL directly or indirectly are, therefore, void, ab
      initio.

    


    Further,
      the Commission finds evidence regarding PGL’s dealings with enovate is properly
      reviewed in a PGA reconciliation. As the GCI point out, Section 525.40(d) of
      the
      Commission’s rules require that revenues derived from non-tariff transactions
      must be used to offset recoverable gas costs if any
      of the
      associated costs are recoverable gas costs. (83 Ill. Adm. Code 525.40(d)).
      Here,
      the evidence established that enovate used PGL’s PGA assets such as its PGA gas
      supply. (See,
      e.g.,
      City
      -CUB Ex. 2.5 at 9; City-CUB Ex. 2.0 at 18). Therefore, the profits derived
      therefrom must offset PGA costs. (Id.).
      Staff
      presented evidence establishing that enovate’s profits were solely derived from
      use of PGA assets. (See, e.g., Staff Ex. 9.00 at 9). PGL’s vague assertion that
      enovate made an unspecified amount of money that it could not ascertain through
      means other than use of PGL’s PGA assets does not rebut the evidence presented
      establishing that enovate made money at the expense of ratepaying consumers.
      

    



    
      
         

        


        
        

      

      
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    PGL
      avers
      that it is improper to “summarily” hold it responsible for what it deems to be
      lawful arm’s length transactions between PEC, Enron North America and their
      subsidiaries. PGL points out that its parent has every legal right to structure
      transactions in any legitimate manner it chooses, even if the effect of that
      structure avoids Commission jurisdiction. According to PGL, there never was
      a
      claim that the transactions between PEC and Enron were unlawful. (PGL BOE at
      31). 

    


    PGL
      overlooks the evidence and the arguments presented. By its own admission, PGL’s
      parent only has a right to structure legitimate, legal transactions in a manner
      that avoids Commission jurisdiction. It is true that PEC’s unregulated
      activities do not fall under Commission jurisdiction. However, when PEC
      structures transactions that involve the use of regulated assets, the Commission
      has every right and indeed an obligation, to consider the effects of these
      transactions. PGL’s assertion that no one claimed that transactions between PEC
      and Enron were unlawful misstates the record. Staff and other parties have
      established that these transactions violated the law, were not arm’s length
      transactions, and, they created profits for PEC while increasing consumer gas
      costs. PGL’s argument is without merit. 

    


    PGL
      also
      argues that there was no “direct evidence” that the transactions between PEC,
      Enron North America and their unregulated subsidiaries were structured to avoid
      Commission scrutiny. Even if this were so, according to PGL, this structure
      would not be unlawful or in violation of Commission rules. The Commission finds
      PGL’s argument is baseless. PGL does not state what “direct evidence” is and it
      cites no law requiring that this Commission only consider it. PGL also cites
      no
      law construing Sections 7-101 and 7-102 of the PUA to apply only to transactions
      that do not involve third-party “straw men” like Enron Midwest. PGL also ignores
      the fact that it did not present credible evidence rebutting or explaining
      the
      evidence presented by Staff establishing that enovate’s transactions with PGL
      unnecessarily raised gas costs.

    


    PGL
      further asserts that the findings in the ALJPO do not support piercing the
      corporate veil. (“Courts are willing to treat parent and subsidiary corporations
      as ’alter egos’ only where the evidence shows that the parent exercises
      day-to-day business control over the subsidiary.”). This argument ignores the
      fact that the law asserted here does not concern piercing a corporate veil
      pursuant to corporate law. The law asserted here is Sections 7-101 and 7-102
      of
      the PUA. 

    


    On
      Exceptions, PGL avers, citing no fact of record, that when it withdrew its
      petition for Commission approval of its transactions with enovate, it only
      continued to conduct transactions with enovate that did not need Commission
      approval pursuant to Section 7-101 of the PUA. (PGL BOE at 30). Because PGL
      cites no factual basis for this argument, PGL waived its right to have this
      Commission consider it. (Fraley,
      251 Ill.
      App. 3d at 77). This argument ignores the evidence presented at hearing
      establishing that PGL did enter into transactions, directly and indirectly,
      with
      enovate. 

    


    For
      all
      of the above reasons, the Commission finds that PGL acted imprudently when
      directly or indirectly transacting business with enovate.

    



    
      
         

        


        
        

      

      
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    3) Ordinary
      Course of Business

    


    PGL
      correctly asserts that transactions made in the ordinary course of business
      do
      not require Commission approval. However, PGL’s direct and indirect transactions
      with enovate were not conducted in the ordinary course of business.
      (See,
      e.g., 83
      Ill.
      Adm. Code 310.10-310.60 defining the ordinary course of business, within the
      context of what is excluded from Commission approval of affiliated interest
      transactions, as routine transactions, like routine banking transactions;
      settling accounts of $5,000 or less with consumers who have financial
      difficulties; employment contracts; supply contracts and contracts, pursuant
      to
      which, the total financial obligation is $500 or less.). For example, PGL paid
      enovate for gas and pipeline delivery in the “Trunkline Deal.” (Staff Ex. 5.00
      at 6). This certainly does not fall within “ordinary course of business”
activities outlined above. PGL cites no authority interpreting the phrase
“ordinary course of business” to include a purchase or sale of gas made by an
      LDC. 

    


    PGL
      also
      ignores its own actions. PGL filed an application seeking Commission approval,
      pursuant to Section 7-101 of the Act, of its relationship with enovate. PGL’s
      petition indicated its relationship with enovate would be for the purpose of
      optimizing “the use of the Company’s gas supply and capacity assets.”
(Peoples
      Gas Light and Coke Co., Application for Authority under Section 7-101 of the
      Public Utilities Act to Enter into a Master Natural Gas Contract with enovate,
      LLC,
      Docket
      No. 00-0760). The existence of this application is indicia that PGL
      decision-makers knew that PGL was required by law to petition for Commission
      approval before it transacted business with its affiliate, enovate. PGL chose
      to
      terminate that proceeding because it didn’t want to spend any more resources
      pursuing Commission approval, not because PGL thought Commission approval was
      unnecessary. However, after PGL withdrew its application for Commission approval
      of its relationship with enovate, it continued to transact business with
      enovate, sometimes directly and sometimes through Enron North America/Enron
      Midwest. Given all the evidence and other nuances of PGL’s relationship with
      enovate, the Commission has no choice but to conclude that PGL’s failure to
      obtain approval of its affiliated interest with enovate was for the purpose
      of
      avoiding Commission detection. 

    


    For
      all
      of the reasons above, the Commission finds PGL acted imprudently by transacting
      business with enovate. Any disallowance associated with the Commission’s finding
      of imprudence for this provision is properly included in the Settlement
      Agreement fully discussed in Section I . 

    


     

     


    
      
        


        
        

      

      
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    IV. The
      Gas Purchase Agency Agreement

     

    


     

    A. Findings
      of Fact

     

    


     

    1. Background

     

    


    In
      October of 1998, PGL filed a petition with the Commission, Docket No. 98-0820,
      requesting permission to eliminate its PGA and instead impose a fixed gas charge
      of 31.08 cents per therm. In an Order dated June 7, 1999, the Commission allowed
      PGL to impose a fixed gas charge, but it authorized PGL to charge a fixed rate
      of 25.63 cents per therm. In reaching this decision, the Commission concluded
      that PGL included several items in its proposed charge at erroneous amounts
      or
      improperly included those items. The Commission found that the proposed charge
      included payment for a set of premiums for the acquisition of natural gas
      options with delivery months extending out for several years into the future,
      which violated Section 9-220(d) of the PUA. Additionally, the Commission ruled
      that PGL’s proposal improperly normalized day-to-day variations in demand
      through the spot market, instead of relying on storage. The Commission further
      concluded that PGL undervalued the credits consumers received for the net
      revenue from off-system transactions. (See,
      Peoples Gas Light and Coke Company, Proposal to Eliminate its Purchased Gas
      Adjustment (PGA) Clause and Include Gas Charges in Base Rates,
      1999
      Ill. PUC Lexis 414 at *15-21, 24-25). 

    


    Pursuant
      to the effort described above, PGL sent “requests for qualifications” (“RFQs”)
      to gas marketers and selected Enron NA to be its gas supplier for the fixed
      gas
      charge. PGL never implemented a fixed gas charge. PGL believed the Commission
      decision on the fixed gas charge to be too low to obtain the necessary supply
      contracts. Instead, it continued utilizing a PGA Rider, which imposes gas
      charges and related costs on consumers on a monthly basis. (PGL Ex. C at 8-12).
      

    


    On
      September 16, 1999, PGL entered into a five-year agreement with Enron NA.
      Pursuant to this contract, effective October 1, 1999, Enron NA supplied PGL
      with
      66% of its gas supply during the reconciliation year. (See,
      e.g., Tr.
      1011;
      Staff Ex. 2.00, attachments, GPAA). This contract was called the Gas Purchase
      Agency Agreement (“GPAA”). (Tr. 907). Before entering into the GPAA, PGL did not
      seek competitive bids. Rather, it engaged in private negotiations with Enron
      NA.
      (PGL Ex. C at 4-5). 

    


    The
      person primarily responsible for entering into the contract with Enron was
      William Morrow. Mr. Morrow also oversaw the negotiations of the GPAA with Enron
      North America. (PGL Ex. C at 10). As noted previously, Mr. Morrow and David
      Delainey, Managing Director of Enron North America, executed the GPAA. (Staff
      Ex. 2.00, attachments, GPAA, at 36). 

    


    Before
      the GPAA, PGL usually entered into gas contracts with several suppliers for
      smaller volumes of gas. Those contracts, typically, had terms ranging from
      four
      months to five years. (See,
      e.g.,
      Staff
      Ex. 2.00 at 8-9). 

    


     

     


    
      
         

        


        
        

      

      
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    2. The
      Terms of the GPAA

     

    


    Mr.
      Wear
      testified as to the terms of the GPAA. Mr. Wear has been the Manager of Gas
      Supply Administration at PGL since April of 2000. (Tr. 1039). The Gas Supply
      Division includes the Gas Supply Administration Department and it is responsible
      for entering into and administering contracts for gas supply and for purchasing
      transportation and storage services. (PGL Ex. B at 3). Mr. Wear’s involvement in
      the negotiations with Enron NA regarding the GPAA was to provide information
      to
      the decision-makers determining whether the GPAA would be a reliable supply
      of
      gas when needed. Mr. Wear was not one of the persons at PGL who actually decided
      whether to enter into the contract with Enron NA. (Tr. 1046). Previous to the
      GPAA, PGL’s gas supply contracts provided that PGL would purchase the same
      quantity for a fixed five-month period (November through March) or for a period
      of one or two years. 

    


    In
      general, the GPAA had three main provisions through which Enron North America
      provided PGL with approximately 66% of its total gas supply. (See,
      e.g., PGL
      Ex.
      F, Attachment 10). Those provisions were for Baseload Quantity gas, Summer
      Incremental Quantity gas (“SIQ”), and Daily Incremental Quantity gas (“DIQ”).
      (Staff Ex. 2.00, Attachments, GPAA, at 7). The GPAA also required PGL to release
      pipeline capacity to Enron North America. (Id.
      at 12).
      The GPAA was negotiated with a view toward other transactions between the
      parties. Reference is made therein to several other agreements, gas
      transportations contracts, the gas supply contracts and the “Master Agreement.”
(Id.
      at 16).
      These provisions will be further described below.

    


    According
      to Mr. Wear, when PGL negotiated the GPAA with Enron NA, the following were
      PGL’s objectives: 

    


    -market-based
      pricing with no demand or reservation charges;

    -flexible
      pricing options;

    -preservation
      of transportation capacity in the face of projections of  shrinking
      basis;

    -flexibility
      to meet demand in weather under normal conditions, colder than  normal
      conditions and warmer than normal conditions; and 

    -the
      contract should substitute for the aggregate of what PGL previously  had
      with
      other suppliers.

    


    (PGL
      Ex.
      C at 11). Later, Mr. Wear asserted that the GPAA also conferred certain
      non-quantifiable benefits on PGL, like technical support provided by Enron
      North
      America and training as to the use of financial hedging instruments, like energy
      derivatives and options. (PGL Ex. F at 8-9). PGL has never proffered any reasons
      other than these for entering into the GPAA. Other than expressions of concern
      over mitigating the decline in value of its pre-existing pipeline contracts,
      (basis) this record is devoid of any evidence indicating that decision-makers
      at
      PGL were concerned that the GPAA could increase the gas costs it passed on
      to
      consumers in its PGA. 

    



    
      
         

        


        
        

      

      
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    a. Baseload
      Quantity Gas

    


    This
      provision refers to the established daily volume of gas PGL was required to
      purchase from Enron NA by month from October 1999 to October 2004. Daily
      baseload purchases are ones that PGL made in order to meet its overall supply
      requirements. (Tr. 1070). The GPAA had a fixed, predetermined schedule of
      baseload quantities. (Staff Ex. 2.00, Attachments, GPAA, Schedule 2.1). However,
      the parties could meet annually to discuss changes to the baseload quantity
      or
      to the SIQ quantity. (Staff Ex. 2.00, Attachments, GPAA, Art. 2.8).


    


    PGL
      used
“normal weather” to establish its baseload needs, although PGL did not provide
      any study or analysis to support its decision to use “normal weather” as its
      determinant for baseload quantity gas. (Staff Ex. 2.00). The price of baseload
      quantity gas purchased pursuant to the GPAA was the price published in Natural
      Gas Intelligence Chicago citygate19
      First-of-the-Month (“FOM”) price, less a three cent per MMBtu
      discount.20
      (See,
      e.g., Id., Staff
      Ex.
      3.00 at 8). 

    


    b. The
      SIQ and DIQ Provisions

    


    Two
      of
      the GPAA provisions allowed PGL to purchase gas supply to meet its incremental
      needs. Gas purchased pursuant to the Summer Incremental Quantity (“SIQ”) clause
      was used to fill PGL’s on-system and purchased gas storage facilities from the
      months of April through November. SIQ gas was used to create a supply of less
      expensive summer gas to meet PGL’s needs in the winter, when gas prices would be
      higher. (Tr. 1209-20). SIQ gas was, in effect, PGL’s “hedging gas.”
(See,
      e.g.,
      PGL Ex.
      C at 14; Staff Ex. 7.00 at 34).

    


    Pursuant
      to the GPAA’s SIQ clause, Enron NA agreed to supply gas to PGL at the Natural
      Gas Intelligence Chicago citygate FOM price, minus three cents per
      MMBtu.21
      (Staff
      Ex. 2.00, Attachments, GPAA, at 2, 9). During the months of April through
      November, Enron North America was required to provide at least 45,000 MMBtus
      of
      gas per day to PGL. (Id.
      at
      6, 9;
      Tr. 908). Enron NA could, at its sole discretion, deliver an amount up to and
      including 125,000 MMBtus of gas to PGL. (Id.
      at 6).
      Also during this period, whenever Enron MW delivered more than 45,000 MMBtus
      of
      gas, PGL was obliged to purchase this gas as long as the gas delivered did
      not
      exceed 125,000 MMBtus. (Tr. 909). Thus, Enron NA had the option to, but not
      the
      obligation to, deliver up to 80,000 MMBtus of gas to PGL, over and above the
      contractual minimum of 45,000 MMBtus of gas. (Id.
      at 2,
      9). 

    


    ______________________

    19  The
      Chicago citygate is a term that refers to the delivery points on the systems
      of
      PGL, North Shore and Nicor Gas. (Tr. 1078).

    


    20   FOM
      pricing is driven by the market activity during the preceding month, and is,
      therefore, less susceptible to price fluctuations that occur subsequent to
      the
      first of the month. It is, therefore, generally, less expensive than daily
      index
      pricing. (See,
      Staff
      Ex. 2.00 at 25). 

    


    21   Citygate
      pricing includes the cost of transporting the gas to the Chicago citygate.
      (See,
      e.g.,
      Staff
      Ex. 2.00 at 20). 

    



    
      
         

        


        
        

      

      
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    On
      any
      given day, PGL had no control over the amount of gas it received pursuant to
      the
      SIQ clause. This clause allowed Enron NA to control a portion of PGL’s supply by
      choosing the amount of SIQ gas delivered to PGL. On 236 of the 244 summer days
      during the time period in question, Enron forced PGL to purchase maximum SIQ
      volumes. (Staff Ex. 3.00 at 31). Over 70% of the days when Enron NA delivered
      the maximum amount of SIQ gas, PGL was forced to sell gas back to Enron NA.
      (City-CUB Ex. 2.00 at 13; Staff Ex. 2.00 at 29; Tr. 869)

    


    The
      Daily
      Incremental Quantity (“DIQ”) clause gave PGL the right to purchase gas at the
      Gas Daily Chicago citygate Daily Midpoint Price, up to a certain specified
      level. PGL received DIQ gas with no discount. (Staff Ex. 2.00, Attachments,
      GPAA, at 3). Pursuant to the DIQ clause, PGL could nominate any portion or
      no
      portion of the DIQ. The amount of gas that PGL could purchase on any given
      day
      pursuant to the DIQ clause was determined by subtracting the total pipeline
      capacity that PGL released to Enron North America on that day from the sum
      of
      gas purchased that day through the baseload and SIQ provisions. (See,
      e.g.,
      Staff
      Ex. 2.00, Attachments, GPAA, at 3; PGL Initial Brief at 11).

    


    The
      DIQ
      provision replaced what is known as “swing gas,” for which there is usually an
      added premium called a “demand charge” paid by a gas buyer like PGL.22
      (PGL
      Ex.
      B at 5). The DIQ clause, however, did not impose this added premium. Mr. Wear
      calculated the savings incurred by not paying this added premium to be $345,894
      for the time period in question. Staff concurs that this provision saved
      consumers money and it concurs with this calculation.

    


    


    ______________________

    21   Citygate
      pricing includes the cost of transporting the gas to the Chicago citygate.
      (See,
      e.g.,
      Staff
      Ex. 2.00 at 20). 

    22   A
      demand charge is a premium for being “on call” on short notice for the
      possibility of delivering gas with no assurance that the buyer will ever
      actually take the gas. (PGL Ex. C at 17). 


    
      
         

        


        
        

      

      
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        01-0707

      

    


    


    Staff
      witness Mr. Anderson opined that the combination of the SIQ provision and the
      DIQ provision gave Enron NA the incentive to force PGL to pay higher gas prices.
      The SIQ was priced at lower FOM index prices, minus three cents per MMBtu.
      The
      SIQ provision required PGL to take a minimum 45,000 MMBtus per day, although
      Enron NA could force PGL to take up to 125,000 MMBtus per day. The DIQ, on
      the
      other hand, was priced at no discount and it was based on the generally higher
      Daily Midpoint Price. Often when the Daily MidPoint Price rose above the FOM
      price, Enron NA would deliver less SIQ gas and deliver the more expensive DIQ
      gas instead. When the Daily Midpoint Price rose above the FOM price, Enron
      had
      the economic incentive not to sell PGL the full SIQ amount, irrespective of
      PGL’s needs, forcing PGL to purchase gas at higher prices. (Staff Ex. 2.00 at
      24-25). 

    


    GCI
      witness Ms. Decker also averred that the terms of the GPAA allowed Enron NA
      to
      force PGL to buy more gas, when doing so was advantageous economically to Enron
      NA. She opined that allowing Enron NA to determine how much gas PGL received
      pursuant to the SIQ clause had no practical or prudent purpose. (City-CUB Ex.
      1.0 at 11-12). Ms. Decker noted that normally, sellers maximize their profits.
      Thus, the interest of Enron NA would not translate into the best interest of
      PGL. Also, normally, LDCs like PGL recover their carrying costs in base rates.
      Since an LDC cannot increase base rates without filing a rate case, an LDC
      has
      the incentive to recover carrying costs by passing on such costs in the form
      of
      a gas cost. (Id.
      at 15).
      Ms. Decker pointed out that during the reconciliation period, overall, PGL
      gas
      prices were 22.28% higher than Chicago citygate prices. She also noted that
      PGL’s gas prices decreased after Enron filed bankruptcy and concluded that this
      decrease was caused by the GPAA, as, pursuant to the GPAA, PGL ceded control
      of
      price and quantity to Enron NA at the expense of consumers. (Id.
      at
      23-24). 

    


    Before
      entering into the GPAA, PGL performed no analysis of the effect of the DIQ
      or
      SIQ provisions on consumers. PGL also did not assess the value that Enron North
      America received as a result of its ability to manipulate the SIQ clause. (Tr.
      911-12). Staff calculated that Enron’s use of the SIQ and DIQ clauses in this
      manner incurred unnecessary costs that were passed on to consumers in the amount
      of $4,818,319. (Staff Ex. 3.00 at 35). 

    


    c. Provisions
      that Allowed Enron North America to Increase 

    the
      Cost of Gas

    


    According
      to Staff and GCI, the GPAA contained several provisions that allowed Enron
      NA to
      unilaterally increase the cost of PGL’s gas supply. Pursuant to the “Baseload
      Price Adjustment Clause” (“BLPA”), Enron NA had the option to change the price
      of a portion of baseload volumes from the FOM price to the Gas Daily and Chicago
      citygate Daily Price, without notice or limit.23
      (Staff
      Ex. 2.00, Attachments, GPAA, at 9). The Chicago citygate Daily Price was often
      higher than the Gas Daily price. However, Enron NA did not invoke this right
      to
      change the price during the reconciliation period. (Staff Ex. 3.00 at
      18).

    


    


    ______________________

    23   Both
      the Gas Daily and the Natural Gas Intelligence Weekly are readily-available
      sources for setting prices in gas contracts. These two publications, however,
      do
      not always have the same prices for the same thing. (See,
      e.g.,
      PGL Ex.
      C at 18-20). One million MMBtus is approximately equivalent to one Bcf of gas.
      (Tr. 1004). A MMBtu is one million Btus. (Staff Ex. 2.00, Attachments, GPAA,
      at
      5). A decatherm is also one million Btus. (NYMEX.com\glossary). A Btu is a
      British thermal unit, which is the amount of energy required to raise the
      temperature of one pound of pure water the one degree from 59 degrees Fahrenheit
      to 60 degrees Fahrenheit, at sea level pressure. (Staff Ex. 2.00, Attachments,
      GPAA, at 2)


    
      
         

        


        
        

      

      
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    Notwithstanding
      any increase imposed by Enron NA made pursuant to the BLPA, pursuant to Articles
      4.2(b) and 4.2(c) of the GPAA, Enron NA could change the price of gas without
      any input from PGL. (Staff Ex. 2.00, Attachments, GPAA, Articles 4.2(b) and
      4.2(c)). Article 4.2(b) gave Enron NA the right, during December through March,
      to change the price of baseload gas for up to 71,250 MMBtus per day of gas.
      Pursuant to Article 4.2(b), Enron NA could elect to change the baseload purchase
      price from the FOM price to the daily midpoint Gas Daily Chicago citygate price.
      (Staff Ex. 2.00 Attachments, GPAA, at 3, 10). Article 4.2(c) also gave Enron
      NA
      the right, during the winter period (December through March), to change the
      price of baseload gas for up to 71,250 MMBtus per day of gas. Pursuant to
      Article 4.2(c), Enron North America could elect to change baseload purchases
      from the Natural Gas Intelligence Chicago citygate FOM prices to the daily
      midpoint Gas Daily Chicago citygate price. (Staff Ex. 2.00, Attachments, GPAA,
      at 3, 10). 

    


    Ms.
      Decker opined that Articles 4.2(b) and 4.2(c) gave control over pricing to
      Enron
      NA. Under various market conditions, one or the other of the pricing options
      would be more advantageous to Enron NA and less advantageous to PGL. (City-CUB
      Ex. 1.0 at 10-11). 

    


    d. Released
      Pipeline Capacity and Foregone Demand Credits 

    


    PGL
      articulated several reasons for its decision to enter into the GPAA. These
      reasons will be discussed more fully below. Two of PGL’s reasons for executing
      the GPAA were to prevent the erosion of basis and to eliminate demand charges.
      As part of PGL’s plan to prevent the erosion of basis, it agreed to relinquish
      certain pipeline capacity rights, and to forego certain demand credits.


    


    The
      GPAA
      required PGL to release all of its rights, title and interests to certain
      pipeline capacity to Enron NA. (Staff Ex. 2.00, Attachments, GPAA, at 12, 13).
      According to Mr. Wear, Enron NA sold gas to PGL at the citygate to meet PGL’s
      requirements. To facilitate this, PGL released some of its pipeline capacity
      to
      Enron NA (PGL Ex. B at 4; Staff Ex. 2.00, Attachments, GPAA, par. 4.3, Schedule
      6.2). PGL released pipeline capacity to Enron NA on the following interstate
      pipelines: Midwestern Gas Transmission (“MG”) Trunkline, American Natural
      Resource Company, (“ANR”) and Natural Gas Pipeline Company. (See,
      e.g.,
      Staff
      Ex. 3.00 at 22; Staff Ex. 2.00, Attachments, GPAA, Schedule 6.3). Enron NA
      paid
      the pipelines directly and then PGL reimbursed Enron NA for all the pipeline
      transportation costs that it paid. (Staff Ex. 2.00 at 17-19; Attachments, GPAA,
      Article 4.3). PGL, though, was entitled to all credits, refunds and
      reimbursements due it from any pipelines for demand or reservation charges.
      (Id.
      at 11).
      PGL also bore the cost of and received the credits from any increase or decrease
      in variable transportation costs and fuel, when those increases or decreases
      resulted from its usage and were created due to changes in the applicable
      tariffs. (Id.
      at
      11).


    


    Also
      pursuant to the GPAA, PGL agreed to renew one of its contracts with Natural
      Gas
      Pipeline of North America until the term of the GPAA expired on October 31,
      2004. (Id.
      at Art.
      6.4). PGL also had recall rights. Enron NA did not have management rights or
      responsibilities associated with storage. (PGL Ex. C at 22). Enron could,
      however, use whatever capacity PGL did not need for Enron’s own business
      purposes without paying PGL anything for the use of those pipelines. (Staff
      Ex.
      2.00 at 19). 

    



    
      
         

        


        
        

      

      
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    Mr.
      Anderson pointed out that PGL traded the use of its pipeline capacity in
      exchange for citygate prices. These citygate prices included the cost of
      transporting the gas to Chicago, PGL paid twice for transporting gas to Chicago
      and passed those costs on to its PGA customers. Furthermore, PGL gave away
      its
      excess capacity to Enron NA. (Id.
      at 20).
      In Mr. Anderson’s opinion, the GPAA did not protect PGL’s PGA customers from
      eroding basis. (Id.
      at 18,
      20). 

    


    PGL
      did
      not achieve its goal of eliminating demand charges by executing the GPAA.
      According to Mr. Anderson, the GPAA contained certain embedded demand charges.
      (Staff Ex. 2.00 at 20). The GPAA required PGL to reimburse Enron NA for all
      pipeline demand charges incurred. (Staff Ex. 2.00, Attachments, GPAA, Art.
      4.3).
      PGL failed to provide an analysis of the cost components of the GPAA; therefore,
      there is no evidence to show that PGL isn’t paying demand charges. Mr. Anderson
      avers that mere statements concluding that the GPAA contains no demand charges
      are not enough. 

    


    In
      the
      reconciliation year24
      PGL
      entered into 103 off-system transactions.25
      In 1998,
      PGL entered into 346 such transactions. In 1999, it entered into 358 off-system
      transactions. In 2000, when PGL operated under the GPAA, PGL entered into only
      114 off-system transactions. (PGL Ex. C at 31).

    


    Mr.
      Wear
      testified that the number of off-system transactions declined after PGL entered
      into the GPAA. The reason for the decline, according to Mr. Wear, was the fact
      that PGL had released some of its transportation assets to Enron NA pursuant
      to
      the terms of the GPAA. Many of the off-system transactions in previous years
      involved use of those assets. (PGL Ex. C at 31-32). 

    


    Dr.
      Rearden opined that, during the months when the SIQ was in effect, there was
      usually plenty of “slack” in the released pipeline capacity for PGL to choose
      DIQ gas for at least as much volumes as was specified in the DIQ provision.
      Thus, PGL could force the price of gas upward. (Staff Ex. 7.00 at
      35).

    


    e. Flexible
      Pricing

    


    As
      more
      fully articulated below, one of PGL’s reasons for executing the GPAA was that it
      allowed for flexible pricing options. Article 4.2 of the GPAA allowed the
      parties to renegotiate the price of gas. Enron NA, however, was under no
      obligation to furnish gas at a lower price than the terms of the GPAA. Instead,
      the price of gas could only be changed upon mutual assent by both parties.
      (Staff Ex. 2.00, Attachments, GPAA, Article 4.2). PGL did not attempt to arrive
      at a mutually agreed-upon alternative price to that which was specified in
      the
      GPAA until May of 2001. (Tr. 978). There was no reason that PGL personnel could
      not have procured a lower price before May of 2001. (Tr. 978-79).

    


    


    ______________________

    24  PGL’s
      reconciliation year is also the same as its fiscal year.

    25
        PGL’s
      fiscal year is the same as the reconciliation period, October 1, through
      September 30 of any given year. 


    
      
         

        


        
        

      

      
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    f. Penalties
      Paid on Re-sales of Gas to Enron 

    


    Article
      2.4 gave PGL the right to resell gas to Enron NA. The price for resales was
      a
      daily price, minus a penalty. The amount of the penalty was contingent upon
      how
      timely PGL was at nominating the resale and the amount of the resale. Also,
      larger resales incurred larger penalties. The penalties ranged from 1.00 cents
      to 3.50 cents per MMBtu. (Staff Ex. 2.00, Attachments, GPAA, 9-10; Staff Ex.
      3.00 at 28). 

    


    Staff
      witness Rearden provided an explanation of Staff’s interpretation of this
      provision of the GPAA. Dr. Rearden opined that the existence of this provision
      is indicia that PGL expected to have an oversupply of gas. (Staff Ex. 3.00
      at
      29). Resales occurred most often when Enron NA had already forced PGL to
      purchase the maximum amount of SIQ gas. Only 3.4% of resales during the summer
      period were made on days in which Enron NA personnel did not choose to deliver
      the SIQ maximum or an amount near the maximum. On 93.9% of the days when Enron
      NA forced PGL to buy these large quantities, PGL made resales back to Enron
      NA.
      Dr. Rearden opined that if PGL had entered into a contract that did not require
      it to make excess purchases pursuant to the SIQ clause, it would not need such
      a
      provision. (Staff Ex. 7.00 at 33). 

    


    PGL
      witness Wear explained why PGL wanted this provision to be included in the
      GPAA.
      Mr. Wear stated that when negotiating the GPAA, PGL required a sell-back
      provision in the contract because a sell-back provision created a firm market
      that PGL could turn to when it had an oversupply. (PGL Ex. C at 23). A standing
      firm bid to purchase oversupply, which would likely be executed under excess
      conditions in the marketplace, is valuable. (Id.
      at
      20-21). He also testified that it was often difficult for PGL to unload large
      amounts of gas. (Tr. 1071). According to Mr. Wear, it was not advantageous
      to
      PGL to be in a position in which it had to unload a large amount of gas. In
      such
      an instance, the counterparty is often aware of the need to unload the gas.
      As a
      result, PGL would receive less money than it would have received otherwise.
      (Tr.
      1071). Mr. Wear testified that most spot transactions are 5,000 to 10,000
      MMBtus. The more gas PGL has to unload, the more time it could take to
      accomplish that goal. 

    


    An
      oversupply can also cause pipeline imbalances. An imbalance can occur when
      PGL’s
      no-notice storage contractual rights are exceeded by the amount of gas that
      is
      in that storage. Under these circumstances, pursuant to contract, PGL must
      pay a
      penalty, which can be substantial. (PGL Ex. C at 26-27).  Mr.
      Wear
      stated that the resale provision was not placed in the GPAA in anticipation
      of
      an oversupply. Rather, PGL personnel recognized that resales might be necessary.
      (PGL Ex. F at 19-20). 

    


    g. Annual
      Review

    


    Article
      2.8 of the GPAA required the parties to meet annually to discuss any necessary
      or appropriate adjustments to baseload quantity gas and SIQ gas. (Staff Ex.
      2.00, Attachments, GPAA, at 10). 

    



    
      
         

        


        
        

      

      
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    h. Conversion
      to Performance-Based Rates

    


    Article
      4.5 of the GPAA provided that, if during the term of the GPAA, PGL filed,
      pursuant to Section 9-220(d) of the Public Utilities Act, a petition seeking
      authority for performance-based rates, thus eliminating its PGA, or if it sought
      alternative regulation pursuant to Section 9-224 of the Act, the parties could
      re-negotiate the pricing terms of the GPAA. (Staff Ex. 2.00, Attachments, GPAA,
      at 12). 

    


    i. Books
      and Records

    


    Article
      19.9 of the GPAA required PGL and Enron NA to maintain all books and records
      related to Transaction Agreements for a period of three years from the end
      of
      the terms of the GPAA, or three years from termination of the GPAA. (Staff
      Ex.
      2.00, Attachments, GPAA, at 34). 

    


    j. The
      “Master Contract”

    


    Attached
      to the GPAA was the “Master Contract.” It was the master agreement, pursuant to
      which PGL and Enron NA could enter into transactions, like Transaction 19.
      (Tr.
      1085). Pursuant to the GPAA, the terms and conditions of any sales or purchases
      “shall be set forth in a Transaction Agreement pursuant to the Master
      Agreement.” (Staff Ex. 2.00, Attachments, GPAA at 7). Thus, Enron North America
      and PGL were contractually required to document the transactions between them
      in
      the form of a formal contract. 

    


     

    
      	 	
              3.

            	
              Economic
                Analyses Made of the GPAA Just Before it was
                Executed

            


    

     

    


    During
      discovery, Staff and the GCI requested any studies, analysis or like information
      used by PGL to determine the economic benefits of the GPAA. Initially, PGL
      denied that any economic analysis of the effect of the GPAA on consumers had
      ever been performed. (See,
      e.g.,
      Staff
      Ex. 2.00 at 5; GCI Init. Brief at 31). In fact, PGL’s chief witness, Mr. Wear,
      the Manager of Gas Supply Administration at PGL, testified that no economic
      analysis of the GPAA was performed. (PGL Ex. F at 14; Tr. 1009-10).



    
      
         

        


        
        

      

      
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    However,
      after discovery reopened, a study called the “Aruba Analysis” surfaced. Roy
      Rodriguez, who was employed in Peoples Energy Corp’s Risk Management Department,
      prepared this document in August and September of 1999. The Aruba Analysis
      only
      evaluated certain terms of the GPAA, not the entire agreement. (Tr. 1294).
      Using
      information gathered by PGL personnel26,
      Mr.
      Rodriquez analyzed the projected economic value conferred on Enron NA by PEC
      and
      the projected effect of the GPAA gas prices on consumers. (Tr. 1294; Staff
      Ex.
      7.00 at 12). 

    


    In
      the
      Aruba Analysis, Mr. Rodriguez compared the GPAA FOM price, minus the three-cent
      discount, with the NYMEX cost of gas in the field, plus the forecast field-Henry
      Hub basis differential and the variable cost of transportation to
      Chicago.27
      (See,
      e.g.,
      Staff
      Ex. 7.00 at 13). Mr. Rodriguez calculated two scenarios to determine the effect
      of the GPAA on consumers. One scenario used a high amount of SIQ volumes and
      the
      other used a low amount of SIQ volumes. He determined, using different
      scenarios, that the extra costs resulting from the GPAA would be in a range
      between approximately $19 million to approximately $24 million. (Group Ex.
      1 at
      ST-PG-135-161). In both scenarios that Mr. Rodriguez used, the results indicated
      that the GPAA would increase
      consumer
      gas costs. (Group Ex. 1 at ST-PG-135-161). Mr. Rodriguez discussed the findings
      in his “Aruba Analysis” with Mr. Wear, meaning decision makers at PGL knew or
      should have known the GPAA would cost PGA customers more than other supply
      arrangements. (See,
      e.g., City-CUB
      Ex. 1.0 at 18).

    


    Mr.
      Wear
      also performed an analysis of the economic costs of the GPAA. At hearing,
      counsel for the City questioned Mr. Wear about a document, Wear Cross Ex. 15,
      which had been produced by PGL in discovery. This document was taken from Mr.
      Wear’s computer and it was in a file created by Mr. Wear. (Tr. 1036-46). It
      simulated what total gas costs would have been pursuant to the GPAA compared
      to
      what PGL’s supply practices for the previous four years. It was created on
      September 8, 1999, and it was last modified on September 10, 1999, six days
      before the GPAA was executed by Delainey and Morrow. (Wear Cross Exhibit 15).
      Wear Cross Exhibit 15 indicated that gas costs passed on to consumers would
      increase by approximately $50 million throughout the first four years of the
      five-year life of the GPAA.28
      (See,
      Wear
      Cross Exhibit 15). 

    


    During
      the hearing phase of this docket, Mr. Wear’s behavior called into question his
      credibility. Mr. Wear testified that he did not recognize Wear Cross Exhibit
      15.
      (Tr. 1011). He did not recall performing any comparisons regarding the price
      of
      gas paid to Enron NA. (Tr. 1076; 1010). Mr. Wear professed to have no memory
      regarding a document that he admitted was on his password-protected computer
      in
      a computer folder that he created. (Tr. 1036-46). However, he admitted preparing
      a similar document, PGL Exhibit 8. (Tr. 1013). 

    


    


    


    ______________________

    26   This
      is the same data contained in PGL Exs. 2 and 3, attached to Mr. Wear’s
      testimony. (PGL Ex. C, Attachments 2,3).

    27   The
      Henry Hub, in southern Louisiana, is the largest centralized point in the U.S.
      for purchasing gas, or, for purchasing gas futures contracts. It is a nexus
      of
      16 natural gas pipeline systems that draw supplies from the region’s gas fields.
      (Nymex.com\glossary). 

    28   In
      its Initial Post-trial Brief, PGL avers that Mr. Wear did not recall this
      document, but, he “may have” nevertheless conducted an analysis of how a supply
      agreement like the GPAA would have affected consumers. (PGL Init. Post-trial
      Brief at 60). PGL further asserts that Wear Cross Exhibit 15 established that
      the GPAA was “increasingly favorable” over the four-year period it analyzed.
      (Id.).
      This
      is not correct. Not surprisingly, PGL cites no actual dollar amounts from that
      document. 


    
      
         

        


        
        

      

      
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    Neither
      of the analyses discussed above took the economic impact of all of the GPAA
      provisions into consideration. However, according to both analyses, the GPAA
      would result in higher gas costs being passed on the consumers. (Wear Cross
      Ex.
      15; Group Ex. 1 at ST-PG-135-161;Tr. 911-12).

    


     

    4. The
      Reasons Articulated by PGL for Entering into the GPAA

     

    


    PGL
      articulated several reasons for its decision to execute the GPAA. Industry
      studies indicated that basis would begin to decline. PGL believed the GPAA
      would
      protect against the erosion of basis. Additionally, PGL averred that the GPAA
      provided certain unquantifiable benefits. The discussion below fully outlines
      PGL’s reasoning for entering into the GPAA.

    


    a. Eroding
      Value of Basis

    


    “Basis”
      is the difference in gas price at a location in the field area (either at the
      wellhead or at a specific trading point) and gas prices at another market point.
      In this case, that other market point is the Chicago citygate. (Tr. 881). It
      is,
      essentially, the cost, as is reflected in the marketplace, of transporting
      the
      gas to Chicago citygate. (Tr. 883, 885; PGL Ex. C at 7). Basis has two elements,
      the variable transportation cost and a certain percentage of gas taken off
      at
      the top by a pipeline to maintain pressure in the pipelines and to account
      for
      lost gas. As the price of gas increases, so does basis. (Staff Exs. 3.00 at
      24;
      7.00 at 20-21). 

    


    At
      the
      time the GPAA was executed several pipeline construction projects were underway
      that would soon increase the natural gas supply to the Chicago area.
      (See,
      e.g., PGL
      Ex. F
      at 5). Specifically, Northern Border Pipeline Co. and Alliance Pipeline had
      projects planned for Chicago that would increase capacity to the Chicago area
      by
      almost 2.0 Bcf of gas per day. (PGL Ex. C at 6). The effect of these projects
      would be to erode the value of PGL’s existing transportation contracts.
      (Id.).
      PGL
      witness Wear testified that one reason PGL entered into the GPAA was to
      counteract the predicted decline in basis from a field location to Chicago.
      (Tr.
      1067). As basis declines, a citygate purchase becomes more attractive; in such
      a
      scenario, the difference in price between the field gas and transportation
      costs
      and citygate gas decreases. (Staff Ex. 3.00 at 12). 

    


    Before
      signing the GPAA, PGL purchased a portion of its portfolio at citygate prices.
      (Tr. 937). According to Mr. Wear, these citygate purchases mitigated some of
      the
      effect of a decline in basis. (Tr. 937-38). However, in order for the citygate
      delivery price to be profitable, the average basis would have to fall below
      the
      transportation costs. (PGL Ex. H at 34). 


    
      
         

        


        
        

      

      
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    Additionally,
      in the past, PGL was able to “optimize” its transportation assets on days when
      they were not needed to meet system requirements.29
      (PGL.
      Ex. C at 8). A decrease in basis might also result in a decrease in the amount
      of demand credits PGL received through “optimization” of its firm transportation
      contracts through off-system transactions. (See,
      e.g., Staff
      Ex.
      2.00 at 14 and PGL Ex. C at 6). Mr. Wear estimated that the decrease in
      optimization credits available resulting from a decline in basis was $400,000.
      (PGL Ex. C at 9). 

    


    Mr.
      Wear
      testified that PGL decision-makers determined that Enron NA’s proposal for a
      substantial gas supply contract would remove the risk of a decline in basis
      by
      ensuring index-based market pricing for gas supply and guaranteeing demand
      credits. (PGL Ex. B at 6). According to Mr. Wear, declining basis was a reason
      PGL personnel decided to enter into the GPAA with Enron NA. (Tr. 883). Mr.
      Wear
      testified that purchasing gas at the citygate index price would lower the cost
      of gas. (Tr. 888). Mr. Wear also opined that the three-cent discount offset
      the
      financial impact of declining basis on consumers. (Tr. 1079-81). Mr. Wear
      projected the decline in basis to be slightly more than one cent per MMBtu
      per
      year. (PGL Ex. C at 8-9). There is no credible evidence that any of the PGL
      decision-makers contemplated that basis would decline more than this amount.
      Mr.
      Wear sponsored PGL’s basis projections. (Tr. 890). 

    


    Staff
      Witness Dr. Rearden testified that the most important evaluation of the GPAA
      is
      a comparison between that which PGL did before entering into the GPAA—buy gas in
      the field and pay the cost of variable transportation—with the cost of gas
      pursuant to the GPAA, which provides for gas transported to the Chicago
      citygate, less three cents per MMBtu. To acquire a “hedge” against basis, PGL
      agreed to several terms that raised prices for consumers. According to Dr.
      Rearden, for the GPAA to be a prudent decision, the decline in basis must exceed
      the increase the consumers incurred in gas costs as a result of the GPAA.
      (Id.
      at
      23-24).

    


    


    _____________________

    29   The
      term “optimize,” as it is used here, means to rent those facilities out, to
      others, for a fee, when they are not being used. (See,
      e.g., Tr.
      996-999). 


    
      
         

        


        
        

      

      
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    Staff
      Witness Mr. Anderson testified that PGL had other options with which it could
      have avoided a loss in released capacity revenues and demand credits due to
      eroding basis. PGL had, at the time period in question, a portfolio of
      transportation contracts with various pipelines that expired, or would expire
      shortly, that it could have negotiated at a lower cost, as eroding basis causes
      pipeline transportation to be worth less. Just before the time when PGL entered
      into the GPAA, it renegotiated four pipeline contracts. (Staff Ex. 2.00 at
      16-17). Mr. Anderson opined that there is no evidence that PGL personnel were
      unaware that potential basis erosion was on the horizon at that time. To combat
      a decline in basis, PGL could have negotiated shorter-term contracts, to be
      re-negotiated as competition reduced pipeline rates. (Id.
      at 18).
      Mr. Anderson also opined that load shifting is another way to mitigate the
      financial effect of declining basis. Load-shifting between competing pipelines
      is a common practice in the industry. (Tr. 875). PGL conducts business with
      six
      pipeline suppliers and has the flexibility to shift load between those
      suppliers. (Id.).
      When a
      gas company puts more load on a pipeline, it can receive discounts from the
      pipeline at rates below the maximum FERC rate. (Tr. 875). The basis projections
      that Mr. Wear prepared showed a projected decline in basis of approximately
      one
      cent per MMBtu. (Tr. 890). 

    


    Staff
      believes that to properly evaluate the prudence of the GPAA, one must consider
      the information available to PGL at the time it executed the GPAA. Dr. Rearden
      opined that, in order to determine what the decline in basis actually was,
      one
      must determine the difference between the price of gas bought in the field
      and
      delivered, versus the Chicago citygate price. Using information that Mr. Wear
      used to prepare PGL Ex. 2, Dr. Rearden compared the citygate price with the
      field price, plus the cost of delivery from the field to the citygate. He
      calculated the difference between the two and concluded that the citygate price
      did not offset any decline in basis. He estimated that the gas purchased through
      the GPAA, using the GPAA prices, would increase gas prices by approximately
      $26,205,000 over the five-year life of the GPAA. (Staff Init. Brief at 50).
      Dr.
      Rearden used the same data as that used by PGL witness Mr. Wear. However, in
      Mr.
      Wear’s calculations, he found the projected decline in basis to be approximately
      one cent per MMBtu per year. (PGL Ex. C at 8; Staff Ex. 12.00 at 8).


    


    Dr.
      Rearden testified that, in order to accurately determine basis for delivered
      gas, one must use both the Chicago-Henry Hub basis and the weighted average
      basis from Henry Hub to a field zone. This method is how Mr. Rodriguez analyzed
      basis when preparing the “Aruba Analysis.” (PGL Ex. L at 2). In Dr. Rearden’s
      opinion, PGL witness Mr. Graves’ calculation of basis was incorrect; Mr. Graves
      only examined the effect of changing Chicago-Henry Hub basis. Mr. Graves did
      not
      consider the changes to the weighted average basis from the field to the Henry
      Hub that are implied by using the alternative projected basis for Chicago-Henry
      Hub. (Staff Ex. 12.00 at 15-16). 

    


    b. The
      CERA Report and Other Industry Information

    


    At
      the
      time the contract with Enron NA was being negotiated, there was some speculation
      in the industry that basis would decline dramatically. (Tr. 891). Information,
      such as a report issued by the Cambridge Energy Research Associates, (“CERA”)
      was available to PGL decision-makers at the time PGL was negotiating the GPAA
      indicated that basis would decline. The CERA Report, however, contains
      information about the value of basis declining in some locations that are not
      pertinent to PGL. (Staff Exs. 12.00 at 17; 7.00 at 25). 


    
      
        


        
        

      

      
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        01-0707

      

    


    Mr.
      Graves testified that Dr. Rearden’s calculations of basis were incorrect because
      several scenarios were possible, given the information that was known to persons
      in the industry, and some of those scenarios suggest that the GPAA could have
      a
      net savings with respect to the basis-variable transportation cost component.
      (PGL Ex. L at 45). Mr. Graves admitted that whether the GPAA would “pay off” for
      PGL was not a certainty. (PGL Ex. L at 47). There is no evidence indicating
      that
      decision-makers or anyone else at PGL considered the CERA Report or other
      industry data indicating the possibility of a steep decline in basis, when
      deciding to enter into the GPAA. 

    


    c. A
      Liquidity Premium

    


    A
      liquidity premium is an adjustment made in order to take into account the fact
      that PGL, when buying large amounts of gas, can be required to buy gas to meet
      the needs of consumers, irrespective of market conditions. In other words,
      in
      such a situation, PGL must meet consumer needs; it cannot wait until gas prices
      fall. Mr. Graves opined that, when calculating basis, a liquidity premium must
      be used. (See,
      PGL Ex.
      L at 19). Mr. Rodriguez used a liquidity premium when he prepared the “Aruba
      Analysis.” Using a 1.5 cent liquidity premium, Mr. Graves determined that a
      liquidity premium reduced Dr. Rearden’s calculated delivered price of gas,
      versus the citygate cost disadvantage, by $5.7 million. (PGL Ex L at 19). Mr.
      Graves never stated why he determined that this was the correct amount of his
      liquidity premium.

    


    Dr.
      Rearden opined that a liquidity premium should not be used. He pointed out
      that
      while in some instances, PGL may be subject to increased prices due to its
      need
      to purchase gas, the converse is also true. That is, a large purchaser, such
      as
      PGL, can have a superior ability to buy gas below that which other buyers pay.
      (Staff Ex. 12.00 at 13).

    


    d. Unquantifiable
      Benefits 

    


    According
      to PGL, the GPAA also provided certain unquantifiable benefits. In September
      of
      1999, Enron NA was a large company that dominated the marketplace. It was a
      well-established gas supplier. Pursuant to the GPAA, Enron NA supplied PGL
      with
      some technical support, such as a secure webpage that allowed PGL and Enron
      NA
      to exchange information about daily activity, a database on weather , and
      training regarding hedging instruments, like energy derivatives and options.
      (PGL Ex. F at 9). However, there is no evidence that PGL’s employees ever used
      any of these services. Because PGL traded no options or derivatives at all
      during the time period in question, PGL’s employees never used the training
      regarding options and derivatives for the benefit of ratepaying consumers.
      

    



    
      
         

        


        
        

      

      
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        01-0707

      

    


     

    B. Conclusions
      of Law

     

    


     

    
      	 	
              1.

            	
              Proposed
                Disallowances

            


    

     

    


    Staff
      proposed a total cost disallowance for the GPAA of $13,304,910. Staff’s proposed
      disallowances are as follows: $10,755,048 for the increase in prices due to
      citygate versus delivered gas prices; $847,429 for foregone demand credits;
      $86,681 for resale penalties; $4,818,319 for increased gas costs due to the
      SIQ
      option. Staff also proposed credits of approximately $3.2 million for the
      provisions that saved consumers money. (See,
      Staff
      Ex. 7.05). The GCI’s total recommended disallowance is $37,470,517 for increased
      gas costs. (City-CUB Ex. 1.0 at 4). As is set forth below, Staff and the GCI
      raise several issues regarding the prudence of the GPAA, in light of what
      decision-makers at PGL knew or should have known. 

    


     

    2. Ignoring
      Internal Unfavorable Economic Analyses

     

    


    a. Staff’s
      Position

    


    Two
      internal economic analyses performed just before PGL entered into the GPAA
      indicated that the GPAA would raise the price of gas borne by consumers through
      PGL’s PGA. PGL witness Mr. Wear performed an economic analysis of the financial
      impact of the GPAA that indicated a possible increase in the price of gas passed
      on to consumers in the amount of $50 million for the four-year period he
      analyzed. (Wear Cross Exhibit 15). Mr. Rodriguez’s “Aruba Analysis” determined
      the extra costs imposed on consumers to be in a range between approximately
      $19
      million and $24 million. (Group Ex. 1 at ST-PG-135-161). 

    


    According
      to Staff, there are no economic analyses indicating that the GPAA was prudent.
      And, the two analyses PGL did perform established that the GPAA would be more
      costly than PGL’s supply purchasing practices in previous years. Nevertheless,
      PGL entered into the GPAA. (Staff Init. Brief at 44, 47-48). 

    


    Staff
      posits that PGL presented no evidence that it considered any alternative to
      the
      GPAA, which was a dramatic departure from PGL’s gas-buying practice in prior
      years. Previously, PGL purchased gas in the field and paid for transportation
      to
      the Chicago citygate. In contrast, the GPAA represented 66% of PGL’s system
      supply purchases for the time period in question. Another major difference
      between the GPAA and PGL’s previous supply contracts was the length of the
      contract. The GPAA was a five-year contract. Typically, PGL’s gas supply
      contracts were one or two years in duration. (Id.
      at
      44-45). Thus, Staff argues that a change in purchasing method requires evidence,
      perhaps in the form of a request for proposal (an “RFP”) or in the form of an
      economic study, establishing the prudence of PGL’s decision to enter into the
      GPAA. (Id.
      at 46).
      Staff views the lack of any quantitative analysis supporting the GPAA as indicia
      of imprudence. Staff does not contend that PGL should be required to perform
      any
      specific type of analysis. (Staff Reply Brief at 20).

    



    
      
         

        


        
        

      

      
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    b. GCI’s
      Position

    


    The
      GCI,
      as well, argue that entering into the GPAA in the face of two analyses
      indicating that the GPAA would raise gas costs is imprudent. (GCI Initial Brief
      at 36-38). The GCI point out that the credibility of PGL’s chief witness on this
      issue, Mr. Wear, was impeached through the existence of Wear Cross Ex. 15.
      Despite Mr. Wear’s testimony that no economic analysis was performed of the GPAA
      by any PGL personnel, an economic analysis of the GPAA Mr. Wear performed,
      and
      it was unfavorable. The GCI point out that Wear Cross Ex. 15 is also a
      party-admission, as it contradicts PGL’s assertion that no economic analysis of
      the GPAA was performed by PGL personnel. (GCI Init. Brief at 31-35).


    


    The
      GCI
      aver that Wear Cross Ex. 15 and the “Aruba Analysis” establish that entering
      into the GPAA would increase the cost of gas borne by consumers. PGL produced
      no
      analyses made at the time the GPAA was entered into indicating that that the
      GPAA would not increase the cost of gas. The GCI contend that, because
      contemporaneous analyses were performed demonstrating the imprudence of the
      GPAA, PGL’s justifications of its failure to conduct a favorable economic
      analysis are no longer relevant, except to demonstrate PGL’s lack of
      credibility. (GCI Init. Brief at 35-37).

    


    c. PGL’s
      Position

    


    PGL
      concedes that Mr. Wear “may have looked at the economics of the GPAA.” It
      asserts that Mr. Wear was “unable to testify about the substance” of his
      analysis, or with whom he may have discussed this analysis. According to PGL,
      Mr. Wear’s analysis (Wear Cross Ex. 15) showed that the characteristics of the
      GPAA were, in fact, increasingly favorable over the four-year period Mr. Wear
      analyzed. PGL argues that this exhibit showed directionally improving results,
      when comparing the last year of historical data used for comparison purposes
      (1999) in that document with the fourth year the GPAA would be in effect. From
      this single year of a four-year comparison, PGL asserts that its expectations
      with regard to the effect of declining basis were correct.30
      (PGL
      Reply Brief at 29). PGL also asserts that its Ex. 8, which was prepared by
      Mr.
      Wear, establishes that the GPAA would be beneficial to consumers. (PGL Init.
      Brief at 60-61). 

    


    PGL
      further claims that the Commission should not consider the “Aruba Analysis”
because PGL decision-makers did not consider it when deciding to enter into
      the
      GPAA. Also, the “Aruba Analysis” is not consistent with conclusions drawn by
      PGL’s expert witness Mr. Graves after the GPAA was executed. (PGL Init. Brief at
      61). PGL maintains that Staff and the GCI have placed far too much emphasis
      on
      the “Aruba Analysis” and Wear Cross Ex. 15, as there is no evidence that PGL
      decision-makers were privy to these analyses. Further, even though PGL did
      not
      object to admission of the “Aruba Analysis” into evidence at hearing, Staff
      could have, but did not, subpoena Mr. Rodriguez to testify. (Id.).
      

     

    Both
      Staff witnesses Dr. Rearden and Mr. Anderson criticized PGL for not implementing
      an RFP bidding process and not relying on a written quantitative analysis when
      electing to execute the GPAA. According to PGL, in so doing, Staff has required
      PGL to have these tasks performed for the first time. In the past, PGL did
      not
      conduct formal bidding or conduct economic analysis of its supply contracts.
      (See,
      PGL
      Init. Brief at 56-59; PGL Ex. L at 12). 

    _____________________

    30   Declining
      basis is discussed in Section (b)(2) herein.


    
      
         

        


        
        

      

      
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    On
      Exceptions, PGL argues that the Commission is altering the applicable standard
      when requiring it to justify its decisions based on information that could
      have
      been available to decision-makers at the time the relevant decisions were made.
      PGL argues that this Commission should not require utilities to use information
      that decision-makers knew or should have known at the time they made a decision.
      (PGL BOE at 57).

    


    d. Commission
      Analysis and Conclusions

    


    After
      the
      ALJ reopened discovery in this matter, two economic analyses of the GPAA,
      performed by employees of PGL/PEC, magically emerged. These analyses are the
      Wear Cross Ex. 15 and the colorfully titled “Aruba Analysis.” While these
      analyses did not evaluate all of the cost terms of the GPAA, both analyses
      indicated that the GPAA would cause gas prices borne by consumers to
increase.31 

    


    The
      “Aruba Analysis” included a liquidity factor and two different scenarios
      regarding a decline in basis. Under both of these scenarios, the GPAA
increased
      gas
      costs borne by consumers. Yet, in the face of these unfavorable analyses and
      with no other information indicating that the GPAA would not increase consumer
      costs, PGL chose to execute the GPAA. This alone gives the Commission pause
      when
      considering the prudence of PGL’s decision.

     

    The
      Commission notes that PGL’s error is not in failing to perform a certain type of
      study or in failing to solicit a certain type of bid. Rather, PGL’s error is its
      lack of evidence indicating consideration by PGL personnel of the economic
      impact of the GPAA on consumers prior to executing it. Additionally, we agree
      with the GCI that the importance of PGL’s assertions that it should not be
      required to conduct an economic analysis has to do with credibility, given
      the
      fact that there were unfavorable economic analyses available. 

    


    While
      the
      Commission does not require utilities to perform any particular type of analysis
      or bidding process, we do require utilities to provide evidentiary support
      demonstrating the prudence of all gas supply contracts for which the costs
      are
      passed on to PGA customers. Here, PGL embarked on an encompassing venture with
      Enron North America when it executed the GPAA. At the time of execution, the
      GPAA governed approximately two-thirds of PGL’s supply for a period of five
      years. PGL had an obligation, pursuant to statute, to mitigate rising gas costs.
      (220 ILCS 5/9-220). Yet, here, PGL presented no evidence that its
      decision-makers made any attempt to consider the effect of the costs it incurred
      through the GPAA on ratepaying consumers. What we are requiring is that
      utilities must be able to prove that their expenditures were not, as was often
      the case here, money spent unnecessarily. (See,
      e.g.,
      the
      portions of this Order concerning the impact of foregone demand credits, and
      the
      economic impact of the SIQ provision in the GPAA.). 

    


    


    _____________________

    31   The
      “Aruba Analysis” included transportations costs and basis. Wear Cross Ex. 15
      merely compared past base gas prices with the base prices in the GPAA. Neither
      one of these analyses covered such items as the economic impact of the DIQ
      clause, the possible effects of Enron changing the price of baseload gas
      pursuant to the GPAA, and various other provisions that had an obvious impact
      on
      the price of gas borne by consumers. (Wear Cross Ex. 15; Staff Group Ex. 1
      at
      ST-PG-135-161). 


    
      
         

        


        
        

      

      
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    While
      PGL
      cites its Exhibit 8 as evidence of economic analysis of the GPAA, which was
      prepared by Mr. Wear, this document does not aid it. There is no evidence in
      this record establishing that PGL
      Ex. 8
      was created at the time the decision was made to enter into the GPAA. Therefore,
      it is not probative as to what PGL decision-makers consulted, or should have
      consulted, when entering into the GPAA. Similarly, Mr. Graves’ conclusions were
      drawn after the time PGL entered into the GPAA, and his testimony does not
      establish what information decision-makers at PGL considered when entering
      into
      the GPAA. 

    


    PGL’s
      assertion that Wear Cross Ex. 15 establishes that its expectations with regard
      to the effect of declining basis were correct is without merit. PGL overlooks
      the fact that, in Wear Cross Exhibit 15, Mr. Wear did not analyze basis. He
      merely compared PGL’s historical purchases of gas with four years of previous
      gas purchases PGL made (from October, 1995 to September, 1999) using GPAA
      purchases prices, like FOM minus three cents per MMBtu. (Wear Cross Ex. 15).
      Mr.
      Wear’s analysis proves nothing with regard to the impact of basis and the GPAA.
      

    


    Mr.
      Wear
      projected an approximate loss of $50 million over the four-year period he
      analyzed. Mr. Wear also projected a gain in the fourth year (1999) of
      $10,920,308. (Id.).
      PGL
      does not explain how incurring a loss of $50 million over four years is offset
      by approximately $11 million in the last of these four years. 

    


    The
      record evidence shows that Mr. Wear was not a credible witness. At hearing,
      he
      often evaded answering the questions asked of him, and many times he changed
      his
      testimony in significant ways. Mr. Wear also contradicted his own testimony
      on
      several occasions. (See,
      e.g.,
      Tr.
      1072, where Mr. Wear stated that he previously testified that PGL did not
      renegotiate with Citgo because the Citgo gas PGL received previously was
      inferior, but, admitted that, after PEC assumed the Citgo contract, PGL
      continued to receive this same inferior gas (through Enron Midwest)).
      Additionally, Mr. Wear often made factual conclusions without stating the
      factual foundation for those conclusions. This Commission need not consider
      factually unsupported conclusions of fact. (Fraley
      v. City of Elgin,
      251 Ill.
      App. 3d 72, 77, 621 N.E.2d 276 (2nd
      Dist.
      1993)).

    


    Furthermore,
      Wear Cross Exhibit 15 impeached Mr. Wear’s credibility, as the record is replete
      with statements he made that no economic analysis was performed. (See,
      e.g.,
      Tr.
      1009-10). However, Wear Cross Ex. 15 established, at a minimum, that Mr. Wear
      created a document on his computer approximately one week before PGL executives
      signed the GPAA. (Wear Cross Ex. 15; Staff Ex. 2.00, GPAA). Any statement made
      by Mr. Wear that he did not recall Wear Cross Ex. 15, or that he did not recall
      with whom he spoke regarding this document is not credible. 

    


    The
      Commission concludes that PGL
      presented no evidence establishing that it had a prudent reason for ignoring
      these two unfavorable analyses. Mere statements that decision-makers did not
      consider these analyses does not absolve PGL from its obligation to incur only
      those costs that are prudently incurred. (220 ILCS 5/9-220). And, any objection
      PGL had to the failure of Staff to subpoena Mr. Rodriguez should have appeared
      at hearing. It cannot do so now. (See,
      e.g., People v. Robinson,
      157 Ill.
      2d 68, 79, 623 N.E.2d 352 (1993); Fleeman
      v. Fischer, 244
      Ill.
      App. 3d 753, 755-56, 244 N.E.2d 836 (5TH
      Dist.
      1993)). 


    
      
         

        


        
        

      

      
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    It
      is
      unfathomable to the Commission that PGL executed the GPAA when at least two
      analyses showed an increase in costs to PGA customers. It would seem that any
      negative attributes of a supply contract would be an integral part of the
      decision-making process, especially given that Commission rules require PGL
      to
“refrain” from actions that lead to an increase in costs for consumers. The fact
      that PGL’s decision-makers did not consider them actually shows that PGL acted
      imprudently when entering into the GPAA. Failure to consider what increases
      in
      gas costs, actual or potential, as a result of entering into the GPAA,
      constitutes an exercise in judgment outside the standard of care that a
      reasonable person would be expected to exercise under the same circumstances
      encountered by utility management at the time decisions had to be made. PGL’s
      decision was, therefore, imprudent. (Illinois
      Power, 245 Ill.
      App.
      3d at 371). Disallowances based on the specific increases in costs caused by
      PGL’s imprudent decision will be discussed in detail below. 

    


    On
      Exceptions, PGL ignores the law in arguing that the Commission should only
      require it to justify its decisions based on information that could have been
      available to decision-makers at the time the relevant decisions were made.
      The
      Commission is required to determine whether a decision is prudent based on
      what
      decision-makers knew or should have known. (See,
      e.g., Ill. Power,
      245 Ill.
      App. 3d at 371). Moreover, we decline to allow utilities to justify decisions
      based on information that decision-makers might have known, unless, as is the
      case with the “Aruba Analysis and Wear Cross Ex. 15, those documents were
      prepared for the purpose of making the decision in question. In such a case,
      the
      decision-makers should have known the contents of those documents.

    


     

    
      	 	
              3.

            	
              Enron’s
                Ability to Change the Price of Gas: the Baseload Price Adjustment
                Clause
                and Articles 4.2(b) and 4.2(c) of the GPAA 

            


    

     

    


    a. Staff’s
      Position

    


    Staff
      contends that, pursuant to the BLPA, Enron NA could increase the price of
      baseload gas. Also, Articles 4.2(b) and 4.2(c) of the GPAA allowed Enron to
      increase the price of baseload gas in wintertime, notwithstanding any increases
      Enron North America imposed pursuant to the BLPA. Staff acknowledges that no
      harm actually resulted from these three clauses, as Enron never actually changed
      the price of gas pursuant to these three clauses during the reconciliation
      period. Staff avers that it was unreasonable for PGL to enter into a contract,
      pursuant to which a supplier could increase the amount of money charged. This
      holds especially true for baseload gas, which PGL needed to meet customer
      demands. (Staff Init. Brief at 41; 50-51). Because consumers suffered no
      economic harm from these provisions, Staff seeks no disallowance. (Id.
      at
      56).

    


    b. GCI’s
      Position

    


    The
      GCI
      also contend that the BLPA and Articles 4.2(b) and 4.2(c) of the GPAA allowed
      Enron NA to unilaterally increase the price of baseload gas in wintertime,
      which
      was imprudent. (GCI Init. Brief at 45, 47).

    



    
      
         

        


        
        

      

      
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    c. PGL’s
      Position

    


    PGL
      acknowledges that the BLPA clause allowed Enron NA to choose to price up to
      45,000 MMBtus per day of the baseload quantity at a daily price, rather than
      the
      FOM price, during December through March. According to Mr. Wear, PGL agreed
      to
      include the BLPA clause in order to secure the three-cent per MMBtu discount
      on
      baseload gas and SIQ gas. (Id.
      at 21).
      PGL argues that the emphasis on the existence of these clauses is misplaced
      because Enron NA never invoked these clauses. And, Articles 4.2(b) and 4.2(c)
      expired, unexercised, before the commencement of the reconciliation year. (PGL
      Reply Brief at 30). 

    


    d. Commission
      Analysis and Conclusions

    


    The
      Commission agrees with Staff and the GCI that facts were known to PGL
      decision-makers at the time the GPAA was negotiated which established that
      these
      clauses could have resulted in harm to ratepaying consumers. A simple review
      of
      these three clauses in the GPAA would have revealed that Enron NA could have
      imposed unnecessary costs on consumers. Baseload gas is critical for PGL to
      meet
      the demands of its customers. Because PGL is required by law to pass on only
      those costs that are prudently incurred, price of baseload gas (or any supply
      of
      gas) should always be a concern for PGL. (220 ILCS 5/9-220). Yet, conspicuously
      absent from this record is evidence that anyone at PGL was concerned that Enron
      could increase the price of gas, if Enron decided to do so. 

    


    The
      Commission finds that PGL acted imprudently by entering into a contract with
      three provisions that potentially allowed Enron NA to increase the price of
      baseload gas, which is the quantity PGL needs to satisfy its customer demands.
      However, Enron NA did not actually invoke its rights pursuant to these
      provisions. No harm to ratepaying consumers actually occurred. The fact that
      Enron NA did not invoke these clauses only has to do with the level of economic
      harm PGL caused by failing to analyze the GPAA. It is simply imprudent to enter
      into a contract with these provisions when the potential for harm is so
      patent.

    


     

    4. Baseload,
      SIQ and DIQ Gas

     

    


    
      	 	
              a.

            	
              Staff’s
                Position

            


    

    


    Staff
      argues that the baseload, SIQ and DIQ gas clauses lend further support for
      finding the GPAA to be imprudent.

    


    PGL
      indicated that it established baseload requirements through negotiations with
      Enron NA and did not necessarily reflect demand. PGL stated that baseload
      quantities included in the GPAA were similar to baseload purchases prior to
      the
      existence of the GPAA. Finally, PGL claimed that baseload quantities were based
      on normal weather conditions, although daily and monthly purchases might be
      based on other factors. According to Staff, none of PGL’s explanations justify
      the contracted amount of baseload included in the GPAA. (Staff Init. Brief
      at
      41).

    



    
      
         

        


        
        

      

      
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    Baseload
      requirements represent the portion of customer demand that a gas utility can
      take on its system. If a gas utility purchases baseload based on normal weather
      conditions, its goal is to obtain supplies that meet the load requirements
      of
      its customers. Sound business practice dictates that PGL would provide some
      sort
      of study or analysis to support its decision to use normal weather conditions
      to
      establish baseload requirements. PGL did not do that here. Staff believes PGL
      to
      be unreasonable in committing to purchase baseload requirements without first
      analyzing the needs of its customers. (Staff Ex. 2.00 at 21-22).

    


    Pursuant
      to the SIQ provision, Enron NA chose the amount of gas it delivered to PGL
      during the summer period defined in the GPAA. Enron NA sold SIQ gas to PGL
      at
      the FOM price, less a three-cent per MMBtu discount. However, the GPAA enabled
      Enron NA to force PGL to purchase maximum SIQ volumes of gas when the Gas Daily
      price was less than the FOM price. (See, Staff Ex. 3.00 at 31). According to
      Staff, the SIQ provision forced PGL to buy gas it did not need. Enron NA could,
      and did, deliver large amounts of SIQ gas to PGL when the FOM price was higher
      than the daily price, which forced PGL to buy gas it did not need at a higher
      price than what was available in the marketplace at the daily price. Staff
      argues that it was imprudent for PGL to allow Enron NA to determine how much
      gas
      PGL would receive. (Staff Ex. 12.00 at 24; Staff Init. Brief at 49).


    


    Staff
      sets forth that DIQ gas was sold at daily prices, which are usually higher
      than
      FOM prices, with no discount. Thus, when the daily price was above the monthly
      price, Enron NA had the incentive to deliver the minimum SIQ volumes allowed
      by
      the GPAA. By merely delivering a small amount of SIQ gas, Enron NA forced PGL
      to
      purchase the remainder of what it needed, either through the DIQ clause, or
      from
      another source, at the higher daily prices. In other words, when Enron NA
      elected not to sell the full 80,000 MMBtus of SIQ gas to PGL, and if PGL needed
      that amount of gas, PGL would be required to purchase gas at a higher cost.
      (Staff Ex. 12.00 at 24). PGL submitted evidence establishing that on only 20%
      of
      the days on which Enron NA made such a decision, PGL did not purchase DIQ
      volumes from Enron NA at the daily price. (PGL Ex. L at 11; Staff Init. Brief
      at
      43). Staff determined that the SIQ increased consumer costs during the year
      in
      question in the amount of $4,818,319, which represents the difference between
      the daily price index and the FOM index price, times incremental SIQ gas
      volumes. (Staff Init. Brief at 56).

    


    b. GCI’s
      Position

    


    The
      GCI
      argue that the SIQ clause virtually guaranteed that Enron would benefit, at
      the
      expense of consumers. Citing Mr. Wear’s testimony on this issue, they conclude
      that PGL should not have been “indifferent to when the volumes of gas showed
      up.” (GCI Init. Brief at 47-48)

    


    c. PGL’s
      Position

    


    PGL
      contends that the SIQ provision was prudent because relinquishing control over
      how much SIQ gas was delivered to it was done in exchange for a three-cent
      discount. (See,
      e.g.,
      PGL
      Init. Brief at 18). According to Mr. Wear, the three-cent per MMBtu discount
      in
      both the baseload clause and the SIQ clause saved consumers $2.7 million. (PGL
      Ex. C at 16). 

    



    
      
        


        
        

      

      
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    PGL
      argues that Staff and the GCI exaggerate the effect of the SIQ provision, which
      PGL acknowledges “allowed Enron some control over the timing and amount of gas
      sold to Peoples Gas under the GPAA.” (PGL Reply Brief at 35). PGL points out
      that Enron NA had no control over the amounts of PGL’s higher-priced purchases
      from Enron North America pursuant to the DIQ clause. Also, citing Staff’s
      Initial Brief and Mr. Anderson’s testimony, PGL argues that Enron NA never
      forced PGL to buy DIQ gas when Enron NA selected the minimum amount of SIQ
      gas.
      (PGL Reply Brief at 36). 

    


    d. Commission
      Analysis and Conclusions

    


    As
      an
      initial matter, the Commission agrees with Staff that PGL should have performed
      some sort of analysis to determine its baseload requirements prior to executing
      the GPAA. Contracting for baseload requirements without an idea as to what
      demand might be defies logic. The Commission notes that no party proposes a
      disallowance for the baseload provision of the GPAA. However, we find PGL simply
      acted imprudently by not performing a quantitative analysis.

    


    The
      Commission will now consider the effects of the SIQ and DIQ clauses. Normally,
      price and amount are essential terms in a contract. (See,
      e.g., Butler v. Butler,
      275 Ill.
      App. 3d 217, 225-29, 655 N.E.2d 1120, (1st
      Dist.
      1995), upholding refusal to grant specific performance when the contract that
      the plaintiff sought to enforce did not have a specific price; City/CUB Ex.
      1.0
      at 9). Mr. Wear testified that having an oversupply could produce undesirable
      consequences for PGL. Yet, the SIQ provision relinquished PGL’s control over the
      amount of gas PGL would receive on any given day to Enron NA. 

    


    It
      defies
      logic for PGL to contend, on the one hand, that the GPAA was prudent, yet on
      the
      other hand to contend that an oversupply was undesirable. The record clearly
      demonstrates that the SIQ clause not only created an oversupply, but created
      an
      oversupply beyond PGL’s control. Without control over the amount of gas Enron NA
      delivered to PGL on any given day, it is difficult to imagine how PGL could
      effectively plan how to meet its responsibilities. Too little gas, also, brought
      about undesirable consequences, as it required PGL to buy gas at the higher
      DIQ
      price from Enron NA, or elsewhere, at a daily price. (See,
      e.g.,
      PGL Ex.
      B at 6). The SIQ clause allowed Enron NA to force PGL to pay more for gas when
      Enron NA manipulated the difference between the price in the SIQ clause and
      the
      DIQ clause. And, there is simply no evidence substantiating PGL’s claim that
      this provision would be offset by the three-cent discount. 

    


    PGL’s
      reference to Staff witness Mr. Anderson’s testimony in support of its claim that
      Enron NA never forced PGL to take maximum SIQ gas is taken out of context.
      (See,
      Tr.
      869). So is its reference to Staff’s Initial Brief in support of its contention
      that Enron NA never forced PGL to take the maximum amount of SIQ gas. In fact,
      Staff argued on page 43 of this Brief that when Enron NA delivered only the
      minimum SIQ gas, PGL was required to find volumes to replace SIQ gas. Staff
      averred that Enron NA forced PGL to take minimum volumes approximately 80%
      of
      the time when doing so was economically advantageous for Enron NA. (Staff Init.
      Brief at 43). There is other evidence, however, that Enron also forced PGL,
      on
      236 of the 244 summer days, to purchase maximum SIQ volumes. (Staff Ex. 3.00
      at
      31). PGL’s argument ignores the evidence. 


    
      
         

        


        
        

      

      
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    Essentially,
      the SIQ gas was injected to create a supply of less expensive summer gas to
      meet
      PGL’s winter load requirements, which includes gas for ratepaying consumers. PGL
      had an obligation, pursuant to Section 9-220 of the PUA, to procure that gas
      in
      a manner that did not unnecessarily increase consumer gas costs. The SIQ
      provision caused PGL to fail in this obligation. Any disallowance associated
      with the Commission’s finding of imprudence for this provision is properly
      included in the Settlement Agreement and Addendum fully discussed in Section
      I
      .

    


    The
      Commission notes that Section 4.5 of the GPAA allowed PGL to renegotiate the
      price of gas, if PGL were to discontinue use of a PGA rider and therefore would
      no longer be directly passing the price of gas on to consumers. (Staff Ex.
      2.00,
      Attachments, GPAA, Par. 4.5). The existence of this clause is some indicia
      that
      if the prices in the GPAA were not passed on directly to consumers, PGL would
      not find those prices to be satisfactory. If PGL had to pay for this gas and
      account to its shareholders for those costs, the prices would be re-negotiated.
      This is further evidence that PGL did not have its customer’s best interests in
      mind when negotiating the GPAA.

    


     

    5. Foregone
      Demand Credits

     

    


    a. Staff’s
      Position

    


    Staff
      contends that, by releasing pipeline capacity pursuant to the GPAA, PGL
      surrendered its ability to engage in demand-credit transactions. Before the
      GPAA, PGL obtained revenues that were flowed through its PGA, offsetting costs
      that were passed on to consumers. These revenues were obtained in two ways.
      Either PGL released pipeline capacity, earning a fee, or it engaged in demand
      credit transactions where it purchased gas at one point in a pipeline and sold
      it at another. The margin on such a sale covered other demand charges imposed,
      which reduced the costs passed on to consumers in the PGA. Staff maintains
      that
      releasing this pipeline capacity unnecessarily increased consumer costs. (Staff
      Ex. 3.00 at 34; Staff Init. Brief at 55).

    


    b. PGL’s
      Position

    


    PGL
      asserts that it is not possible to calculate the demand credits it would have
      earned if it had not entered into the GPAA. It contends that there are many
      unpredictable factors in these types of transactions. 

    


    
      	 	
              c.

            	
              Commission
                Analysis and Conclusions

            


    

    


    Even
      assuming that PGL is correct in its contention that it is not possible to
      determine the amount of foregone demand credits with certainty, PGL was
      imprudent in relinquishing the revenues and credits from the pipeline capacity
      to Enron NA with no benefit conferred upon consumers as a result of this
      relinquishment. Record evidence establishes that the pipeline capacity PGL
      ceded
      to Enron NA pursuant to the GPAA generated income before the GPAA was executed.
      (PGL Ex. C at 31; Staff Ex. 3.00 at 34). After the GPAA was executed, this
      pipeline capacity generated no income. It should have been obvious to PGL that
      this capacity could generate no income. (Staff Ex. 2.00, Attachments, GPAA,
      Art.
      4.3) 


    
      
         

        


        
        

      

      
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    While
      PGL
      has contended, essentially, that Dr. Rearden’s calculation of foregone demand
      credits is inaccurate, PGL proffers no evidence as to what would be accurate.
      There is nothing patently inaccurate about Dr. Rearden’s use of the profits PGL
      gleaned during a previous fiscal year to determine what PGL would have earned.
      The Commission agrees with Staff that PGL’s release of pipeline capacity
      increased consumer costs with no benefit for consumers resulting from this
      release. Any disallowance associated with the Commission’s finding of imprudence
      for this provision is properly included in the Settlement Agreement and Addendum
      as approved in Section I.

    


     

    6. Penalties
      for Resales of Gas

     

    


    
      	 	
              a.

            	
              Staff’s
                Position

            


    

    


    Dr.
      Rearden estimated that penalties on resales of gas pursuant to the GPAA raised
      consumer costs by $86,681. (Staff Ex. 3.00 at 34). Dr. Rearden opined that
      the
      existence of this provision is indicia that PGL expected to have an oversupply.
      (Id.
      at 29).


    


    
      	 	
              b.

            	
              PGL’s
                Position

            


    

    


    PGL
      argues that the resale provision, even with its penalties, was beneficial.
      An
      oversupply creates significant issues, as it is difficult for PGL personnel
      to
      unload large amounts of gas, and, an oversupply can create an overpressure
      situation. (PGL Init. Brief at 23). PGL argues that Staff continues, wrongfully,
      to characterize the financial onus imposed by the GPAA on consumers whenever
      resales occurred as a “penalty.” According to PGL, Staff has ignored the
      dynamics of the marketplace. Also, Dr. Rearden acknowledged that a sale at
      less
      than the daily midpoint price does not necessarily reflect a penalty. (Tr.
      1292,
      PGL Reply Brief at 31). 

    


    Referring
      to Mr. Wear’s testimony, PGL maintains that the sell-back provision is not an
      uncommon one. Mr. Wear testified that once, in a contract that spanned from
      1996
      through 1998, PGL had a similar arrangement with an unnamed supplier.
      (See,
      PGL Ex.
      C at 32). Also, the sell-back provision compared favorably with alternatives,
      like purchasing “Park and Loan” services from an interstate pipeline. Further,
      if PGL had too much gas, it could incur substantial pipeline overrun charges.
      (PGL Reply Brief at 32-33). 

    



    
      
         

        


        
        

      

      
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              c.

            	
              Commission
                Analysis and Conclusions

            


    

    


    PGL
      asserts that unloading excess gas can be a very difficult task. (See,
      e.g.,
      PGL Ex.
      C at 23). However, to counteract the difficulties encountered by an oversupply,
      a reasonably prudent person would have placed himself in a position in which
      an
      oversupply is a rare occurrence. If PGL personnel were truly concerned with
      the
      detrimental effect of an oversupply, logic would dictate that it would not
      have
      allowed Enron NA to control the amount of SIQ gas that PGL received on a daily
      basis. Instead, PGL chose to enter into a supply contract where Enron NA could
      decide to deliver, at Enron NA’s sole discretion, the maximum SIQ. Enron NA
      exercised its option under the SIQ provision on 236 out of 244 summer days
      during the reconciliation period. On an astonishing 70% of those days, PGL
      was
      forced to resell the Enron NA-caused oversupply back to Enron NA and incur
      penalties. It is unclear to the Commission how allowing another entity to
      control the delivered SIQ gas, the same entity to which PGL must ‘conveniently’
resell any artificially created oversupply at a loss, could be considered
      prudent. Compounding that with the profit sharing arrangement between PGL’s
      parent and Enron NA, the Commission finds the reselling of gas to Enron NA
      to be
      imprudent. Any disallowance associated with the Commission’s finding of
      imprudence for this provision is properly included in the Settlement Agreement
      and Addendum as approved in Section I.

    


    PGL’s
      citation to Dr. Rearden’s testimony overlooks the fact that penalties were
      imposed by the GPAA every time a resale was made, irrespective of the daily
      midpoint price. PGL’s argument concerning Dr. Rearden’s testimony does not aid
      it. 

    


    Mr.
      Wear’s testimony regarding one single two-year contract with an unnamed supplier
      for an unspecified amount of gas does not aid PGL. Mr. Wear mentions but one
      contract, which is not an industry-wide practice. There is no evidence that
      this
      unspecified contract contained provisions like the SIQ clause in the GPAA,
      which
      forced PGL to accept excess gas supply from Enron NA. Finally, there is no
      evidence that this unnamed contract involved the supply of 66% of PGL’s total
      intake of gas, which is the situation here. 

    


     

    7. Released
      Pipeline Capacity

     

    


    
      	 	
              a.

            	
              Staff’s
                Position

            


    

    


    Staff
      argues that, when PGL released pipeline capacity to Enron NA, it surrendered
      an
      item for which consumers paid for through the PGA. The value of that pipeline
      capacity is $3,377,303, over the five-year life of the contract. (See,
      Staff
      Init. Brief at 51). 

    


    
      	 	
              b.

            	
              PGL’s
                Position

            


    

    


    PGL
      contends that it did not release pipeline capacity. It cites FERC rules, which
      provide that when pipeline capacity is released, the released shipper receives
      a
      credit on its pipeline invoice in an amount equal to the charges paid by the
      replacement shipper. Pursuant to the GPAA, Enron NA paid PGL whatever PGL was
      required to pay the pipelines. (See,
      18. C.
      F. R. 284.8(f); PGL Init. Brief at 20).

    



    
      
         

        


        
        

      

      
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              c.

            	
              Commission
                Analysis and Conclusions

            


    

    


    The
      regulation cited by PGL provides that:

    


    unless
      otherwise agreed to by the pipeline, the contract of the shipper releasing
      capacity will remain in full force and effect, with the net proceeds from any
      resale to a replacement shipper credited to the releasing shipper’s reservation
      charge. 

    


    (18
      C.F.R. 284.8(f)). Thus, this regulation contemplates a situation akin to a
      tenant’s sublease, in which the subleasing tenant actually pays the landlord, as
      the subleasing user of the pipeline pays the pipeline. However, it is not
      disputed that pursuant to the GPAA, Enron NA has the responsibility to pay
      shippers. Rather, Staff has maintained that because the GPAA required PGL to
      reimburse Enron NA for those charges, PGL still paid those pipeline charges.
      (See,
      e.g., Staff
      Ex.
      2.00 at 18, 20). 18 C.F.R. 284.8(f) is therefore not relevant. 

    


    PGL
      bears
      the burden of proof here, which it failed to meet. It did not provide evidence
      establishing that the pipeline capacity it released was not paid for by
      consumers pursuant to the terms in the GPAA. (See,
      generally, PGL Init. Brief). Enron NA had use of that pipeline capacity for
      its
      own business purposes above and beyond facilitating supply to PGL. Enron paid
      nothing for the use of that pipeline. (Staff Ex. 2.00, Attachments, GPAA, Arts.
      6.1, 6.4). The Commission concludes, therefore, that this clause also was
      imprudent. Any disallowance associated with the Commission’s finding of
      imprudence for this provision is properly included in the Settlement Agreement
      and Addendum as approved in Section I.

    


     

    8. Eroding
      Basis

     

    


    
      	 	
              a.

            	
              PGL’s
                Position

            


    

    


    The
      cost
      of transporting gas to Chicago is passed on to consumers in PGL’s PGA. (83 Ill.
      Adm. Code 525.40(a)). Based on Mr. Wear’s and Mr. Graves’ testimony about a
      concern in the industry regarding an impending decline in pipeline
      transportation value, PGL contends that it entered into the GPAA to protect
      itself, and therefore consumers, from a decline in the value of PGL’s
      preexisting transportation contracts (“basis”). Because more pipelines were
      being built to Chicago, people in the industry began to speculate that there
      would soon be excess pipeline capacity, causing the value of pipeline capacity
      to decrease. 

    


    It
      is not
      contested by any party that if basis shrunk enough, it would be less expensive
      to buy gas at the citygate price than to buy it in the field and pay to
      transport it. (PGL Initial Brief at 29-30; See
      also,
      PGL Ex.
      H at 42; PGL Ex. E. at 6). Also, as basis declined, so would PGL’s revenues from
“optimizing” transportation assets. (PGL Ex. C at 9). According to Mr. Wear,
      purchasing gas at the citygate price, as well as the three-cent discount on
      baseload and SIQ gas, offset the impact of a decline in basis. Citing this
      testimony, PGL argues that the three-cent discount “guaranteed” value for its
      transportation assets and offset the expected decline in basis. (See,
      e.g.,
      Tr. 883,
      1079-81; PGL Init. Brief at 48-50). Also, the expected basis decline was not
      an
      event that would occur immediately. (PGL Reply Brief at 27). 


    
      
         

        


        
        

      

      
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    PGL
      argues that Staff unjustly accuses it of failing to just shift loads amongst
      pipelines in order to obtain better pipeline prices. PGL points out that, even
      Mr. Anderson acknowledged that price is not the only factor when selecting
      pipeline capacity. Also, operational considerations limit the extent to which
      PGL personnel can shift a load. Further, Natural Gas Pipeline is the only
      interstate pipeline directly connected to PGL’s distribution system. Natural Gas
      Pipeline uses “pressure control” operations instead of “flow control”. Pipelines
      that use pressure control operations provide “true” no-notice service. As
      consumption on PGL’s system changes, the pressure changes, causing PGL to take
      more or less gas as pipeline pressure dictates. With pipelines that operate
      under flow control, changes in pipeline pressure do not affect the flow of
      gas
      upstream on PGL’s system. PGL contends that therefore, only Natural Gas Pipeline
      by way of its pressure control operations, can assist it in real time balancing.
      (PGL Reply Brief at 29-30). 

    


    
      	 	
              b.

            	
              Staff’s
                Position

            


    

    


    Staff
      maintains that buying gas at the citygate price, as opposed to buying it in
      the
      field and delivering it, unnecessarily increased the price of gas in the amount
      of $10,755,048. (Staff Init. Brief at 55). Staff argues that PGL did not
      demonstrate that the GPAA preserved the value of pre-existing transportation
      assets against a falling basis. Staff points out that PGL negotiated four new
      pipeline contracts in 1998 and another in 1999, just before PGL executed the
      GPAA, which occurred in September of 1999. If PGL decision-makers were truly
      concerned about the decline in basis, they could simply have renegotiated those
      pipeline contracts to reflect the decline in market value of those contracts,
      but they did not. (Id.
      at
      36-37). 

    


    Staff
      points out that PGL had other options available to it that would offset the
      effect of eroding basis. Utilities often shift the load between pipelines to
      negotiate lower transportations costs. In fact, Staff maintains, PGL has used
      this practice in the past. However, PGL presented no evidence that it considered
      this alternative before it executed the GPAA. (Staff Init. Brief at 35-36).
      Staff states that it is not requiring PGL to investigate these two alternatives.
      Instead, the evidence indicates that PGL did not even consider alternatives
      available to it when negotiating the GPAA. Staff points to the profit-sharing
      partnership PEC formed with Enron North America/Midwest and contends, in
      essence, that the real reason PGL entered into the GPAA was that arrangement.
      (Id.
      at 37).


    


    Staff
      also argues that the GPAA did not offset any decline in basis because the GPAA
      caused PGL to pay twice for transportation. Consumers paid once for delivery
      of
      gas to the citygate, and again when the GPAA required it to release
      transportation capacity to Enron NA at no cost to Enron NA. (Id.).
      


    
      
         

        


        
        

      

      
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    Staff
      avers that there is no evidence that PGL decision-makers actually contemplated
      a
      steep decline in basis when the GPAA was signed. Staff contends that PGL failed
      to present evidence that before signing the GPAA, PGL conducted an evaluation
      of
      the probability of a steep decline in basis. (Staff Reply Brief at 36). Staff
      further contends that the three-cent discount must be compared to the field
      price, plus the variable cost of transportation versus the citygate price.
      Staff
      argues that the economic impact of other provisions of the GPAA must also be
      examined, such as Enron NA’s re-pricing options, the resale penalty, lost demand
      credits due to the GPAA, and, the financial impact of Enron’s manipulations of
      the SIQ provision. 32
      (Staff
      Init. Brief at 48-49). 

    


    Given
      PGL’s projections of basis made at the time the GPAA was executed, Staff
      contends that the GPAA’s discounts were not enough to offset the projected basis
      decline. (Id.
      at
      37-38). Staff avers that correct manner to determine the field price and
      delivery costs, versus the citygate price, is to do the same analysis PGL
      performed when it valued the transportation it released to Enron North America
      pursuant to the GPAA. For each delivery point in the transportation contracts
      PGL released to Enron, PGL projected a basis from the Henry Hub to that point,
      and, to Chicago, using NYMEX futures contract prices to determine the amount
      of
      these prices. PGL also used NYMEX futures prices to determine the price of
      gas
      in the field. Similarly, PGL calculated the citygate price as the Henry Hub
      price, plus basis. PGL determined variable transportation costs by viewing
      the
      applicable tariffs. (Id.).
      

    


    Staff
      does not dispute that the three-cent per MMBtu discount conferred a benefit
      on
      ratepaying consumers. Using the amounts just previously described, Staff
      estimated that the value of the three-cent discount, over the life of the GPAA,
      was $13,176,693, and the extra cost imposed on consumers by use of the citygate
      price was $26,205,000, over the life the GPAA.33
      (Staff
      Ex. 3.00 at 17-18; Staff Init. Brief at 50; FCG-ARG-3). Staff avers that this
      differential, coupled with other harmful clauses in the GPAA, make it imprudent.
      (Id.
      at
      49-52). 

    


    
      	 	
              c.

            	
              Commission
                Analysis and Conclusions

            


    

    


    PGL
      professes that its decision-makers were concerned about the value of preexisting
      transportation contracts. However, the record indicates otherwise. The terms
      of
      the GPAA contract actually increased the cost of transportation that was passed
      on to consumers. Pursuant to the GPAA, PGL relinquished pipeline capacity to
      Enron NA to “facilitate the citygate supply relationship.” (PGL Ex. B at 4).
      Consumers also paid the citygate price of gas, which includes the cost of
      transportation to Chicago. PGL does not explain how the GPAA could offset a
      decrease in previously contracted-for transportation costs when consumers
      actually paid twice for transportation. Nor is it obvious. In contrast, Dr.
      Rearden’s testimony established that the GPAA increased gas costs to a point at
      which purchasing gas at the citygate prices, even with the three-cent discount,
      did not offset the decline in basis. 

    


    


    _____________________

    32   These
      other provisions of the GPAA shall be discussed herein, in other sections of
      this Order. 

    33   Staff’s
      figures here were proffered for purposes of price comparison, not as a
      disallowance. (See,
      Staff
      Ex. 7.02). 

    



    
      
         

        


        
        

      

      
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    Further,
      the evidence did not establish that the citygate prices and the three-cent
      discount on baseload and SIQ gas actually protected PGL, and thus consumers,
      from declining basis. This is true because, as previously set forth herein,
      PGL
      had no control over the amount of SIQ gas it received pursuant to the GPAA.
      The
      presence of the SIQ clause and other clauses previously mentioned herein, which
      increased the price consumers paid for gas, eroded the value of the three-cent
      discount included in PGL’s citygate purchases to the point of non-existence.
      Given the amount of extra costs that the GPAA imposed, it makes no sense to
      focus on basis as a measure of the prudence of the GPAA without looking at
      the
      substantial increases in costs that the GPAA imposed.

    


    PGL
      contends that it did not consider any other economic aspect of the GPAA, such
      as
      the BLPA or the interplay between the SIQ and DIQ provisions. (See,
      e.g.,
      PGL Ex.
      C at 11). In so arguing, PGL merely admits that its decisions-makers did not
      act
      in a manner in which a reasonable person would under the same circumstances
      encountered by utility management at that time. (Illinois
      Power,
      245 Ill.
      App. 3d at 371). In other words, essentially PGL admits that it entered into
      the
      GPAA imprudently. (Id.).
      

    


    PGL
      cites
      no authority, and indeed there is none, that allows utilities to enter into
      contracts that pass on costs to consumers without considering the effect of
      those costs on consumers. When determining whether the provisions in the GPAA
      passed on prudently-incurred costs, the Commission cannot be limited to what
      PGL
      decision-makers claim to have considered when executing the GPAA. (Illinois
      Power,
      245 Ill.
      App. 3d at 371). 

    


    There
      are
      other reasons in this record that cast doubt on PGL’s contention that the GPAA
      was entered into to protect against declining basis. Just prior to the time
      when
      PGL executed the GPAA, it re-negotiated four pipeline contracts. (Staff Ex.
      2.00
      at 16-17). As Staff witness Mr. Anderson pointed out, PGL could simply have
      renegotiated transportation contracts at lower costs, since if pipeline capacity
      was worth less, PGL should have been able to just pay less for it. Certainly,
      PGL had other well-known and simpler alternatives available to it. Yet, there
      is
      no evidence that PGL personnel even considered these alternatives. 

    


    PGL
      argues that it could not engage in load-shifting among pipelines to reduce
      costs
      due to the nature of the pipelines with which it connects. But this does not
      explain why other, more commonly used methods of mitigating a decline in basis
      were not explored. While the Commission is not requiring PGL to explore
      alternatives to the GPAA, the fact that PGL did not explore any of these
      alternatives casts doubt on the credibility of its contention that the GPAA
      was
      executed to offset the effect of a decline in basis. 

    


    In
      sum,
      the Commission finds PGL’s failure to fully evaluate its options to combat
      eroding basis, if indeed this was a reason to execute the GPAA, to be imprudent.
      Ample evidence exists showing that the costs of the GPAA far out-stripped any
      benefits to be gained by purchasing gas at the citygate instead of in the field.
      Any disallowance associated with the Commission’s finding of imprudence for this
      provision is properly included in the Settlement Agreement and Addendum as
      discussed in Section 1. 

    


     

     


    
      
         

        


        
        

      

      
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              9.

            	
              The
                CERA Report and Other Reasons for Possibly Higher
                Basis

            


    

     

    


    
      	 	
              d.

            	
              PGL’s
                Position

            


    

    


    PGL’s
      expert witnesses Mr. Graves and Mr. Wear testified that, at the time the GPAA
      was being negotiated, there was information within the industry projecting
      that
      basis could decline sharply. (PGL Ex. H at 45-46; Attachments, FCG-6 and FCG-7;
      PGL Ex. C at 7-8). For example, the Cambridge Energy Research Associates
      (“CERA”) issued reports in the Spring and Summer of 1999 projecting that in many
      parts of the United States, basis in 2000 and 2001 would be
      negligible.34
      (See,
      e.g.,
      PGL Ex.
      2, Spring 1999 CERA Report). Based on information that existed at the time
      PGL
      executed the GPAA, PGL argued that when comparing basis with actual
      transportation costs, Dr. Rearden improperly determined that an average decline
      in basis was $0.01 per MMBtu per year.35
      However,
      PGL admits that there is no evidence establishing that the PIRA and CERA Reports
      were considered by PGL decision-makers when entering into the GPAA. It argues
      that Mr. Graves’ estimates are still valid. (PGL Reply Brief at
      39-40).

    


    PGL
      also
      argues that the Commission should not consider Staff’s estimate of the harm
      caused by the GPAA because Dr. Rearden did not use a liquidity premium in his
      calculations. Mr. Graves used a liquidity premium of .5 cents when calculating
      his estimate of harm caused by the GPAA. 

    


    Even
      though PGL has repeatedly asked the Commission to ignore the “Aruba Analysis,”
it contends here that, because Mr. Rodriguez used a liquidity premium when
      preparing the “Aruba Analysis,” the “Aruba Analysis” is evidence that a
      liquidity premium should be used. PGL argues that illiquidity is a phenomenon
      that it experiences in the field. Dr. Rearden used field prices in his basis
      calculations, which according to PGL, underestimated the actual field prices
      because field areas are not as liquid as trading hubs. (PGL Reply Brief at
      37-39). PGL also argues that Mr. Graves “followed Dr. Rearden’s lead” when only
      calculating basis from Ventura and Henry Hub to the Chicago citygate. Mr. Graves
      did not study the effect of the CERA scenarios on basis from the field to the
      citygate. (Id.
      at
      39-40). 

    


    


    _____________________

    34   At
      trial, none of the parties objected to the admission of this testimony and
      documents into evidence.

    35   PGL
      stated in its Initial Brief that its review of projections for the GPAA showed
      that basis “likely would decline,” implying that PGL personnel analyzed basis
      when the GPAA was negotiated and projected a steep decline in basis.
      (See,
      PGL
      Init. Brief at 48). However, there is no evidence, in this record, that the
      projections it cites were made when the GPAA was negotiated, and are, therefore,
      relevant. (See,
      also,
      PGL Ex.
      C. at 78, where Mr. Wear stated that the CERA Reports existed
      at the
      time when PGL negotiated the GPAA. He never stated that anyone at PGL actually
      read that report. (See,
      e.g.,
      Tr.
      944-45, where Mr. Wear admitted that “scenarios” illustrating a dramatic decline
      in basis were not part of the record.)).


    
      
         

        


        
        

      

      
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              e.

            	
              Staff’s
                Position

            


    

    


    Staff
      maintains that there is no evidence in this record that any PGL decision-maker
      considered steep basis projections, like those found in the CERA Study, before
      entering into the GPAA. Also, locations in the CERA Study are not the same
      as
      the pertinent PGL delivery points. Therefore, Staff concludes that the CERA
      Study is not relevant because the information therein is not comparable to
      the
      facts here. And, Mr. Graves’ projections are not accurate because he only used
      the CERA scenarios to examine changes in basis from the Henry Hub to the Chicago
      citygate. An accurate depiction of the basis at issue would account for the
      effects of basis changes at other field locations in each scenario, and would
      therefore, examine any effect from altering the field zone prices, as well
      as
      the Chicago citygate price. (Staff Ex. 12.00 at 15-17).

    


    Staff
      also points out that the CERA report only contained information regarding
      regional markets, not delivery points. Thus, in order for the information in
      such a study to be useful, a person would have to perform calculations tying
      the
      information in that report to a delivery point on its interstate pipeline
      service. That was not done here. (Staff Reply Brief at 27-28). 

    
      	 	
              f.

            	
              Commission
                Analysis and Conclusions

            


    

    


    The
      portion of Mr. Graves’ testimony that PGL cites is not an analysis of the GPAA.
      As is set forth herein, many other clauses in the GPAA passed on unnecessary
      costs to consumers, or placed consumers at unnecessary risk of increased gas
      costs. Even if the Commission were to accept PGL’s contention that its
      decision-makers thought that basis could be much steeper than it was, that
      alone
      does not justify entering into many other provisions in the GPAA. A steep
      decline in basis would not offset the increase costs borne by consumers through
      the SIQ clause, foregone demand credits, paying twice for pipeline
      transportation to Chicago and other costs that have been set forth herein.
      A
      steep decline in basis does not excuse PGL personnel from entering into a
      contract that contained clauses, like the BLPA, with an obvious potential to
      cause economic harm to consumers. 

    


    The
      Commission finds PGL’s reliance on the “Aruba Analysis” as evidence of the
      effects of the decline in basis rather curious, if not disingenuous. First,
      PGL
      wants us to ignore it since PGL decision-makers did when executing the PGAA.
      Now, PGL wants the Commission to consider the “Aruba Analysis” as evidence that
      PGL’s efforts to combat eroding basis were legitimate. Interestingly, PGL’s
      request does nothing to strengthen its case. In the “Aruba Analysis,” Mr.
      Rodriguez used a high and low SIQ volume to examine the effects of the projected
      basis on consumer gas costs. Both sets of projections indicated that the GPAA
      would increase consumer costs. (Group. Ex. 1.00 at ST-PG 50-74). Even including
      a liquidity premium, as Mr. Graves recommends, and as Mr. Rodriguez did in
      the
“Aruba Analysis,” the disadvantages of the GPAA, in total, are not outweighed by
      any effect it had on declining basis. As discussed previously herein, the GPAA
      provisions produced many, many unwarranted costs on consumers, with no
      offsetting benefit. 

    


    Further,
      Mr. Graves never explained why he determined that the liquidity premium he
      used
      was the proper amount. Nor did he explain how he calculated liquidity premium
      he
      used. Therefore, the Commission agrees with Staff that use of Mr. Graves’
liquidity premium is not substantiated. 


    
      
         

        


        
        

      

      
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    As
      stated
      earlier, the GPAA actually increased the pipeline transportation costs, because
      consumers paid twice for transportation costs. The citygate price included
      the
      cost of transportation to Chicago; consumers paid again for the capacity PGL
      released to Enron NA to “facilitate the citygate supply relationship.” Enron NA
      paid nothing to PGL for the privilege of using this capacity for its own
      business purposes, although Enron NA only used this capacity when PGL did not
      use this capacity. (See,
      e.g., Staff
      Ex.
      2.00, Attachments, GPAA, pars. 6.1, 6.4, PGL Ex. B at 4). Thus, the GPAA did
      not
      offset the effect of any decline in preexisting transportation costs.


    


    PGL
      is
      asking the Commission to make determinations about facts without presenting
      evidence that those facts were considered by its decision-makers when entering
      into the GPAA. In so doing, PGL ignores the fact that we are required, by law,
      to consider only what decision-makers considered, or should have considered,
      at
      the time a decision was made. (Illinois
      Power,
      245 Ill.
      App. 3d at 371). There is no evidence in this record that decision-makers at
      PGL
      knew of, or should have considered, possible projections in industry
      publications, such as the CERA Reports, as to the possible decline in basis.
      

    


    Additionally,
      Mr. Wear’s testimony that PGL entered into the GPAA to protect the value of this
      capacity is not credible. As stated earlier, Mr. Wear was not a credible
      witness. And, Mr. Wear did not make the ultimate decisions regarding the terms
      of the GPAA. There is no evidence that someone like Mr. Morrow, who executed
      the
      GPAA, considered declining basis when he negotiated this contract. 

    


    Moreover,
      Mr. Graves’ calculations as to basis are inaccurate. PGL’s transportation is
      from the field to a hub, such as the Henry Hub in Louisiana, and then to the
      Chicago citygate. Yet, Mr. Graves only considered transportation from a hub
      to
      the Chicago citygate. Contrary to PGL’s assertion that Mr. Graves “followed Dr.
      Rearden’s lead” and calculated basis from the Henry Hub or Ventura to the
      Chicago citygate, PGL’s own brief asserts that this statement is incorrect, and
      states that Dr. Rearden calculated basis from the field to the pertinent Hub
      and
      then to the Chicago citygate. (See,
      PGL
      Reply Brief at 38).

    


     

    9. Differing
      Economic Theories

     

    


    
      	 	
              g.

            	
              PGL’s
                Position

            


    

    


    Various
      witnesses recommended different dollar amounts as to the recommended
      disallowances for the GPAA. These different opinions as to how much the GPAA
      was
      imprudent, according to PGL, illustrate that how the GPAA should be quantified
      is subjective, making it unreasonable to view the GPAA as imprudent. (PGL Init.
      Brief at 57). 

    


    PGL
      points to the GCI testimony on the GPAA and states that the differences amongst
      the experts as to the dollar values of the harm it caused for consumers
      demonstrates that it is not possible to determine the GPAA’s economic impact.
      PGL concludes that therefore, neither Staff nor the GCI provided a basis for
      finding the GPAA imprudent. PGL points out that honest differences of opinion
      are not necessarily evidence of imprudence. (PGL Init. Brief at 56-57).


    



    
      
         

        


        
        

      

      
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              h.

            	
              Staff’s
                Position

            


    

    


    Staff
      posits that the GPAA was a complex contract and, for the most part, the experts
      only differ in terms of mathematical approaches, not in their opinions as to
      why
      PGL personnel acted imprudently. Additionally, the existence of a variety of
      approaches of experts is often the case in litigation. In support, Staff cites
      Hall
      v. National Freight, Inc.,
      264 Ill.
      App. 3d 412, 422-23, 636 N.E.2d 791 (1st
      Dist.
      1994)). Staff concludes that PGL’s argument confuses the reasonableness in the
      amount of the adjustment proposed as a result of imprudence with a determination
      as to prudence. (Staff Reply Brief at 31-33). 

    


    
      	 	
              i.

            	
              GCI’s
                Position

            


    

    


    The
      GCI
      aver that all of the experts PGL cites agreed that the GPAA was imprudent.
      Their
      differing estimations only have to do with the amount of damage conferred on
      consumers, which does not mean that the GPAA was prudent. The GCI posit that
      PGL’s contention is disingenuous, as it ignores the fact that some experts only
      addressed specific provisions of the GPAA, while others examined the entire
      contract. (GCI Reply Brief at 30). 

    


    
      	 	
              j.

            	
              Commission
                Analysis and Conclusions

            


    

    


    PGL
      overlooks the fact that all of the Staff witnesses, as well as Mr. Mierzwa,
      Mr.
      Effron and Ms. Decker, concluded that the GPAA was imprudent. There is, in
      fact,
      no disagreement amongst Dr. Rearden, Mr. Mierzwa, Mr. Effron, Ms. Hathhorn,
      Mr.
      Knepler, Mr. Anderson, Ms. Decker and other witnesses that the GPAA was
      imprudent. Some of these witnesses testified only as to different aspects of
      the
      GPAA. Others examined the total contract. Different issues were raised by
      different experts. 

    


    As
      Staff
      points out, there is nothing unusual about experts espousing different opinions
      as to the economic harm of a person’s actions. The same rules as to weight and
      credibility apply to experts as to other witnesses; it is up to the trier of
      fact to assess the credibility of an expert, as the trier of fact is in the
      best
      position to do so. (Hall,
      264
      Ill. App. 3d at 422-23). PGL’s argument on this issue is without merit.


    


     

    10. Staff
      Witness Dr. Rearden’s Dollar Values

     

    


    
      	 	
              k.

            	
              PGL’s
                Position

            


    

    


    PGL
      contends that Dr. Rearden’s extensive calculations as to the economic value of
      the harm to consumers resulting from the GPAA are but “mathematical exercises.”
PGL avers that these calculations are erroneous because they are based on a
      single set of assumptions and inputs, rather than considering a “range of
      realistic scenarios.” According to PGL, Dr. Rearden’s calculation of basis was
      too precise to be meaningful. (PGL Init. Brief at 59). 

    



    
      
         

        


        
        

      

      
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              l.

            	
              Commission
                Analysis and Conclusions

            


    

    


    While
      PGL
      contends Dr. Rearden improperly treated prudence as a “mathematical exercise” in
      fact, the measure of economic harm to consumers resulting from increased costs
      is mathematical. Dr. Rearden’s determination as to what harm consumers incurred
      is something that PGL decision-makers could, and should, have contemplated,
      but
      did not, prior to executing the GPAA. 

    


    It
      should
      also be pointed out that many provisions in the GPAA had the obvious potential
      to increase costs, with no offsetting benefit to consumers from those additional
      costs. Calculating a “range of scenarios” of potential disasters is not helpful,
      or even meaningful, when PGL personnel could have simply read the GPAA and
      determined that harmful terms existed, like the BLPA, or the fact that Enron
      North America could have forced unnecessary costs on consumers. 

    


    The
      Commission concludes that PGL overlooks the fact that it had the burden to
      prove
      that the GPAA was prudent. Merely stating generalities as to possible ways
      in
      which Dr. Rearden’s calculations might be erroneous is not the same as
      presenting evidence explaining why Dr. Rearden is in error. PGL’s argument is
      without merit. 

    
      	 	
              11.

            	
              PGL’s
                Previous Reconciliation

            


    

    


    
      	 	
              m.

            	
              PGL’s
                Position

            


    

    


    PGL
      points to its previous PGA reconciliation, Docket 00-0720, which concerned
      its
      gas purchases from October 1, 1999, through September 30, 2000, and therefore
      concerned PGL’s gas purchase practices pursuant to the GPAA during the first
      year of its existence. In that docket, however, Commission Staff found no
      imprudence on the part of PGL. (See,
      Ill. Commerce Commission, on its own Motion, v. Peoples Gas Light and Coke
      Co.,
      2002
      Ill. PUC Lexis 170). PGL reasons that finding the GPAA imprudent here, after
      having found it prudent in PGL’s previous reconciliation, is unreasonable. Such
      a conclusion would “stand the Commission’s prudence standard on its head.” PGL
      points out that an unexplained and unsupported departure from past practice
      is
      contrary to Commission policy and Illinois case law, citing Ill.
      Power Co. v. Ill. Commerce Commission,
      339 Ill.
      App. 3d 425, 790 N.E.2d 377 (1st
      Dist.
      2003). (PGL Init. Brief at 53). PGL maintains that Commission past practices
      may
      not be binding on it, but prior decisions of the Commission are not ignored
      by
      the appellate courts and they should not be ignored by the Commission. (PGL
      Reply Brief at 7-9). 

    


    
      	 	
              n.

            	
              Staff’s
                Position

            


    

    


    Staff
      contends that allowance of a cost item in one year does not guarantee that
      the
      Commission will allow that cost item in future years, citing Governors
      Office of Consumer Services v. Ill. Commerce Comm.,
      242 Ill
      App. 3d 172 (1st
      Dist.
      1993) and Ill.
      Commerce Comm. on its own Motion, v. Ill. Power Co., Reconciliation of FAC
      and
      PGA Clauses,
      2004
      Ill. PUC Lexis 101 at *13, 16-17). Staff maintains that new evidence, such
      as
      the “Aruba Analysis” and Wear Cross Ex. 15, came to light for the first time in
      this docket, even though this evidence was under PGL’s control. (Staff Init.
      Brief at 33-34). 

    



    
      
         

        


        
        

      

      
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              o.

            	
              GCI’s
                Position

            


    

    


    The
      GCI
      posit that the reason previous Commission decisions do not bind it is because
      this Commission has quasi-legislative powers, as well as judicial functions.
      It
      cites Business
      and Professional People for the Public Interest v. Ill. Commerce
      Comm.,
      1171
      Ill. App. 3d 948, 525 N.E.2d 1053 (1st
      Dist.
      1988)). The GCI additionally maintain that reconciliation proceedings like
      this
      one are single-year proceedings. This Commission’s determination in each
      reconciliation proceeding is confined to relevant evidence presented regarding
      the costs incurred in that 12-month period. 

    


    The
      GCI
      additionally assert that the GPAA was not thoroughly reviewed in PGL’s previous
      reconciliation, as PGL initially concealed information. (GCI Reply Brief at
      14-16). The GCI distinguish Ill.
      Power Co. v. Ill. Commerce Commission,
      339 Ill.
      App. 3d 425, 790 N.E.2d 377 (1st
      Dist.
      2003), because here, Staff and the GCI argue that PGL’s failure to heed the
      results of two internal analyses was imprudent. In contrast, in Ill.
      Power,
      Staff
      required Ill. Power to conduct a specific type of analysis that it had never
      required of it before. (GCI Reply Brief at 38-40).

    


    
      	 	
              p.

            	
              Commission
                Analysis and Conclusions

            


    

    


    The
      Commission concludes that
      Illinois Power
      does not
      apply here. In Ill.
      Power,
      the
      Appellate Court reversed a Commission ruling that Ill. Power’s decision to
      retire a propane plant that it used at peaking times was imprudent for failure
      to conduct a study, specifically, a Present Value Revenue Requirement Study,
      supporting that decision. Both Commission Staff and Ill. Power agreed, however,
      that Ill. Power would be required to expend $1.873 million to keep that plant
      safe and operational. Ill. Power had retired four other propane plants prior
      to
      the reconciliation year, and Commission Staff never raised any issue regarding
      a
      Present Value Revenue Requirement Study and those other propane plants in Ill.
      Power’s previous reconciliations. (Ill.
      Power, 339
      Ill.
      App. 3d at 437). 

    


    In
      reversing the Commission, the Appellate Court noted that there was nothing
      in
      the record establishing a difference between the first four propane plant
      retirements and the one at issue, the Freeburg Plant. The Court concluded that
      it was not disputed that significant capital expenditures were needed to keep
      that plant operational and safe. And, Ill. Power had the prior experience of
      retiring four propane plants within the previous six years without needing
      the
      Present Value Revenue Requirement Study to justify these retirements. The Court
      noted that the Commission did not adopt a new standard or policy. It decided,
      after the fact, that this analysis should have been conducted. In so reasoning,
      the Appellate Court noted that the Commission considered each of the factors
      Ill. Power considered in isolation, rather than viewing those factors in their
      totality. (Id.
      at
      437-39). 

    


    The
      Commission concludes that Illinois
      Power only
      supports a finding of imprudence here. PGL correctly points out that in the
      previous reconciliation, Commission Staff did not voice a concern with PGL/PGL
      affiliates’ relationship with Enron NA. However, as the Ill.
      Power
      Court
      noted, in order to determine whether a decision is prudent, a fact-finder must
      view the circumstances, in their totality. Commission Staff and other parties
      to
      this proceeding did not know the true set of circumstances, such as the
      profit-sharing arrangement between PEC and Enron NA, or the existence of the
      “Aruba Analysis” until February of 2004, when discovery was reopened.



    
      
         

        


        
        

      

      
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    PGL
      is
      required by law to petition the Commission for approval of affiliated-interest
      transactions. PGL did not divulge pertinent information to Staff in this
      proceeding before discovery was reopened, and it did not acquire Commission
      approval of its relationship with enovate. (See,
      220 ILCS
      5/7-101; 102). Documents such as the “Aruba Analysis” and Wear Cross Exhibit 15,
      which both establish that PGL/PEC personnel had actual knowledge that the GPAA
      would unnecessarily increase consumers’ costs were only tendered to Staff and
      other parties here after discovery in this docket was reopened. Unlike the
      situation in Ill.
      Power,
      PGL’s
      failure to disclose pertinent facts distinguishes this case from PGL’s previous
      reconciliation. In contrast, in Illinois
      Power,
      the
      Commission’s approval of Ill. Power’s three prior reconciliations was not based
      on Ill. Power’s withholding of pertinent information from Staff perusal.


    


    In
      Ill.
      Power,
      the
      Commission required a utility, for the first time, to obtain a certain type
      of
      study to document the validity of its decision to retire a peaking propane
      plant, even though Ill. Power was not required to obtain this study in prior
      years when it retired four other propane plants in three previous
      reconciliations. (Ill.
      Power,
      339 Ill.
      App. 3d at 437). When finding imprudence here, this Commission is not imposing
      a
      new standard. Rather, it is imposing the standard it would have imposed, if
      pertinent information had been disclosed properly by PGL. 

     

    The
      Commission reiterates that Section 9-220 of the Public Utilities Act puts the
      burden of proof of prudence on PGL. Section 9-220 does not give PGL a
      presumption of prudence from the prior Docket 00-0720. The prior docket does
      not
      give rise to the presumption of prudence to the GPAA for several reasons. First,
      this Commission is not a judicial body; there is no res judicata here. Second,
      Section 9-220 calls for annual reconciliations before this Commission. A utility
      cannot escape the annual reconciliation provision of the statute. In the
Illinois
      Power
      case, in
      Docket 01-0701, the Commission ruled that the fact that we had disallowed a
      contract in a prior year did not mean that we could not, on evidence, allow
      it
      in a subsequent year. And, in this case, the same argument applies: Section
      9-220 does not give any utility a presumption, just because the items have
      been
      looked at before. 

    


     

    12. Proxy
      for Historical Gas Purchase Practices 

     

    


    
      	 	
              q.

            	
              PGL’s
                Position

            


    

    


    PGL
      avers
      that the GPAA was a good proxy for its historical purchases, when compared
      to
      PGL’s past practices. (PGL Init. Brief at 44). The mix of baseload and swing
      gas, as well as index-based pricing, were the same as the contracting approach
      it used prior to the GPAA. (Id.
      at
      52).
      PGL asserts that its Exhibit 8 establishes that the GPAA was a reasonable proxy
      for its actual monthly gas costs for the two fiscal years prior to the GPAA,
      1998 and 1999. According to PGL, this exhibit establishes that its total average
      gas price it previously paid was $0.0327 per MMBtu more than the Chicago
      citygate prices it incurred pursuant to the GPAA. (PGL Init. Brief at 53).
      

    



    
      
         

        


        
        

      

      
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    PGL
      Ex. 8
      was prepared by Mr. Wear. When preparing it, he weighted the average price
      paid
      during the two previous years, with 35% of purchases at a daily index price
      and
      65% of purchases at an FOM price. He concluded that the cost of gas prior to
      the
      GPAA was comparable to the average of what was paid pursuant to the GPAA.
      (See,
      PGL Ex.
      C at 28). Mr. Wear testified that PGL did not use this type of analysis when
      assessing the GPAA’s value (when this contract was being negotiated) because
      changing market conditions “dictate” a more forward-looking approach to
      negotiations. (Id.).

    


    PGL
      also
      cites its Ex. 9, which is attached to Mr. Wear’s Rebuttal testimony, PGL Ex F.
      It contends that the increases in costs associated with GPAA were less than
      0.25% of the total GPAA costs passed on to consumers. Finally, PGL cites its
      Ex.
      10, which is also attached to PGL Ex. F. It is a comparison between its GPAA
      gas
      purchases and its non-GPAA purchases. PGL’s GPAA purchases, which comprised
      approximately 66% of the total in Ex. 10, were approximately 14% less expensive
      than its non-GPAA gas purchases. (PGL Ex. F, Attachment 10; PGL Initial Brief
      at
      53). 

    


    
      	 	
              r.

            	
              Staff’s
                Position

            


    

    


    Staff
      points out that, in the past, PGL had multiple contracts with many suppliers
      for
      both supply and transportation. A single, five-year contract with one vendor
      is
      not equivalent to those previous contracts. (See,
      e.g.,
      Staff
      Initial Brief at 40; Staff Ex. 2.00 at 27). Staff maintains that, according
      to
      the basis projections PGL provided Staff, it would not have been less expensive
      to buy gas at the citygate price than it would have been to buy gas at the
      field
      and pay for delivery to the Chicago citygate. Staff concludes that the GPAA
      was
      not a proxy for what PGL did in previous years. (Staff Ex. 3.00 at 22-24; Staff
      Ex. 7.00 at 20-21). 

    


    
      	 	
              s.

            	
              GCI’s
                Position

            


    

    


    The
      GCI
      aver that PGL Ex. 10 does not aid PGL, as the GPAA covered a very large portion
      of PGL’s gas-buying needs. Non-GPAA purchases were, therefore almost by
      definition, unplanned and spot purchases made under unfavorable market
      conditions. The GCI conclude that absent anomalous market behavior, it is
      predictable that non-GPAA costs would be higher than the planned gas cost
      purchases PGL made pursuant to the GPAA. Also, PGL did not address the
      significantly different risk profile of the GPAA due to having only one contract
      with a single supplier for approximately two-thirds of its supply. The GCI
      maintain that PGL’s argument overlooks the harms to consumers caused by the
      GPAA, which ceded control over price and the amount of gas delivered. The GCI
      argue that there is no evidence that PGL personnel considered any of these
      large
      deficiencies when entering into this contract. (GCI Reply Brief at 23-25).
      


    
      
         

        


        
        

      

      
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              t.

            	
              Commission
                Analysis and Conclusions

            


    

    


    While
      the
      GPAA provided both baseload and swing gas, it did so in a manner that harmed
      consumers, as Enron NA could unilaterally change the price of baseload gas.
      PGL
      provided no evidence that, in the past, gas sellers could change the price
      of
      gas. Additionally, Enron NA could, and did, determine the amount of SIQ and
      DIQ
      gas, which forced PGL to buy gas on the spot market on some occasions and left
      PGL with gas to unload on other occasions. When PGL unloaded the excess gas
      by
      selling it back to Enron NA, PGL paid a penalty every time it made a resale.
      PGL
      made no showing that its previous gas purchase contracts contained such
      provisions. The GPAA was not a prudent proxy for PGL’s previous gas contracts.


    


    Moreover,
      PGL’s Exhibit 8 does not establish that the GPAA was prudent. While PGL cited
      this document for the proposition that the GPAA was a reasonable proxy for
      what
      was done in previous years, the fact that this document shows the average cost
      of gas under the GPAA was fairly comparable to prices in previous years, does
      not establish that the costs imposed by the GPAA were reasonable. This is
      especially true here, when the credible evidence established that profits from
      this contract were gleaned by PGL affiliates/Enron North America/Enron Midwest,
      often for performing no real service or for performing very little
      service.36
      PGL Ex.
      9 also does not aid it; the amount of costs passed on to consumers has no
      relevance to the issue here-whether the GPAA was prudent. An imprudent cost
      can
      be in any amount. 

    


    PGL
      cites
      no authority that would require the Commission to consider that which has been
      done under different circumstances, i.e.,
      a
      different year, with different climate and very different contractual
      obligations and supplies, which is relevant when establishing prudence. PGL
      also
      cites no authority establishing that a comparison between the costs passed
      on to
      consumers in the year in question and what it passed on 1998 or 1999 is relevant
      in the context of passing on only prudently-incurred costs to consumers. It
      should also be pointed out that, according to Mr. Wear, PGL did not perform
      an
      analysis like Exhibit 8 before executing the GPAA. (PGL Ex. C at
      28).

    


    Finally,
      as the GCI point out, PGL presented no evidence at hearing indicating that
      its
      purchases in addition to those made pursuant to the GPAA were made under
      circumstances like those made pursuant to the GPAA. The fact that the GPAA
      was a
      contract to supply two-thirds of PGL’s gas supply is some indication that
      purchases made outside the GPAA were made on more of an emergency basis.
      Therefore, PGL Ex. 10 does not aid PGL. 

    


    


    


    


    _____________________

    36   See,
      the
      analysis herein regarding third-party transactions.


    
      
         

        


        
        

      

      
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    13. Market-Based
      Pricing with No Demand or Reservation Charges

     

    


    
      	 	
              u.

            	
              PGL’s
                Position

            


    

    


    PGL
      maintains that one of the key elements in the GPAA was market-based pricing.
      All
      three quantity components in the GPAA, baseload, SIQ and DIQ, were market-based.
      PGL has used market-based contracts in the past. (PGL Init. Brief at 47-48;
      Ex.
      L at 13). Market-based pricing results in gas costs that track market
      conditions. (PGL Ex. L at 13-14). 

    


    Also,
      the
      GPAA had no reservation or demand charges with respect to DIQ gas. Demand
      charges are typical for swing services, and the DIQ clause, essentially,
      provided a swing service. In the past, however, PGL has paid demand charges
      for
      swing services. PGL points out that not paying demand charges for swing gas
      saved consumers money. (PGL Init. Brief at 48)). 

    


    PGL
      avers
      that reference by Staff and the GCI to pipeline demand charges is disingenuous,
      as PGL personnel were not concerned with the costs consumers would pay in the
      way of pipeline demand charges when entering into the GPAA. Rather, PGL
      personnel were only concerned with commodity demand charges. (PGL Reply Brief
      at
      35). 

    


    
      	 	
              v.

            	
              Staff’s
                Position

            


    

    


    Staff
      points out that, pursuant to the GPAA, PGL continued to pay pipeline demand
      charges. (Staff Init. Brief at 38-39; Staff Ex. 2.00 at 20). However, Staff
      acknowledges that the DIQ clause did not have demand charges, which lowered
      gas
      costs for consumers. Staff estimated that the amount of gas demand charges
      saved
      pursuant to the DIQ clause was $1,750,000, over the life of the GPAA. (Staff
      Ex.
      7.02; Staff Init. Brief at 51-52). Staff recommends offsetting its proposed
      disallowances for the time period in question in the amount of $350,000 (Staff
      Ex. 7.02). 

    


    
      	 	
              w.

            	
              GCI’s
                Position

            


    

    


    The
      GCI
      point out that there were, in fact, pipeline demand charges embedded in the
      GPAA. The GCI concur with Staff that market-based pricing, with no demand
      charges for DIQ gas, does not justify entering into the GPAA. (GCI Init. Brief
      at 43). 

    


    The
      GCI
      posit that there is nothing per
      se
      prudent
      about market-based pricing. Mr. Graves, PGL’s expert, acknowledged that in
      circumstances like those involved in the Citgo contract, PGL is obligated to
      take advantage of a reasonable opportunity to acquire gas at less than the
      market price.37
      (GCI
      Reply Brief at 20). 

    


    


    _____________________

    37   The
      Citgo contract is discussed herein under the heading “the Citgo
      Contract.”


    
      
         

        


        
        

      

      
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              x.

            	
              Commission
                Analysis and Conclusions

            


    

    


    The
      GPAA
      eliminated the demand charges that would have been incurred for swing gas.
      While
      Staff has provided evidence that PGL continued to pay pipeline demand charges
      pursuant to the terms of the GPAA, Staff did not provide an amount paid. (Staff
      Ex. 2.00 at 20). However, for the year in question, the undisputed amount of
      saved gas demand charges is $350,000. (See,
      e.g.,
      PGL Ex.
      C at 15). Based on the evidence provided, it appears that the GPAA provided
      this
      benefit to consumers. 

    


    PGL’s
      argument that the GCI and Staff disingenuously raise the issue of pipeline
      demand charges is
      a
      party-admission. PGL is required by statute to consider the effect of all costs
      it passed on to consumers, including pipeline charges. (220 ILCS 5/9-220).
      The
      Commission concludes that PGL’s assertion that it did not consider these charges
      when entering into the GPAA is an admission that it acted imprudently.


    


    Finally,
      as the GCI point out, PGL’s assertion that market-based pricing was beneficial
      ignores the situations it created regarding the market in the reconciliation
      year. As shall be set forth herein, situations like the Citgo contract could
      be
      considered to be market-based pricing, even though PEC/Enron Midwest
      artificially inflated the prices consumers paid for the gas procured pursuant
      to
      that contract. As the GCI point out, there is nothing per
      se prudent
      about market-based pricing. PGL’s assertion that market-based pricing in the
      GPAA is evidence of prudence is without merit. 

    


     

    14. Flexible
      Pricing

     

    


    
      	 	
              z.

            	
              PGL’s
                Position

            


    

    


    PGL
      argues that the GPAA was beneficial because, pursuant to the GPAA, the parties
      could agree to an alternative to the index pricing set forth in the GPAA. It
      could, for example, lock in prices other than the applicable index price. (PGL
      Init. Brief at 48). PGL argues that the GPAA’s flexible pricing provision
      (Article 4.2(a)) provided a benefit for consumers. Beginning in May, 2001,
      PGL
      locked-in the price of certain baseload quantities under the GPAA. PGL personnel
      did this pursuant to its “Gas Price Protection Strategy,” which was in place
      during the reconciliation period. (Id.
      at 51).


    


    
      	 	
              aa.

            	
              Staff’s
                Position

            


    

    


    Staff
      posits that the flexible pricing provision only had value because the GPAA
      was a
      five-year contract. It maintains that PGL could have gained pricing flexibility
      by merely doing what it did in the past-entering into contracts of shorter
      duration. Staff argues that the flexible pricing provision merely restores
      the
      flexibility PGL would have had if it had not committed itself to a five-year
      contract with Enron NA. And, according to Staff, other parts of Article 4.2
      decreased PGL’s pricing flexibility, while enhancing Enron NA’s flexibility.
      (Staff Ex. 2.00 at 26). 

    



    
      
         

        


        
        

      

      
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    Further,
      Article 4.2(a) did not allow PGL to unilaterally change the GPAA prices.
      Instead, pursuant to this provision, both PGL and Enron NA were required to
      agree to a price change. Presumably, Staff contends, Enron NA would only agree
      to a price change if it benefited from that change. Additionally, almost any
      contract can be changed by mutual assent. Thus, Staff concludes that flexible
      pricing does not compensate consumers for a pricing provision that does not
      provide gas at the least cost. (Staff Ex. 3.00 at 30). 

    


    
      	 	
              bb.

            	
              GCI’s
                Position

            


    

    


    The
      GCI
      contend that the GPAA’s flexibility in pricing was one-sided. The BLPA clause in
      the GPAA allowed Enron NA to increase the price of up to 71,250 MMBtus of gas,
      per day, in the winter period. The GCI aver that the amount of the change was
      from the FOM price to the daily price. Thus, Enron North America had the
      flexibility to raise gas prices through the BLPA clause.

    


    PGL,
      on
      the other hand, could change the price of gas only if Enron NA agreed to that
      change. The GCI aver that flexible pricing was only an issue because the GPAA
      was such an extensive contract. It covered 66% of PGL’s gas supply and it lasted
      five years; thus, granting this substantial power to Enron NA was not prudent.
      (GCI Init. Brief at 43). 

    


    
      	 	
              cc.

            	
              Commission
                Analysis and Conclusions

            


    

    


    PGL’s
      argument does not square with basic contract law. Irrespective of what was
      in
      the GPAA, a written contract can always be modified upon the written assent
      of
      both parties, provided that such mutual modification does not violate the law
      or
      public policy. (See,
      e.g., Schwinder v. Austin Bank,
      348 Ill.
      App. 3d 461, 468, 809 N.E.2d 180 (1st
      Dist.
      2004); Nebel
      v. Mid-City National Bank of Chicago,
      769 Ill.
      App. 3d 957, 964, 769 N.E.2d 45 (1st
      Dist.
      2002)). This term in the GPAA merely reiterated what PGL would be entitled
      to
      pursuant to the law. Because the law has provided this right, any clause in
      the
      GPAA setting forth this same right has no value except the nominal value of
      reminding the parties what the law is. 

    


    Anything
      in the GPAA allowing PGL to renegotiate prices with Enron NA must be viewed
      in
      the context of the whole contract. The BLPA clause allowed Enron NA to change
      the price of baseload gas, if it so desired. (Staff Ex. 2.00, Attachments,
      GPAA,
      at 9). And, Articles 4.2(b) and 4.2(c) of the GPAA gave Enron NA the right,
      above and beyond the BLPA, to change the price of gas to the Gas Daily Midpoint
      Price for up to 71,250 MMBtu for any day in the contractually-defined winter
      period. Thus, anything modified mutually, could be unilaterally modified again
      by Enron NA. (Staff Ex. 2.00, Attachments, GPAA, at 9). The Commission concludes
      that the flexible pricing provision conferred no benefit on consumers.



    
      
         

        


        
        

      

      
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    15. Load
      Flexibility

     

    


    
      	 	
              dd.

            	
              PGL’s
                Position

            


    

    


    PGL
      argues that the GPAA also provided it with flexibility. PGL points out that
      its
      load is weather-sensitive and its day-to-day requirements can fluctuate
      substantially. The negotiation of baseload, SIQ and DIQ gave PGL the flexibility
      to address these fluctuations. (PGL Exs. C at 14; Ex. L at 15-16). 

    


    Also,
      the
      GPAA gave PGL the right to resell gas to Enron NA. According to PGL, this right
      substantially eliminated the uncertainty associated with finding a market for
      gas, often on short notice. PGL contends that the need to sell gas is
      substantially influenced by variables, such as weather, customer usage and
      transportation customers’ deliveries, over which PGL has little or no control.
      PGL points out that an oversupply can cause a pipeline imbalance, which can
      result in penalties that it must pay. (PGL Init. Brief at 49-50). 

    


    PGL
      maintains that the penalties it incurs when selling gas back to Enron NA are
      not
      really penalties. This is true because the sell-backs in the GPAA are based
      on
      daily prices. (See,
      Staff
      Ex.
      2.00, Attachments, GPAA, at 9-10). However, according to PGL, it is not always
      possible to receive bids at the daily midpoint price. Often, to attract buyers,
      it is necessary to offer a discount from that price. Then, too, unloading a
      large amount of gas can be a formidable task. (PGL Init. Brief at 50-51).


    


    
      	 	
              ee.

            	
              Staff’s
                Position

            


    

    


    Staff
      contends that PGL presented no evidence establishing that the GPAA was equal
      to,
      or superior to, PGL’s contracts in previous years. And, a five-year contract
      with one vendor is not as flexible as multiple contracts for supply and
      transportation with multiple suppliers and varying expiration dates. (Staff
      Init. Brief at 39; Staff Ex. 2.00 at 26). Staff points out that PGL had no
      control over the amount of gas Enron NA delivered to it pursuant to the SIQ
      provision. As a result, PGL had too much gas on its hands. Without the GPAA,
      PGL’s need to unload excess gas would have been occasional and in small
      quantities. (Staff Ex. 7.00 at 33). 

    


    
      	 	
              ff.

            	
              GCI’s
                Position

            


    

    


    PGL
      ceded
      control over the amount of gas that the GPAA required PGL to purchase. Enron
      North America’s decisions regarding how much SIQ gas it delivered to PGL led,
      repeatedly, to oversupply situations that required PGL to sell gas back to
      Enron
      NA. The GCI argue that on 93% of the occasions when the sell-back provision
      was
      used, Enron NA had delivered maximum SIQ volumes, citing Staff Ex. 2.00 at
      20.
      (GCI Init. Reply Brief at 22-23).


    
      
         

        


        
        

      

      
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              gg.

            	
              Commission
                Analysis and Conclusions

            


    

    


    While
      the
      arrangement in the GPAA (the mix of baseload, SIQ and DIQ gas) provided PGL
      with
      flexibility, it did so in a manner that passed unnecessary costs on to
      consumers. As has been previously discussed, the harm this contract passed
      on to
      consumers outweighs any benefit conferred by the mix of baseload, SIQ and DIQ
      gas. 

    


    Finally,
      the Commission previously determined that PGL failed to prove that the resale
      provision was beneficial. There is no evidence, given the amount of SIQ gas
      that
      Enron NA was allowed to control, that this provision conferred any benefit
      on
      PGL or on consumers. When weighed against the harm that the provisions PGL
      cites
      in support of its contention that it had load flexibility, PGL has not sustained
      its burden to establish that the beneficial aspects its cites outweigh the
      harmful aspects of these provisions. 

    


     

    16. Unquantifiable
      Benefits

     

    


    
      	 	
              hh.

            	
              PGL’s
                Position

            


    

    


    PGL
      contends that the GPAA conferred benefits on it that are not easily quantified.
      A large contract with a single supplier allowed PGL to conduct its daily
      purchases while remaining hidden from the larger market. Citing Mr. Wear, PGL
      avers that without direct knowledge of PGL’s purchase plans in that marketplace,
“daily prices might tend to rise less dramatically than if (PGL) were out in
      the
      open market soliciting offers from dozens of counterparts.” (PLG Ex. F at 8; PGL
      Init. Brief at 56). 

    


    PGL
      also
      argues that the GPAA preserved the reliability of its supply. When it negotiated
      the GPAA, Enron NA was the dominant gas trader in the United States. And, Enron
      NA had a presence in the Chicago market. Also, according to PGL, Enron provided
      other benefits, benefits it would not have received with a portfolio of smaller
      contracts. (PGL Init. Brief at 55). Enron NA further supplied PGL with technical
      support to facilitate operations, including a secure webpage that allowed PGL
      and Enron NA to exchange information about daily activity. Enron NA additionally
      created a database for PGL’s gas controllers. This database retrieved historical
      system send-outs based on weather outputs. Enron NA also provided training
      to
      PGL employees as to how to use financial hedging instruments, like energy
      derivatives and options. (See,
      PGL Ex.
      F at 9). 

    


    
      	 	
              ii.

            	
              Staff’s
                Position

            


    

    


    Staff
      contends that PGL offered no facts or concrete examples to demonstrate the
      value
      of those benefits. Instead, according to Staff, PGL asserted only vague
      generalizations. And, these benefits did not provide direct results for
      consumers. (Staff Init. Brief at 53). 


    
      
         

        


        
        

      

      
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              jj.

            	
              GCI’s
                Position

            


    

    


    The
      GCI
      argue that none of the unquantifiable benefits cited by PGL supports its claim
      that the GPAA was prudent. They contend that PGL presented no evidence
      establishing that its daily price activity was large enough to have an impact
      on
      the prices in the larger market. Also, PGL presented no evidence establishing
      that the GPAA actually made prices less dramatic in the larger market. Rather,
      Mr. Wear merely stated that such a situation might occur. (GCI Reply Brief
      at
      25-26). Additionally, PGL presented no evidence that Enron North America’s size
      and market dominance, at the time the GPAA was executed, were elements of the
      GPAA. Finally, the GCI posit that, while Mr. Wear testified that certain aspects
      of the GPAA benefited operations and employee education, Mr. Wear did not
      testify that anyone at PGL considered these benefits when deciding whether
      to
      enter into the GPAA. (Id.
      at
      26-27). 

    


    
      	 	
              kk.

            	
              Commission
                Analysis and Conclusions

            


    

    


    Mr.
      Wear’s statement, quoted above, is too vague to be given any evidentiary weight.
      He also offers no examples, and the phrase “might tend to rise,” is speculative.
      Mr. Wear does not explain what PGL would be doing in the open marketplace
      soliciting bids, or why. And, Mr. Wear points to no information establishing
      that previously, PGL’s baseload gas was purchased on a daily basis in the open
      marketplace. 

    


    There
      also is no evidence establishing that training PGL employees on futures and
      financial derivatives provided any benefit to consumers or that such training
      ever occurred; PGL conducted no such transactions during the time period in
      question. Additionally, while PGL argues that Enron NA was a premier supplier,
      it proffered no evidence indicating that Enron NA’s reputation was an asset to
      PGL consumers. Therefore, there is no evidence that Enron NA being a premier
      supplier, at the time the GPAA was entered into, is of any benefit. And, as
      the
      GCI point out, there is no evidence that PGL decision-makers considered these
      benefits, or even knew of these benefits at the time the GPAA was executed.
      The
      Commission concludes that PGL failed to present evidence establishing that
      the
“unquantifiable benefits” it cites conferred any meaningful benefit on
      consumers. 

    


     

    17. Conclusions
      Regarding the GPAA, in Total

     

    


    
      	 	
              ll.

            	
              PGL’s
                Position

            


    

    


    Citing
      Mr. Graves’ testimony, PGL asks the Commission, if it feels that CERA and PIRA
      basis data should be considered, to consider what Mr. Graves estimated as a
      disallowance. Since the actual credit for baseload and SIQ purchases was three
      cents, the disallowance should only be for the gap between the required credit
      to show prudence taking the three-cent discount on baseload and SIQ purchases
      into account. PGL reasons that the amount of increased costs per MMBtu should
      be
      multiplied by the FOM volumes taken during the reconciliation period to
      calculate a disallowance. Using


    
      
        


        
        

      

      
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    this
      approach, Mr. Graves estimated that harm to consumers was in the range between
      $2.9 and $8 million. PGL avers that Dr. Rearden’s calculations treat all of the
      unspecified “anomalous results” of the 2000-2001 winter period as attributable
      to the GPAA. (See,
      PGL
      Reply
      Brief at 40-41). 

    


    On
      Exceptions, PGL argues that the ALJPO’s proposed disallowance of $13,304,910 is
      only 2.3% of the total gas costs paid to Enron North America pursuant to the
      GPAA during the reconciliation period. It reasons that therefore, 97.7% of
      the
      GPAA gas costs were prudent. According to PGL, based on this result, finding
      its
      decision to be imprudent “seemingly runs afoul” of the principle that a finding
      of imprudence requires more than a mere difference of opinion. (PGL BOE at
      33-34).

    


    Commission
      Analysis and Conclusions

    


    Certain
      obvious harms exist in the GPAA that, even without some sort of economic
      analysis, are apparent upon a reading of this contract. A diligent reading
      of
      the BLPA, Articles 4.2(b) and 4.2(c) and the SIQ provision would place a
      reasonable person on notice that executing the GPAA would relinquish control
      to
      Enron North America over price and amount, essential contractual terms. There
      are other, less obvious harms to the GPAA, such as paying twice for the same
      delivery of gas, decreasing the amount of demand credits available due to
      release of pipeline capacity, and paying penalties on resales, when resales
      were
      necessitated by the SIQ provision. 

    


    PGL
      correctly maintains that the GPAA conferred some benefits. For example, it
      imposed no demand fees on swing gas. When the benefits of the GPAA are weighed,
      however, against the harms it caused, it is overwhelmingly clear that the GPAA
      was indeed a harmful contract. 

    


    PGL
      accepted the GPAA, in the face of two economic analyses indicating that this
      contract would increase consumer costs, and PGL decision-makers, nevertheless,
      executed this contract. There is ample evidence of disregard for the negative
      effects of the GPAA on consumers—executing the GPAA, despite two economic
      analyses establishing its harm on consumers—and the obvious harms in that
      contract, mentioned above, that should become apparent to any PGL
      personnel—exercising a stand of care that a reasonable person would use—upon
      reading this contract.

    


    There
      is
      no credible evidence that PGL personnel were concerned about the increased
      costs
      resulting from the GPAA. Based on this record, the Commission cannot draw the
      conclusion that entering into the GPAA was an inadvertently bad decision. Nor
      can we conclude, based on this record, that it was a good decision that simply
      went awry. Rather, the Commission concludes that entering into a relationship
      with Enron NA—conferring profits to its parent company, PEC with no offsetting
      benefit derived by PGA consumers from those profits—is astonishingly imprudent.
      PGL decision-makers willingly entered into a contract that created oversupplies,
      as is evidenced by the fact that 93.9% of the time when Enron North America
      sold
      the


    
      
         

        


        
        

      

      
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    maximum
      amount of SIQ gas, PGL had to sell gas back to Enron NA, and had to pay a
      penalty every time it made a sell-back. 

    


    Additionally,
      we cannot view the GPAA in a vacuum. On the same day Mr. Morrow signed the
      GPAA,
      he also signed an LOI on behalf of PEC, PGL’s parent company, agreeing to share
      profits with the same company that provided PGL with gas pursuant to the GPAA.
      As shall be set forth herein, there is credible evidence in this record,
      establishing that the GPAA was negotiated with an eye toward profit-sharing
      from
      PGL’s relationship with Enron NA. 

    


    The
      Commission finds PGL’s use of the GPAA to be imprudent. Any disallowance
      associated with the Commission’s finding of imprudence for the GPAA is properly
      included in the Settlement Agreement and Addendum as discussed in Section
      I.

    


     

    V. Manlove
      Field

     

    A. Findings
      of Fact

     

    1. Background

     

    


    Gas
      utilities typically employ some means of storage to meet supply needs. PGL’s
      Manlove Field (“Manlove”) is one such facility. Manlove is an aquifer, which is
      a water-bearing porous geologic structrure with properties that lend to
      conversion to a natural gas storage facility. (Staff Ex 2.00 at 42). Manlove
      is
      dome-shaped, with a cover of impermeable rock that prevents the upward migration
      of natural gas. Porous, water-filled rock exists underneath the layer of
      impermeable rock. PGL injects natural gas into the pores of the water-filled
      rock, displacing the water. The displaced water then contains the natural gas
      by
      forming a seal at the bottom of the aquifer (also known as a reservoir).
      (Id.).
      

    


    Three
      basic components of natural gas exist in storage reservoirs: top or working
      gas
      (“working”); recoverable base gas and non-recoverable base gas. Gas utilities
      cycle working gas during the course of normal operations during the
      injection/withdrawal seasons. Recoverable base gas is not cycled, but provides
      the necessary pressure to cycle the working gas. Recoverable gas represents
      a
      non-depreciating capital plant while in operation. This gas can only be removed
      from the reservoir upon abandonment. Non-recoverable gas is trapped in the
      reservoir and cannot be recovered, even at abandonment. This gas is capitalized
      and depreciated over the life of the reservoir. (Staff Ex. 2.00 at
      42-43).

    



    
      
         

        


        
        

      

      
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    PGL
      typically injects gas into storage during the summer when natural gas prices
      are
      lower. During the winter, PGL relies on stored gas to meet its customers’
heating needs, supplementing with spot purchases as needed. PGL also provides
      storage services for third parties, including North Shore Gas. PGL also uses
      storage to accommodate for weather that was not forecasted, a force
      majeure,
      and
      situations, in which, gas suppliers provide a different amount of gas other
      than
      that which was agreed upon.38
      (PGL Ex.
      D at 17). PGL stores 27 Bcf of natural gas for PGA customers and 8 Bcf for
      non-tariffed services at Manlove. (See,
      e.g.,
      PGL
      Initial Brief at 9). Mahomet pipeline connects Manlove to PGL’s Chicago
      distribution system. (Tr. 1301). 

    


    The
      injection season for Manlove Field usually commences the first or second week
      of
      March and it ends in the first or second week of December. (PGL Ex. I at 6).
      Once withdrawal season begins, PGL personnel continues to withdraw gas for
      the
      remainder of the season. (Id.
      at 7).
      At the start of each injection season, a working gas target for that season
      is
      established. Then, an injection schedule is made, whereby certain injection
      volumes are targeted, as well as average daily rates for each month. (PGL Ex.
      I
      at 5). PGL personnel monitor monthly totals of injections and the seasonal
      cumulative totals. If a particular month is long or short compared to the
      schedule, or if the working gas target is revised, the rest of the injection
      season is adjusted. (Id.).
      When
      PGL shifts to the withdrawal season, withdrawals from Manlove should not fall
      below a certain level. (PGL Ex. L at 50). Once withdrawals begin, they cannot
      be
      stopped. (Id.).
      PGL
      personnel are not able to change from injections to withdrawals and back again.
      (Tr. 1066). Therefore, if PGL is in its injection phase, Manlove can be
      unavailable for withdrawals during the months of October, November, March and
      April. (Id.).

    


    During
      the winter of 2000-2001, PGL personnel planned to keep enough gas in Manlove
      to
      carry it through the third week in January, in order to meet peak winter
      conditions. (Staff Ex. 6.00 at 40-41). In November of 2000, PGL stored gas
      for
      its ratepaying customers, North Shore Gas and third-party customers. PGL
      considers this to be “Hub services,” or “non-tariff” services. Withdrawals from
      Manlove commenced on November 21, 2001, two weeks earlier than usual. At the
      time PGL began withdrawing gas from Manlove, third-party customers had already
      injected approximately 7.1 Bcf of gas. (Staff Ex. 7.00 at 46). 

    


    Certain
      events happened that caused PGL to alter its storage withdrawal plans for
      Manlove. Record cold conditions existed in Chicago in the months of November
      and
      December of 2000. (See,
      e.g., Tr.
      1066-67). Heating degree-days were 6% higher than normal at Midway Airport
      and
      11% higher than normal at O’Hare International Airport. In December of 2000,
      heating-degree days were 28% above the normal at Midway Airport and 27% at
      O’Hare. Also, natural gas prices increased dramatically in November. In
      December, gas prices peaked at over $10 per MMBtu and remained above $5 per
      MMBtu almost through April. (Staff Ex. 3.00 at 50). 

    


    


    _____________________

    38   A
      force
      majeure
      is an
      unforeseen act of God, or man, such as flooding, war, or vandalism.
      (Kahara
      Bodas Co. v. Perusahaan Pertambangan,
      335 F.3d
      357, 360 (5th
      Cir.
      2003)).


    
      
         

        


        
        

      

      
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    PGL
      witness Mr. Wear testified that the reason PGL personnel decided to withdraw
      gas
      from Manlove earlier than usual was because the weather at that time was colder
      than normal and gas prices at that time were at an unprecedented high. PGL
      decided to begin withdrawals earlier than planned because November 2000 gas
      prices were higher than December 2000 and January 2001 forward prices and it
      was
      possible that the colder than normal weather would subside. (PGL Ex. F at 35).
      Because of this decision, Mr. Wear stated that PGL needed to buy less gas to
      balance the system. Also as a result of this decision, PGL had less storage
      gas
      to use going into December, which necessitated modifying PGL’s withdrawal plan.
      (PGL Ex. F at 35-36). 

    


    As
      mentioned above, PGL used Manlove to provide storage for its PGA customers
      and
      to provide services to third parties. Some of PGL’s third party transactions
      involved Enron. In November of 2000, PGL allocated only half of Manlove’s
      storage capacity for consumers. The other half of this gas went to
      third-parties. As discussed in more detail below, “Manlove Jumpstart” was one
      such third party transaction. In December of 2000, 52% of the gas withdrawn
      from
      Manlove went to consumers. In January of 2001, 78.4% of Manlove gas withdrawals
      were for consumer use. (See,
      Staff
      Ex. 3.00 at 50). None of the revenues from third-party transactions were used
      to
      offset gas costs passed on to consumers pursuant to PGL’s PGA. (Staff Ex. 7.00
      at 54). 

    


    To
      facilitate the non-tariffed39
      third-party transactions, PGL increased the amount of working gas in Manlove
      by
      8 Bcf, representing a significant increase of approximately 30%. (See,
      e.g.,
      Staff
      Ex. 2.00 at 29, 45). According to Staff witness Mr. Anderson, an increase in
      working gas must be supported with an increase in recoverable and
      non-recoverable base gas. Ideally, PGL should perform reservoir engineering
      studies to determine the appropriate amounts of recoverable and non-recoverable
      gas needed to support an increase in working gas. PGL provided no data in this
      proceeding demonstrating that PGL increased recoverable and non-recoverable
      gas
      when it increased working gas at Manlove. Essentially, PGL failed to show how
      it
      increased non-tariffed working gas in Manlove without increasing recoverable
      gas
      and non-recoverable gas. This failure lead to PGA customers improperly paying
      for the necessary recoverable and non-recoverable gas. PGL improperly passed
      costs for non-tariffed services on to PGA customers. (Staff Ex. 2.00 at 46).
      

    


    


    


    _____________________

    39   Non-tariffed
      services are not subject to rates on file with the ICC. Rather, these
      transactions are performed either pursuant to a FERC operating statement or
      through third party storage agreements. For third party storage arrangements,
      PGL leverages its system assets. (Staff Ex. 2.00 at 30).


    
      
         

        


        
        

      

      
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    Staff
      provided an analysis of third party transactions during the winter of the
      reconciliation period at Manlove. On January 5, 2001, PGL’s non-tariff,
      third-party inventory balance turned negative; meaning third-parties removed
      more gas from Manlove than they had injected into it. On February 28, 2001,
      PGL’s maximum negative third-party inventory occurred at -4,903,211 Dth. This
      third-party inventory remained negative for almost five months, until May 3,
      2001. (Staff Exs. 2.00 at 37; 3.00 at 59). During this five-month period, it
      was
      not possible for PGL to meet third-party obligations without using the gas
      it
      stored for consumer use—the PGA gas. (Staff Ex. 2.00 at 37). PGL did not use a
      total of 25.5 Bcf of gas stored in Manlove, which PGL claims is reserved for
      consumers use during the winter months. PGL withdrew a total of 12 Bcf of gas
      over the 2000-2001 winter heating season (November through March) for
      third-parties. Seven Bcf of that gas was injected by third-parties during that
      season. (Staff Ex. 7.00 at 46). An additional five Bcf of gas used for
      third-parties, however, was the less expensive gas purchased for consumer use
      in
      the winter. (See,
      e.g.,
      Staff
      Ex. 3.00 at 44; 7.00 at 47-49; City-CUB Ex. 4.0 at 45). 

    


    Staff
      witness Dr. Rearden explained the significance of the negative third party
      balances. According to Dr. Rearden, a negative third-party balance shows PGL
      gave preference to third party transactions at the expense of PGA customers.
      PGL
      measured the gas flows into and out of Manlove and then allocated those volumes
      between various entities. In doing this, PGL must ensure it meets its
      obligations to PGA customers, as well as third parties. In December 2000 and
      January 2001, PGL over-allocated resources to third party customers and
      under-allocated resources to PGA customers. During this period of particularly
      high gas prices, PGL denied its PGA customers the benefit of lower priced
      storage withdrawals. (Staff Ex. 12.00 at 30-31). Further, these negative
      balances also evince that third-party transactions do not have a benign impact
      on consumers. When PGL over-allocated gas for third-parties, this
      over-allocation interfered with withdrawal plans for consumers. (Id.
      at 31).
      CUB witness Ms. Decker additionally opined that the gas used in third-party
      transactions was not limited to just an oversupply of gas. (City-CUB Ex. 1.0
      at
      47). 

    


    PGL
      used
      all of its supply assets to meet its system load requirements for any given
      day.
      Thus, on any given day, the PGL consumer requirements and PGL’s third-party
      requirements were fulfilled by whatever gas PGL had on hand. (Staff Ex. 2.00
      at
      38). Third-party services also altered the timing and use of PGA purchases
      and
      injections, as well as the timing and use of withdrawals from leased storage
      and
      withdrawals from Manlove, especially during periods of high demand. (Staff
      Ex.
      2.00 at 38-39). 

    


    The
      gas
      stored at Manlove for use in the 2000-2001 winter was purchased in the summer
      of
      2000. Because PGL over-allocated resources to third parties during Manlove’s
      withdrawal season, it then needed to purchase replacement gas for PGA customers.
      PGL acquired this replacement (or swing) gas by purchasing expensive winter
      gas
      and passing the cost of that gas on to consumers. Two of PGL’s major suppliers
      for this replacement gas were Enron NA and Enron Midwest. In some instances,
      PGL
      delivered gas from Manlove to Enron Midwest and then purchased expensive spot
      winter gas to replace that gas. (See, e.g.,
      Staff
      Ex.
      3.00 at 59). Enron Midwest and Enron NA, combined, accounted for 28% of PGL’s
      swing purchases for the month of November 2000. In December, 2000, these two
      entities provided 36.8% of PGL’s swing gas. In January, 2001, these two entities
      supplied 23.3% of PGL’s swing gas. (Staff Ex. 7.00 at 55). Dr. Rearden opined
      that PGL’s primary use of Manlove during the winter season was to benefit
      third-party Hub transactions. (Staff Ex. 7.00 at 38). 


    
      
         

        


        
        

      

      
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    According
      to CUB-City witness Mr. Mierzwa, the average price of gas during the Manlove
      summer injection season of 2000 was $4.12 per Dth. The average cost of gas
      purchased to replace this gas was $10.76 per Dth. Mr. Mierzwa determined that
      the economic loss suffered by consumers as a result of PGL’s giving preference
      to third party transactions over PGA customer needs was $51.2 million. (City-CUB
      Ex. 4.02 at 18). 

    


    Staff
      witness Mr. Anderson concluded that, in addition to using Manlove Field to
      provide non-tariff services, PGL also used leased storage services, the cost
      of
      which consumers paid for through the PGA. (Staff Ex. 2.00 at 39). In his
      opinion, PGL would not be able to perform non-tariff services without all of
      its
      supply resources, including, the gas it bought for consumers and leased storage,
      without using that which was designated for consumers in third-party
      transactions. (Id.
      at
      39).
      Mr. Anderson further testified that PGL had an inappropriate incentive to use
      PGA assets to provide non-tariff services. PGL recovers the costs of serving
      consumers through the PGA. However, PGL engages in non-tariff transaction,
      subject to competitive market conditions. PGA costs are an automatic pass
      through, whereas PGL must compete to win non-tariff business. The pressure
      to
      generate revenue in the competitive market likely caused PGL to favor its
      non-tariff services customers at the expense of PGA customers. (Id.
      at 40).
      The costs PGL avoided by using storage gas designated for consumers in third
      party transactions increased the net revenues received by PGL/PGL affiliates
      from those transactions. (Staff Ex. 2.00 at 39). Ms. Decker, also, opined that,
      when accomplishing third-party transactions, PGL used its storage and
      transportation assets. (City-CUB Ex. 1.0 at 44).

    


    PGL
      responded to Staff’s and CUB-City’s concerns. According to Mr. Wear, even if PGL
      had not used Manlove Field for third-parties, the same amount of gas would
      have
      been available for consumer use and the consumers would be unaffected, both
      in
      terms of the withdrawal season and Manlove’s peak day activity. Mr. Wear
      testified that PGL usually plans to have only 25.5 Bcf of gas storage available
      for consumers. That is all PGL would have had for consumer use, even if PGL
      personnel had not decided to withdraw gas from Manlove early, (in November,
      as
      opposed to December) in the time period in question. (PGL Ex. F at 38). One
      of
      the reasons for this is that PGL attempts to fully cycle the working inventory
      of its storage fields to maintain overall performance and the lifespan of the
      fields. Experience with the Manlove aquifer showed that storing 25.5 Bcf for
      consumers fit PGL’s load profile. (Id.).
      

    


    Further,
      under warmer-than-normal weather conditions, Mr. Wear continued, PGL would
      not
      be able to withdraw more than 25.5 Bcf of gas. Under other weather scenarios,
      PGL would use the extra gas injected into Manlove Field, but such use would
      reduce or replace the need for baseload purchases. Mr. Wear stated that reducing
      baseload purchases would be economically unwise because baseload purchases
      are
      necessary to achieve a mix of FOM prices and daily prices. Mr. Wear reasoned
      that, without baseload purchases, PGL could be required to buy gas on the daily
      market, subjecting it to daily price volatility. Also, PGL would not be able
      to
      reduce much of its other storage services. Those services perform unique
      functions to meet PGL’s load requirements. (PGL Ex. F at 39). Also, according to
      Mr. Wear, the peak day capacity of Manlove would not change. The amount of
      gas
      stored in Manlove has no impact on peak day capacity. Rather, that capability
      is
      determined by Manlove’s geological characteristics. (Id.).
      


    
      
         

        


        
        

      

      
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    Mr.
      Wear
      further testified that PGL could not have interrupted deliveries to third party
      customers and instead used that gas for PGA customers. If PGL had interrupted
      third-party services, it would have been in breach of its contractual
      commitments and its tariff obligations to those third-parties. Gas delivered
      by
      third parties to Manlove either must be returned to those parties at some point.
      Mr. Wear did not specifically state what those contractual commitments or tariff
      obligations were. (PGL Ex. F at 40). 

    


     

    2. The
      Decline Point for Manlove 

     

    


    When
      determining whether and when to withdraw gas from Manlove, PGL personnel
      consider Manlove’s geological factors. (Tr. 873-4). PGL witness Mr. Puracchio,
      who is responsible for operating Manlove, testified that gas storage in an
      aquifer, such as Manlove, is less efficient than other types of storage. This
      is
      because injecting gas into, and withdrawing gas from, an aquifer results in
      large proportions of gas being trapped in the pores of the rocks by the
      water.40
      Along
      with the gas in the aquifer, large amounts of water are also produced. (PGL
      Ex.
      I at 3). The water must be displaced by injecting gas at a pressure that is
      higher than the pressure of the water. (PGL Ex. I at 3). 

    


    Because
      a
      certain pressure must be maintained to withdraw gas from an aquifer, after
      a
      certain point in time in the withdrawal season, Manlove can no longer meet
      its
      rated maximum capacity. This is called its “decline point.” (Tr. 679). At that
      point, usually in February, Manlove cannot be counted on as a source of supply
      for peak delivery. (Tr. 677). During the reconciliation period, PGL personnel
      projected that Manlove Field would reach its decline point on February 4, 2001.
      Manlove Field actually reached its decline point on February 2, 2001. (PGL
      Ex. M
      at 5).

    


    Mr.
      Puracchio testified that PGL cycled more than 27 Bcf of gas per season at
      Manlove. Injecting more gas extends the field decline point, which extends
      how
      long Manlove is useful for storage. When more gas is injected, less gas becomes
      trapped. (Id.
      at 7;
      Tr. 681). During the time period in question, PGL personnel successfully
      extended the decline point of Manlove, which increased Manlove Field’s storage
      capability. (Tr. 681). PGL presented no evidence establishing that this
      increased capacity was used to benefit consumers directly, through use of this
      extra capacity, or indirectly, through profits from the use of this extra
      capacity. 

    


    


    _____________________

    40   Use
      of the term “trapped gas” in Mr. Puracchio’s testimony does not refer to any
      accounting terminology. (See,
      e.g., PGL
      Ex I.
      at 27). Instead, it speaks to the term “trapped” as it is used in common
      parlance. (Id.).
      


    
      
         

        


        
        

      

      
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    3. Maintenance
      Gas or “Cushion Gas”

     

    


    Maintenance
      gas is gas that is used to keep a certain, necessary level of pressure in a
      natural gas utility’s system. Because this pressure must be maintained,
      maintenance gas cannot be withdrawn under normal operating conditions. (Staff
      Ex. 1.00 at 13). Historically, until the reconciliation year in question, PGL
      designated this gas as “maintenance gas;” which is recoverable in base rates,
      not in a PGA. For the time period in question, however, PGL recorded this gas
      as
      gas that was lost and unaccounted for (“GLU”). Staff maintains that $4,628,267
      represents the amount of gas that was improperly recorded as GLU. PGL does
      not
      contest this proposed disallowance. (PGL Init. Brief at 104).

    


    Before
      1999, PGL personnel allocated 6.5% to 7.5% of the gas it injected into Manlove
      to cushion gas. (Staff Ex. 2.00 at 58; PGL Ex. I at 13). PGL hired consultants,
      who performed the Roxar Study to determine what effect, if any, adding this
      gas
      to Manlove would have on Manlove. Both the Roxar study and the Smedivg Study,
      cited by Mr. Anderson, recommended allocating 5%-6% to cushion gas. (PGL Ex.
      M
      at 5). 

    


    In
      1999,
      PGL personnel began allocating only 2% of the total injected gas at Manlove
      to
      cushion gas, including the gas injected for third-parties. (See,
      e.g.,
      PGL Ex.
      M at 4). However, third-parties received 100% of the gas injected for them
      during the time period in question. Staff witness Mr. Knepler concluded that
      consumers subsidized third-parties by paying for the third-parties’ share of the
      maintenance gas. (Staff Ex. 1.00 at 13). PGL also injected gas into Manlove
      for
      use by North Shore. However, PGL did not charge North Shore for maintenance
      gas.
      Mr. Knepler concluded that PGL customers also subsidized North Shore. (Staff
      Ex.
      1.00 at 27). Further, according to Staff witness Mr. Anderson before PGL used
      Manlove for third-party services, PGL should have considered the results of
      the
      studies PGL conducted, recommending an increase in the volume of recoverable
      and
      non-recoverable base gas. (Staff Ex. 2.00 at 58). 

    


    Mr.
      Puracchio testified that performance at Manlove was adequate with a 2%
      allocation to cushion gas. As a result of allocating only 2% of gas to “cushion
      gas,” field performance at Manlove has not declined. This, he stated, was “clear
      evidence” that a 6.5-7.5 % allocation of gas to cushion gas is not needed. (PGL
      Ex. I at 13; PGL Ex. M at 5). 

    


    Mr.
      Anderson testified that when PGL personnel increased the amount of gas injected
      by eight Bcf, the amount of gas lost increased by 0.52 to 0.60 Bcf of gas,
      which
      cost consumers $3.2 million to $3.7 million. (Staff Ex. 2.00 at 13). In Mr.
      Anderson’s opinion, it was imprudent of PGL to increase the amount of gas it put
      into Manlove, even after having studies performed which determined that
      substantial additional costs to consumers would be necessary to support those
      services. (Staff Ex. 2.00 at 30). 


    
      
        


        
        

      

      
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    4. Displacement

    


    Staff
      witness Mr. Anderson testified that PGL could not have been able to supply
      non-tariff, third-party services without using assets that are included in
      PGL’s
      PGA. Mr. Anderson opined that PGL used displacement to perform these services
      with its PGA gas. (Staff Ex. 2.00 at 31-32). Mr. Anderson explained that
      displacement is the process by which gas moves through a pipeline transportation
      system, without the physical delivery of the same molecules of gas. Displacement
      concerns accounting entries instead of the physical movement of gas. If, for
      example, PGL injected 1,000 units of gas into Manlove during a 24-hour period
      and withdrew 10 units of non-tariff gas from Manlove, PGL personnel would
      execute an accounting entry with ten units of PGA gas that it could have, but
      did not, inject into Manlove. Instead, these 10 units were supplied to the
      third-party. In this example, physically, PGL only injected 990 units of gas
      and
      another ten units was used for the third-party transaction. (Id.
      at
      32).
      Displacement permits the movement of gas through a pipeline without actually
      delivering the same molecules of gas. (Staff Ex. 2.00 at 32). 

    


    Thus,
      gas
      is a fungible commodity; it is not possible to physically distinguish whether
      gas stored in Manlove was purchased for consumers, or whether it was injected
      for third-party use. What separates various injections and withdrawals is only
      accounting entries, which include the gas volume and price paid for it, where
      applicable. (Staff Ex. 2.00 at 32). 

    


    Mr.
      Anderson analyzed the injections and withdrawals during the months of October,
      2000 through September of 2001. He concluded that PGL used displacement to
      accomplish many non-tariff services. The data showed PGL physically operated
      Manlove in a manner consistent with practices at other aquifers in Illinois.
      Like other aquifers, PGL injected gas into Manlove from April through October
      and withdrew gas from December through February. PGL treated May and November
      as
      swing months, where both injections and withdrawals may take place. However,
      Mr.
      Anderson noticed PGL recorded injections during the winter months and
      withdrawals during the summer months. He opined that because injections were
      recorded during winter months when, normally, no physical injections take place
      and withdrawals occurred during summer months, when no physical withdrawals
      take
      place, PGL used displacement to accomplish its third-party services.
      (Id.
      at
      34-35). 

    


    Mr.
      Anderson concluded that approximately 8,506 Dths of gas did not physically
      move.
      (Staff Ex. 2.00 at 36-37). He averred that PGL’s records established that
      approximately 9,237,000 Dths more gas was withdrawn from Manlove than actual
      metering records at Manlove stated. (Id.
      at 37).
      This discrepancy shows that PGL used displacement to perform non-tariff
      services. Additionally, use of displacement allowed PGL to arrange third-party
      transactions without incurring the cost of physically transporting that gas.
      (Id.
      at 38).


    


    Displacement
      uses recoverable gas costs for the performance of non-tariff services. Mr.
      Anderson concluded that, if non-tariff revenues do not flow through
      PGL’s


    
      
         

        


        
        

      

      
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    PGA,
      personnel at PGL will have the inappropriate incentive to use gas costs passed
      on to consumers to provide third-party, non-tariff services. (Id.
      at 40).
      He stated that, in his opinion, there is nothing wrong with displacement
per
      se.
      Rather,
      Staff objects to PGL’s use of displacement of gas while still contending that
      only its rate-based assets (Manlove and its transmission system) are used to
      perform non-tariff services. (Id.
      at 39).


     

    
      	 	
              5.

            	
              Large
                Withdrawals from Manlove for Third-Parties at the Onset of
                Winter

            


    

     

    


    During
      the time period in question, PGL provided services to third-parties that were
      not pursuant to its Commission-jurisdictional tariff. In general, it provided
      transportation, storage and “park and loan” services.41
      PGL also
      provided 3PSes, which were exchanges of gas with third-parties. (PGL Ex. C
      at
      29-31). 

    


    Also
      during the time period in question, PGL entered into what is referred to herein
      as 3PSE exchanges with Enron Midwest, three of which PGL personnel colorfully
      entitled; “38 Millennium Special;” “Manlove Jumpstart;” and “Hub Blowout.”
Collectively, these three contracts called for PGL to supply 3.5 Bcf of gas
      to
      Enron Midwest during November, 2000 and continuing through February of 2001.
      The
      three exchange agreements provided that Enron Midwest would return this gas
      to
      PGL beginning in April of 2001 through October of 2001. PGL derived minimal
      payments from these three contracts.

    


    In
      the
      course of discovery, PGL provided Staff with three different explanations as
      to
      how it was compensated for entering into these exchange contracts. At first,
      PGL
      maintained that two of these contracts were priced at “the cost of carry” which
      means that a value was assigned to the gas loaned, as well as the gas delivered,
      with the difference between the two treated as a loan. (See,
      Staff
      Ex. 3.00 at 52). PGL provided no explanation at that time with regard to the
      third contract, the “38 Millennium Special” . (Id.).
      Next,
      PGL claimed that it determined the values attached to the loan and repayment
      of
      gas in these contracts by examining the pricing differentials using NYMEX
      forward prices (for futures contracts). (See,
      Staff
      Ex. 3.00 at 52). Later, it averred that two of the three contracts were paid
      for
      in conjunction with FERC Operating Statement firm transportation services it
      provided to Enron Midwest, Meaning PGL bundled two services together and
      received one payment for both (Id.).
      

    


    The
“Hub
      Blowout” exchange provided for a loan to Enron MW of .5 Bcf of gas in November
      of 2000 and PGL was to receive an equal amount of gas back again in August
      and
      September of 2001. The articulated “cost of carry” for this transaction was
      $145,000, payable to PEC, PGL’s parent company. (See,
      Staff
      Ex. 3.00 at 54). While PGL delivered the loan as planned, Enron MW actually
      repaid the loan from June through August 2001. Actual compensation to PEC was
      $368,125. PGL asserted that the reason the change occurred was due to
“additional value that was created after the original transaction was entered
      into.” (sic).
      (Id.).

    


    


    _____________________

    41   A
      “park and loan” transaction is one, in which, a shipper delivers gas to PGL on
      an agreed-upon schedule, subject to interruption, (a ”park”) and PGL would then
      be obliged to return a like quantity of gas to that shipper, on an agreed-upon
      schedule, also subject to PGL interruption (the “loan”). A loan, however, can
      occur before a park. PGL does not use any of its pipeline transportation for
      these transactions. (PGL Ex. C at 33). 

    



    
      
         

        


        
        

      

      
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    “Manlove
      Jumpstart” consisted of a loan of gas, occurring on November 21, 2000 through
      November 30, 2000, of one million MMBtus of gas to Enron Midwest at the Chicago
      citygate Daily Price, the same price as DIQ gas. PGL received $265,000
      compensation for this transaction. “Manlove Jumpstart” commenced at the same
      time PGL began withdrawing gas for PGA customers from Manlove Field. PGL stopped
      purchasing DIQ gas from Enron NA during this time period. Instead, on almost
      every day that PGL withdrew gas and sold it to Enron MW pursuant to “Manlove
      Jumpstart,” it also purchased the same amount of gas at the higher Gas Daily
      Chicago citygate Daily Price. PGL received funds for the exchange, but did
      not
      pass them through to consumers. (See,
      Staff
      Ex. 7.00 at 53-54; Staff Ex. 3.00 at 56). 

    


    At
      that
      time, the applicable NYMEX futures price differential was 85.5 cents per MMBtu.
      In fact, the spot price for gas at this point in time was at a record high.
      (See
      Staff Ex. 3.00 at 53-54). PGL’s compensation from Enron MW, however, was 10.8
      cents per MMBtu, less than one-eighth of the value of that gas. This gas loan
      was not repaid until April through October of 2001. (Id.
      at 56).


    


    The
“38
      Millennium Special” was an attempt to expand Manlove’s storage capacity by using
      two summer storage cycles, instead of only one. (City-CUB Ex. 1.0 at 54). It
      consisted of a loan of 2 Bcf of gas to Enron MW in February of 2001, which
      was
      repaid in March and April of 2001. The compensation Enron MW paid to PGL was
      $124,022. This compensation was part of a non-tariff service contract. At that
      time, the smallest price differential between pertinent futures contracts in
      Natural Gas Intelligence was 107 cents per MMBtu. PGL’s compensation for
      entering into the “38 Millennium Special,” however, was at 6.2 cents per MMBtu.
      (Staff Ex. 3.00 at 56-57). 

    


    Using
      Manlove Field, PGL also offered “Park and Loan” storage services to Enron and
      others during the time period in question. (Staff. Ex. 5.00 at 5). These
      services were interruptible, thus, PGL had the right to refuse service or
      discontinue providing service, if supplying such service would impair its
      ability to draw on this resource to meet the needs of consumers. (Tr. 928-29).
      

     

    A. Conclusions
      of Law

     

    1. Staff’s
      Position

     

    Staff
      argues that PGL acted imprudently with respect to several decisions involving
      Manlove Field and proposes two disallowances for this imprudence. The first
      is
      $10,268,171, which is the value of the gas loaned to third-parties, minus the
      value of the gas those third-parties returned to Manlove at the time when the
      gas was returned. (Staff Init. Brief at 57, 62). Staff also proposes to disallow
      $25,920,181, which is the cost of gas PGL purchased to initially replace that
      gas, for a total proposed gross disallowance of $36,188,352. From this amount,
      Staff deducts $6,628,631; $4,378,466 of which represents the amount of profit
      gained from FERC operations, and $2,250,165 of which represents profits from
      PGL
      storage exchange transactions. The latter amount concerns third-party
      transactions and will be discussed in the Section here discussing third-party
      transactions. Thus, Staff’s net disallowance for imprudent use of Manlove Field
      is $29,559,721. (See,
      attached
      Schedule, Staff Init. Brief at 57, 62). 


    
      
         

        


        
        

      

      
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    Staff
      notes that in November of 2000, PGL allocated only half of Manlove’s storage
      capacity for consumers. The other half was used to deliver gas to third parties.
      PGL did not offset gas costs passed on to consumers with these revenues as
      Commission rules require. (Staff Ex. 7.00 at 54-55). Staff maintains that PGL
      over-allocated Manlove to third-parties in a manner that raised gas costs that
      were borne by consumers. Staff argues that PGL also over-allocated usage of
      Manlove at a time when the prices were high. According to Staff, PGL’s
      over-allocation of gas to third-parties additionally required it to purchase
      gas
      on the spot market to support Manlove’s peak delivery. Staff avers that PGL
      could have interrupted its third-party services to prevent the need for spot
      purchases for PGA customers, but it did not. PGL had an option through which
      it
      could have averted buying gas on an exceptionally high market in a
      colder-than-normal winter, but PGL did not avail itself of this option.
      (Id.
      at
      58).

    


    Staff
      points out that, by January 5, 2001, PGL’s third-party customers had drained all
      of the gas injected into Manlove for these third-parties’ benefit. Staff
      maintains that PGL allowed third-party customers to continue to remove gas
      after
      January 5, 2001 through March of 2001. (Staff Reply Brief at 55). Since
      third-parties had withdrawn their gas from Manlove as of January 5, 2001, PGL
      used the gas it stored for its ratepaying customers, and those of North Shore,
      to satisfy its third-party customers’ demands. (Id.
      at
      57-58). PGA customers suffered increased costs as a result. 

    


    Also,
      since PGL loaned gas to third-parties, Staff asserts that there was less volume
      in Manlove Field. A certain volume is necessary in order to keep the pressure
      at
      peak deliverability. (Staff Ex. 3.00 at 59). PGL bought gas for storage in
      Manlove to maintain sufficient pressure to keep Manlove at peak deliverability.
      The price of this new gas was borne by consumers instead of the third-parties.
      (Id.
      at 58;
      Staff Ex. 7.00 at 46). Staff contends that PGL acted imprudently when loaning
      gas stored for winter use by consumers to third-parties, rather than using
      it
      for ratepaying consumers. (Id.
      at 58).


    


    Staff
      argues that when PGL made these withdrawals at the expense of consumers and
      replaced that gas, it did so in a manner that conferred benefit on its parent,
      PEC. PGL’s major suppliers for spot gas were Enron NA and Enron MW. Staff avers
      that the partnership between PEC and Enron was established to earn profits
      for
      both partners, thus, Hub services with third-party customers allowed PEC to
      enjoy those profits. (Staff Init. Brief at 58-59). 

    


    Staff
      opines that PGL acted imprudently by not interrupting these third-party
      transactions, as PGL’s failure to interrupt them left PGL with far less capacity
      to deliver the inexpensive summer gas that was purchased for consumers. (Staff
      Ex. 3.00 at 47). Staff acknowledges that there could be instances where the
      amount of money paid by a third party could overcome the added costs incurred
      by
      contracting for non-interruptible services. That was not the case here, however.
      PGL did not use the revenues from third-party services to offset consumer gas
      costs. Therefore, Staff concludes that consumers received no benefit from these
      transactions, instead consumers were harmed. 

    


    Staff
      posits that PGL limited its withdrawals from Manlove during a time when
      consumers needed it most---in December of 2000. Staff avers that if PGL
      personnel really intended to meet PGL’s articulated goal of maintaining peak
      delivery from Manlove until late January of 2001, PGL personnel would have
      interrupted service to its third-party consumers. (Staff Reply Brief at 41;
      Staff Ex. 7.00 at 50). 


    
      
         

        


        
        

      

      
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    Staff
      states, essentially, that PGL ignores the record when relying on Mr. Wear’s
      statement that the amount of Manlove Field storage capacity used for consumers
      was established independently from its decisions to store gas for third-party
      services. Staff points to the evidence provided by Dr. Rearden, which Staff
      contends, established that PGL put third-party customers’ needs before those of
      consumers. (Staff Reply Brief at 42-43). 

    


    Staff
      disagrees with PGL’s assertion that displacing storage services for withdrawing
      additional gas from Manlove is not feasible. Staff points out that it has never
      asserted that PGL’s use of its leased storage was improper. Therefore, PGL’s
      argument on this issue is irrelevant. (Staff Init. Brief at 49). 

    


    Also,
      Staff states that while it may be true, for planning purposes that storage
      services are not substitutable, in operational terms, this is less true.
      According to Staff, when planning, PGL cannot consider all storage as the same,
      but in operations, PGL can alter the use of leased storage in conjunction with
      Manlove Field. Since PGL used displacement to perform third-party services,
      leased storage and storage at Manlove had an impact on each other. (Staff Reply
      Brief at 44; Staff Ex. 2.-00 at 31-41). Staff posits that PGL proffered no
      evidence of specific instances in which these operational factors occurred
      and
      to what extent they occurred during the reconciliation period. (Staff Reply
      Brief at 45-46). Also, according to PGL’s Initial Brief, PGL had no-notice
      services, which enabled PGL to withdraw or inject gas with little or no “lead
      time.” According to PGL, the no-notice services allowed it to serve load
      variations quickly, when unforeseen circumstances occurred. Staff concludes
      that
      PGL’s Brief establishes that it had service options with which it could have
      accommodated third-party obligations instead of allowing third parties to
      withdraw gas from Manlove allocated for PGA customer use. (Staff Reply Brief
      at
      47, citing PGL Initial Brief at 67). 

    


    Staff
      takes issue with PGL’s assertion that Staff’s use of the LIFO rate required PGL
      to have knowledge of information (PGL’s annual LIFO rate) that was not available
      to PGL personnel at the time the withdrawals from Manlove took place. Staff
      argues that it used LIFO to calculate the harm done to consumers as a result
      of
      PGL’s imprudent actions; Staff did not determine that PGL should use LIFO on a
      daily basis. (Staff Reply Brief at 50-51; 53-54). 

    


    Staff
      finds PGL’s contention that it made almost no “incremental” purchases beyond
      baseload purchases to be misleading, citing PGL’s Initial Brief at 68-69. Staff
      points out that PGL purchased additional gas for PGA customers due to its
      third-party transactions. According to Staff, it does not matter whether those
      purchases are baseload purchases or other purchases. (Staff Reply Brief at
      55).


    


    On
      Exceptions, Staff argues that in fact, PGL personnel should have been able
      to
      determine the cost of gas from one transaction relative to another at any given
      time. This is true, Staff continues, because the Public Utilities Act requires
      PGL to manage its gas costs in a manner that allows PGL to prove the prudence
      of
      transactions affecting the PGA. In support, Staff cites 220 ILCS 5/9-220. Staff
      points out that PGL’s alternative to Dr. Rearden’s determination as to the cost
      of replacement gas is based on the LIFO value of gas. The LIFO value, however,
      overstates the value of gas and therefore it understates the adverse impact
      of
      the third-party transactions. (PGL Reply Brief on Exceptions at
      10-11).

    


     

     


    
      
         

        


        
        

      

      
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    2. PGL’s
      Position

     

    


    Without
      any record citation, PGL argues that it did nothing wrong in failing to use
      gas
      stored at Manlove “in excess of the 25.5 Bcf of gas it bought and injected in
      Manlove.” PGL claims that if it had not used this gas for third-parties, it
      would have been in breach of contractual commitments and/or violating
      unspecified laws by “stealing gas that belonged to third parties.” (PGL Init.
      Brief at 68). PGL further maintains that none of its customers have a right
      to
      demand services from Manlove Field or any other specific resource. It points
      out
      that during its withdrawal period within the reconciliation period, Manlove
      never had a negative balance. Also, PGL avers that its accounting regarding
      what
      customer gets what gas has no operational relevance. (Id.
      at 70).
      According to Mr. Wear, consumers should not have “unfettered use” of a storage
      field. (PGL Ex. H at 30).

    


    PGL
      admits that it bought gas to replace that which it loaned to third-parties.
      It
      argues that it did not purchase as much replacement gas as Staff states. And,
      the loaned gas was replaced by third parties. PGL asserts that while Staff’s
      proposed disallowance is based on 4,914,182 Dth of “loan activity,” at most PGL
      only bought 352,342 Dth of replacement gas. PGL claims that no one was harmed
      by
      these purchases. (PGL Init. Brief at 70-71; PGL Ex. 14, 15). 

    


    Citing
      Mr. Wear’s testimony, PGL argues that no damage was done to consumers due to
      third-party transactions because, even if PGL did not engage in such
      transactions, the same amount of storage at Manlove would have been used for
      consumers. No additional volume of gas would have been in PGL’s storage
      inventory for consumer use. Mr. Wear stated, in essence, that injecting more
      gas
      into Manlove would have been financially unwise because then PGL would not
      have
      been purchasing gas at FOM prices, which is less expensive than gas purchased
      on
      the daily market. (PGL Init. Brief at 65; PGL Ex. F at 38-39).

    


    PGL
      asserts that Staff and the GCI failed to consider the purpose of its purchased
      storage. PGL does not state that it used purchased storage for consumer use;
      instead, it states that total withdrawals from purchased storage for the five
      winter months (November through March) were greater than those it made in the
      previous year. (PGL Reply Brief at 43). 

    


    PGL
      argues that displacing purchased storage service with additional gas from
      Manlove Field is not possible because only a marginal amount of “tweaking” can
      be done between these two types of storage. Its services from Natural Gas
      Pipeline are used to correct weather forecast errors. Also, PGL has firm storage
      from ANR Pipeline for swing loads in the fringe months of October, November,
      March and April, when Manlove is not available for withdrawals. PGL acknowledges
      that it had no-notice services from ANR, but, it contends that Manlove does
      not
      have a no-notice feature to it. Citing Mr. Wear’s testimony, PGL concludes that,
      in addition to the difficulty in cycling additional Manlove inventories during
      warmer than normal conditions and its effect on baseload purchases, PGL must
      maintain diversity for operational and reliability concerns. (PGL Init. Brief
      at
      67-68). 

    



    
      
         

        


        
        

      

      
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    PGL
      maintains that providing service to third-parties has also produced operational
      benefits for Manlove Field, as less gas becomes trapped and the field decline
      point is extended when more gas is stored at Manlove. PGL avers that increasing
      the amount of gas injected into Manlove Field by eight Bcf extended the decline
      point (from approximately 18 Bcf to approximately 27 Bcf), resulting in an
      increase of one Bcf of cumulative withdrawal. (PGL Initial Brief at 71).


    


    Citing
      no
      portion of the record, PGL states that it did not need to use Manlove Field
      for
      consumers in December of 2000 because purchased gas nominations could not be
      changed. PGL also contends that it did not use more of the gas stored in Manlove
      for consumers in January and February of 2001 because it did not need to do
      so.
      PGL points out that January and February are the coldest months of the year
      in
      Chicago. Usually, there are about nine days in January and February in Chicago
      where the temperature is below 10 degrees Fahrenheit. In January and February
      of
      2001, however, there was only one day in which the weather dipped below 10
      degrees Fahrenheit. PGL personnel could not know in advance that the storage
      would not be needed for anticipated cold days. (PGL Init. Brief at
      77-79).

    


    PGL
      avers
      that Dr. Rearden’s calculations as to the harm from its withdrawals for
      third-party use are improper because he used NYMEX futures prices to determine
      the price of gas at certain times. NYMEX data for January through March of
      2001
      would not establish that prices during that time would be lower than December
      2000 prices. And, according to PGL, NYMEX futures prices are a very poor
      indicator as to the actual price. (PGL Init. Brief at 80-81).

    


    PGL
      further argues that Dr. Rearden’s calculations as to the harm caused by its use
      of PGA gas for third-party use is improper because Dr. Rearden based his
      calculations on PGL’s LIFO price. PGL’s LIFO price, however, is unknown until
      the end of its fiscal year. PGL contends that therefore, it could not be used
      to
      make daily withdrawal decisions. (PGL Init. Brief at 81). Also, Staff’s
      recommended disallowance did not take PGL’s operational considerations, like
      peak day protection, its balancing needs and the possibility that summer prices
      could exceed winter prices, into account. PGL concludes that it must be flexible
      and use storage to accommodate discrepancies between planned and actual
      conditions. (Id.
      at
      81-82). 

    


    PGL
      agrees with Mr. Anderson that it used displacement to accomplish the third-party
      transactions. PGL maintains that it cannot color-code the molecules of gas
      it
      injects into Manlove. There is no guarantee that the same gas that was injected
      for a particular purpose, such as for consumers, will be withdrawn for that
      purpose. And, gas is a fungible commodity; it really does not matter what gas
      a
      person or entity receives. PGL concludes that it impossible, from an operational
      perspective, to state that a transaction did or did not have any recoverable
      gas
      costs associated with it. (Id.).
      

    


    PGL
      further asserts that Commission Staff should not be allowed to contest its
      use
      of Manlove Field because Commission Staff participated in PGL’s FERC proceeding
      in which PGL was certificated by the FERC to provide such services. (PGL Reply
      Brief at 49).

    



    
      
         

        


        
        

      

      
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    In
      its
      Brief on Exceptions, PGL contends that Dr. Rearden’s calculation of damages with
      regard to the purchases of replacement gas is too high because Dr. Rearden
      used
      the actual, but highest, withdrawals from Manlove Field, minus the LIFO price,
      to determine the avoided costs, or how much consumers were harmed. PGL reasons
      that CUB Witness Mr. Mierzwa’s estimated analysis is more accurate. However,
      according to PGL, given that both Staff and the GCI based their disallowances
      on
      factors that improperly exaggerate their calculations, an unspecified adjustment
      is necessary to reduce the disallowance to $12,960,090.50. PGL asserts that
      when
      making a determination as to the harm resulting from replacement gas purchases,
      Dr. Rearden improperly assumed that PGL could know what purchases had the
      highest price. (PGL BOE at 17-18). 

    


     

    3. GCI’s
      Position

     

    


    GCI
      witness Mr. Mierzwa testified that PGL used 12 Dths of gas to support
      third-party transactions conducted during the winter of 2000-2001. He
      recommended a disallowance of $51.2 million due to PGL’s imprudent use of
      Manlove Field. (CUB Ex. 2.00 at 7). The GCI argue that the actual amount of
      gas
      withdrawn from Manlove was 12 Dth of gas. This is the amount of gas that PGL
      could have used for consumers, but did not, resulting in PGL personnel having
      to
      purchase gas at prices more than double the average cost of the gas in storage.
      (GCI Init. Brief at 57-58). 

    


    The
      GCI
      contend that gas stored in Manlove and the costs of operating and maintaining
      Manlove are encompassed by the PGA. They argue that therefore, those facilities
      should be used first for consumers, or exclusively for consumers. The GCI
      concede that there is nothing wrong with using storage facilities to generate
      revenues from third-party transactions. Rather, the GCI maintain, PGL was
      unreasonable in engaging in such activities in a manner that increased consumer
      costs. (GCI Init. Brief at 56-57).

    


    The
      GCI
      take issue with PGL’s assertion that it could not have used more than 25.5 Bcf
      of gas for consumers during the time period in question. The GCI point to Mr.
      Mierzwa’s testimony that PGL could have used its computerized gas planning model
      to determine how much stored gas should be used for system supply, rather than
      giving third-party transactions priority over consumers. In fact, PGL did not
      even prepare a gas supply plan for the winter of 2000 through 2001 regarding
      warmer than normal weather conditions. Since PGL planned to make no daily-priced
      purchases if the winter of 2000 through 2001 was normal (not colder or warmer
      than normal), the GCI maintain that under warmer than normal conditions, it
      would be unlikely that PGL would purchase significant amounts of gas at the
      daily price. (GCI Reply Brief at 45-48). 

    


    The
      GCI
      additionally point out that while PGL argues that adding more gas to Manlove
      Field extended Manlove’s decline point, which increased the amount of gas that
      could be stored at Manlove, PGL witness Mr. Puracchio was unable to identify
      any
      economic benefit to consumers associated with the extension of Manlove’s decline
      point. (GCI Init. Brief.
      at 53;
      Tr. 681-82). 

    



    
      
         

        


        
        

      

      
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    The
      GCI
      further posit that PGL entered into the third-party transactions in the summer
      of 2000, at the same time when it would also be planning to store enough gas
      to
      serve customers under extreme winter conditions. The GCI conclude that because
      PGL failed to maintain sufficient flexibility to meet consumer needs in the
      winter of 2000 through 2001, PGL cannot now complain that it could not meet
      those needs due to contracts that PGL imprudently entered into. (Id.
      at
      48).

    


     

    4. Commission
      Analysis and Conclusions

     

    


    The
      PUA
      requires PGL to do what is reasonable and necessary to prudently incur gas
      costs. (220 ILCS 5/9-220). PGL failed to provide evidence establishing that
      its
      withdrawal practices from Manlove Field during the winter of the reconciliation
      period complied with the prudence requirement in the PUA. Not only did PGL
      fail
      to meet its burden of proof with respect to its withdrawal practices, but other
      parties provided ample evidence showing PGL acted imprudently.

    


    As
      an
      initial matter, what the Commission finds particularly appalling is PGL’s third
      party transactions with Enron that increased consumers PGA costs without giving
      consumers the benefits of any profits gained from these transactions. As
      discussed elsewhere in this order, the Commission can think of no other
      explanation for the creation of the corporate consanguinity here than to divert
      revenues from PGL to an unregulated entity. Parties to Manlove Jumpstart and
      38
      Special clearly intended to use PGL’s PGA assets for the unregulated entities’
shareholder gain, to the detriment of consumers. This lends considerable support
      to the Commission’s finding that many of PGL’s third party transactions
      involving gas stored at Manlove were imprudent.

    


    PGL
      contends that stored gas cannot be labeled for a particular customer’s use. From
      a purely operational perspective, this is true. However, proper accounting
      should allow PGL to track gas stored in Manlove for PGA customer use and gas
      stored for third party use. The record demonstrates that PGL knew of at least
      three accounting options for managing third party withdrawals from Manlove
      Field. PGL could have used the lower-priced summer gas for third-parties and
      allowed consumers to benefit from the profits from those transactions. It also
      could have used the lower-priced summer gas for consumer benefit and charged
      third-parties for the cost of higher-priced winter gas. The third of PGL’s
      options, charging consumers for higher-priced gas and loaning the less expensive
      summer gas to third parties, with none of the profits benefiting consumers,
      is
      what PGL chose to do. This flies in the face of the requirement that PGL offset
      any costs of using PGA assets with any profits gleaned from such
      transactions.

    


    Further,
      PGL’s contention that no customer has the right to use Manlove overlooks the
      evidence, which concerns what gas was used for third-parties and for consumers,
      in terms of the accounting treatment it received. No party has asserted that
      any
      customer of PGL, consumer or otherwise, has a right to use a particular
      facility. Rather, various parties in this proceeding have consistently
      maintained that PGL had a duty, conferred upon it by Section 9-220 of the PUA,
      not to engage in transactions in a manner that increase consumer gas
      costs.

    


    It
      is
      noteworthy that PGL contends that its use of storage provides a “hedge” for
      consumers. Yet, as Staff established, during the winter of 2000-2001, Manlove
      Field was not providing much of a “hedge” for consumers. 


    
      
         

        


        
        

      

      
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    PGL’s
      factually unsupported conclusion that it should not be required to “use gas in
      excess of the 25.5 Bcf it bought and injected into Manlove” to provide consumers
      with gas lacks validity for many reasons. (See,
      PGL
      Init. Brief at 68). This conclusion of fact is asserted with no factual basis
      cited. This Commission need not consider factually unsupported conclusions
      of
      fact. (Fraley
      v. City of Elgin,
      251 Ill.
      App. 3d 72, 77, 621 N.E.2d 276 (2nd
      Dist.
      1993)). Additionally, PGL’s conclusion is erroneous. During much of the time
      when PGL was withdrawing gas for third-parties from Manlove, its inventory
      for
      third-party gas was at a negative balance. Consumers did not even have full
      access to the 25.5 Bcf of gas allocated for their use. 

    


    PGL
      claims its third-party services were not interruptible without providing any
      evidence to support this assertion. In fact, the record demonstrates PGL could
      interrupt third party services. The Commission finds it difficult to believe
      that PGL could not have interrupted its third-party contractual obligations
      to
      honor its obligations to consumers, had it so chosen. PGL’s decisions to
      position third-party requests before the needs of consumers placed PGL in the
      undesirable position of being required to buy large quantities of replacement
      gas at higher prices. In turn, PGL passed these imprudently incurred costs
      on to
      PGA customers.

    


    Further,
      PGL’s assertion that not using stored gas third-party contractual commitments
      and unspecified laws would be “stealing” that gas from third-parties contradicts
      Mr. Wear’s testimony that third-party services could be interrupted. (Tr.
      929-35). It also contradicts PGL’s statement on page 25 of its Initial Brief
      that its park and loan services were interruptible. (PGL Init. Brief at 25).
      PGL
      cannot have it both ways. It would seem to the Commission that prudent storage
      management would not place the needs of third parties above the needs of PGA
      customers. This PGL did not do. 

    


    Mr.
      Wear’s testimony that PGL could not have used its purchased storage to
      accomplish third-party transactions does not aid PGL. The propriety of PGL’s use
      of its purchased storage has never been an issue. Therefore, this testimony
      is
      irrelevant. Even if this testimony was relevant, it is vague. Mr. Wear cites
      no
      examples as to why PGL had no alternatives to use of Manlove for third-parties,
      or even why PGL decision-makers entered into third- party storage contracts
      knowing that use of Manlove Field was its only option. Staff offered evidence
      to
      sufficiently contradict Mr. Wear’s testimony on this issue. As Staff points out,
      the existence of no-notice contracts is some indicia that PGL had alternatives
      to use of Manlove Field. 

    


    PGL
      believes the Commission should compare PGL’s storage withdrawals during the
      reconciliation period to PGL’s withdrawals during the previous winter. This does
      not aid PGL because there is no evidence here as to the circumstances in the
      winter of 1999-2000. For example, PGL could have been using Manlove in the
      previous year for third-party storage in the same manner in which it did here.
      There is no evidence here establishing what was done in the previous year.
      Certainly, there is evidence here establishing that the GPAA was in effect
      during the previous year, but beyond that, there is no evidence establishing
      what occurred during the winter of 1999 through 2000. 

    



    
      
         

        


        
        

      

      
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    PGL’s
      argument that it used baseload gas, instead of swing gas, to replace the stored
      summer gas misses the point. The issue here is not where the replacement gas
      came from. Rather it is what consumers were required to pay as a result of
      PGL’s
      decision to use its consumer“hedge”
      for third-parties. PGL’s Exs. 14 and 15 indicate that great amounts of gas
      stored for consumer use were withdrawn from Manlove and used for third-parties.
      PGL Ex. 15 compares its swing purchases in the month of March to the value
      of
      the loan paybacks that occurred in that month. However, it does not mention
      the
      value of the gas when it was loaned to third-parties. (See,
      PGL Exs.
      14, 15). These Exhibits do not establish that that PGL acted prudently.


    


    PGL’s
      contention that the loaned gas was paid back, therefore no harm was done, is
      also without merit. Dr. Rearden calculated the value of gas bought, less the
      value of the gas returned by third-parties. (See,
      e.g., Staff
      Init. Brief at 57). Because third-party gas was not returned until March through
      September of 2001, that gas was not available to consumers during the winter,
      meaning PGL had to purchase any supply shortfalls elsewhere, typically at
      increased costs. And, the gas was worth less when it was paid back by
      third-parties. 

    


    Mr.
      Puracchio, who is PGL’s Gas Storage Manager, testified that injecting more gas
      into Manlove makes it more useful because this use extends the decline point
      of
      Manlove, which is the point, at which, a given daily withdrawal rate can no
      longer be met. (PGL Ex. M at 8). The problem with this assertion is that there
      is no credible evidence in this record that the additional gas injected could
      not have been used to confer a benefit on ratepaying consumers, either directly
      or indirectly, by passing the profits on from third-party use of Manlove to
      consumers. At a minimum, PGL should have managed the extra storage space at
      Manlove in a way that did not increase the costs passed on to consumers. The
      record shows that PGL’s management of Manlove withdrawals increased consumers
      costs either indirectly, through increased costs caused by but not borne by
      third-parties and directly, through PGL’s practice of “dipping into” the gas
      purchased for consumers and using that gas for third-parties, requiring PGL
      to
      purchase more expense replacement gas. This only leads to a conclusion of
      imprudence.

    


    PGL’s
      assertion that it did not use Manlove in December as much as has been forecast
      is factually unsupported. We need not consider it. (Fraley
      v. City of Elgin,
      251 Ill.
      App. 3d 72, 76, 621 N.E.2d 276 (2nd
      Dist.
      1993); In
      re
      Marriage of Thornquist,
      79 Ill.
      App. 3d 791, 798, 399 N.E.2d 176 (1st
      Dist.
      1979)). 

    


    PGL’s
      assertion that it did not need to use the gas stored in Manlove Field because
      the weather was warm in the winter of 2001 is equally without merit. PGL, the
      party that had the burden of proof, could have provided evidence establishing
      the weather conditions in January and February of 2001. It did not. Merely
      stating that there was only one day in that two-month period in which the
      weather dipped below 10 degrees Fahrenheit does not establish that the weather
      was not cold during this period. PGL provided no evidence as to what the weather
      was like or how the weather affected consumer demand. Furthermore, the
      Commission finds it difficult to follow PGL’s logic here when it actually
      started withdrawals from Manlove earlier than planned due to colder than normal
      weather in December 2000. PGL has not established that it did not need to use
      gas stored in Manlove Field during January and February 2001 because of warmer
      than usual weather conditions. 

    



    
      
         

        


        
        

      

      
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    PGL’s
      contention that NYMEX futures prices are not the same as actual prices also
      ignores the fact that it had the burden of proof. PGL could have presented
      evidence establishing what it determined was the actual relevant prices to
      be.
      It did not. The only evidence as to what gas was worth at the pertinent times
      on
      this issue was Dr. Rearden’s assessment of NYMEX futures prices. Dr. Rearden did
      not proffer NYMEX futures prices to suggest that PGL should have purchased
      futures in December, which is what PGL suggests in its argument. Rather, he
      proffered those prices to determine the value of gas on the open
      market.

    


    Mr.
      Wear’s testimony that the additional working capacity would not have been deemed
      to be useful for use by ratepaying consumers is also not credible. Mr. Wear
      stated that, to place more gas in Manlove would be financially unwise because
      PGL would then be using stored gas, in part, instead of purchasing baseload
      gas.
      This, he averred, is bad because baseload gas was the less expensive FOM Gas,
      as
      opposed to gas purchases on the daily market. (PGL Ex. F at 38-39). There
      is
      nothing in this record, however, indicating that using gas already in storage
      would be more expensive than buying FOM gas. While it is true that FOM gas
      is
      generally less expensive than gas purchased on a daily market, there is no
      evidence that using more of Manlove’s storage for consumers would raise the cost
      of gas passed on to consumers. And, as the GCI point out, under warmer than
      normal conditions, it is unlikely that PGL would need to purchase much gas
      at a
      daily price. Mr. Wear again misstated facts, casting further doubts as to his
      credibility. 

    


    Record
      evidence indicates that PGL loaned gas to third-parties that was originally
      purchased to meet some of consumers’ supply needs during the winter months.
      Commission regulations bar a utility from engaging in any transaction that
      raises the costs that are passed on to consumers. These regulations provide
      that
      utilities “shall refrain from entering into any such transaction” that would
      raise such charges. (83 Ill. Adm. Code 525.40(d)). (emphasis added). Were the
      Commission to accept PGL’s position, we would only encourage utilities to use
      assets meant for consumers as a means to cull corporate profit that is not
      passed on to consumers. We would also be encouraging utilities not to actively
      participate in gas price reduction on behalf of consumers. This scenario was
      not
      the intent of this Commission when it promulgated Section 525.40. (Ill.
      Commerce Comm., on its own Motion: Revision of 83 Ill. Adm. Code 525,
1995
      Ill.
      PUC Lexis 592 at *17). Section 525.40(d) was meant to deter utilities from
      subsidizing off-system transactions with assets used for consumers and thus
      subject to a PGA. This
      is
      not to suggest that the Commission disapproves of all third-party transactions
      on the part of utilities. Rather, when third-party transactions involve use
      of
      PGA assets, use of those assets, especially gas supply, must be prudent.


    


    The
      Commission finds PGL acted imprudently with regard to many aspects of its
      operation of Manlove Field. Any disallowance associated with the Commission’s
      finding of imprudence for this provision is properly included in the Settlement
      Agreement and Addendum as discussed in. 


    
      
         

        


        
        

      

      
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    VI. Unaccounted
      for Gas- “GLU”

     

    A. Findings
      of Fact

     

    According
      to Staff witness Mr. Anderson, Unaccounted-for Gas (“GLU”) is defined as the
      difference between gas available from all sources and gas sales accounted for
      by
      the utility as sales, net interchange and company use. This difference, or
      “lost” gas can occur in a variety of ways, such as leakage, theft, meter
      inaccuracies, or temperature or pressure changes. (Staff Ex. 2.00 at 50). GLU
      is
      an accounting term for gas that has become lost or is otherwise unaccounted
      for.
      It is the difference between the amount of gas sent out and that which has
      been
      sold. (Tr. 702). GLU is recovered by PGL in its PGA. (Staff Ex. 2.00 at 50).
      

    


    Evidence
      adduced during the hearings shows PGL’s GLU levels for several years. In fiscal
      year 1998, PGL reported GLU at 1.10 %. (Tr. 714). In fiscal 1999, it was 1.09%.
      In fiscal 2000, it was at 0.84 %. In 2002, PGL’s GLU was 2.89%. (Id.).
      However, during the reconciliation period, PGL’s GLU level was approximately
      3.76%, which is an increase from the previous year of almost 400%. (Tr. 699).
      Management at PGL was aware that its GLU increased dramatically during the
      time
      period in question. (Tr. 694). 

    


    PGL
      witness Mr. Zack concluded that the level of GLU recorded during the
      reconciliation period was not excessive. Also, he did not believe that
      increasing GLU from 1999 to 2002 represented a trend. Mr. Zack testified that
      it
      is not uncommon for GLU to be 6.0%. He bases his conclusions on his experience
      with GLU, not his experience at PGL. Mr. Zack is in charge of gas supply
      planning, gas supply administration, gas control and gas storage for both PGL
      and North Shore. (Tr. 735). Mr. Zack was not in PGL’s gas supply administration
      department during the reconciliation period. (Tr. 736). 

    


    City-CUB
      witness Ms. Decker testified that during the reconciliation period, PGL
      consumers paid for a significantly larger amount of gas than was actually
      delivered during the reconciliation period. (City-CUB Ex. 1.0 at 28; 2.0 at
      25).
      Because PGL personnel did not correct this increase in GLU, she opined that
      PGL
      was imprudent. (Id.
      at
      33-34). While GLU may be a relatively low in terms of a percentage, here, it
      represents a very large amount of gas. (Id.
      at 41).
      Ms. Decker pointed out that PGL initiated an investigation to determine why
      GLU
      increased so much. (City-CUB Ex. 1.0 at 34-35).

    


    Ms.
      Decker averred that gas shippers acknowledge that a small percentage of gas
      in
      their pipeline, or “throughput,” is taken or consumed along the way to run
      compressors as the gas travels through shipping pipelines and storage devices.
      (City-CUB Ex. 1.0 at 29). She also stated that a significant amount of PGL’s
      total gas is customer-owned gas. Ms Decker recommended a disallowance in the
      amount of $38,102,680, which represents excess costs PGL recovered from
      consumers. (Id.
      at 34).


     

     


    
      
         

        


        
        

      

      
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    B. Conclusions
      of Law

     

    1. Staff’s
      Position

     

    Staff
      took no position on the issue of excess GLU. As has been previously discussed
      herein, Staff recommended a disallowance in the amount of $4,628,267, which
      represents the amount of maintenance gas that was improperly accounted for
      as
      GLU and recovered through the PGA. PGL does not contest Staff’s proposed
      disallowance. (See,
      e.g., PGL
      Init.
      Brief at 104). 

    


     

    2. GCI’s
      Position

     

    


    City-CUB
      witness Ms. Decker testified that during the reconciliation period, PGL
      consumers paid for a significantly larger amount of gas than was actually
      delivered during that period. (City-CUB Ex. 2.0 at 25). During the time period
      in question, PGL’s GLU increased by approximately 400%. (Id.
      at
      33-34). According to GCI, PGL executives were alarmed at the GLU levels. The
      GCI
      argue that PGL personnel did not attempt to correct this problem, therefore,
      PGL
      was imprudent. (Id.
      at
      33-34; GCI Initial Brief at 74-77). Ms. Decker opined that the Commission should
      disallow $38,102,680, which represents excess costs PGL recovered from consumers
      due to PGL’s excessive GLU. (Id.
      at 34).
      The GCI assert that this unexplained increase in GLU, which resulted in
      increased costs to consumers, was imprudent. (See,
      e.g.,
      GCI
      Initial Brief at 14, 74-76). 

    


    Furthermore,
      PGL’s claim that its GLU was within the range of PGL’s Illinois peers is
      hindsight, as this could not have been known at the time in question. The GCI
      conclude that therefore, consideration of other Illinois gas companies’ GLU is
      not permitted. (GCI Reply Brief at 78). 

    


     

    4. PGL’s
      Position

     

    


    PGL
      argues that Ms. Decker’s benchmark of 1% GLU was based solely on PGL’s GLU from
      two prior years. This, PGL contends, is an arbitrary benchmark. Also, Ms. Decker
      did not include maintenance gas in her total figure when determining the
      percentage of GLU. If she had done this, GLU would have been reduced from 3.76%
      to 3.44%. (Id.
      at 91).
      PGL presented statistics as to its Illinois peers as to their GLU during the
      time period in question. Based on these statistics, PGL concludes that the
      amount of its GLU was not imprudent. (PGL Init. Brief at 90). 


    
      
         

        


        
        

      

      
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    On
      Exceptions, PGL maintains that GLU rises and falls by its very nature. It
      concluded that given the fluctuating nature of GLU, a comparison of
      multiple-year averages is a better indicator of PGL’s performance, as opposed to
      a single year. (PGL
      Reply BOE at 6-7). According to PGL, what appears to be a large increase in
      GLU
      in terms of percentage, can be quite large in actual quantity, even when the
      percentage changes from one small percentage to another small percentage.
      (Id.
      at
      7).

    


     

    5. Commission
      Analysis and Conclusions

     

    


    The
      Commission agrees with the GCI that PGL should have exercised more care with
      respect to GLU. We also agree with the GCI that evidence of the GLU levels
      of
      PGL’s peers during the time period in question could not have been known to PGL
      personnel at that time. It is, therefore, impermissible hindsight and we will
      not consider it.

    


    The
      Commission cannot state, based on this record, that PGL’s conduct rose to the
      level of imprudence. PGL personnel did note that there was a problem. However,
      there is simply no evidence that, if PGL personnel had undertaken any course
      of
      action, its GLU would have been reduced. We also note that Ms. Decker did not
      take into account that maintenance gas, which, when properly recorded, will
      increase the total amount of gas, and reduces her GLU percentage, albeit
      slightly. 

    


    The
      evidence established that GLU can occur in a variety of ways, such as meter
      inaccuracies, leakage, or temperature changes. (See,
      e.g.,
      Staff
      Ex. 2.00 at 50). The source of the problem can be difficult to detect. There
      is
      no evidence that PGL personnel knew or should have known what was causing a
      sharp increase in its GLU during the time period in question. Ms. Decker’s
      testimony on GLU speaks to what is acceptable for pipelines, not LDCs.
      (See,
      City-CUB
      Ex. 1.0 at 29). There is no evidence that LDCs like PGL would have the same
      factual considerations as those of pipelines. Finally, we agree with PGL that
      a
      benchmark based on two previous years is not reasonable, as, generally,
      benchmarks are based on a wider time-frame in order to ensure that anomalies
      do
      not occur. Therefore, the Commission declines to accept the GCI’s recommended
      disallowance on this issue. 

    


    The
      GCI’s
      point is well-taken regarding Ms. Decker’s testimony as to how PGL corrected its
      level of GLU. The PGL investigation she referred to did not occur in the
      reconciliation period. However, there is no evidence that in this proceeding
      if
      PGL personnel had undertaken an investigation in the reconciliation period,
      they
      would have been able to determine the cause of the GLU and correct the problem.
      

    


    Finally,
      the GCI blame PGL for the fact that Ms. Decker’s benchmark for GLU was only two
      years in duration, as the GCI assert that this was all the information that
      PGL
      gave them in discovery. However, the remedy for an incomplete discovery response
      is another discovery request or a motion to compel. We note that there is no
      indicia that this situation is like the one regarding enovate’s activities,
      where the evidence was allegedly with Enron and PGL claimed that therefore,
      it
      did not have that evidence.

    


     

     


    
      
        


        
        

      

      
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    VII. Off-System
      Transactions in General

     

    A. Findings
      of Fact

     

    According
      to PGL, off-system transactions (i.e.,
      sales
      for resale) are a routine part of the management of its system. PGL used Manlove
      Field and Mahomet Pipeline to provide third-party services. (See,
      e.g.,
      Staff
      Ex. 3.00 at 45). PGL also used leased storage and PGA gas to provide third-party
      services. PGL did not offset PGA costs passed on to consumers with profits
      earned from these. (Id.).
      

    


    Mr.
      Wear
      averred that all off-system transactions must accomplish one or more of the
      following criteria: a.) provide a positive commodity or demand credit; b.)
      meet
      operational needs; or c.) test the logistics or feasibility of future
      transactions that would meet operational needs or provide demand/commodity
      credits. (PGL Ex. C at 29). According to Mr. Wear, off-system transactions
      can
      reduce the gas costs PGL passed on to consumers in its PGA. When an off-system
      transaction uses an asset, the costs of which PGL recovers through its PGA,
      the
      revenues from that transaction flow through that PGA gas charge as well. Mr.
      Wear acknowledged that the reason such revenues offset gas charges is that
      the
      law requires PGL to use those revenues to offset the gas charges PGL passes
      on
      to consumers in its PGA. (PGL Ex. C at 30). PGL classified its system
      transactions in two categories, Hub and PGA. Mr. Wear testified that the
      third-party transactions that used only base rate assets were considered to
      be
      Hub transactions. Those transactions that used gas charge assets were considered
      to be PGA transactions. (Tr. 993). 

    


    GCI
      witness Mr. Mierzwa testified as to how a gas utility should determine how
      much
      storage should be used to serve its load. He opined that a major gas utility
      such as PGL should have utilized its Gas Dispatch Model to determine how much
      gas storage should be used for system supply. However, PGL personnel chose
      not
      to use the model during the winter of 2000/2001. (CUB Ex. 4.0, at 25-28). Mr.
      Mierzwa also testified that, based on the gas supply plan prepared by PGL,
      an
      additional 12 Bcf of storage could have been used. PGL could have reduced the
      amount of baseload purchases it made during warmer than normal weather by merely
      reducing baseload purchases up to 13.5 Bcf during the months of December, 2000
      through February of 2001. (Id.).
      Mr.
      Mierzwa proposed a disallowance for PGL’s storage and exchange activities that
      do not involve loans of gas in the amount of $27.1 million. He used the average
      cost of gas that was used to displace higher gas costs. In Mr. Mierzwa’s
      opinion, the amount of gas used for third-parties was actually 12 Bcf of gas.
      (Id. at 10). Mr. Mierzwa further opined that Staff’s use of PGL’s LIFO rate
      understated the adverse impact on sales customers of the PGL storage and
      exchange activities. Under PGL’s LIFO rate, storage injections and withdrawals
      are based on the average cost of gas for the fiscal year. Gas injected by
      third-parties in the summer of 2000 would not have been included in the LIFO
      rate. (Id.
      at
      12-15). 

    


     

     


    
      
        


        
        

      

      
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    B. Conclusions
      of Law

     

    1. Staff’s
      Position

     

    Staff’s
      total proposed cost disallowance for off-system loans of gas, or what Staff
      has
      referred to as non-tariff services, is $6,628,631. Staff’s recommended
      disallowance contains two components: $4,378,466 for revenues from PGL’s FERC
      operations and $2,250,165 for its storage exchange transactions. Staff argues
      that the revenues from PGL’s off-system transactions should be included in PGL’s
      PGA, as opposed to its base rates. Including these revenues in PGL’s PGA would
      offset the gas costs that are borne directly by consumers through the PGA.
      Staff
      contends that to accomplish the off-system transactions, PGL used all of its
      assets, including gas, leased storage and the Mahomet Pipeline and Manlove
      Storage Field. Pursuant to this Commission’s PGA regulations, the costs
      associated with these items, (i.e.,
      leased
      storage and flowing gas) as well as the profits therefrom, should be passed
      on
      to consumers through PGL’s PGA. (See,
      e.g.,
      Staff
      Ex. 12.00 at 31; Staff Init. Brief at 63-64). 

    


    PGL’s
      use
      of the term “above the line” in its Initial Brief is incorrect, according to
      Staff; it refers to an incomparable situation to the one here-revenues and
      expenses that are included in a utility’s operating income for purposes of
      determining rates. Staff argues that an expense recorded “above the line” can be
      flowed through a PGA. (Staff Reply Brief at 63). 

    


    Staff
      contends that if the Commission were to allow PGL to recover the profits from
      use of these assets in base rates, the Commission would provide PGL with the
      incentive to unnecessarily increase the cost of gas passed on to consumers.
      Indeed, according to Staff, here, PGL did raise gas costs borne directly by
      consumers in order to support its off-system transactions. (See,
      e. g.,
      Staff
      Ex. 3.00 at 5). 

    


    Staff
      argues that any third-party transaction used at least three assets, Mahomet
      Pipeline, Manlove Field and displaced gas. Staff points out that displaced
      gas
      is a recoverable gas cost, citing 83 Ill. Adm. Code 525.40(a)(1). Staff contends
      that Section 525.40 of the Commission’s rules does not address whether an asset
      is recorded
      through
      base rates. Rather, this Rule speaks to whether any associated cost necessary
      to
      complete a transaction is a recoverable cost, as is defined in Section
      525.40(a). (Staff Reply Brief at 58). 

    


    Staff
      maintains that PGL is required by law to refrain from actions that raise gas
      costs. When, as is the case here, non-tariff services alter the delivery of
      gas
      to ratepayers from least cost values, these non-tariff services raise the amount
      of gas costs passed on to consumers. Also, when PGL does not use the profits
      gleaned from third-party loans to offset gas costs borne by consumers, it does
      not have the incentive to limit non-tariff services in a manner that considers
      the needs of consumers. (Staff Ex. 10.00 at 9). 

    



    
      
         

        


        
        

      

      
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    Staff
      contends that use of displaced gas allowed PGL to enter into transactions that
      used facilities without the physical delivery of the same molecules of gas.
      Thus, displaced gas molecules injected into PGL’s system substituted for gas
      molecules that are presently in PGL’s system. (Staff Initial Brief at 65-66).
      Citing PGL’s Section 525.40 Brief at 12, Staff posits that PGL admitted that the
      transfer of gas may occur at different points in time and at different
      locations. And, under PGL’s FERC operating statement, PGL entered into
      transactions that first required it to loan gas to third-parties, which was
      repaid in-kind at a later date. Staff contends that it was impossible for PGL
      to
      accomplish such a transaction without using displacement of gas in its system.
      Because the cost of natural gas is defined as a recoverable gas cost by Section
      525.40(a)(1) of the Commission rules, Staff avers that PGL is required by
      Section 525.40(d) to include the revenues from use of that gas in its
      determination of what costs are recoverable here. (Staff Init. Brief at 66-67).
      

    


     

    2. PGL’s
      Position

     

    


    PGL
      disagrees with Staff and the GCI that the revenues in question are derived
      from
      transactions that are subject to gas charges. This is true, PGL continues,
      because the costs involved for all of the assets involved in these transactions,
      such as PGL’s transmission pipelines and Manlove Field, are included in PGL’s
      base rates, not passed through its gas charge. (PGL Init. Brief at 72-73).
      Mr.
      Wear stated that “none of the costs supporting PGL’s Hub transactions are
      recovered through the gas charge.” (PGL Ex. C at 33).

    


    PGL
      contends that the expenses it incurs in connection with Manlove Field and the
      Mahomet Pipeline are included in its base rates. It reasons that therefore,
      the
      profits from use of those assets should be in base rates, not passed on directly
      to consumers in its PGA to offset the cost of gas. PGL also asserts that because
      its Hub services are available only because of base rate assets that it owns,
      Section 525.40(d) does not require PGL to flow the revenues from these
      transactions through its PGA. (PGL BOE at 23). 

    


    PGL
      also
      argues that this Commission has consistently ruled that third-party revenues
      are
      not to be included in PGAs, citing 83 Ill. Adm. Code 525.40(d). (PGL Reply
      Brief
      at 72-73). PGL points to Northern
      Ill. Gas Co., Application for an Order Approving its Accounting Treatment
      Related to Certain Market Area Hub Activities,
      1996
      Ill. PUC lexis 151, *11), and contends that the Commission allegedly required
      Nicor to account for its revenues by including them in its next rate case.
      (Id.
      at
      74-75). Also, in Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 956, and Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 201, the Commission again found Nicor’s above-the-line treatment
      of its third-party revenues to be acceptable. (PGL Init. Brief at 74-75).


    


    PGL
      further posits that Staff is wrong in asserting that the two Nicor/North Shore
      pipeline contract dockets were exempt from PGA consideration because they were
      pursuant to tariffs. These contracts were filed pursuant to Section 7-102 of
      the
      PUA. According to PGL, there is no tariff under which Nicor provided service
      to
      North Shore. (PGL Reply Brief at 48). 

    



    
      
         

        


        
        

      

      
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    PGL
      further maintains that until this Commission issued a final Order in Nicor’s
      recent rate case, docket 04-0779, this Commission had a longstanding practice
      of
      allowing Nicor to account for its Hub revenue through base rates. PGL maintains
      that fairness dictates that the appropriate forum for deciding the treatment
      for
      PGL’s hub revenue is in its next rate case. (PGL BOE at 22). 

    


    Also,
      according to PGL, Staff’s assertion that only system supply gas can be used for
      third-party transactions elevates form over substance. There are many sources
      of
      gas, such as recoverable cushion gas and gas that is supplied to transportation
      and delivery customers, which do not touch the gas charge. Mr. Anderson knew
      that PGL had transportation programs, but he could not testify if gas was
      purchased from PGL or others. (Tr. 871-72). However, 40% of PGL’s annual
      throughput is gas supplied by third-parties who buy their gas from non-utility
      sources. Citing Section 525.40 generally, PGL argues that gas in storage affects
      its gas charge only when it is delivered to end users. Citing Mr. Wear’s
      testimony, PGL contends that merely because a transaction involves displacement
      does not mean that PGL has purchased gas for which the costs are recovered
      through its PGA. (PGL Reply Brief at 45-47). 

    


    PGL
      also
      cites Mr. Anderson’s testimony and asserts that it is impossible to know if the
      molecules placed in the system are the same as those later delivered to an
      entity. Also, according to PGL, third-party services can be supported without
      using gas charge assets. Interstate pipelines with no merchant functions provide
      services like park and loan services. PGL points to a service provided by
      Natural Gas Pipeline, but does not state that it ever contracted for this
      service. (PGL Reply Brief at 47-48). 

     

    3. GCI’s
      Position

     

    


    The
      GCI,
      also, cite 83 Ill. Adm. Code Section 525.50(d) and contend that revenues from
      use of PGL’s PGA assets, such as leased pipeline and gas, must offset consumer
      gas costs through the PGA. The GCI point out that this regulation requires
      that
      such revenues must offset PGA gas costs if
      any
      of the
      costs associated with the transaction in question is a “recoverable gas cost,”
as is defined in Section 525.40(a). (emphasis added). Because PGL used
      displacement of gas to accomplish these transactions, PGL could move the gas
      without incurring the cost of physically transporting gas to the customer,
      or
      having that customer arrange for transportation. The costs PGL avoided by using
      gas injected into storage to serve consumers on the operations of PGL’s system
      increased the revenues involved. However, consumers paid the entire cost of
      storage and for pipeline use without receiving any corresponding benefit. (GCI
      Init. Brief at 51-52).

    



    
      
         

        


        
        

      

      
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    The
      GCI
      further contend that Northern
      Ill. Gas Co., Application for an Order Approving its Accounting Treatment
      Related to Certain Market Area Hub Activities,
      1996
      Ill. PUC Lexis 151, does not concern Section 525.40. In that docket, this
      Commission simply rejected Nicor’s contention that third-party revenues should
      be split between its shareholders and ratepayers and concluded that the
      ratepayers are entitled to the full amount of such revenues. It was in the
      context of rejecting Nicor’s proposal to share revenues, whose above-the-line
      treatment was not challenged, that the Commission determined that revenues
      should be treated above-the-line. (GCI Reply Brief at 43-44). And, in the two
      other Commission decisions cited by PGL, Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 956, and Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 201, no party argued that third-party revenues should flow
      through a PGA. (Id.
      at
      44).

    


    The
      GCI
      point out that PGL did not dispute that the transactions in question were
      accomplished through displacement. The GCI assert that the unrefuted evidence
      of
      record establishes that displacement is not possible without use of PGA gas.
      Also, leased pipeline and leased storage was used in displacement. These costs
      are recoverable gas costs under Section 525.40(a)(2) and the associated revenues
      must be used to offset gas charges. (GCI Initial Brief at 42-43). 

    


     

    4. Commission
      Analysis and Conclusions

     

    


    PGL’s
      contention that this Commission has consistently construed Section 525.40 of
      its
      rules in a manner that allows revenues from non-PGA assets to be accounted
      for
      in base rates is without a basis in fact. None of the cases PGL cites even
      mention Section 525.40. Moreover, the language in this regulation is
      unambiguous. This Commission cannot look to extrinsic sources to ascertain
      the
      meaning of a law that is unambiguous. (People
      v. Hari,
      355 Ill.
      App. 3d 449, 456-57, 822 N.E.2d 889 (4th
      Dist.
      2005)). Finally, as Staff points out, the term “above the line” refers to what
      is included in a determination of utility operating income when setting base
      rates, as opposed to what costs utility shareholders bear. This proceeding
      does
      not involve setting base rate revenues or determining what costs are recovered
      through base rates. It is not applicable to the situation here, where the
      Commission is determining what costs are borne directly by consumers through
      a
      PGA.

    


    The
      cost
      of system supply gas and any other gas “purchased for injection into the gas
      stream” is an expense that is passed directly on to consumers through a PGA. (83
      Ill. Adm. Code 525.40(a)(1)). The cost of leased pipeline and leased storage
      is
      also a PGA expense. (83 Ill. Adm. Code 525.40(a)(2) and (3)). All revenues
      from
      any transactions that use these assets must offset the costs imposed on
      consumers by a PGA, as the regulations further provide that recoverable gas
      costs “shall be offset by the revenues derived from transactions at rates that
      are not subject to the Gas Charge(s) if any of the associated costs are
      recoverable gas costs.” (83 Ill. Adm. Code 525.40(d)). (Emphasis added).
      Therefore, even when a third-party transaction only uses some PGA assets (in
      other words, when a third-party transaction only involves one recoverable
      associated cost), the revenues from those transactions offset the costs imposed
      by a utility in its PGA. (Id.).

    



    
      
         

        


        
        

      

      
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    PGL
      ignores the issues raised by the parties by contending that it is impossible
      from an operational standpoint to state that a transaction did not have any
      recoverable gas costs associated with it. Section 525.40 is an accounting
      regulation. It does not concern operational matters. And, this regulation
      requires PGL to offset gas costs with the revenues from a transaction if any
      of
      its PGA assets are used for the benefit of third-parties. (83 Ill. Adm. Code
      525.40(d)).

    


    As
      Staff
      and the GCI point out, the two Nicor cases PGL cites approving transportation
      contracts, Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 956, and Northern
      Ill. Gas Co., Petition for Approval of a Firm Transportation
      Agreement,
      2003
      Ill. PUC Lexis 201, are not applicable in this situation. Section 525.40(d)
      creates an exception in terms of what gas costs must be recovered through a
      PGA.
      It provides that “[T]his subsection shall not apply to transactions subject to
      rates contained in tariffs filed with the Commission, or in contracts entered
      into pursuant to such tariffs . . .” (83 Ill. Adm. Code 525.40(d)). The two
      Nicor transportation contracts in the dockets cited above were contracts entered
      into pursuant to tariffs filed at the Commission. (Nicor,
      2003
      Ill. PUC Lexis 956 at *3-4; Nicor,
      2003
      Ill. PUC Lexis 201 at *4-5). What was at issue in those transportation contract
      cases is not the situation here. 

    


    PGL
      contends that these two transportation contract dockets are not exempt from
      Section 525.40 because there was no tariff, under which, Nicor provided
      transportation service to North Shore. (See,
      PGL
      Reply Brief at 48). This argument ignores the language in this regulation.
      Section 525.40(d) specifically exempts contracts entered into “pursuant to
      tariffs on file with the Commission.” (83 Ill. Adm. Code Section 525.40(d)).
      (Emphasis added.). These transportation contracts were pursuant to tariffs
      on
      file with the Commission. (See,
      e.g., Nicor,
      2003
      Ill. PUC Lexis 956 at *3, where the Commission ruled that it was proper for
      North Shore to treat the charges for the service as recoverable gas costs that
      are accounted for in its PGA; Nicor,
      2003
      Ill. PUC Lexis 201 at *2, where the Commission commented that the maximum
      quantity that Nicor Gas would transport represented 1.4% of Nicor Gas'
      historical peak day sendout). The transportation contract provided services
      to
      consumers. Services to consumers are pursuant to tariffs on file with the
      Commission. Pursuant to Section 525.40(d), such contracts are exempt from the
      accounting treatment that Section 525.40 would otherwise impose. 

    


    PGL’s
      assertion that it is possible to accomplish third-party services without using
      gas charge assets also does not aid it. The issue here is what happened, not
      what services are possibly available to PGL. Stating that some interstate
      pipelines offer services that make it possible to transact third-party services
      is not the same as establishing what happened here. 

    


    PGL’s
      assertion that gas in storage affects its gas charge only when it is delivered
      to end users ignores the language in Section 525.40. There is no provision
      in
      this regulation that requires delineation of gas costs at the time of delivery.
      Moreover, essentially, in so arguing, PGL states that when a transaction is
      completed through displacement instead of delivery, none of the costs associated
      with the displacement transaction flows through its PGA. There is no such
      language supporting such an argument in Section 525.40. The Commission agrees
      with Staff and the GCI that Section 525.40(d) requires PGL to offset the PGA
      costs passed on to consumers with the revenues gleaned from, at a minimum,
      PGA
      gas, as well as other assets, during the reconciliation period.



    
      
         

        


        
        

      

      
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    Finally,
      PGL has not established that the revenues from these services should be handled
      in PGL’s next rate case. The final Order amending the applicable regulation,
      Section 525.40(d), issued on October 3, 1995. (Ill.
      Commerce Comm. on its own Motion,
      Revision
      of 83 Ill. Adm. Code 525, 1995 Ill. PUC Lexis 640). The final Order issued
      in
      Nicor’s previous rate case on April 3, 1996 (Northern
      Ill. Gas Co., Proposed General Increase in Rates for Gas
      Services,
      1996
      Ill. PUC Lexis 204). This Order issued pursuant to a petition filed
      approximately 11 months prior to April 3, 1996. It appears, therefore, that
      there was an overlap in time between the two dockets and Section 525.40(d)
      was
      not incorporated in Nicor’s previous rate case.

    


    However,
      here, according to PGL, use of Manlove Field for park and loan and exchange
      services did not commence until 1998, well-after the time in which Section
      525.40(d) was promulgated. (Ill.
      Commerce Comm., on its own Motion, Revision
      of 83 Ill. Adm. Code 525,
      1995
      Ill. PUC Lexis 640; PGL Initial Brief at 23-25). We also note that PGL
      participated in the rulemaking proceeding that added Section 505.40(d)).
      (Id.).
      Further, during some of the time between Nicor rate cases, Nicor did not even
      have a PGA, it had a performance-based regulatory program. (See,
      e.g., Illinois Commerce Commission, on its own Motion, v. Northern Illinois
      Gas
      Co.,
      2002
      Ill. PUC Lexis 1164). Further, we note that PGL has not presented facts
      indicating that its situation is similar to that of Nicor. 

    


    In
      conclusion, the Commission finds that PGL improperly passed off-system
      transaction costs to consumers through the PGA without any corresponding offset
      in revenues. Any disallowance associated with the Commission’s finding of
      imprudence for this provision is properly included in the Settlement Agreement
      and Addendum as discussed in Section I. As a final note on this issue, the
      Commission recognizes PGL’s commitment in the Settlement Agreement and Addendum
      to include revenues from its off-system transactions, or its non-tariff
      services, in PGL’s PGA as opposed to its base rates.


    
      
         

        


        
        

      

      
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    VIII. Specific
      Off-System Transactions

     

    A. Transactions
      16/22

     

    1. Findings 

     

    During
      discovery, PGL advised Commission Staff that transactions 16/22 were as follows:
      Enron MW had the right to call on up to 20,000 Dths of gas per day, up to a
      total of 200,000 Dth of gas, during November and December of 2000. The price
      for
      the gas was set at the Natural Gas Intelligence Chicago citygate FOM. PGL
      characterized this transaction as a call option with a “demand credit” to PGL in
      the amount of $241,600.00.42
      However,
      PGL did not receive payment from Enron Midwest. Instead, it received payment
      for
      this transaction from enovate, three months after the gas was delivered. (Staff
      Ex. 1.00 at 28-30). 

    


    PGL
      needed to purchase gas in order to make up for the gas it sold to Enron Midwest
      pursuant to this transaction. The amount of money needed to make up this
      difference in gas was $535,554, which is Staff’s proposed disallowance. PGL does
      not contest this recommended disallowance. (PGL Initial Brief at 103-5).


    


    PGL
      personnel professed not to know the nature of this transaction until Staff
      served discovery on PGL asking for an explanation. PGL personnel then consulted
      with Enron Midwest to determine the nature of the transaction it entered into.
      (Staff Ex. 3.00 at 39-40). In Mr. Knepler’s opinion, the lack of documentation
      evincing the nature of this transaction establishes a breakdown in internal
      controls at PGL. Mr. Knepler recommended requiring PGL to conduct internal
      audits for five years.43
      (Staff
      Ex. 1.00 at 29).

    


    The
      Commission makes note of the agreed to disallowance and also notes that any
      disallowances are included in the Settlement Agreement and Addendeum as
      discusssed in Section I. The Commission further notes that the discussion of
      Staff’s recommendation to require PGL to conduct internal audits for five years
      will be discussed in another section of this order.

    


    


    _____________________

    42   A
      call option is a trading terms for the right to buy a contract at a specific
      price at a certain time. (NYMEX.com/Media/energyhedge).

    43   At
      the time this deal came into existence, enovate was called “Midwest Energy Hub.”
(Staff Ex. 9.00 at 18). 

    



    
      
         

        


        
        

      

      
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    B. The
      Trunkline Deal

     

    1. Findings
      of Fact

     

    The
      Trunkline Deal was a series of transactions between PGL, Enron Midwest and
      enovate. When it was effectuated, enovate already had leased Trunkline pipeline
      capacity from the South Texas field zone to the Chicago citygate. It obtained
      baseload gas supplies from PERC and Reliant to fill the leased pipeline
      capacity. (Staff Ex. 7.00 at 50; Staff Ex. 9.00 at 18). enovate then sold this
      gas to Enron Midwest with delivery at the Chicago citygate. (Staff Exs. 7.00
      at
      50, 68; Staff Ex. 9.00 at 18) enovate delivered the gas to Enron Midwest in
      the
      form of a call option. (See,
      Group.
      Ex. 1 at ST-PG-262-65). 

    


    Enron
      Midwest then sold this gas and pipeline service to PGL with delivery at the
      Chicago citygate at the same price at which Enron Midwest purchased from
      enovate. (Staff. Ex. 7.00 at 50, Staff Ex. 9.00 at 19). PGL then paid enovate,
      enovate, in turn, paid Trunkline. From these payments, PERC PGL’s affiliate,
      received 50% of the revenues enovate accrued. (Group Ex. 1 at ST-PG 76-77).
      This
      entire series of transactions was effectuated on the same day. (Id.
      at
      68-69). The total profit garnered by PERC/Enron Midwest for these transactions
      was $372,000. (Staff Ex. 5.00 at 6; Staff Ex. 9.00, Attachment F). 

    


    PGL’s
      accounting records regarding the “Trunkline Deal” show the following columns:
“PGL paying enovate” “enovate paying Trunkline” “net” and “PERC’s 50%.” No
      mention is made therein of Enron Midwest. (Staff Ex. 9.00, Attachment F). The
      “Trunkline Deal” was recorded in this manner because PGL and PERC were
      affiliates and PERC received one-half of enovate’s income. In such an instance,
      PGL would not recognize income coming from an affiliate in its accounting
      documents. (Group Ex. 1, ST-PG-75-76).

     

    Staff
      witnesses Dr. Rearden and Ms. Hathhorn opined that this series of transactions
      was not done at arms-length. (Staff Ex. 7.00 at 51; Staff Ex. 9.00 at 19; Staff
      Ex. 12.00 at 38). Enron Midwest provided no service. Enron Midwest did, however,
      serve as a “buffer” between PGL/PGL affiliates, which avoided Commission
      detection. (See,
      e.g., Staff
      Ex.
      9.00 at 19; Staff Ex. 12.00 at 38; Staff Ex. 13.00 at 19). 

    


     

    2. Conclusions
      of Law

     

    


    
      	 	
              a.

            	
              Staff’s
                Position

            


    

    


    Staff
      points out that PGL’s accounting treatment of the Trunkline Deal made no mention
      of Enron Midwest. According to Staff, this accounting treatment evinces that
      Enron Midwest performed no service. Staff maintains that Enron Midwest’s
      function in this transaction was to act as an intermediary in order to shield
      the Trunkline Deal from Commission scrutiny pursuant to Section 7-101 of the
      PUA. Staff recommends a disallowance in the amount of $372,000, which is the
      total profit garnered from this transaction by PEC and Enron Midwest. (Staff
      Init. Brief at 82-84; Staff Ex. 9.00, Attachment F).


    
      
         

        


        
        

      

      
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        01-0707

      

    


    Dr.
      Rearden testified that, in his opinion, this was not an arm’s length
      transaction. Enron Midwest passed enovate’s costs through to PGL without any
      markup. PGL could have obtained gas at the same price at which enovate acquired
      it, but it chose to create a “daisy chain” to indirectly link itself to its
      affiliate enovate. (Staff Ex. 12.00 at 39). In his opinion, enovate earned
      profits due to its relationship with PGL, as all of enovate’s profits depended
      on PGL’s participation in this deal. (Staff Ex. 7.00 at 69-72). Without PGL to
      ensure the existence of a buyer, enovate may not have been able to assemble
      this
      transaction. (Id.).
      Staff
      points out that, because the Trunkline Deal was sponsored by enovate, the
      profits from this deal accrued to Enron Midwest and PEC. Because this was an
      affiliate transaction, the profits should have been flowed through the PGA.
      However, PGL’s consumers received no credit or other benefit from this
      transaction. (Id.
      at 70;
      Staff Ex. 12.00 at 39). 

    


    Staff
      contends that the $372,000 PGL paid to enovate should be disallowed. Staff
      maintains that the Trunkline deal was nothing but a ruse for PGL to transact
      business with enovate, using Enron Midwest as a “straw man” to escape the
      Commission’s scrutiny regarding affiliated interest transactions. It posits that
      finding this deal to be imprudent will discourage utilities from attempting
      to
“end-run the PUA.” (Staff Initial Brief at 84-85). 

    


    Staff
      maintains that by redirecting funds from PGL to enovate, PGL furthered the
      strategic partnership between PEC and Enron whose purpose was to use PGL assets
      and gas to increase PEC/Enron profits. Staff avers that its adjustment is not
      an
      attempt to undo the entire deal. Rather, Staff’s recommended disallowance
      recuperates the profits made at the expense of consumers. (Staff Reply Brief
      at
      84-86). 

    


    In
      its
      Brief on Exceptions, Staff argues there should be a finding that the Trunkline
      Deal was imprudent because there was no written contract between the parties.
      (Staff BOE at 18). 

    


    
      	 	
              b.

            	
              PGL’s
                Position

            


    

    


    PGL
      maintains that it acted prudently because it purchased, pursuant to this
      transaction, firm rights to purchase supplies year-round on a swing
      basis.44
      It avers
      that, pursuant to the Trunkline Deal, PGL customers received market-priced
      gas.
      PGL contends that the Trunkline Deal was just an ordinary gas purchase
      transaction, in that the pricing structure was not atypical. According to Mr.
      Wear, the reservation charge in that transaction was in consideration for the
      firm rights for swing delivery and for the implied cost of transportation from
      the field zone to the citygate. (PGL Init. Brief at 97-8). 

    


    


    _____________________

    44   Swing
      contracts permit a utility to take gas on any given day, subject only to timely
      notice to the seller and the pipeline.


    
      
         

        


        
        

      

      
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    Mr.
      Wear
      testified that this contract provided the potential for PGL to alter its
      deliveries by 92,500 MMBtus from one day to the next in the winter, which
      provided PGL with supply flexibility and the ability to balance its load. The
      pricing formula in this transaction provided PGL with the opportunity to benefit
      from field prices, which at that point in time, lagged behind the citygate
      prices. PGL concludes that this transaction provided it with a significant
      amount of supply flexibility, as it allowed PGL to purchase up to 50,000 MMBtus
      of gas. PGL acknowledges that the Trunkline Deal was not part of its peak day
      supply portfolio, but maintains that nevertheless, swing gas pursuant to the
      Trunkline Deal could be used in the winter. (PGL Ex. L at 42-43; PGL Init.
      Brief
      at 96-98). 

    


    
      	 	
              c.

            	
              Commission
                Analysis and Conclusions 

            


    

    


    The
      Commission finds PGL acted imprudently by engaging in the Trunkline Deal. Any
      disallowance associated with the Commission’s finding of imprudence for this
      transaction is properly included in the Settlement Agreement and Addendum as
      discussed in Section I . The record indicates that PGL attempted to disguise
      an
      affiliate transaction by using Enron Midwest as a straw man. PGL directly paid
      enovate for the gas and pipeline capacity that Enron Midwest actually supplied
      to PGL. Thus, PGL did in fact, directly transact business with its affiliate,
      enovate. If this transaction were truly an arm’s length transaction, PGL would
      have paid the entity that was supposed to be its supplier, Enron Midwest, for
      gas and transportation. PGL did not. Further, the Commission notes that PEC
      gained 50% of the profits of this transaction by virtue of its relationship
      with
      enovate. Additionally, there is no evidence in this record establishing that
      Enron Midwest actually performed a service, other than acting as a conduit
      to
      remove the transaction from Commission detection. 

    


    PGL’s
      assertion that the value it received was really in the pipeline transportation
      (from the field to the citygate and the ability to divert gas away from the
      citygate) only demonstrates that this was really an affiliated interest
      transaction accomplished through Enron Midwest. enovate, the affiliated
      interest, held the Trunkline contract and enovate supplied pipeline
      transportation pursuant to this contract. As shall be discussed in the portion
      of this Order discussing enovate, since this was an affiliated interest contract
      that was not approved by this Commission, it is void, ab
      initio.
      (220
      ILCS 7-101(d)(3); 7-102(g)). Additionally, the Commission agrees with Staff
      that
      the profits from this transaction should have been flowed through the PGA.
      

    


    Staff
      also argues that the Trunkline Deal should be found to be imprudent because
      there was no written contract. We agree that the Trunkline Deal was imprudent,
      but it was imprudent because it passed on unnecessary costs to consumers. We
      agree with Staff that the Trunkline Deal should have been memorialized in some
      fashion. However, the Commission declines to require utilities to enter into
      written contracts for every purchase of gas. Rather, we stress that all
      transactions should be supported with adequate documentation, in whatever form,
      memorializing the terms of the transaction and otherwise complying with the
      USOA. PGL should be savvy enough to know that prudently incurred gas costs
      are
      easier to substantiate with written agreements than oral agreements. PGL alleges
      it memorialized the Trunkline Deal in writing. However, the contract which
      PGL
      claims memorialized the transaction here appears to concern Transaction 19
      or a
      similar type of arrangement. (Group Ex. 1 at ST-PG-254-57). 

    


     

     


    
      
         

        


        
        

      

      
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    C. Transaction
      103

     

    1. Findings
      of Fact

     

    On
      May 7,
      2000, PGL contracted with Enron Midwest to deliver gas to Enron Midwest in
      December of 2000 at the October FOM price. In exchange, Enron Midwest agreed
      to
      pay a pipeline penalty to Natural Gas Pipeline. The value of that pipeline
      penalty was $0.10 per MMBtu. (See,
      e.g.,
      Staff
      Ex. 7.00 at 41). 

     

    At
      the
      time this transaction was agreed upon, the NYMEX futures price for December
      2000
      delivery was $3.30 per MMBtu. The NYMEX futures price for October 2000 delivery
      was $3.094 per MMBTU. Enron Midwest gained a profit of $0.206 per MMBtu,
      resulting in a financial gain in the amount of $1,411,031. (Staff Ex. 7.00
      at
      42). 

     

    2. Conclusions
      of Law

     

    


    
      	 	
              a.

            	
              Staff’s
                Position

            


    

    


    Staff’s
      proposed disallowance for this transaction is $1,411,031. (Staff Ex. 7.00 at
      17,
      41). Staff states that Transaction 103 is imprudent because this transaction
      did
      not equal the projected difference in futures gas prices between October and
      December of 2000 at the time this transaction was consummated. The terms of
      this
      contract were “struck” in April of 2000 and it involved delivery of gas to Enron
      Midwest in December of 2000 at October, 2000 prices in exchange for Enron
      Midwest paying a pipeline penalty that PGL had incurred. (Staff Reply Brief
      at
      82-83). Staff avers that this transaction was imprudent because the dollar
      amount of the penalty Enron Midwest paid was less than the projected difference
      in the price of gas between October and December. PGL and Enron Midwest knew
      this since they had information about the October and December 2000 prices
      (i.e.,
      NYMEX
      futures) in April of 2000. Staff further contends that Transaction 103 was
      imprudent because basis usually increases in winter. Essentially, PGL
      decision-makers knew, when entering into this transaction, that payment of
      the
      penalty would not adequately compensate consumers. (Staff Init. Brief at 81).
      

    


    Staff
      points out that there is nothing uniquely beneficial about paying a penalty.
      To
      be prudent, the benefit conferred on Enron MW by this arrangement should equal
      what PGL gave up in exchange for the payment of this penalty. (Id.).
      Staff
      posits that here, the increased costs to consumers resulting from Transaction
      103 is the additional cost of gas that PGL purchased to replace the gas it
      sold
      to Enron Midwest pursuant to this transaction. (Id.).
      

    



    
      
         

        


        
        

      

      
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    Staff
      opines that the spread between the October and December futures and forward
      gas
      markets provide a means by which one can determine whether Transaction 103
      is
      prudent. This is true because this contract was entered into in April or May
      of
      2000, when the actual contract price was not known. What was known at that
      time,
      were futures and forward prices. (Staff Ex. 7.00 at 41). Using NYMEX data,
      Dr.
      Rearden computed the value conferred on Enron at $0.206 per MMBtu. He then
      subtracted $0.10, which is the value of the pipeline penalty Enron Midwest
      paid.
      The results indicated that PGL received about half of what the gas was worth.
      Dr. Rearden opined that the value of obtaining gas in December 2000 at October
      2000 prices far exceed the value to PGL of Enron Midwest paying the penalty.
      He
      concluded that PGL imprudently gave up too much in Transaction 103. (Staff
      Ex.
      12.00 at 40). Dr. Rearden pointed out that his use of the NYMEX spread was
      to
      determine what was known to the parties when they entered into Transaction
      103,
      not to require PGL to perform hedges. (Id.).

    


    Staff
      posits that because this transaction was entered into in advance, the only
      valuation available to the decision-makers at the time the transaction was
      entered into was NYMEX futures prices. When determining the value of this
      transaction, to use any other type of information would entail using information
      that PGL personnel would not have known at the time the transaction was entered
      into. (Staff Reply Brief at 81-82). 

    


    
      	 	
              b.

            	
              PGL’s
                Position

            


    

    


    PGL
      contends that Transaction 103 was a reasonable business decision designed to
      avoid paying a pipeline penalty. Because of PGL’s Rate Schedule DSS (Delivered
      Storage Service) that PGL purchases from Natural, PGL was faced with either
      reduced injection rights in the upcoming injection season or pay a cycling
      charge t the pipeline. PGL could have paid the pipeline charge to preserve
      its
      injection rights. However, Enron MW offered an alternative—Enron MW would pay
      the entire charge in exchange for Transaction 103. PGL argues this arrangement
      allowed it balancing flexibility in the 2000 injection season and provided
      the
      opportunity to receive gas commodity charge credits through off-system
      transactions. PGL used these injection rights 69 times. (PGL Initial Brief
      at
      95-96). 

    


    PGL
      also
      argues that Dr. Rearden’s calculations are wrong because Dr. Rearden based his
      calculations on a theory that this transaction was purely a financial spread
      transaction that PGL could have undertaken. PGL avers that the injections to
      support the sale to Enron MW, which took place from May through October, were
      expected on a no-notice basis. Therefore, according to PGL, there could not
      be a
      baseload hedge on this gas. Also, the October, 2000 prices, which occurred
      at
      the time the transaction was entered into, were higher than NYMEX prices from
      May through October. Even with a hedge, PGL could not have achieved the economic
      result that Dr. Rearden asserted was possible. (PGL Initial Brief at 97).


    


    PGL
      characterizes Staff’s analysis of this transaction as a “purely theoretical
      economical analysis.” It argues that it could not have both paid the pipeline
      charge and also hedge the October/December spread because the benefit it
      received from payment of the pipeline penalty was a no-notice service that
      could
      not be hedged. (Id.).

    



    
      
         

        


        
        

      

      
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              c.

            	
              Commission
                Analysis and Conclusions

            


    

    


    PGL
      does
      not explain why it could not simply have paid this penalty. Also, Staff does
      not
      contend that that the penalty should not have been paid. While paying the
      penalty may have preserved PGL’s injection rights, there is no evidence here
      that who paid the penalty made a difference. Therefore, PGL could have paid
      the
      penalty. Nor does PGL explain why Enron Midwest could not have tendered fair
      market value (i.e.,
      the
      applicable futures price) in exchange for the payment of this penalty. What
      PGL
      should have considered before agreeing to this transaction was whether it would
      increase costs to PGA customers. PGL provided no evidence that it even
      considered the effects on PGA customers. 

    


    PGL’s
      averments regarding Dr. Rearden’s disallowance calculations overlook his actual
      testimony, which does not speak of NYMEX futures or options in terms of imposing
      a duty to purchase hedges through the use of futures. Rather, Dr. Rearden’s
      testimony speaks of the NYMEX futures in terms of what gas prices were known
      to
      the parties about the value of the gas conferred on Enron Midwest pursuant
      to
      Transaction 103 when they entered into it. (Staff Ex. 7.00 at 41). 

    


    PGL’s
      statement that the transaction was entered into in October is incorrect. The
      transaction was entered into in April or May of 2000. The events that took
      place
      pursuant to this agreement occurred in December of 2000. The only discernable
      connection in this record to the month of October, 2000 is that the gas price
      was the October price. (Staff Ex. 7.00 at 41). Therefore, the applicable NYMEX
      futures prices would be those that existed in April or May of 2000. PGL’s
      assertion that October futures prices were promising is based on prices that
      existed in October of 2000, not the October futures prices that existed when
      the
      transaction was entered into. Finally, Mr. Wear’s testimony that Dr. Rearden’s
      calculations as to NYMEX futures prices is incorrect is not credible. The
      Commission agrees with Staff that this transaction is imprudent. Any
      disallowance associated with the Commission’s finding of imprudence for this
      transaction is properly included in the Settlement Agreement and Addenduem
      as
      discussed in Section I.

     

    D. Transaction
      19

     

    1. Findings
      of Fact

     

    Transaction
      19 was an agreement where PGL resold baseload gas to Enron NA in the amount
      of
      50,000 Dths of gas per day, for each day in the month of December, 2000, at
      the
      Natural Gas Intelligence Chicago citygate FOM price. (Tr. 917). Enron Midwest
      sold this gas back to PGL at high winter daily spot prices. (See,
      e.g., Staff
      Ex.
      12.00 at 24). PGL executed this agreement in November 2000, around the time
      it
      decided to begin early withdrawals from Manlove. (PG Ex. F at 49-50). The
      replacement gas cost consumers $5,661,703. (AG Ex. 1.1 at 11-20). Dr. Rearden
      opined that the reason PGL personnel entered into this transaction was the
      desire for unregulated profits from this transaction. (Staff Ex. 7.00 at 28-29).
      

    


    The
      total
      value of this transaction was approximately $9.5 million. (Tr. 918). PGL entered
      into this contract based on one e-mail. (Tr. 1295). 

    



    
      
         

        


        
        

      

      
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        01-0707

      

    


    According
      to Mr. Wear, the gas sold to Enron NA was just “excess gas.” Mr. Wear testified
      that PGL entered into this agreement based on several factors: The November
      2000
      gas prices were higher than the forward prices for December 2000 and January
      2001 and PGL believed the colder than normal weather that existed at the time
      would subside, leading to PGL’s early withdrawals from Manlove. (PGL Ex. F at
      35). Mr. Wear testified that this decision reduced the amount of purchased
      gas
      PGL needed to balance its system. At the time, the purchase price of gas was
      at
      unprecedented high levels. (PGL Ex. F at 35-36). 

    


    Also,
      PGL
      personnel were concerned with the possibility of having an oversupply of gas.
      At
      the same time, however, they were concerned with the possibility that PGL would
      have an undersupply of gas. (Id.).
      Transaction 19 and weather conditions in Chicago caused PGL to fall short in
      December of 2000, in terms of what gas it needed to serve its customers. Thus,
      PGL had to replace the 50,000 MMBtus of gas that it sold to Enron NA per day.
      It
      did so by buying an approximately equal amount of gas, at the higher daily
      price. (See,
      e.g.,
      AG Ex.
      1.1 at 11-12). 

     

    2. Conclusions
      of Law

     

    


    
      	 	
              a.

            	
              Staff’s
                Position

            


    

    


    Staff’s
      proposed disallowance for this transaction is $5,661,703, which represents
      the
      cost of replacement gas. (Staff Brief at 78). Dr. Rearden opined that this
      gas
      was sold before PGL personnel could determine what the weather in the beginning
      of winter would be like. (Tr. 1296). Staff points out that much of the gas
      withdrawn for third-parties in November was done to loan gas to Enron MW in
      the
      form of “Manlove Jumpstart.” Staff opines that PGL
      personnel needed to ensure that a sufficient amount of stored gas would be
      available, in case this gas was needed later on in the winter. Also, PGL’s
      explanation that it was planning for warmer than normal conditions in November
      was implausible. 

    


    Staff
      is
      of the opinion that Transaction 19 imprudently decreased PGL’s ability to
      respond to any weather other than a warmer than normal winter in Chicago. The
      risk PGL identified, facing oversupply due to warmer than normal winter, is
      a
      situation that PGL faces every year. Staff argues that PGL personnel traded
      the
      risk that it might suffer losses on the excess supply due to the winter weather
      for the risk of being short during an already cold winter. 

    



    
      
         

        


        
        

      

      
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              b.

            	
              PGL’s
                Position

            


    

    


    PGL
      argues that Transaction 19 was a reaction to an oversupply. PGL sold the gas
      involved because it had too much gas. PGL argues that if it had reduced its
      baseload purchases, it would still risk being exposed to daily price
      increases.45
      (PGL
      Init Brief at 93). Citing Mr. Wear’s testimony, PGL avers that at the time it
      entered into Transaction 19, it had purchased quantities of spot gas to fill
      Manlove Field and to meet a higher than normal demand. These gas purchases
      were
      at an unprecedented high level. Because gas prices were so high, an early onset
      of gas withdrawal would reduce gas purchases by nearly $3 million per day,
      but
      it would also mean that PGL would enter the heating season with less stored
      gas
      than what was planned, as well as the “increased likelihood of a weather-related
      oversupply.” (Id.
      at
      94).


    


    PGL
      disagrees with Mr. Effron’s assessment of Transaction 19. PGL argues that Mr.
      Effron purported to compare qualified “costs” with quantified “benefits” to
      produce a recommended disallowance of $8.1 million. (See,
      AG Ex.
      1.0 at 15, 18). This analysis was based on Mr. Effron surmising that Transaction
      19 was a surrogate for the BLPA clause in the GPAA. According to PGL, the only
      apparent purpose of Mr. Effron‘s statement was “to make his GPAA cost/benefit
      analysis produce a larger result than can be attributed to the GPAA.” PGL avers
      that both the GPAA and Transaction 19 are prudent. It contends that Mr. Effron
      presented no evidence of a tie between the BLPA, which Enron North America
      never
      exercised, and Transaction 19. In support, PGL cites PGL Ex. F at 53-54. (PGL
      Init. Brief at 63-64).

    


    Likewise,
      PGL argues that Staff’s proposed disallowance is too high. PGL seeks to reduce
      Staff’s disallowance to $5,057,982. PGL contends that Dr. Rearden should not
      have used PGL’s highest-priced purchases of replacement gas to determine what
      Transaction 19 cost consumers, as no particular gas purchase it made was
      allocated to any particular customer. PGL contends that the proper way to
      determine the value of the replacement gas necessitated by Transaction 19 is
      to
      use a weighted average of the pertinent gas purchases. (PGL Init. Brief at
      95-96). Also, Dr. Rearden used 50,000 Dth of gas, for every day Transaction
      19
      was replaced. However, there were days, in which, PGL did not buy 50,000 Dth
      of
      replacement gas. Correcting these errors, and allowing for a previous
      computational error made by Dr. Rearden, reduces Staff’s proposed disallowance
      by $1,299,706. (Id.
      at
      96).


    


    PGL
      asserts that Staff disregards the consequences of its decision to begin
      withdrawing gas two weeks early from Manlove Field. Because PGL had to withdraw
      350,000 MMBtus daily, PGL personnel were required to create a tendency at
      Manlove for gas and water to move toward the center of this reservoir. (PGL
      Reply Brief at 53-54). Also, by selling gas to Enron NA outside the GPAA resale
      provision, Transaction 19 preserved the three-cent per MMBtu credit. PGL
      concludes that therefore, this transaction was beneficial to consumers.
      (Id.
      at
      54-55). 

    


    


    


    _____________________

    45   In
      this
      context, it appears that PGL is referring to baseload purchases as DIQ gas,
      not
      baseload gas. Baseload gas was not sold at daily prices; instead, it was sold
      at
      FOM price, with a three-cent per MMBtu discount. (Staff Ex. 2.00, Attachments,
      GPAA). 


    
      
         

        


        
        

      

      
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        01-0707

      

    


    


    PGL
      further asserts that its decision to enter into Transaction 19 only can be
      criticized based upon an after the fact review. PGL personnel had to decide
      whether to engage in the transaction before it could know what the weather
      in
      December of 2000 would be. According to PGL, under different weather and price
      conditions, Transaction 19 would have been unfavorable to Enron NA. PGL does
      not
      state what those different weather and price conditions are. (PGL BOE at 26).
      

    


    
      	 	
              c.

            	
              GCI’s
                Position

            


    

    


    The
      GCI’s
      recommended disallowance for this transaction is $5,472,000. Mr. Effron opined
      that, while Enron NA never actually acted upon the BLPA, Transaction 19 was
      a
      substitute for increasing consumer gas costs pursuant to the BLPA. While PGL
      averred that Transaction 19 was meant to address an oversupply, Mr. Effron
      was
      of the opinion that PGL’s planning document regarding Transaction 19 showed the
      opposite, that PGL risked undersupply in December of 2000. (AG Ex. 1.1 at
      11-16). The GCI point out that the spot gas PGL bought to replace the 50,000
      MMBtus to Enron NA was higher than the average daily price in December of 2000.
      (GCI Init. Brief at 46). 

    


    The
      GCI
      posit that there was no clear oversupply situation in Chicago in November of
      2000 that merited this extraordinary situation. The planning documents that
      PGL
      offered to support this decision actually demonstrated the opposite. (AG Ex.
      1.0
      at 12; GCI Reply Brief at 33). This planning document established that there
      were as many days projected by PGL personnel that would be in excess of its
      available supply (short), as would be long. However, the largest daily short
      position would be greater than any long position projected. The GCI maintain
      the
      PGL disregarded the possible problems from being in a short position because
      PGL
      could have bought expensive spot gas to correct a short situation. (GCI Reply
      Brief at 33-34). 

    


    Also,
      the
      sellback provision had a maximum of 150,000 MMBtus, which was three times the
      amount of the transaction here. PGL could have exercised the sellback provision
      on individual days for a specific price, instead of doing what it did here,
      committing to a month-long obligation to sell gas. (Id.).
      

    


    
      	 	
              d.

            	
              Commission
                Analysis and Conclusions

            


    

    


    This
      is
      yet another in a long line of imprudent decisions PGL made during the
      reconciliation year in question. PGL bases its argument on the prudence of
      Transaction 19 on Mr. Wear’s testimony, which the Commission previously
      determined to be not credible. Mr. Wear testified, essentially, that PGL
      personnel made the decision to unload excess gas because they were concerned
      about both an undersupply and an oversupply, which makes no sense. (PGL ex.
      F at
      35-36). Mr. Wear offered no explanation as to why PGL personnel would be
      concerned with having too much gas in November, the beginning of the winter
      heating season. In fact, at that point in time, record cold conditions existed.
      (Staff Ex. 3.00 at 50). 

    



    
      
         

        


        
        

      

      
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        01-0707

      

    


    Even
      if
      the Commission were to accept Mr. Wear’s version of the events as true, it was
      imprudent for PGL to place itself in a position where its personnel feared
      having an oversupply of gas at the onset of winter. In fact, PGL’s subsequent
      purchases of gas to replace this gas is some evidence that a fear of having
      an
      oversupply was not the case. Moreover, PGL presented conflicting reasons for
      engaging in Transaction 19. To contend that early withdrawals from Manlove
      were
      necessary to protect PGA customers from high gas prices during the colder than
      expected November 2000 and to also contend PGL faced an oversupply simply
      flummoxes us. PGL’s imprudent behavior unnecessarily increased costs for PGA
      customers. The Commission finds Transaction 19 to be imprudent. Any disallowance
      associated with the Commission’s finding of imprudence for this transaction is
      properly included in the Settlement Agreement and Addendum as discussed in
      Section 1.

    


    PGL
      disagrees with Dr. Reardon’s assessment of the proposed disallowance. PGL did
      not establish that Dr. Rearden improperly used only high spot gas prices, as
      PGL
      did not present credible evidence establishing that these prices do not depict
      its actual purchases. If Dr. Rearden’s amounts were not correct, PGL could have,
      but did not, produce evidence documenting the correct gas prices.
      However,
      there
      is
      insufficient evidentiary support to conclude that Transaction 19 was a
      substitute for the BLPA. We cannot adopt this assumption without evidence that
      Transaction 19 was a substitute for the BLPA. We conclude, therefore, that
      Staff’s recommended disallowance better reflects the economic loss incurred by
      consumers as a result of this transaction. 

    


    Finally,
      the Commission notes that PGL transacted here with Enron MW, meaning one-half
      of
      the profits from any subsequent sales of gas garnered from this transaction
      were
      conferred upon PEC/PERC through enovate. The profits from this transaction
      flowed to enovate instead of through the PGA as required by Commission rules,
      lending further support to the Commission’s finding of imprudence on Transaction
      19. 

    


     

    E. The
      Storage Optimization Contract
      (“SOC”)

     

    1. Findings
      of Fact

     

    During
      the time period in question, PGL had contracts with six pipeline suppliers.
      (Tr.
      875). These contracts allowed PGL to purchase gas in the field and transport
      gas
      to the Chicago citygate at less than citygate prices, when the basis
      differentials for a given transportation contract was wider than the cost.
      (Tr.
      905). There were times, however, when PGL did not used these transportation
      rights. (See,
      e.g.,
      Tr.
      901). For a fee, PGL loaned its unused transportation rights to third-parties.
      (Id.).
      According to Mr. Wear, the purpose of making such loans is to generate income
      to
      be used as a credit that offset customer gas charges. (Tr. 901-02).


    



    
      
         

        


        
        

      

      
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        01-0707

      

    


    PGL
      had
      two contracts, called the NSS Contracts, with Natural Gas Pipeline Company
      (“Natural”) for storage service. (Tr. 996-98). These contracts were for tariffed
      services that had rigid rules. (Tr. 997). Under Rate Schedule NSS (“NSS”),
      Natural provided PGL with 75-day storage service. PGL coupled the NSS with
      the
“no-notice balancing” under Natural’s Rate Schedule Firm Transportation Service
      (“FTS”). The NSS tariff required PGL to keep the gas stored at a certain level.
      (Tr. 999). PGL generally needed a 10 or 20 day of period of storage service
      which it used only on the coldest days in winter, both NSS contracts required
      PGL to purchase 75 days of capacity. (Tr. 997). The maximum storage volume
      for
      the two NSS Contracts, combined, was 19,218,750 MMBtus. (Tr. 1009).


    


    On
      January 21, 2000, PEC received an offer from the entity that had previously
      “optimized” the NSS contracts with Natural Gas Pipeline. This offer suggested
      three alternatives:

    


    
      	 	 	
              -the
                entity would market “seasonal gross margins” for 17% of the profits
                therefrom and market “unencumbered capacity” at 30% of the profits; and it
                would market “encumbered capacity for 10% of the profits. However, PEC
                would pay the carrying costs for “encumbered capacity.”
                

            


    

    


    
      	 	 	
              -a
                “Fixed Price Proposal,” in which the entity would pay PEC a fixed amount
                per month, in return for managing the NSS contract. PEC again would
                pay
                the carrying costs. 

            


    

    


    
      	 	 	
              -the
                entity proposed managing just one Bcf of the storage service in return
                for
                a fixed payment to PEC. 

            


    

    


    (Staff
      Ex. 7.00 at 63-64). PEC personnel chose not to explore any of these options
      with
      this company. Instead, they chose to execute the Storage Optimization
      Contract(“SOC”) with Enron MW. Under the SOC, Enron MW would “optimize” the
      excess leased storage capacity of PGL. PGL chose this because it wanted more
“no
      notice” rights in its portfolio, but did not need the 75 days of peaking
      capacity. PGL stated that by entering into the SOC, it was able to convert
      its
      two 75 day NSS contracts into a 10-day storage contract and a 20 day storage
      contract.46
      The
      costs and revenues associated with the SOC flowed through PGL’s gas charge and
      were paid by consumers. (Tr. 996). PGL received a total of $334,344 in credits
      from the SOC during the time period in question, which it flowed through the
      PGA. (Staff Ex. 9.02). 

    


    Article
      4, par. 2, of the SOC obliged Enron MW to purchase gas for injection into the
      Natural Gas Pipeline on behalf of PGL. (See,
      e.g.,
      Tr.
      1006). This was done so that PGL’s inventory never fell below the amount
      required by Natural Gas Pipeline in its tariffs. (Tr. 1007). When Enron MW
      caused gas to be injected into PGL’s NSS storage, PGL was obligated to
      compensate Enron MW for that gas. (Tr. 1007). PGL did so by transferring title
      to Enron MW of a quantity of gas equal to that which Enron Midwest injected
      into
      PGL’s NSS storage. (Tr. 1008). When Enron MW withdrew gas from the unrestricted
      NSS capacity, Enron MW would return title of the equivalent value of gas to
      Manlove. (Tr. 1008). 

    


    


    _____________________

    46   The
      10-day storage contract was for 90,000 MMBtus. The 20-day storage contract
      was
      for 85,000 MMBtus for a total of 1,700,000 MMBtus.


    
      
         

        


        
        

      

      
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        01-0707

      

    


    PGL
      paid
      Enron Midwest $20,000 per month as a management fee. (See,
      e.g.,
      Staff
      Ex. 7.00 at 64). This contract also provided that Enron MW took a percentage
      of
      the profits for providing optimization services. This percentage increased
      as
      the gross margin increased. (Staff Ex. 2.00, Attachments, SOC Contract). Not
      only did Enron MW profit from this arrangement, but so did PEC/PERC per the
      profit sharing arrangement with Enron NA. PEC/PERC received half of these fees
      paid for the year in question, or $120,000. ($20,000 x 12 divided by 2). (Staff
      Ex. 9.00 at 15, Sched. 9.02). 

    


    PGL
      paid
      other fees to Enron MW pursuant to the SOC as well. The total fees PGL paid
      to
      Enron Midwest pursuant to the SOC were $503,000. (Staff Ex. 15-16; Schedule
      9.02). Pursuant to the profit-sharing arrangement between Enron Midwest and
      PEC,
      PEC was entitled to 50% of the profits gained by EMW from the SOC. After
      PERC’s/PEC’s share was apportioned, Enron Midwest gleaned $717,455 from the SOC.
      (Staff Ex. 7.00 at 49). 

     

    The
      SOC
      required Enron MW to file reports with PGL setting forth what Enron MW was
      doing
      in the field. (Tr. 1324). Those reports would show what Enron MW did to earn
      the
      revenues it took. (Staff Ex. 3.00 at 64). Enron Midwest, however, did not file
      these reports with PGL. (Tr. 1324). There is no evidence to indicate that Enron
      Midwest actually earned any of the revenues it took pursuant to the SOC.


    


    The
      GCI
      contend that because the NSS contracts were used only during peak times, PGL
      only needed 15 days of capacity. However, the two NSS contracts each provided
      75
      days of capacity. (City-CUB Ex. 1.0 at 53). The cost in procuring this extra
      capacity and other related costs were borne by consumers. Ms. Decker opined
      that
      the SOC allowed Enron Midwest to gain control over Manlove Field because it
      required PGL to inject a substantial amount of gas into its NSS accounts.
      (City-CUB Ex. 1.0 at 53). 

     

    2. Conclusions
      of Law

     

    a. Staff’s
      Position

    


    Staff
      recommends a total disallowance for the SOC in the amount of $1,340,455, which
      Staff breaks down into two parts. Staff recommends a $717,455 disallowance
      for
      PGL’s failure to establish that the SOC was a prudent choice and which
      represents the amount Enron MW received from for “optimizing” the NSS contracts.
      Staff also recommends a disallowance of $623,000, which is PERC’s share of Enron
      MW’s management fees that were funneled through enovate, and its share of the
      revenues that Enron Midwest generated by “optimizing” the NSS capacity, but were
      also funneled to PEC/PERC through enovate. (Staff Init. Brief at 88-89; Staff
      Ex. 5.00 at 6). 

    



    
      
         

        


        
        

      

      
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    Staff
      articulated several other reasons PGL’s participation in the SOC was imprudent.
      Staff maintains that PGL’s failure to document what Enron MW was doing to earn
      the revenues it took pursuant to the SOC was imprudent. Staff posits that PGL
      never explained why it needed Enron Midwest to optimize its leased storage.
      And,
      PGL had an alternative to Enron Midwest, another company that was interested
      in
      optimizing this storage, at more favorable terms to consumers. Staff contends
      that PGL chose EMW over this other vendor due to the profit-sharing arrangement
      Enron Midwest had with PEC. Staff argues that therefore, PGL’s choice of Enron
      Midwest as its storage optimizer was imprudent. (Staff Init. Brief at 87-88,
      Staff Ex. 7.00 at 49). 

    


    Staff
      also argues that PEC gleaned profits pursuant to SOC from PGL. Enron MW paid
      PERC/PEC one-half of the management fees it collected which amounted to
      $240,000. Staff argues that this arrangement is blatant cross-subsidization,
      as
      it served no purpose other than to move money from PGL to its parent, just
      to
      increase PEC/PERC’s revenues. According to Staff, PGL has proffered no
      explanation for entering into a contract that conferred benefits on its
      corporate parent, which also denied consumers the full benefits of storage
      optimization. (Id.
      at
      88-89). 

    


    Staff
      takes issue with PGL’s statement that the SOC did not increase gas costs. The
      SOC caused PGL to spend more money for this service than it otherwise would
      have
      paid. The previous offer for “optimization services” would have resulted in PGL
      sharing approximately 19% of the profits with the offering company. The SOC,
      however, required PGL to pay Enron Midwest an amount between 20% to 40% of
      the
      profits from the optimized storage. (Staff Reply Brief at 71-74). 

    


    Staff
      points out that PEC received 50% of Enron MW’s profits from the SOC through
      enovate. The fact that PEC, PGL’s parent company, received a percentage of
      profits gleaned from PGL calls into question whether the SOC was an arm’s length
      transaction. Also, the fact that Section 525.40(a)(4) of the Commission’s Rules
      allows for recovery of supply management contracts does not, by itself, make
      such a contract prudent. (Id.).
      

    


    On
      Exceptions, Staff seeks a finding that the other optimization contract offer
      was
      a better choice for PGL. In effect, Staff seeks a finding that PGL was imprudent
      for failing to enter into the alternative optimization arrangement. (Staff
      Reply
      Brief on Exceptions at 12-14). 

    


    b. GCI’s
      Position

    


    The
      GCI
      point out that both of the NSS contracts underlying the SOC provided 75 days
      of
      (no-notice) service. In fact, PGL only needed one of the NSS contracts to get
      the 15 days or so of the no-notice service PGL needed. (City-CUB Ex. 1.0 at
      52;
      City-CUB Ex. 1.25). Also, Article IV(2) of the SOC obliged Enron MW to inject
      gas into PGL’s NSS storage. Article V(1) of the SOC provided that, when Enron MW
      caused gas to be injected into PGL’s NSS storage inventory, title to the same
      amount of PGL gas in Manlove Field was transferred to Enron MW pursuant to
      Article XI(1) of the SOC. (Staff Ex. 2.00, Attachments, SOC Contract, Tr.
      1007-8; City-CUB Ex. 1.0 at 51).

    



    
      
         

        


        
        

      

      
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    Thus,
      by
      having a second (and unnecessary) NSS contract, a much greater volume of gas
      in
      Manlove Field could be transferred to Enron MW. The amount of gas in Manlove
      that was made available was substantial. The GCI contend that through the SOC,
      PGL gave Enron MW more than 65% of the volume of gas in Manlove Field that
      was
      reserved for its customers, free of the restrictions attached to the NSS
      contracts. The GCI recommend no disallowance, however, as the harm to ratepaying
      consumers was not quantifiable. The GCI aver that PGL never produced information
      that would have allowed them to determine that harm. (GCI Initial Brief at
      66-69). 

    


    c. PGL’s
      Position

    


    According
      to PGL, the SOC did not increase gas costs. PGL points out that the NSS
      contracts in question provide no-notice, 75-day storage. For each MMBtu of
      peak
      withdrawal capability that a shipper wants, that shipper must also acquire
      75
      times that amount in capacity. PGL desired to acquire no-notice capacity rights,
      but it did not need 75 days of peaking capability. PGL entered into these two
      NSS contracts, and what was not needed was “optimized,” or used to support
      revenue-generating transactions pursuant to the SOC. Under the SOC, Enron
      Midwest was responsible for acquiring the supplies and coordinating with PGL
      to
      dispatch those supplies in order to optimize the storage PGL did not need.
      (PGL
      Init. Brief at 26-27, 81). 

    


    PGL
      contends that Section 525.40(a)(4) was promulgated so that third-parties could
      be paid through the PGA to manage excess capacity. According to PGL, it did
      not
      relinquish control over the gas it transferred to Enron Midwest. PGL
      acknowledges that it transferred title to this gas, but it claims that it only
      did so because federal policy necessitated the transfer in title. (PGL Init.
      Brief at 83; PGL Reply Brief at 83). 

    


    PGL
      states that it did not accept the other offer made for storage optimization
      services because, at that time, the offering company had just been acquired
      by
      another company. PGL personnel were concerned about entrusting the NSS contracts
      to a company with an uncertain future. Also, PGL had two NSS contracts because
      one contract was an extension of an existing arrangement; the other contract
      replaced a 30-day storage service that was not renewed. (PGL Reply Brief at
      66-67). 

    


    d. Commission
      Analysis and Conclusions

    


    The
      Commission finds PGL acted imprudently by entering into the SOC. Prior to
      executing the SOC, PGL received an offer from another company that presented
      terms more favorable to consumers than the SOC, yet PGL chose Enron Midwest
      to
      optimize storage. On its face, this might not look like a bad choice. But,
      when
      we consider the arrangement between PEC and Enron NA to funnel profits from
      their dealings from PGL up to the corporate parents, this smacks of imprudence.
      PEC gleaned not only 50% of the SOC profits, but PEC gleaned 50% of Enron MW’s
      management fees pursuant to this contract through enovate. 

    



    
      
         

        


        
        

      

      
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    PGL
      proffers no evidence establishing that Enron MW in fact, performed a legitimate
      service. Also, while Enron Midwest collected its profit, above and beyond its
      monthly charges, PGL has not proffered evidence, such as what space it
“optimized,” to whom, or when, establishing what Enron Midwest did to earn those
      profits. PGL cites no law that requires this Commission to deem a contract
      to be
      prudent when a utility is unable to explain what the provider did to earn
      monthly fees and contractually-established profits from that contract. Indeed,
      there is none. 

    


    While
      Commission regulations permit recovery of supply management costs, PGL is still
      subject to the statutory requirement that all costs must be prudently incurred.
      (220 ILCS 5/9-220). Therefore, PGL was required to account to the Commission
      for
      what Enron MW did to earn its monthly fees and commissions. Additionally, the
      record here is devoid of any evidence that PEC/PERC performed any service.
      Yet,
      it garnered $623,000 in fees collected from consumers. The fact that PEC
      garnered profits from this transaction casts doubt on any claim that it was
      an
      arm’s length transaction. 

    


    Citing
      no
      law or fact, PGL argues that the conclusions above are mere conjecture and
      speculation. PGL has waived its right to assert this argument. (Fraley,
      251 Ill.
      App. 3d at 77). PGL had the burden to prove the prudence of this contract.
      PGL
      cites no law or fact indicating that these conclusions were anything more than
      reasonable inferences drawn from the evidence by the trier of fact.


    


    The
      other
      optimization offer is evidence that PGL could have optimized the NSS contracts
      without Enron. This other offer is also some indicia that PGL personnel, when
      entering into the SOC contract, were motivated by a desire to confer profit
      on
      PEC, irrespective of whether the SOC was in the best interests of PGL. However,
      we decline to find, as Staff suggests, that PGL was imprudent for failing to
      enter into the other contract. To do so would be managing PGL’s day-to-day
      affairs. 

    The
      Commission finds the SOC to be imprudent. Any disallowance associated with
      the
      Commission’s finding of imprudence for this provision is properly included in
      the Settlement Agreement and Addendum as discussed in Section I.

    


     

    F. The
      Citgo Contract

     

    1. Findings
      of Fact

     

    Before
      the reconciliation period, PGL had a gas purchase agreement to buy refinery
      fuel
      gas from a Citgo subsidiary, also known as Uno-Ven, or PDVMR, at 75% of the
      Chicago citygate price. This gas was in the form of a peaking
      service.47
      (Group
      Ex. 1 at ST-PG-184). The Citgo contract was in effect from October 1, 1995
      through September 30, 1999. However, PGL continued purchasing pursuant to this
      contract after it expired, until October 1, 2000. William Morrow, Vice-President
      of PGL, executed this contract on behalf of PGL. After October 1, 2000, PERC
      assumed this contract. By way of a letter dated March 13, 2002, William Morrow
      terminated this contract on behalf of PERC, effective April 30, 2002. (Group
      Ex.
      1 at ST-PG-188). 

    


    _____________________

    47   The
      peak winter period is December through February. (Tr. 872). 


    
      
        


        
        

      

      
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    After
      PERC assumed PGL’s contract with Citgo, PERC purchased gas at 75% of the
      citygate price with the same terms and conditions as PGL had done before. PERC
      then sold gas to Enron MW for 92.5% of the citygate price. Enron MW then sold
      gas to PGL for 95% of the citygate price. Enron Midwest was the intermediary
      between PERC and PGL. (Staff Ex. 9.00 at 12; Attachment B; Staff Ex. 13.00
      at
      1-2). Enron Midwest’s 2.5% profit was transferred to enovate to be split between
      PEC and Enron North America. (Staff Ex. 9.00 at 9, 14). Also, PERC enjoyed
      a
      17.5% profit from selling this gas to Enron Midwest. (Staff Ex. 9.00, Attachment
      B). The amount of profit gleaned from this arrangement by PERC and Enron Midwest
      $2,232,490. (Staff Ex. 9.00, Sched. 9.01). 

    


    According
      to Mr. Wear, the refinery gas PGL previously received pursuant to its contract
      with Citgo was not of good quality. (Tr. 1072). However, Citgo sold gas to
      PERC.
      PERC sold gas to Enron Midwest, who sold gas to PGL. (Tr. 1072-73). Mr. Wear
      admitted that there was no way of knowing whether PGL was, in fact, receiving
      the same “inferior” gas from Citgo though PERC/Enron Midwest. (Tr. 1072). Mr.
      Wear stated that in his opinion, “[a]ny disallowance (regarding the Citgo
      contract) whatsoever is penalizing (PGL) for buying discounted gas for its
      customers.” (PGL Ex. L at 47). 

     

    2. Conclusions
      of Law

     

    a. Staff’s
      Position

    


    Staff
      proposes a cost disallowance for the Citgo Contract of approximately $2.2
      million. Staff maintains that this transaction added unnecessary costs to
      consumer gas costs. After PERC assumed PGL’s Citgo contract, the price of gas
      PERC paid did not increase, but, the price paid by consumers increased, from
      receiving a 25% discount to a 5% discount on the citygate price. Of the 20%
      difference in discounts, PERC received 17.5%, and Enron MW received 2.5%. Staff
      argues that Enron MW’s role in this transaction was to aid in the avoidance of
      Commission scrutiny. (Staff Init. Brief at 85-87). 

    


    According
      to Staff, PGL has never offered evidence indicating that Enron MW performed
      a
      service in consideration for the markup it received on this gas. Staff’s
      recommended disallowance of approximately $2.2 million does not include any
      profit PERC/PEC earned through its profit-sharing arrangement with Enron North
      America/Enron Midwest, enovate. Staff never received the documentation that
      would enable it to determine whether PEC received half of Enron Midwest’s
      markup. (Id.,
      Staff
      Ex. 13.00 at 14). 

    


    b. PGL’s
      Position

    


    PGL
      acknowledges that it purchased refinery gas from Enron MW, instead of Citgo,
      at
      95% pf the index price, instead of at 75%, which is what it previously had
      with
      Citgo. PGL avers that the Citgo contract terminated in 2001 and the arrangement
      through PERC/Enron Midwest actually saved consumers money because consumers
      paid
      5% less than the full price. (PGL Init. brief at 99-100). 

    


    On
      Exceptions, PGL explicitly waived its right to contest this disallowance. (PGL
      BOE at 37). 


    
      
         

        


        
        

      

      
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    c. GCI’s
      Position

    


    Pursuant
      to an unwritten agreement, PERC assumed PGL’s contract with Citgo. By inserting
      PERC in PGL’s position, according to the GCI, PGL paid 20% more for gas. Also,
      this arrangement was designed to avoid Section 7-101 of the PUA. Further,
      according to the GCI, this deal was imprudent because PGL personnel did not
      keep
      the contract with Citgo and they accepted the unnecessary mark-ups on the gas.
      The GCI posit that because PERC/PEC enjoyed 50% of Enron MW’s profits, it is
      likely that PEC/PERC received an amount of money in additional to its mark-up
      on
      the Citgo gas. (GCI Init. Brief at 69-71). According to the GCI, this
      transaction was imprudent because PGL accepted Enron MW’s markup. (Id.
      at
      69-71). 

    


    d. Commission
      Analysis and Conclusions

    


    The
      Citgo
      contract was in effect from October 1, 1995 through September 30, 1999. PGL
      continued purchasing pursuant to this contract after it expired, until October
      1, 2000. After that, PERC assumed this contract. PERC purchased refinery gas
      under the same terms, including paying 75% of the citygate price, then sold
      this
      to Enron MW at a markup. Coming full circle, Enron MW then sold this gas to
      PGL
      at an additional markup. The record is empty of evidence that the “middlemen,”
PERC and Enron MW, served any legitimate purpose. There is no evidence that
      this
      arrangement, through PERC/Enron Midwest was anything but imprudent.


    


    PGL’s
      contention that the Citgo contract “saved” consumers money after PGL transferred
      it to PERC is ridiculous . Consumers received the same gas through the
      PERC/Enron Midwest arrangement as they did from Citgo, but at a 5% discount
      instead of a 25% discount. By the Commission’s math, this was actually a 20%
increase
      in
      costs
      to consumers. PGL provided no evidence that any benefit was conferred on
      consumers as a result of the 20% increase in gas costs.

    


    PGL’s
      argument that consumers benefited from this arrangement is just wrong. In fact,
      the arrangement here was nothing more than an affiliated interest contract
      whereby PERC garnered profits from consumers through via another scheme with
      Enron MW. The contract is therefore, void ab
      initio.
      For all
      of these reasons, the Commission finds PGL’s behavior under the Citgo contract
      to be imprudent. Any disallowance associated with the Commission’s finding of
      imprudence for this provision is properly included in the Settlement Agreement
      and Addendum as discussed in Section I. 

    


     

     


    
      
         

        


        
        

      

      
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    G. Hedging 

     

    1. Findings
      of Fact

     

    a. Background

    


    Hedging
      is a way to reduce price volatility. Hedging instruments include futures
      contracts, option contracts, swap contracts, which are also called
“derivatives,” and are securities or contracts whose value depends on the value
      of the underlying asset. (PGL Ex. H at 9). 

    


    Mr.
      Wear
      testified that PGL took “several steps” to address price volatility during the
      reconciliation year. It used seasonal storage, and “followed” two separate price
      protection programs. During the reconciliation period, PGL had two different
      price protection programs that were in effect. PGL did not use one of its price
      protection programs at all during the time period in question. (Tr. 969-70).
      

    


    PGL
      provided descriptions of both of its price protection programs. Gas prices
      would
      have to drop below $2.30 per MMBtu before PGL personnel could purchase gas
      pursuant to the “Gas Supply Price Protection Financial Trading Strategy.” (Tr.
      968). PGL personnel could not lock in any price above $2.30 per MMBtu without
      the prior approval of its Gas Supply Administration Department. (Tr. 968).
      In
      the period up to and including the year in question, gas prices were, on
      occasion, below $2.30 per MMBtu. (Tr. 968, 969). However, PGL personnel did
      not
      purchase any hedges pursuant to this plan. (Tr. 969-70). 

    


    PGL’s
      second hedging program, the “Gas Supply Price Protection Strategy,” became
      effective in April of 2001. (Tr. 974). The second strategy allowed PGL personnel
      to lock into prices based on the forward market. (Tr. 975). Pursuant to the
      second hedging program, the recommended hedging amount was 44%, approximately
      53,120,000 MMBtus of gas, of its total purchase volumes from April through
      October of 2001. (Tr. 976). In November of 2001 through March of 2002, PGL
      hedged as much as 60% of its purchase volumes. (Tr. 977). PGL personnel used
      financial hedging instruments during its fiscal year 1999. PGL personnel did
      not
      use financial instruments during the instant reconciliation year. (Tr. 972-73).
      

    


    Mr.
      Wear
      testified that PGL’s price protection programs insulated consumers from price
      volatility. Making physical purchases at forward prices produced a ”dampening
      effect” on gas price movement. Mr. Wear further testified that the purchases PGL
      made mitigated price volatility for its customers, “not only for gas consumed
      during (the) May through September period, in which the deliveries were made,
      but also for the re-injection of gas withdrawn to satisfy customer requirements
      during the preceding winter months.” (PGL Ex. B. at 8). 

    



    
      
         

        


        
        

      

      
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    b. PGL
      Expert Witness Mr. Graves’ Testimony

    


    All
      opinions contained in this section of the order are those of Mr. Graves unless
      otherwise noted. Frank Graves, Audit Manager with Grant Thorton LLP, testified
      that exposure to price risk is the uncertain realization of what a cost of
      revenue is as the result of a purchase or sale. (Tr. 1160). That exposure is
      affected by the quantity involved in the purchase. (Id.).
      He
      opined that utilities should have some coherent plan to lessen the effect of
      price risk. (Tr. 1163). Mr. Graves also acknowledged that hedging by utilities
      can be very useful, when it achieves specific risk reduction goals that benefit
      consumers, as well as benefiting the financial health of a utility. (PGL Ex.
      H
      at 8). 

    


    PGL’s
      decision not to use financial hedging instruments “in light of the Commission’s
      lack of guidance” regarding financial hedging instruments was prudent. The
      Commission has clearly stated that hedging is not required. Regulated utilities
      cannot, without clear direction from regulators, internalize their own successes
      and failures. (PGL Ex. H at 6). The Commission has never required, or even
      encouraged, utilities to use financial hedging instruments. This is in contrast
      to other state commissions, like the New York Public Service Commission, cited
      by Mr. Ross, which requires the use of financial hedging instruments. Without
      a
      clear statement from the Commission supporting the use of financial hedging
      instruments, a utility could easily be found to be imprudent if it chose to
      embark on a financial hedging program. (Id.
      at
      16-17, 21). 

    


    It
      is
      only feasible to have such a program when there are specific hedging guidelines
      enunciated by regulators, determining when and why mitigating price volatility
      is worthwhile. It is “inappropriate” to impose disallowances, after market price
      spikes have occurred, when a utility did not have a “clear signal” from a
      regulatory commission as to how it should hedge. (Id.
      at
      8-9).

    


    Comparing
      PGL to unregulated companies, like its parent, PEC, is not “useful” because such
      companies hedge only to reduce their financial risk, not to manage consumer
      prices. These companies do not have to worry about what a regulatory body will
      determine with regard to their hedging purchases. PGL’s shareholders do not
      benefit from gains produced by hedging, as, pursuant to the PGA, all of the
      costs and benefits are passed on to consumers, not the shareholders.
      (Id.
      at
      23-24). In The appropriate level of hedging is not obvious, it is best
      determined by a Commission-generated inquiry and the gradual process of
      controlled customer exposure, as, the appropriate level of hedging depends
      on a
      consumer comfort with the idea. Some consumers may prefer to be at fixed prices,
      which provides stability, but may foreclose the opportunity of lower prices.
      Others may be averse to fixed prices. Still other, larger consumers, such as
      the
      City of Chicago, may be able to obtain their own hedges. (Id.
      at 29).
      Exposure to volatility is controllable, to a large degree, when there is an
      understanding of the costs and benefits of so doing. (Id.
      at
      16-17). 

    



    
      
         

        


        
        

      

      
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    Financial
      hedging instruments do not necessarily lower gas costs. A hedging program should
      only be expected to reduce volatility. A hedging program also increases gas
      costs and there is no way of knowing beforehand whether a hedging program will
      increase or decrease gas costs. Spot gas prices are always different than past
      forward (financial hedging instrument) prices, because unexpected market
      conditions often arise after a hedging instrument is bought or sold. (PGL Ex.
      H
      at 9). Additionally, financial hedging instruments have no effect on average
      prices paid in the primary gas supply market. Financial hedging instruments
      only
      reflect the risk tradeoffs between purchases at different times or at different
      places. Mr. Graves reasoned that therefore, financial hedging instruments do
      not
      gain control over average wholesale prices and there can be no expected savings
      when expected cost savings are fairly priced. (Id.).
      

    


    Volatility
      exposure, on the other hand, can be transferred from one party to another.
      Financial hedging instruments are traded on markets, with “sophisticated
      parties” on either side of a transaction. Thus, the prices at which hedges are
      available reflect a consensus view of the most likely outcome. Hedging is a
      risk
      management function; it is not a least-cost function. (Id.
      at 10,
      12). Price spikes in previous years (the winters of 1995 and 1996 through 1997)
      were indicia that the Commission chose not to implement price hedging programs
      after those two price spikes occurred. (Id.
      at 25).


    


    Mr.
      Graves noted that gas price volatility started in May of 2000. It approached
      65-70% in June and July of 2000. However, that level of volatility was not
      unusual, given the volatility that existed in the fall and winter of 1999-2000.
      The volatility increase in the summer of 2000 did not provide a strong signal
      that a hedging program should be initiated. Volatility in the winter of 2000
      through 2001 was much higher than the volatility in the summer of 2000, but
      this
      was only known “after the fact.” The extreme run-up in gas prices during the
      winter of 2000-2001 was unprecedented and unpredictable, and so was the rapid
      decline in gas prices shortly thereafter. In Mr. Graves’ view, both Mr. Herbert
      and Mr. Ross use “hindsight information” when advancing their proposed
      disallowances. (Id.
      at
      16-17). 

    


    The
      increase in gas costs PGL passed on to consumers in the winter of 2000-2001
      was
      unprecedented and unexpected. The peak daily price was more than six standard
      deviations over the average price.48
      This was
      an incredibly rare event, which occurred due a variety of facts, such as the
      surge in wholesale gas prices due to a decline in well production of gas, OPEC
      price-tightening, and the fact that gas prices remained high over the preceding
      summer, which resulted in many buyers filling their seasonal storage late,
      hoping for a price decline that never occurred. Also, in California, power
      markets experienced shortages in hydro-electric power, and at the same time,
      experienced an unusually hot summer. In Mr. Graves’ opinion, the “California
      crisis” may have contributed to a general anxiety about future energy prices,
      which increased a willingness in the marketplace to pay high gas prices.
      Further, futures prices for gas were at very high levels for two to three years
      forward. Finally, at that time, electric companies began to use gas to generate
      electricity. (Id.
      at
      27-29).

    


    _____________________

    48   The
      standard deviation Mr. Graves used is $1.26 per MMBtu and it is for a 10year
      period. It is based on data that includes a high-price period. (PGL Ex. H at
      26). 


    
      
         

        


        
        

      

      
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    PGL
      has
“significant storage resources,” which provided a hedge-like benefit to
      consumers. Any exposure consumers faced was not due to negligence on the part
      of
      PGL. Rather, it was due to the Commission’s decision not to require financial
      hedging and the lack of any process identifying when hedging might be desired.
      (Id.
      at
      22-23).

    


    Mr.
      Graves critiqued City and CUB witnesses Mssrs. Herbert and Ross’ proposed
      disallowance for PGL’s hedging practices during the reconciliation year. Hedging
      gas purchases made in the summer months would reduce summer volatility. There
      was good reason to believe that summer prices in 2001 would be high and
      volatile, due to the “California crisis.” Thus, Mr. Graves reasoned that, by
      excluding summer hedging, both Mr. Herbert and Mr. Ross created after-the-fact
      programs tailored to construct their disallowances. (PGL Ex. L at 30). If Mr.
      Herbert and Mr. Ross had included summer hedges in their recommended
      disallowances, their proposals would have been dramatically lower. (Id.).
      

    


    c. CUB
      Expert Witness Mr. Ross’ Testimony

    


    The
      opinions contained in this section of the order reflect those of Mr. Ross unless
      otherwise noted. CUB witness Mr. Ross, Principal with CRP Planning Inc.,
      considered PGL’s management decisions regarding price volatility and he
      evaluated whether PGL personnel took reasonable steps in the face of known
      risks
      and market conditions. He noted that PGL has faced price volatility in the
      past.
      Previously, during the winter of 1996-97, PGL faced extreme price volatility
      in
      the gas markets. That winter revealed both the magnitude of the price risk
      from
      volatility that PGL could face, and the extent to which PGL’s PGA customers are
      exposed to the volatility and price risk on the wholesale market. (CUB Ex 1.00
      at 1- 3). 

    


    Hedging
      is commonly used to mitigate price risk. Large gas consumers who procure their
      own gas supply frequently hedge some portion of their gas supply to limit price
      risk, either through participation in the futures market, or through the use
      of
      fixed price contracts and ceiling prices. PGL considered managing price risk
      in
      a study conducted in 1998, but ultimately declined to adopt that hedging
      strategy. (CUB Ex 1.00 at 6, 7). 

    


    PGL
      routinely manages weather risk in its annual, monthly, and daily supply
      planning. It can also limit customers’ exposure to volatility by using risk
      management tools, or, by “hedging.” Hedging, for gas buyers, is akin to
      insurance against unexpected price increases. Hedging techniques can include
      financial hedging instruments and the use of fixed-prices. Other forms of
      hedging include storing gas. (Id.
      at
      4-5,10-11). In the past, PGL affiliates have hedged against price risk. PGL’s
      parent company, PEC, invested in gas and oil fields by using swaps and options.
      (Id.
      at
      4-5,10-11). 

    


    PGL’s
      customers bore a substantial price increase during the reconciliation year
      because PGL personnel chose to link nearly all of its gas supply contracts
      to
      market indices, which followed the rapidly escalating market clearing price.
      These market price escalations created substantial hardship for PGL’s PGA
      customers. (CUB Ex. 1.00 at 12, 13). Because PGL faced little price risk when
      acquiring its gas supply, PGL does not have a strong incentive to mitigate
      this
      risk. Consumers, however, face a considerable price risk because this cost
      is
      passed on to them. 

    



    
      
         

        


        
        

      

      
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    Also,
      PGL
      personnel did not care to protect consumers from price risk, as PGL personnel
      were not required to adhere to any explicit hedging standards enunciated by
      the
      Commission. The Commission has not required companies to engage in any
      mitigation strategy, nor has it restricted utilities from using hedging
      strategies. Rather, the Commission has left whether a prudent strategy would
      include financial hedges up to utilities to decide. (CUB Ex. 1.00 at 9-10,
      12,
      13). He concluded that PGL failed to exercise a standard of care that a
      reasonable person would have used in light of known conditions and risks before
      and during the reconciliation period. (Id.
      at 1-2,
      9,14)

    


    PGL
      could
      have managed its price risk by making greater use of stored gas when spot market
      prices were high using financial hedging mechanisms, including fixed-price
      forward and ceiling prices, in its supply contracts. PGL made no attempt to
      use
      fixed price contracts or to hedge against the risk of price volatility. PGL
      also
      chose not to use hedging tools to mitigate the price risk of its contracted
      gas
      supply and it did not engage any of its suppliers to hedge as part of providing
      supply. For the 2000-2001 heating season, PGL’s gas purchasing strategy was
      dependent on contracts indexed to daily and monthly market rates. (CUB Ex 1.00
      at 9, 10-11).

    


    When
      determining what PGL should have hedged, Mr. Ross used a futures market hedging
      strategy, as futures are the most common and simplest financial hedges, assuming
      purchases of six-month natural gas futures (based on the monthly average of
      the
      daily midpoint futures prices at the Henry Hub) for the months of May through
      September.49
      Mr. Ross
      focused on PGL’s firm supply gas, because it is the gas purchased by PGL through
      pre-negotiated gas supply contracts for which a gas supplier guarantees
      delivery. Most of PGL’s winter firm supply is composed of PGL’s baseload
      contracts, which it cannot change in terms of volume or pricing. In the winter,
      firm supply is used to meet demand; it is not usually put in storage.
      (Id.
      at 6,
      17). 

    


    During
      the reconciliation year, PGL personnel knew that price volatility was affecting
      consumers, PGL personnel had developed familiarity with price risk hedging,
      had
      designed a hedging strategy, and were actively mitigating price risk for PGL’s
      shareholders. PGL personnel knew that price risk was a real risk deserving
      of
      mitigation, since they took proactive steps to protect shareholders from price
      risk in the reconciliation year. PGL personnel researched the available tools
      and implemented a strategy to hedge price risk; they simply chose not to do
      so
      for consumers. (Id.
      at
      16-18). The Commission’s prior decisions regarding hedging do not create a
      regulatory ‘safe harbor,’ which is an action or set of actions that PGL can take
      for which the Commission will not question the prudence thereof. PGL personnel
      should not rely on the Commission’s past decisions because this particular
      situation is different from the situations in those cases. (Id.
      at
      9).

    


    PGL
      personnel had sufficient knowledge, understanding, and experience with price
      risk, and had a demonstrated capability to address price risk, yet its personnel
      chose only to protect shareholders, not customers, from price volatility. (CUB
      Ex 3.00 at 10, 12). 

    


    


    _____________________

    49   A
      six-month futures contract is held six months in advance. Thus, a six-month
      May
      futures contract would be purchased in December, payable over the life of that
      contract. This differs from a forward contract, where payment is due at the
      time
      of, or following, delivery. (NYMEX.com\glossary).


    
      
         

        


        
        

      

      
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        01-0707

      

    


    PGL’s
      witnesses Zack and Graves completely ignored their own research and hedging
      design. Prior to the reconciliation year, PGL identified both hedging standards
      and a hedging program designed to mitigate some gas supply price risk pursuant
      to its Gas Price Protection Plan. In the reconciliation year PGL’s parent
      implemented a set of price risk management standards to protect shareholders.
      PGL, however, chose to disregard its research and standards when considering
      price risk for customers. (Id.
      at 19).


    


    Twenty
      percent of PGL’s winter volume is a minimum standard that the Commission should
      consider, given PGL’s decision to hedge nothing on behalf of consumers during
      the time period in question. Twenty percent of winter gas purchases were also
      a
      reasonable hedging standard at that time for a utility beginning to address
      price risk. (Id.
      at
      20-21). Mr. Ross stated that he did not need to consider the summer months
      because PGL had an active price risk hedging program at that time. (CUB Ex
      3.00
      at 22). Mr. Ross’ strategy focused on the volatility of firm gas supply and a
      minimum level of hedging, while Mr. Herbert did not determine a minimum
      standard. (CUB Ex. 3.00 at 23-26).

    


    The
      Commission is not responsible for the fact that PGL’s customers did not receive
      the benefit of a reasonable standard of care. The Commission has repeatedly
      stated that prudence is defined by the reasonable standard of care, and that
      PGL
      has the responsibility for understanding and applying a reasonable standard
      of
      care. PGL personnel had sufficient information and understanding of hedging
      strategies, yet they deliberately chose not to do so for PGL’s customers.
      Simultaneously, however, PGL personnel protected its shareholders from price
      risk. (CUB Ex 3.00 at 26-27).

    


    Mr.
      Ross
      calculated how futures purchase could have mitigated price volatility and price
      risk for two levels of gas purchases. The first is based on gas supply purchased
      under firm contracts for the winter heating months (November through March).
      The
      second is based on all gas purchases (firm and spot market purchases). The
      results for the total winter purchase scenario were $85,602,220 hedging total
      purchases and $53,166,127 hedging 20% of PGL’s winter purchases. The greatest
      level he used was 14,144,512 MMBtus, using only winter months. In his opinion,
      this is the minimum prudent volume that PGL should have used to hedge. Based
      on
      20% of PGL’s total supply, he concluded that consumers overpaid $53,166,127
      during the reconciliation year, due to PGL’s failure to mitigate higher prices.
      (Id.
      at 17,
      21).

    


    d. City
      Expert Witness Mr. Herbert’s Testimony

    


    The
      opinions contained in this section of the order are those of City witness Mr.
      Herbert unless otherwise noted. Mr. Herbert evaluated PGL’s supply and risk
      management practices during the reconciliation period. He considered PGL’s risk
      management knowledge and capabilities, price volatility, and the information
      relied upon by PGL personnel during this period. He reviewed PGL’s gas supply
      management practices focusing on the following: the market conditions during
      the
      2000-2001 winter heating season; how great the natural gas price risk was to
      ratepayers during this period; the safeguards that were available to PGL to
      reduce the price risk; the exposure for its regulated customers; PGL personnel’s
      awareness of the gas commodity price risk; what PGL did to address this risk;
      and whether it was possible to reduce the price risk exposure during the
      2000-2001 winter heating season. (City Ex. 1.0 at 4-5).

    



    
      
        


        
        

      

      
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    Mr.
      Herbert concluded that during the winter of 2000-2001, there were obvious
      indicators that prices were high and volatile and that storage quantities were
      low. Based on the available information at the time it was evident that, without
      some action to protect consumers, the PGA would place consumers at a risk of
      paying higher prices. PGL failed to take any action, based on the market
      conditions, to protect consumers from exposure to price risk. In fact, PGL
      personnel did nothing to fix or cap the price of gas for even the minimum amount
      of gas that its customers would pay. Consumers were harmed as a result of PGL’s
      decision not to hedge, as they would have benefited had PGL initiated a
      conservative price risk management program. Based on what PGL personnel should
      have known, consumers would have saved approximately $230 million. Consumers
      should not be compelled to pay for the cost consequences of PGL’s lack of
      prudent risk management. Mr. Herbert recommended that the Commission adjust
      PGL’s allowed costs to exclude $230 million of the more than $600 million in
      increased operating revenues PGL received when gas prices spiked in the
      reconciliation period. (City Ex. 1.0 at 6-7). 

    


    PGL
      had
      ample notice that these price risks could occur. In the natural gas market,
      risks surfaced in the 1980’s when daily and monthly market prices of gas were
      less than the price of gas in many long-term, take-or-pay contracts. Since
      short-term contracts provided more flexibility and options, gas companies became
      more dependent and a greater dependency meant more price volatility for
      utilities. By 1990, the risk was so great that NYMEX developed a natural gas
      futures contract market. In 2000, NYMEX gas futures became one of the largest
      regulated commodity markets in the world. Commodity future contracts allow
      buyers to moderate their exposure to price risk, so they can focus on other
      parts of their businesses. This allows companies to fix prices themselves for
      their customers for some period of time in the future. (Id.
      at
      9-12). 

    


    However,
      a futures contract is only one method of managing exposure to price risk. As
      the
      use of forward contract markets have matured, more sophisticated methods for
      managing price risks developed. Markets have since developed for paper
      contracts, including futures, swaps and option contracts, which are increasingly
      used. Paper contracts are used as temporary substitutes for the actual
      commodity. Paper contracts manage price risk where delivery of the commodity
      is
      expected. By doing this, a company can fix the price for a portion of its
      purchases or sales of the commodity, no matter how the physical market prices
      change. (Id.
      at
      11-13). 

    


    This
      process can break down or fail to fix prices for two reasons. A mismatch can
      occur between the physical and financial market volumes. If a utility
      over-projects the need for the commodity, there is a mismatch between utilities’
need and futures contract. The second reason for a hedge to fail is when there
      is a difference between the financial market and the cash market price at the
      point of delivery, or basis. If a change in the spot price where a utility
      purchases its gas is not highly correlated with the futures price in the
      financials market, exposure to price risk may not be completely eliminated.
      (Id.
      at
      13-15). 

    



    
      
         

        


        
        

      

      
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    The
      difference between a futures and an option is that while a futures contract
      allows a utility to fix the price of gas for a future time period, an option
      allows the utility company to put a cap on a price. The futures market requires
      a futures buyer to put a down payment on the futures position and to increase
      the size of that down payment, if price declines. An option contract purchases
      for a fixed price, with no down payment. (Id.
      at
      15-16).The event here would be a rise in the market price to a level that
      exceeds the price established by the option, or the “strike price.” If the price
      in the market exceeds the strike price, the option-holder could execute the
      contract and receive the gas at the strike price; or, the option-holder could
      sell the option and apply the gains from the sale to the cost of gas purchased
      at the market price. (Id.
      at
      17-19). 

    


    In
      liquid
      markets, as the gas futures and options markets usually are, these price and
      risk management arrangements can usually be made at little cost to the
      participants. There are administrative and transactional costs and costs
      associated with maintaining the margin for futures contracts or for selling
      an
      option contract. For PGL, that had a service contract with Enron, the cost
      of
      fixing the price would be an ordinary business expense. Hedging is not a
      guarantee of lower prices. But, the cost of assuring that customer costs are
      less volatile over time is insignificant, compared with the potential size
      of
      the price rises, from which, consumers will have been insulated. When the
      weather is cold, sometimes prices rise dramatically. (Id.
      at
      22-23). 

    


    Price
      volatility is quantitative measure of price risk. It is an indication of the
      likelihood of price changes of a certain magnitude over a period of time. It
      is
      the standard deviation concept. The greater the risk, the more important it
      is
      that a utility take action to
      mitigate the price risk exposure to its customers. Price volatility measures
      are
      very important because they allow us to understand what to expect in terms
      of
      potential price changes in future prices. These measures also determine the
      value or cost of hedging instruments in financial derivatives markets.
      (Id.).
      

    


    The
      precise magnitude of the price increases in the 2000-2001 winter heating season
      may have been a surprise but because actual volatility was high, it should
      have
      been obvious to PGL personnel that the prices changed significantly. Given
      the
      information available at the time, Mr. Herbert concluded that it was prudent
      to
      moderate the possible impact of such volatility on customer bills for the
      heating season. During the reconciliation period, an estimate of price
      volatility could be obtained from “Gas Daily” or daily and monthly spot prices
      can be used to estimate price volatility. The price risk that is associated
      with
      natural gas is greater than with other commodities, often 45% or greater, in
      the
      winter heating season. Because the volatility of the gas prices makes customers’
bills volatile, it is critical to use price risk management tools. Also, almost
      80% of a customer’s bill is based on the cost of the commodity. (Id.
      at
      22-25). 

    


    Supply
      managers must be aware of the price risks on PGL’s largest input purchases,
      irrespective of whether PGL is able to pass-through the cost. This is true
      because customers have very a limited ability to protect themselves against
      price risk or price volatility. (Id.).
      

    



    
      
         

        


        
        

      

      
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    PGL
      personnel were very familiar with concepts such as commodity futures and option
      markets, as well as hedging strategies. In 1998, PGL proposed the elimination
      of
      its PGA, recommending fixing prices for consumers through hedging. When PGL
      initiated its RFQ for this endeavor, PGL stated therein that it was interested
      in finding a company that was especially knowledgeable about price risk
      management to aid it in supply management. Despite the understanding of PGL
      personnel of futures market and risk management as a safeguard for regulated
      service customers, PGL left those customers completely exposed. Mr. Herbert
      noted that hedges were used to reduce price risks for PGL’s unregulated
      affiliates. (City Ex. 1.0 at 40). 

    


    At
      the
      same time as PGL’s decision not to cap prices for its ratepayers, PGL’s parent
      company was proactive in protecting company revenues by purchasing weather
      derivatives, resulting in caps on possible revenue loss to the utility due
      to
      weather-related declines in heating fuel. This protected shareholders, but
      not
      ratepaying consumers. (Id.).

    


    There
      was
      a blatant disparity of interest between the risks taken between shareholders
      and
      ratepaying consumers. Additionally, other regulated utilities used fixed-price
      forward contracts during the winter heating season of 2000-2001, as this is
      a
      common practice. Mr. Herbert added that most analysts were aware that market
      conditions were tentative in the winter of 2000-2001. Prices were on the
      incline, supply was limited, and prices were inelastic, in addition to record
      high gas prices. (City Ex. 1.0 at 28).

    


    Mr.
      Herbert additionally averred that what PGL did in its previous reconciliation
      period has no relevance here because the situation here is different from the
      year before. Even if price volatility had stayed the same, the price of gas
      was
      higher in this reconciliation period. (City Ex. 1.0 at 33). 

    


    He
      testified to what prudent risk management strategies were that a gas utility
      should provide for the benefit of its regulated customer. This includes a
      minimum assured level of demand to reduce exposure to price risk. Gas can be
      effectively hedged, because utility personnel know the minimum amount of gas
      that will be needed each month. When there is a significant price risk, it
      is
      imprudent not to hedge. The minimum requirement level must be established by
      reviewing all weather conditions. (Id.
      at
      35-37). Customers could suffer an opportunity cost, if prices go down, even
      if
      hedging is prudent. However, such a loss would be relatively insignificant.
      Additionally, over time, the opportunity costs would be less than the savings
      from hedging. (Id.
      at
      41-42). 

    


    A
      prudent
      utility company would include in its risk management program reviews of hedges
      for gas purchases at the Chicago and Gulf markets, regular estimates of price
      volatility in market analysis, storage, financial hedges to manage price risk,
      and a way to monitor customer feedback. Mr. Herbert advocated for the need
      to
      match physical volumes to be purchased with volumes covered by the hedge and
      testified that PGL personnel were aware that this was necessary for a hedge
      to
      be effective. (Id.
      at 44).


    



    
      
         

        


        
        

      

      
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    Additionally
      PGL could have used stored gas as a hedge for its regulated customers. Despite
      the fact that PGL claimed to use its stored gas to hedge for its regulated
      customers the evidence points to the contrary. There is no portion of stored
      gas
      set aside for PGL’s regulated service customers. Also, PGL relied on gas in
      storage and index-priced gas for its regulated customers, which is very
      unpredictable. Further, there is nothing to suggest that regulated customers
      received any price risk mitigation for gas in storage. Had PGL used the gas
      in
      storage as a hedge, the weighted average cost of gas would have been less than
      the index cost of gas during the heating season for consumers. The result is
      that, had PGL purchased all of its gas requirements at the index price, which
      is
      generally higher, regulated customers would have been better off. (Id.
      at
      44-46).

    


    Also,
      there are ways to quantify the extent to which PGL’s failure to act harmed its
      regulated customers. Mr. Herbert suggested calculating the difference between
      PGL’s actual costs and the costs, had PGL hedged. There is a significant
      differential between actual costs and hedged costs, which resulted in the
      increase of consumer costs during that 2000-2001 winter heating season.
      (Id.
      at
      47-49). Mr. Herbert cited PGL’s “Gas Supply Protection Strategy,” which
      predicted a gas shortage in 2000 and outlined the appropriate gas quantity
      to be
      hedged. (City Ex. 2.0 at 8-9). He also cited PGL witnesses who stated that
      Commission pre-approval is not required for hedging. Mr. Herbert clarified
      that
      his position is that PGL was imprudent for doing absolutely nothing at all,
      despite the market predictors and conditions. (Id.
      at
      11-12).

    


    Mr.
      Herbert also testified as to how he calculated the harm done to PGL’s customers.
      Based on information provided by PGL, he calculated an appropriate objective
      hedging response. Damages themselves work retrospectively, as they are an
      attempt to cure harm already done to customers. (City Ex. 2.0 at 17-18).


    


    Hedging
      is not necessarily about minimizing the cost of the commodity over time. Rather,
      hedging is about reducing the bills of regulated customers. This affords
      customers the ability to pay their gas bills and pay for food, medicine, and
      like items. (Id.
      at 22).


     

    He
      also
      took issue with Mr. Graves’ assertion that the year prior to one at issue was
      not significantly volatile; therefore, there was no reason to hedge. A utility
      company must constantly look at all of the market indicators. Solid hedging
      decisions must be based on a “combination of overall patterns.” A company should
      not “cherry-pick” time periods and must look at extremes of both price and
      volume volatility. 

    (Id.
      at
      32-33). 

    


    Mr.
      Herbert disagreed with Mr. Graves’ opinion that all hedging positions start in
      April. Mr. Herbert recommended that hedging be done at random intervals, in
      the
      time period from April through October, as that is the time period when
      injections and plans for the heating season are made. (City Ex. 2.0 at 26).
      The
      heating season must be of primary focus to an LDC like PGL. This is due to
      the
      likelihood of price spikes during the heating season because of increased
      demand. Mr. Herbert could think of no natural gas utility company which used
      its
      gas in storage as a hedge for requirements of regulated customers during the
      summer months. (Id.
      at
      27-28). 


    
      
         

        


        
        

      

      
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    The
      objective of hedging is not to speculate on future price levels. Based on Mr.
      Graves’ own exhibits, Mr. Herbert concluded that PGL personnel were aware that
      price curves were generally moving upward, sometimes, significantly. This should
      have triggered some sort of price risk management action. Even if PGL personnel
      were solely looking at price levels, as PGL contends, the skewed distribution
      of
      gas prices should have prompted caution and alerted them to the need for
      hedging. (Id.
      at
      32-33). 

    


    Mr.
      Herbert took issue with Mr. Graves’ contention that his testimony is speculative
      about what could have or should have been done. Mr. Herbert averred his
      recommendation to match hedged volumes with the expected minimum requirements
      of
      regulated customers is supported by his professional experience. Mr. Herbert
      stated that he took storage into account, but PGL did not designate a portion
      of
      its gas storage for consumer use. Also, due to PGL’s method for calculating LIFO
      pricing, the price of withdrawn gas changed constantly during the winter of
      2000-2001. PGL’s use of storage during this time period did not provide any
      hedging benefit for consumers. PGL’s use of storage for services like “park and
      loans” reduced PGL’s capability to use storage as a hedge for consumers. Also,
      consumers paid approximately $10 million more than they would have if PGL had
      simply bought gas on the higher-priced daily spot market. (City Ex. 2.0 at
      36-37). Mr. Wear’s $130 million estimate of savings through storage is simply
      the estimated nets of the costs of withdrawal and injection volumes. It ignores
      the effects of PGL’s LIFO pricing on consumers. (Id.
      at
      38-40). 

    


     

    2. Conclusions
      of Law

     

    


    
      	 	
              a.

            	
              PGL’s
                Position

            


    

    


    PGL
      argues that because the Commission has never required a utility to use financial
      hedging instruments, it cannot find its level of hedging imprudent here. Also,
      PGL points out that Dr. Rearden testified that PGL’s level of hedging for the
      reconciliation period was not imprudently low. And, Dr. Rearden never stated
      that PGL’s level of hedging from October through March of the reconciliation
      period was imprudent. (PGL Init. Brief at 32-33; PGL Reply Brief at 63).


    


    PGL
      also
      argues that because PEC is not regulated, whether PEC uses financial hedging
      instruments is not germane here. PGL points out that, if the Commission were
      to
      determine that a program using financial hedging instruments was imprudent,
      cost
      recovery could be disallowed, which is not the case for PEC. PGL maintains
      that
      during the time period in question, 20 out of 49 U.S. LDCs did not use financial
      hedging instruments. 

    


    PGL
      asserts that the extreme run-up on gas prices that occurred during the winter
      of
      2000-2001 was unprecedented and unpredictable. It reasons that it could not
      have
      known whether hedging would produce desirable results. PGL could not, therefore,
      have known whether it would win or lose using financial hedging instruments.
      (PGL. Init. Brief at 39-42). PGL also avers that how much volatility is
      unacceptable to consumers must be determined in advance. Thus, PGL contends
      that
      it could not have known how much of its gas purchases it should hedge.
      (Id.
      at 39).


    



    
      
         

        


        
        

      

      
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    PGL
      maintains that futures contracts would not have aided it because, in most months
      before February of 2001, futures prices were expected to drop. This is true
      because futures prices are generally lower in the months that are further
      forward. (PGL Init. Brief at 40-41). PGL states that it withdrew more gas in
      total in the five winter months than it did the year before. PGL does not state
      how much of these withdrawals were actually used for consumers. (PGL Init.
      Brief
      at 43). 

    


    PGL
      avers
      that, when asserting that it should have a hedging program, the GCI witnesses
      did not take PGL’s use of storage into account, as its use of storage saved $130
      million for consumers in the winter of the reconciliation period. And, after
      the
      winter, PGL saved consumers money through its price risk program. (PGL Reply
      Brief at 61). Also, the GCI do not understand how storage is reflected in the
      gas charge through the LIFO rate. If summer replacement prices are lower than
      winter withdrawal prices, storage provides an effective hedge because consumers
      only pay the actual gas costs. (Id.
      at
      63).

    


    On
      Exceptions, PGL argues that because the Commission issued orders in its 1997
      reconciliation case, Docket No. 97-0024, only a few months before it had to
      decide whether to use and begin purchasing financial hedges for the 2000-2001
      winter, it had no obligation or responsibility to use financial tools to
      mitigate price volatility. (PGL BOE at 7-8).

    


    
      	 	
              b.

            	
              GCI’s
                Position

            


    

    


    The
      GCI
      assert that PGL was imprudent in failing to have in place an effective hedging
      program and in choosing to hedge none of its assured minimum purchases. Mr.
      Ross’ recommended minimum disallowance is in the amount of $53,166,177, which
      represents a 20% hedge of winter gas purchases. Mr. Herbert recommended a
      disallowance of $229,984,352, which is 100% of the minimum amount of gas PGL
      would need in the winter, irrespective of weather or market conditions. Mr.
      Herbert’s recommendation was based on his computation of the difference, on a
      monthly basis, between unhedged prices PGL paid for gas and the price PGL would
      have paid using Mr. Herbert’s hedging strategy. (GCI Init. Brief at 93).


    


    Both
      Mr.
      Herbert and Mr. Ross examined the circumstances at pertinent times, what options
      were available to PGL and its capabilities. Both experts concluded that because
      almost 95% of the gas charges PGL collected were attributable to commodity
      costs, consumers’ bills were almost as volatile as gas prices were in the winter
      of 2000-2001. Also, there was a 13% rise in gas price volatility over the
      previous year. 

    


    Additionally,
      at the beginning of the winter heating season, the amount of gas PGL had in
      storage was very low. Because the supply of gas was tight at that time, PGL
      left
      consumers fully exposed to market risks. Both experts concluded that PGL failed
      to have in place any effective price risk management plan. The GCI maintain
      that, while PGL manages price risk when PGL itself is exposed to this risk,
      it
      merely passes this risk on to consumers in the PGA. (Id.
      at
      83-85). The GCI assert that the only difference between the opinions of these
      two experts is in the calculation of harm to consumers. (GCI Reply Brief at
      69-71). 

    



    
      
        


        
        

      

      
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        01-0707

      

    


    The
      GCI
      point out that in the Order commencing this docket, the Commission expressly
      required PGL to describe the measures it took to insulate the PGA from
      volatility, including any hedging strategies. The GCI opine that prudence
      requires PGL to have and follow a well-defined price risk management program.
      Price risk was significant during the time period in question. However,
      according to the GCI, during the reconciliation period, PGL did not have a
      functioning price risk management plan during the winter of the reconciliation
      period. (GCI Init. Brief at 77-79). 

    


    The
      GCI
      aver that PGL had two price risk management programs in effect during the
      reconciliation period. The first plan was never used and the second plan did
      not
      become effective until April of 2001, after the winter heating season. The
      GCI
      reason that therefore, consumers had no protection from price volatility in
      the
      winter, when they needed it most. (Id.
      at
      81-82).

    


    The
      GCI
      further contend that it is not disputed that PGL personnel had the knowledge
      and
      ability to hedge the price risk exposure. Price volatility can be quantified
      and
      managed. Yet, PGL declined every option available to it, from fixed priced
      contracts for future delivery to standardized paper contracts and financial
      derivatives. 

    


    The
      GCI
      further contend that, during the time period in question, PGL’s use of storage
      did not provide consumers with a price hedge. If PGL had merely purchased gas
      on
      the spot market, instead of making the gas purchases it made, consumers would
      have paid about $10 million less for gas. (PGL Reply Brief at 71). 

    


    The
      GCI
      assert that PGL’s pricing mechanism for gas withdrawn from storage precludes any
      hedging potential from storage. PGL does not set the price consumers will pay
      for the gas it injects gas into storage; it sets the consumer price when the
      gas
      is withdrawn form storage. PGL uses a LIFO-based pricing mechanism that
      incorporates year-to-date actual costs and estimated prices for purchases
      throughout the remainder of the year; thus, prices for customers are never
      fixed
      in advance. They aver that any potential price benefit from stored gas purchased
      at a low price in the preceding injection season is excluded from a LIFO
      calculation, which uses actual and estimated reconciliation period purchase
      costs starting over on the first of October every year. (GCI Init. Brief at
      85).
      According to the GCI, Mr. Wear’s calculation of $130 million saved due to
      storage is nothing of the sort, as it is netted monthly injections and
      withdrawal volumes and costs using PGL’s average market prices. (PGL Ex. F at
      58; Tr. 986-97). 

    


    PGL
      averred that it did not use financial hedging instruments due to a lack of
      Commission guidance on the subject. The GCI maintain that the evidence indicates
      otherwise. Before the reconciliation period, (PGL’s 1999 fiscal year) PGL hedged
      using financial instruments and it did not seek Commission approval before
      doing
      so. Also, the Commission did not disallow any portion of this hedged gas supply.
      (GCI Init. Brief at 87-88), 

    


    The
      GCI
      disagree with Staff’s contention that PGL’s hedging efforts for the
      reconciliation period were not imprudent. Because the winter months are the
      period of maximum price exposure, initiating a hedging program after those
      months, here in April of 2001, could not outweigh the actual exposure of the
      high demand portion of the reconciliation period. (Id.
      at
      90-91). 


    
      
         

        


        
        

      

      
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    The
      GCI
      point out that Staff admitted that PGL’s level of hedging for October of 2000
      through March of 2001 was imprudent. (Id.
      at
      90-92, citing Tr. 1310-12). According to the GCI, Dr. Rearden’s statement cited
      by PGL, that PGL’s level of hedging was not imprudently low, lacks context. Dr.
      Rearden looked at the entire reconciliation year, including the spring of 2001,
      when PGL initiated a hedging program. PGL, however, did not hedge until this
      time, as its personnel did not utilize PGL’s previous hedging program. In the
      preceding winter, when consumers would have needed a hedging program the most,
      there was nothing. And, Dr. Rearden did not view PGL’s level of hedging for the
      winter of the reconciliation period as prudent. (GCI Reply Brief at 62-63).
      

    


    The
      GCI
      aver that PGL cannot rely on past Commission decisions to support its claim
      that
      what it did in the reconciliation period was prudent because the facts in this
      case are unique. The facts in previous Commission cases are different from
      those
      in other Commission cases. In PGL’s previous reconciliation, Ill.
      Commerce Commission, on its own Motion, v. Peoples Gas Light and Coke Co.,
      Reconciliation of Revenues Collected under Fuel and Gas Adjustment Charges
      with
      Actual Costs,
      203 Ill.
      P.U.C Lexis 822, the Commission concluded that it would not create an
      unconditional obligation to use financial hedging instruments. The GCI point
      out
      that, in the previous reconciliation, the Commission neither encouraged nor
      discouraged financial hedging, as doing so is micro-managing utility operations
      by dictating what form price risk management must take. (GCI Reply Brief at
      67).

    


    With
      regard to determining consumer tolerance for risk, the GCI assert that it was
      PGL’s responsibility to make this assessment. According to the GCI, during the
      winter of the time period in question, PGL decided that no hedging was
      necessary, which in effect, was a determination that consumers had an unlimited
      tolerance for price risk. The GCI further take issue with PGL’s assertion that
      unregulated companies like PEC are not comparable to regulated utilities. They
      assert that, in fact, regulated companies lack the economic incentive to control
      PGA costs. (Id.
      at
      71-74). 

    


    c. Staff’s
      Position

    


    Staff
      witness Dr. Rearden opined that PGL’s level of use of financial hedging
      instruments, for the entire reconciliation year, was not imprudently low.
      Hedging does not always lower prices. He reasoned that hedging can only be
      evaluated with respect to the appetite for risk that consumers have. In his
      opinion, consumers’ well-being may not be optimized by hedging programs, even
      when those programs produce lower costs. (Staff Ex. 7.00 at 74). Dr. Rearden
      pointed out that, for the reconciliation period in question, PGL lost when
      it
      did not hedge with financial instruments. In another year, however, PGL might
      not lose. If prices or volatility was predictable, futures prices would reflect
      that predictability and hedging would hold few benefits. (Id.
      at
      75).
      However, in Dr. Rearden’s opinion, PGL’s level of hedging for the winter of
      2000-2001 was imprudently low. (Tr. 1312-13). 

    



    
      
         

        


        
        

      

      
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    d. Commission
      Analysis and Conclusions

    


    In
      addition to procuring a good price for gas, there generally are two ways that
      a
      utility like PGL can mitigate the effect of higher prices in the marketplace
      on
      its PGA customers. PGL can protect against volatility in the marketplace and
      it
      can protect against the effect of higher winter gas costs. When prices will
      be
      volatile is not necessarily predictable. How volatile a market will be, and
      for
      how long, is not a known quantity. That prices will be volatile on occasion
      is
      known, as gas prices have been volatile in the past.

    


    We
      agree
      with Staff’s position and conclude that PGL’s use of financial hedging
      instruments, for the entire year, was not imprudently low. While Dr. Rearden
      testified that PGL’s level of hedging for the winter of 2000-2001 was imprudent,
      we are unable to accurately quantify a disallowance that would reflect the
      difference in costs to consumers had PGL used more aggressive hedging
      instruments. 

    


     

    IX. Further
      Observations on PGL’s Conduct

     

    


    The
      Commission believes PGL’s actions during this reconciliation period move beyond
      mere imprudence to being egregious. PGL entangled itself in a clever corporate
      web with its parent company, its affiliates and Enron designed to use PGA
      assets, assets designated to serve PGL’s ratepayers, solely for the gain of the
      entities involved. At the center of this web lay enovate, a shell of a company
      that existed only as a rest stop for profits on their way to PEC/PERC and
      Enron’s coffers. PGL’s attempts to explain its involvement not only failed, but
      actually worked against it. PGL flouted the law and Commission rules, completely
      disregarded its duty to its PGA customers and jeopardized its credibility.
      Over
      the next few years, the Commission intends to closely scrutinize PGL through
      the
      audits agreed to in the Settlement Agreement and Addendum (discussed below)
      in
      hopes that its conduct during this reconciliation is an aberration.

    


    The
      Commission notes that over four years have passed since this reconciliation
      proceeding commenced on November 7, 2001, for the October 1, 2000 through
      September 30, 2001, period in question. While the Commission believes that
      a
      proceeding’s duration must be congruent to due process assurance, we believe
      that PGL’s conduct, in exercising its due process rights, unnecessarily
      lengthened this proceeding.

    


    Moreover,
      at various times, PGL was not completely responsive to intervener requests.
      Particularly stunning is that PGL, throughout initial discovery, denied the
      existence of vital information about its alleged affiliate business dealings
      and
      about the GPAA contract that later was revealed more fully in re-opened
      discovery. Were it not for the fact that a FERC database contained pertinent
      information about Enron’s relationship with PGL and PGL’s affiliates and that
      information —mined by Staff and the GCI from an avalanche of subsequently
      tendered paper and electronic documents—provided important details on those
      relationships, this Commission may never have fully ascertained the basis for
      and the extent of these agreements and transactions that conferred profits
      to
      PGL’s corporate parent, PEC, and to Enron NA at ratepayer’s expense.


    



    
      
         

        


        
        

      

      
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    Further,
      PGL engaged in certain agreements and transactions with enovate and Enron MW
      that were designed to evade Commission detection. That PGL proceeded in these
      affiliate interest agreements and transactions without prior Commission approval
      is an astonishing disregard for and circumvention of the Public Utilities Act
      and Commission rules.

    


    When
      viewing the record in its totality, the Commission finds that PGL’s conduct is
      not only imprudent, but it also is egregious. People’s Energy and Enron
      developed a strategic partnership that diverted revenues from the regulated
      utility PGL to its unregulated parent company, PEC, and its unregulated
      subsidiaries, along with Enron NA, with no corresponding benefit to PGA
      customers that PGL serves. This strategic partnership used PGL’s PGA
      assets—including gas, contract storage, and Manlove Field operations—and PGL
      performed transactions and engaged in activities with either enovate, Enron
      MW,
      or Enron NA that increased customer gas costs while increasing profits for
      PGL’s
      parent company, PEC. In sum and substance, revenues were diverted from
      ratepayers to Peoples Energy and the unregulated affiliates and to Enron. Those
      revenues should have gone to ratepayers as an offset to the gas costs that
      they
      were actually charged.

    


    The
      Commission’s conclusion of PGL’s imprudent and egregious conduct is borne out by
      substantial evidence in seven areas as follows: One, Letters of Intent to create
      enovate, LLC, the vehicle by which PEC garnered profits from using PGL’s assets,
      and to enter into the GPAA, a five-year, no-bid contract for 66 percent of
      PGL’s
      gas supply; two, the GPAA’s contract provisions that ceded control over gas
      price and quantity (SIQ and DIQ) to Enron NA, forced customers to pay twice
      the
      pipeline transportation of gas to the Chicago citygate, and released pipeline
      capacity to Enron NA that increased consumer gas costs; three, the enovate,
      Enron MW, and HUB transaction profit sharing arrangements that were designed
      to
      increase revenues flowing to unregulated utility affiliates derived from PGA
      assets; four, Manlove Field operations use that gave third-parties preferential
      access to Manlove Field, loans of stored gas meant for consumers, certain
      off-system loans and exchanges, which required PGL to purchase replacement
      gas
      at much higher prices all at ratepayers’ expense; five, the Trunkline Deal, an
      affiliated interest contract with enovate that used Enron MW as a buffer to
      avoid Commission detection and that unnecessarily raised PGA gas costs; six,
      Transaction 19, PGL’s sale of baseload gas to Enron NA and equal buy-back from
      Enron MW at high winter daily spot prices, that unnecessarily raised PGA gas
      costs, and seven, Transaction 103, the PGL agreement for delivery of a large
      amount of gas to Enron MW at the October first of month price in exchange for
      Enron MW paying a penalty PGL owed to the Pipeline, which unnecessarily raised
      PGA costs with no benefits conferred on consumers and allowed PEC to enjoy
      50%
      of the profits because the applicable futures price was nearly double the
      pipeline penalty.

    


    The
      Commission’s finding of imprudence is not the only result of PGL’s imprudent and
      egregious conduct during this reconciliation period. The Commission’s confidence
      in PGL’s management to be forthright and fair in serving ratepayer interests and
      in dealing with this Commission is shaken. The Commission believes that its
      regulatory compact with PGL, its presumption of good faith on the part of PGL’s
      management, and PGL’s overall integrity as a corporate citizen is severely
      damaged by the instant case.

    


     

     


    
      
         

        


        
        

      

      
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    X. Other
      Issues 

     

    A. Audits

     

    1. Staff’s
      Position

     

    Staff
      believes an audit should be conducted of PGL’s management practices for several
      reasons. Staff points out that the internal audit of enovate stated that PEC
      gave enovate control over gas supply and storage functions. (Staff Ex. 9.00
      Ex.
      E). PGL entered into oral contracts to govern certain transactions discussed
      in
      prior sections of this order, instead of written contracts. Additionally, PGL
      failed to keep proper business records. Staff argues that Transaction 16/22
      is
      an example of the problem PGL had in failing to keep basic records. Transaction
      16/22 was not recorded in PGL’s Gas Management System, where PGL must record and
      categorize all of its gas dealings. Transaction 16/22, according to Staff,
      demonstrates a lack of oversight and internal controls at PGL. Staff points
      to
      other examples of lack of internal controls. The evidence provided by PGL to
      Staff did not establish that many contracts generated full value for the
      services PGL provided. Additionally, PGL allowed third-parties to make
      withdrawals from Manlove, even after those parties no longer had gas in storage
      at Manlove. 

    


    Staff
      maintains that PGL has failed to maintain adequate documentation regarding
      many
      of its transactions, including the 3PSEs and Transaction 16/22. Further, PGL’s
      extensive use of Manlove for third-party transactions demonstrates a lack of
      management controls, as, when engaging in these contracts, PGL personnel locked
      up significant capacity at Manlove during peak periods, without regard to the
      impact those transactions had on consumers’ gas costs. Finally, Staff argues
      that PGL’s extensive dealings with Enron NA, Enron MW, and its affiliate,
      enovate, call into question the ability on the part of PGL personnel to separate
      the interest of PGL from that of its affiliates. 

    


    Staff
      concludes that a management audit of PGL’s gas purchasing practices, gas storage
      operations and storage activities should be performed by a Commission-approved,
      independent party. Staff also opines that the Commission should order PGL to
      conduct internal audits of its gas purchasing practices and report those results
      to the Manager of the Commission’s Accounting Department. (Staff Ex. 5.00 at
      13-14). 

     

    Staff
      acknowledges that the new Sarbanes-Oxley Act requires companies to perform
      some
      sort of internal audit. However, if compliance with this Act would truly
      duplicate the internal audit that Staff seeks to impose, the only effort
      required by PGL would be to duplicate a Sarbanes-Oxley report and file it at
      the
      Commission. (Staff Ex. 5.00 at 14-15).

    



    
      
         

        


        
        

      

      
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    Staff
      posits that an external management audit would be a forward-looking evaluation
      of the internal controls needed to ensure that ratepaying consumers are
      protected when PGL personnel make purchasing and storage decisions, like
      entering into gas supply contracts, allocating company-owned storage, leasing
      storage capacity and making decisions regarding injections and withdrawals
      to or
      from storage. An annual internal audit, on the other hand, would be a historical
      evaluation of transactions and compliance with internal controls established
      by
      the management audit. Staff concludes that annual internal audits are a
      necessary follow-up to a management audit. (See, Staff Ex. 10.00 at 2-3). Staff
      also posits that by requiring internal audits, the cost of investigating issues
      would be borne by PGL, as opposed to publicly-funded agencies, like the City,
      CUB and Commission Staff. 

    


     

    2. The
      Position of the GCI

     

    


    The
      GCI
      concur with Staff. (GCI Initial Brief at 95-97). 

    


     

    3. PGL’s
      Position

     

    


    PGL
      claims that since the time period in question, it has taken steps to improve
      its
      internal controls and therefore, no management audit is necessary. (PGL Ex.
      K at
      14-15 and PGL Init. Brief at 101-02). PGL also concludes that compliance with
      recently-enacted Sarbanes-Oxley Act requires it to document and test the process
      it uses to create its financial statements. PGL cites no portion of this Act
      in
      support. It reasons that therefore, a second audit would be duplicative and
      costly. (PGL Init. Brief at 101-102). 

    


    PGL
      proposes to provide Staff information about its current gas supply and capacity
      procurement process and, if Staff wishes to initiate a proceeding, it can make
      the appropriate recommendations to the Commission. (PGL Ex. K at 14).


    


     

    4. Commission
      Analysis and Conclusions

     

    


    The
      Commission notes that the Peoples Companies agreed to include certain findings
      from the ALJPO in the Settlement Agreement and Addenduem that require a variety
      of audits similar to those proposed by Staff. PGL agreed to undertake these
      audits, therefore the Commission need not rule on this issue. 

    


     

     


    
      
         

        


        
        

      

      
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    B. Other
      Non-Monetary Issues

     

    1. Compliance
      with the USOA

     

    a. Staff’s
      Position

    


    Staff
      argues that PGL should be required to issue a report as to how it intends to
      comply with the Uniform System of Accounts (the “USOA”). Staff points out that
      Commission Regulations require PGL to keep documentation supporting its
      decisions. PGL is also required by law to keep accurate accounts and records
      of
      all transactions with associated companies. (See,
      83 Ill.
      Adm. Code 505.10; 18 CFR 201). However, during discovery, when Staff asked
      PGL
      for contracts, workpapers or calculations with respect to various transactions
      under the SOC and with enovate, such as “Rolling Thunder;” “Tidal Wave;” the “38
      Millennium Special” Staff was advised that PGL had none. Staff posits that
      enovate’s actions are not outside the scope of this proceeding; enovate had a
      financial relationship with PGL that had an impact on PGL’s PGA costs and
      revenues. Yet, the records tendered regarding enovate were not
      complete.

    


    Ms.
      Hathhorn opines that PGL merely took the word of personnel at Enron North
      America with regard to many transactions, which demonstrates a lack of controls
      in the accounting of gas and other transactions affecting the PGA. She
      recommends that this Commission order PGL to report as to how it intends to
      comply with the USOA. This report should be filed with the Commission’s Chief
      Clerk, with a copy to the Manager of the Commission’s Accounting Department
      within 60 days after the date of a final Order in this Docket. (See,
      Staff
      Ex. 9.00 at 24-27). 

    


    b. PGL’s
      Position

    


    PGL
      does
      not agree with Staff’s contention on this issue, but it does not oppose the
      recommendation to file an explanation of steps it took to ensure compliance.
      (PGL Reply Brief at 71). 

    


    c. Commission
      Analysis and Conclusions

    


    As
      Staff
      has pointed out, Commission regulations require PGL to have proof establishing
      the nature of its transactions. As has been set forth herein, this often was
      not
      accomplished here. Staff’s recommendation with regard to the USOA is merely
      requiring PGL to supply proof that its accounting is in compliance with the
      law.
      It is therefore adopted. 

    


     

     


    
      
        


        
        

      

      
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    2. Uncontested
      non-Monetary Issues

     

    


    The
      following recommendations made by Staff are not contested by PGL: 

     

    Staff
      recommends that the Commission order PGL to update its operating agreement,
      which was last approved by the Commission in docket No. 55071. (Staff Ex. 5.00
      at 20-22). On Exceptions, Staff points out that it recommended that PGL should
      be required to file this updated agreement within six months of the final order
      in this proceeding, and PGL did not object to this requirement. Also, since
      an
      operating agreement determines how costs and revenues should be allocated
      between the utility and its affiliates, an updated operating agreement should
      be
      on file before PGL files any new rate case. Therefore, Staff contends that
      PGL
      should be required to update its operating agreement within sixty days of the
      entry of a final order in this docket, or before it files its next rate case,
      whichever comes first. (Staff Init. BOE at 19)

     

    Staff’s
      point is well-taken. PGL shall file its update to its operating agreement within
      sixty days of entry of the final order in this docket, or before it files its
      next rate case, whichever comes first.

     

    Staff
      also recommends requiring PGL to account for all gas that is physically injected
      into the Manlove Storage Field by including the cost associated with maintenance
      gas in the amount transferred from purchased gas expense to the gas stored
      underground account (Account 164.1). Staff further recommends that the
      Commission require PGL to account for the portion of gas injected into the
      Manlove Storage Field in order to maintain pressure (i.e.,
      maintenance gas) as credits from Account 164.1, Gas Stored Underground, and
      as
      charges to Account 117, Gas Stored Underground (for the recoverable portion
      of
      cushion gas) or to Account 101, Gas Plant (for the non-recoverable portion
      of
      cushion gas). Staff additionally recommends that the Commission order PGL to
      revise its maintenance gas accounting procedures related to gas injected for
      the
      benefit of the North Shore Gas Company and third-parties, to require those
      entities to bear the cost of maintenance gas. Finally, Staff recommends that
      the
      Commission order PGL to submit its revised maintenance gas accounting procedures
      to the Commission’s Chief Clerk with a copy to the Manager of the Accounting
      Department within 30 days after the date a final order is entered in this
      proceeding. (Staff Ex. 10.00 at 7-9). The GCI share these recommendations.
      (GCI
      Init. Brief at 94).

     

    These
      recommendations are reasonable and in the public interest and they are
      approved.  

    


     

    X. Finding
      and Ordering Paragraphs

     

    


    
      	 	
              (1)

            	
              The
                Peoples Gas Light and Coke Company is a corporation engaged in the
                distribution of natural gas service to the public in Illinois, and,
                as
                such, it is a “public utility” within the meaning of the Public Utilities
                Act;

            


    

    


    
      	 	
              (2)

            	
              the
                Commission has jurisdiction over The Peoples Gas Light and Coke Company
                and of the subject-matter of this
                proceeding;

            


    

    



    
      
        


        
        

      

      
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        01-0707

      

    


    
      	 	
              (3)

            	
              the
                statements of fact set forth in the prefatory portion of this Order
                are
                supported by the evidence of record and are hereby adopted as findings
                of
                fact;

            


    

    


    
      	 	
              (4)

            	
              the
                Settlement Agreement (Exhibit 1) as revised by the Addendum (Exhibit
                2) is
                adopted and their terms incorporated herein as a resolution on the
                merits,
                finding that, during the reconciliation period, Peoples Gas Light
                and Coke
                Company had not acted reasonably and prudently in its purchases of
                natural
                gas and other activities that affected that amounts collected through
                Gas
                Charges in its fiscal year 2001; 

            


    

    


    
      	 	
              (5)

            	
              the
                unamortized balances at the end of Peoples Gas Light and Coke Company’s
                2001 reconciliation year show a refundable balance for the Commodity
                Gas
                Charge of $23,876,327.25; a recoverable balance of $2,969,282.01
                for the
                Non-Commodity Gas Charge and the Demand Gas Charge; and a refundable
                balance of $23, 580.60 for the Transition Surcharge, for a total
                refundable balance of $20,930,626.44; the Factor O Refund is zero;
                

            


    

    


    
      	 	
              (6)

            	
              the
                reconciliations submitted by The Peoples Gas Light and Coke Company
                of the
                costs actually incurred for the purchase of natural gas with revenues
                received for such gas for the reconciliation period beginning October
                1,
                2000, through September 30, 2001, may properly be approved;
                

            


    

    


    
      	 	
              (7)

            	
              pursuant
                to the Settlement Agreement and Addendum, a refund of $100 million
                is to
                be distributed in the manner set forth above as part of the consideration
                paid in global settlement of this docket, as well as I.C.C. Docket
                Nos.
                01-0706, 02-0726, 02-0727, 03-0704, 03-0705, 04-0682,
                04-0683;

            


    

    


    
      	 	
              (8)

            	
              The
                Peoples Gas Light and Coke Company should follow the accounting procedures
                recited above the directives contained in the incorporated parts
                of the
                Settlement Agreement and the Addendum in all future gas adjustment
                charge
                reconciliation dockets.

            


    

    


    
      	 	
              (9)

            	
              The
                Peoples Gas Light and Coke Company shall file quarterly reports with
                the
                Chief Clerk’s office detailing the progress of the Hardship Reconnection
                program. 

            


    

    


    IT
      IS
      HEREBY ORDERED that the reconciliation of revenues collected under the Peoples
      Gas Light and Coke Company’s PGA tariff with the actual cost of gas prudently
      purchased for the time period beginning October 1, 2000, through September
      30,
      2001, as is set forth herein.

    


    IT
      IS
      FURTHER ORDERED that Peoples Gas Light and Coke Company shall comply with all
      of
      the Findings of this Order;

    


    IT
      IS
      FURTHER ORDERED that, subject to the provisions of Section 10-113 of the Public
      Utilities Act and 83 Ill. Adm. Code 200.880, this Order is final; it is not
      subject to the Administrative Review Law. 


    
      
        


        
        

      

      
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        01-0707

      

    


    


    By
      Order
      of the Commission this 28th
      day of
      March, 2006.

    
 

    


    


    (SIGNED)
      CHARLES E. BOX

    


    Chairman

    


    


    
      
         

      

      
         

        
          

        

      

      
         

      

    

    EXHIBIT
      1



    SETTLEMENT
      AGREEMENT
      AND RELEASE

    


    This
      Settlement Agreement and Release (“Agreement”) is entered into this 17
      day of
      January, 2006, between and among the PEOPLE OF THE STATE OF ILLINOIS, through
      LISA MADIGAN, ILLINOIS ATTORNEY GENERAL (the “Illinois Attorney General”) and
      the CITY OF CHICAGO (the “City of Chicago”), PEOPLES ENERGY CORPORATION, an
      Illinois Corporation, THE PEOPLES GAS, LIGHT AND COKE COMPANY, an Illinois
      Corporation (“Peoples Gas”), PEOPLES MW, LLC., a Delaware Limited Liability
      Company, PEOPLES ENERGY RESOURCES COMPANY, LLC., an Illinois Limited Liability
      Company, and NORTH SHORE GAS COMPANY, an Illinois Corporation (“North Shore
      Gas”) (Peoples Energy Corporation, Peoples Gas, Peoples MW LLC, Peoples Energy
      Resources LLC and North Shore Gas are collectively hereinafter referred to
      as
      the “Peoples Companies,” unless otherwise designated individually).

     

    WHEREAS,
      the
      Illinois Attorney General commenced an action against the Peoples Companies
      in
      the Circuit Court of Cook County, Illinois, County Division, Chancery
      Department, styled The
      People of the State of Illinois v. Peoples Energy Corp., et al.,
      No. 05
      CH 5124, and the City of Chicago commenced an action against the Peoples
      Companies in the Circuit Court of Cook County, Illinois, County Division,
      Chancery Department, styled City
      of Chicago v. The Peoples Gas Light & Coke Company, et al.,
      No. 05
      CH 5107, which two actions were consolidated (the “Litigation”);

    


    
      
        
           

          


          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    


    WHEREAS,
      the
      Illinois Attorney General and the City of Chicago alleged that: (a) from 1999
      to
      2002, the Peoples Companies and Enron North America carried out a scheme to
      illegally divert assets from the regulated natural gas utility, Peoples Gas,
      to
      Peoples Energy Corporation and to inflate Peoples Gas’s and North Shore Gas’s
      natural gas costs and pass those inflated costs on to Illinois consumers; and
      (b) the Peoples Companies carried out this scheme through a series of fraudulent
      natural gas transactions, sham companies, illegal agreements, and
      misrepresentations to consumers. The Illinois Attorney General alleged that
      the
      Peoples Companies’ actions resulted in increased natural gas costs for Illinois
      consumers and violated the Illinois Consumer Fraud and Deceptive Business
      Practices Act (“Consumer Fraud Act”). (815 ILCS 505/1 et seq.). The City
      of
      Chicago alleged that the Peoples Companies’ actions resulted in increased
      natural gas costs for Chicago consumers and violated Municipal Code of Chicago
      Sections 4-276-470, 2-24-060 and 1-20-020. The Peoples Companies denied these
      allegations;

     

    WHEREAS,
      in the
      Litigation (a) the Illinois Attorney General seeks equitable relief against
      the
      Peoples Companies, penalties against Peoples Gas and North Shore Gas, and
      disgorgement of profits from and penalties against Peoples Energy Corporation,
      Peoples Energy Resources Company, LLC and Peoples MW, LLC for the alleged
      violations of the Consumer Fraud Act, (b) the City of Chicago seeks equitable
      and compensatory relief and penalties from Peoples Gas, Peoples Energy
      Corporation, Peoples Energy Resources Company, LLC and Peoples MW, LLC for
      the
      alleged violations of Municipal Code of Chicago Sections 4-276-470, 2-24-060
      and
      1-20-020, and (c) the Peoples Companies deny that the Illinois Attorney General
      or the City of Chicago is entitled to any of the relief requested;

     

    


    
      
        
           

          


          
          

        

        
          2

          
            

          

        

        
          
          

        

      

    

    


    WHEREAS,
      there
      is also currently pending before the Illinois Commerce Commission (the “ICC”)
      statutory reconciliation proceedings for the years 2000 through 2004 involving
      Peoples Gas (ICC Docket Nos. 00-0720, 01-0707,
      02-0727, 03-0705, 04-0683) and
      North
      Shore Gas (ICC Docket Nos. 00-0719,
      01-0706, 02-0726, 03-0704, 04-0682)
      (the
      “Reconciliation Cases”);

     

    WHEREAS,
      the
      City of Chicago and the Illinois Attorney General either have appeared or
      intervened in the Reconciliation Cases and alleged that Peoples Gas and North
      Shore Gas acted imprudently in purchasing natural gas and passed on imprudent
      gas costs resulting in unnecessarily increased gas charges to consumers in
      violation of Section 9-220(a) of the Illinois Public Utilities Act, 220 ILCS
      5/9-22(a) and
      various ICC rules, and Peoples Gas and North Shore Gas have denied these
      allegations;

    WHEREAS,
      the
      Peoples Companies, the Illinois Attorney General and the City of Chicago wish
      to
      fully adjust, compromise and settle all rights and claims they may have against
      each other by reason of the Litigation and the Reconciliation Cases;
      and

     

    WHEREAS,
      this
      Agreement does not constitute an admission by or finding against the Peoples
      Companies that any of the conduct alleged in the Litigation and the
      Reconciliation Cases was wrongful, unlawful or in violation of any law,
      regulation or rule.

     

    NOW
      THEREFORE,
      the
      Peoples Companies, the Illinois Attorney General and the City of Chicago agree
      as follows: 

    


    
      
        
           

          


          
          

        

        
          3

          
            

          

        

        
          
          

        

      

    

    


    
      	
              I.

            	
              CUSTOMER
                REFUND 

               

            


    

    A. Refund
      to Customers. Peoples
      Gas and North Shore Gas jointly agree to refund the total sum of $100 million
      to
      Peoples Gas’ and North Shore Gas’ customers in a manner consistent with the
      terms of this Agreement. 

     

    B. ICC
      Approval of Refund. The
      final
      settlement of the Reconciliation Cases is subject to approval by the ICC, which,
      as provided herein, other than the obligations contained in Sections III(B),
      IV
      and V, is a condition precedent to the terms of this Agreement.

     

    C. Payment
      of Customer Refund. The
      Customer Refund shall be paid as follows:

     

    
      	 	
              1.

            	
              By
                crediting, on a per capita basis, the bills of all North Shore Gas’ and
                Peoples Gas’ customers as follows: (a) a payment in the amount of $50
                million that shall begin within 30 days following ICC approval of
                this
                Agreement (“First Payment”); and (b) a payment in the amount of $50
                million that shall begin 12 months after the First Payment. 

               

            


    

    
      	 	
              2.

            	
              The
                refund amounts shall be clearly and conspicuously identified on all
                customers’ bills as a credit against current charges, in a manner
                acceptable to the Illinois Attorney General and the City of
                Chicago.

               

            


    

    
      	 	
              3.

            	
              In
                the event that the ICC does not approve a per capita refund, the
                Customer
                Refund shall be paid by a method that is acceptable to the ICC, provided,
                however, that the Customer Refund is $100 million and is paid in
                two $50
                million payments. 

            


    

    


    
      
        
           

          


          
          

        

        
          4

          
            

          

        

        
          
          

        

      

    

    


    D. Parties
      Cooperation to Obtain ICC Approval. All
      parties to this Agreement shall take all necessary and commercially reasonable
      actions to obtain ICC approval of the settlement of the Reconciliation Cases
      including, within five business days of all parties’ execution of this
      Agreement, the filing of a motion before the ICC requesting expedited review
      and
      disposition and approval of the settlement of the Reconciliation Cases as
      described in this Agreement. Nothing in this Agreement is intended to limit
      in
      any way the ICC’s authority to review and determine whether to approve the
      settlement of the Reconciliation Cases.

     

    E. ICC
      Approval. If
      the
      ICC fails to approve the settlement of all Reconciliation Cases, this Agreement
      (and all obligations and agreements contained herein) shall be null and void
      with the exception of those described in Sections III(B), IV and V of this
      Agreement. The Parties agree that in the event the ICC does not approve the
      $100
      million refund amount or conditions contained in Sections I(C) of this
      Agreement, the Illinois Attorney General, the City of Chicago and the Peoples
      Companies are in no way limited or prevented from pursuing the Litigation or
      the
      Reconciliation Cases or from participating, reinstating or asserting any legal
      rights, allegations, defenses, counterclaims, cross claims, appeals or any
      other
      right or assertion allowed by law, statute or regulation and that the Litigation
      and the Reconciliation Cases continue status quo ante.

    


    
      
        
           

          


          
          

        

        
          5

          
            

          

        

        
          
          

        

      

    

    


    II. CONSERVATION
      AND WEATHERIZATION PROGRAM PAYMENTS

     

    As
      described more fully below, Peoples Energy Corporation shall pay to the City
      of
      Chicago and the Illinois Attorney General, jointly, up to $5 million per year
      for six years totaling up to $30 million. All payments shall be made payable
      to
      the Illinois Attorney General and the City of Chicago, jointly, unless they
      mutually designate, in writing, payment in another way or to another party
      or
      parties. The payments shall be made as follows:

     

    
      	 	
              A.

            	
              The
                first installment of up to $5 million (“First Installment”) shall be made
                within 15 business days after the ICC approves the settlement of
                the
                Reconciliation Cases. From the First Installment, the Peoples Companies
                shall receive a credit in the amount of $675,000 towards the settlement
                of
                the case styled The
                Peoples Gas Light and Coke Company v. City of Chicago
                (No. 03 L 2212 Cir. Ct. Cook County). The City of Chicago and Illinois
                Attorney General, jointly and in their discretion, shall determine
                the use
                and expenditure of the First Installment. The Illinois Attorney General
                shall use any payments that she controls for purposes specified under
                Section 7(e) of the Consumer Fraud Act, 815 ILCS 505/7(e).
                

            


    

    


    
      
        
           

          


          
          

        

        
          6

          
            

          

        

        
          
          

        

      

    

    


    
      	 	
              B.

            	
              Peoples
                Energy Corporation shall pay the five subsequent payments of up to
                $5
                million, which amounts shall be prepaid, on each anniversary of the
                First
                Installment (the “Subsequent Payments”). The Subsequent Payments shall be
                based upon the amount of the cost for the design, implementation
                and
                administration of programs, as estimated in the sole discretion of
                the
                Illinois Attorney General and the City of Chicago (the “Estimated
                Amount”). The Estimated Amount shall be submitted by the Illinois Attorney
                General and the City of Chicago to Peoples Energy Corporation by
                written
                statements. The programs shall be for the following purposes:

               

            


    

    
      	 	 	
              1.

            	
              To
                fund a program of conservation and weatherization for low and
                moderate-income residential dwellings (the “Program”). The Program shall
                be jointly administered by City of Chicago on behalf of the City
                of
                Chicago and Illinois Attorney General on behalf of the State of Illinois
                or by any other agency, entity or representative to which the Illinois
                Attorney General and City of Chicago, in writing, mutually agree.
                The
                Program shall have the purpose of providing energy and natural gas
                conservation programs, whether residential improvements or educational
                or
                otherwise, for residents within Peoples Gas’ or North Shore Gas’ service
                areas and shall have the goal of reducing those residents’ energy usage
                and costs.

            


    

    


    
      
        
           

          


          
          

        

        
          7

          
            

          

        

        
          
          

        

      

    

    


    
      	 	 	
              2.

            	
              Failure
                to use or expend $5 million in any year after the payment of the
                First
                Installment shall in no way affect the Illinois Attorney General’s or the
                City of Chicago’s ability to request and receive funding up to the maximum
                amount of $5 million in any subsequent year or, subject to the requirement
                of this Section II(B), in any way relieve the Peoples Energy Corporation
                of its obligations to make any of the Subsequent Payments. 

               

            


    

    
      	
              III.

            	
              ADOPTION
                OF MANAGEMENT PROPOSALS

               

            


    

    
      	 	
              Peoples
                Gas and North Shore Gas will adopt the forward-looking “Management”
                proposals requested in the Joint Initial Briefs of the City of Chicago,
                the Illinois Attorney General and the Citizens Utility Board in ICC
                Docket
                Nos. 01-0706 and 01-0707. 

               

            


    

    A. These
      forward-looking “Management” proposals, the implementation of which is
      contingent upon ICC approval of the settlement of the Reconciliation Cases,
      are:

     

    
      	1.  	
              Peoples
                Gas and North Shore Gas each shall update its operating agreement,
                which
                were approved by the ICC in Docket No. 55071.

               

            


    

    
      	2.  	
              For
                a period of five years, Peoples Gas and North Shore Gas each shall
                perform
                an annual internal audit of gas purchasing and submit a copy of the
                audit
                report to the Manager of the ICC’s Accounting Department.

               

            


    

    
      	3.  	
              Peoples
                Gas and North Shore Gas each shall engage outside consultants to
                perform a
                management audit of its gas purchasing practices, gas storage operations
                and storage activities. The firm selected to perform the audit shall
                be
                independent of Peoples Gas, North Shore Gas and their affiliates,
                ICC
                Staff, the City of Chicago, the Illinois Attorney General and the
                Citizens
                Utility Board and shall be approved by the ICC. Peoples Gas and North
                Shore Gas shall submit monthly reports on the progress of the management
                audit to the Chief of the ICC’s Public Utilities Bureau, with a copy to
                the Manager of the ICC’s Accounting Department, until the management audit
                report has been submitted. Upon completion of the management audit,
                copies
                of the management audit report would be submitted to the Chief of
                the
                ICC’s Public Utilities Bureau and the Manager of the ICC’s Accounting
                Department. 

               

            


    

    
      	 	
              B.

            	
              Nothing
                in this Agreement shall require the Peoples Companies to conduct
                any
                management or financial audit of gas purchases or transactions for
                their
                1999-2004 fiscal years. Peoples Energy Corporation acknowledges that
                it is
                its Board of Directors’ responsibility to set and implement policy.
                Peoples Energy Corporation further acknowledges that its Chief Executive
                Officer reports to its Board of Directors through its Lead Director.
                The
                acknowledgments contained in this Section III(B) do not require ICC
                approval of the settlement of the Reconciliation Cases.
                

            


    

    


    
      
        
           

          


          
          

        

        
          8

          
            

          

        

        
          
          

        

      

    

    


    
      	
              IV.

            	
              RECONNECTION
                AND DEBT FORGIVENESS OF DISCONNECTED
                CUSTOMERS

            


    

    


    A. Disconnected
      Customers. The
      Peoples Companies acknowledge that approximately 12,000 past customers of
      Peoples Gas and North Shore Gas are presently not receiving gas from the Peoples
      Companies (“Disconnected Customers”). Approximately $14 million of past due
      accounts are attributable to Disconnected Customers. Peoples Gas and North
      Shore
      Gas acknowledge that certain Disconnected Customers, involving customer-occupied
      residential premises, are hardship cases (the “Hardship Cases”). The Peoples
      Companies shall cooperate with the Illinois Attorney General and the City of
      Chicago and any other entity or agency designated by the Illinois Attorney
      General and the City of Chicago to identify the Hardship Cases. 

     

    B. Reconnection
      of Hardship Cases.
       Within
      three days following identification, Peoples Gas and North Shore Gas shall
      reconnect the Hardship Cases without charge. The Peoples Companies shall
      cooperate with the Illinois Attorney General and the City of Chicago and any
      other entity or agency designated by the Illinois Attorney General and the
      City
      of Chicago to identify the Hardship Cases. Peoples Gas and North Shore Gas
      shall
      relieve and forgive all outstanding debt of the Hardship Cases. The Hardship
      Cases may be identified by either the Peoples Companies or the Illinois Attorney
      General and the City of Chicago. Upon
      determination by and notice from the Illinois Attorney General or the City
      of
      Chicago, Peoples Gas and North Shore Gas will advise credit-reporting agencies
      to remove adverse credit information from the credit reports of the customers
      who are the Hardship Cases. 

    


    
      
        
           

          


          
          

        

        
          9

          
            

          

        

        
          
          

        

      

    

    


    


    
      	 	
              C.

            	
              No
                Illinois Commerce Commission Approval. Upon execution of
                this Agreement by all of the parties, the Peoples Companies agree
                to
                fulfill the obligations described in this Section IV notwithstanding
                lack
                of ICC approval of the settlement of the Reconciliation Cases.
                

               

            


    

    
      	
              V.

            	
              PROJECTED
                BAD
                DEBT

               

            	 


    

    In
      addition to the obligations above, the Peoples Companies project absorbing,
      recording and, ultimately, writing off, approximately $52.3 million in bad
      debt
      resulting from accounts that its customers, for a variety of reasons, are unable
      to pay. If the Peoples Companies fail to absorb and record approximately $52.3
      million in bad debt for the fiscal year ending September 30, 2006 (“FY2006”),
      the Peoples Companies agree to absorb and record at least the difference between
      $52.3 million and the amount actually absorbed and recorded in FY2006 during
      the
      fiscal year ending September 30, 2007 or in any subsequent fiscal year. To
      the
      extent that this bad debt relates to the Hardship Cases, Peoples Gas and North
      Shore Gas agree not to pursue collection of those past accounts, but without
      prejudice to the collection of further amounts incurred. The Hardship Cases
      may
      be identified by either the Peoples Companies or the Illinois Attorney General
      and the City of Chicago. Upon determination by and notice from the Illinois

      Attorney General or the City of Chicago, Peoples Gas and North Shore Gas will
      advise credit-reporting agencies to remove adverse credit information from
      the
      credit reports of the customers who are the Hardship Cases.

    


    
      
        
           

          


          
          

        

        
          10

          
            

          

        

        
          
          

        

      

    

    


    VI. MISCELLANEOUS

     

    A. Effective
      Upon Execution. This
      Agreement shall be effective upon execution by all of the parties to the
      Agreement and may be executed in one or more counterparts.

     

    
      	 	
              B.

            	
              Circuit
                Court Approval and Order Entered and Recorded.
                The Peoples Companies, the Illinois Attorney General and the City
                of
                Chicago shall seek judicial approval of this Agreement and the entry
                of an
                Agreed Order staying all proceedings in the Litigation until the
                ICC
                enters an order regarding the settlement of the Reconciliation Cases.
                This
                Agreement shall be included as an exhibit to any such Agreed Order.
                The
                parties to this Agreement shall take all necessary and commercially
                reasonable actions to obtain judicial approval of this Agreement.
                Failure
                to obtain such judicial approval shall make this Agreement null and
                void.
                In the event of failure to obtain judicial approval, the Peoples
                Companies, the Illinois Attorney General and the City of Chicago
                in no way
                are limited or prevented from pursuing the Litigation or the
                Reconciliation Cases or from participating, reinstating or asserting
                any
                legal rights, allegations defenses, counterclaims, cross claims,
                appeals
                or any other right or assertion allowed them by law, statute or regulation
                and that the Litigation and the Reconciliation Cases continue status
                quo
                ante. Upon entry of an order by the ICC approving the settlement
                of the
                Reconciliation Cases, the parties shall seek entry of a consent decree
                pursuant to 735 ILCS 5/2-1009 dismissing the Litigation with
                prejudice.

            


    

    


    
      
        
           

          


          
          

        

        
          11

          
            

          

        

        
          
          

        

      

    

    


    C. Jurisdiction. 
      Notwithstanding the dismissal of the Litigation with prejudice, the Peoples
      Companies, the Illinois Attorney General and the City of Chicago agree that
      the
      Circuit Court of Cook County, Chancery Division, shall retain jurisdiction
      to
      interpret and enforce the terms of this Agreement.

     

    
      	 	
              D.

            	
              Binding
                Agreement.
                This Agreement shall be binding upon, and its benefits shall inure
                to the
                Peoples Companies and their respective heirs, representatives, successors
                and assigns, as well as the respective representatives, successors
                and
                assigns of the Illinois Attorney General and the City of Chicago.
                

               

            


    

    E. Mutual
      Release. In
      accordance with and completion of the terms herein, this Agreement is: (1)
      intended to release and discharge any and all claims that the Illinois Attorney
      General or the City of Chicago ever had, now have or claim or might have or
      claim against the Peoples Companies based upon, arising out of or relating
      to,
      in whole or in part, through the effective date of this Agreement, the
      Litigation, the Reconciliation Cases, and the subpoena served upon Peoples
      Energy Corporation by the Illinois Attorney General, dated August 25, 2005,
      and
      (2) is intended to release and discharge any and all claims that the Peoples
      Companies ever had, now have or claim or might have or claim against the
      Illinois Attorney General or the City of Chicago based upon, arising out of,
      or
      relating to, in whole or in part, through the effective date of this Agreement,
      the Litigation, the Reconciliation Cases and the subpoena served upon Peoples
      Energy Corporation by the Illinois Attorney General, dated August 25,
      2005.

    


    
      
        
           

          


          
          

        

        
          12

          
            

          

        

        
          
          

        

      

    

    


    F. Entire
      Agreement. All
      understandings and agreements heretofore made between the parties are superseded
      by and merged into this Agreement, which alone fully and completely expresses
      the agreement between the parties relating to its subject matter, and the same
      is entered into with no party relying upon any statement or representation
      not
      embodied in this Agreement. Any modification of this Agreement may be made
      only
      by an instrument in writing signed by or on behalf of the party to be bound
      by
      such modification. 

     

    G. Severability. If
      any
      portion, clause, phrase or term of this Agreement is later determined by a
      court
      of law to be invalid or unenforceable, for whatever reason, the remaining
      provisions of this Agreement will remain valid and in effect as to the parties,
      and will be unaffected by said determination other than those portions which
      are
      agreed herein to be a condition precedent.

     

    H. Authority
      to Enter Into the Agreement. The
      signatories below, except for the City of Chicago, acknowledge that they have
      the lawful authority to bind the parties for whom they are signing to the terms
      of this Agreement.

     

    I. No
      Admission of Liability. Nothing
      in this Agreement, or any acts performed or documents executed in furtherance
      of
      this Agreement, shall constitute or may be used as an admission that any party
      to this Agreement is liable to any other party or of the validity of any
      allegation or claim or defense contained in the Litigation or the Reconciliation
      Cases.

    


    
      
        
           

          


          
          

        

        
          13

          
            

          

        

        
          
          

        

      

    

    


    J. Recitals. The
      recitals at the beginning of this Agreement are, and shall be construed to
      be,
      an integral part of this Agreement.

     

    K. Headings
      and Interchangeability. The
      headings of sections contained in this Agreement are merely for convenience
      of
      reference and shall not affect the interpretation of any of the provisions
      of
      this Agreement. Whenever the context so requires, the singular shall include
      the
      plural and vice versa. All words and phrases shall be construed as masculine,
      feminine, or gender neutral, according to the context. This Agreement is deemed
      to have been drafted jointly by the parties and any uncertainty or ambiguity
      shall not be construed for or against any party as an attribution of drafting
      to
      such party.

     

    L. Governing
      Law. This
      Agreement shall be governed by, construed and enforced in accordance with the
      laws of the State of Illinois without regard to the choice of law principles
      thereof.

     

    IN
      WITNESS WHEREOF, the
      parties hereto have executed this Settlement Agreement and Release as of day
      and
      year above first written. 

     

    
      	
              THE
                PEOPLE OF THE STATE OF ILLINOIS

               

              /s/
                Paul J. Gaynor

              By:
                The Office of Illinois Attorney General

            	
              THE
                CITY OF CHICAGO

               

              By:
                /s/
                Mara S. Georges

               

              Title:
                Corporation
                Counsel

            
	
              THE
                PEOPLES COMPANIES (as
                defined in this Agreement)

               

              By:
                /s/
                Theodore R. Tetzlaff

               

              Title:
                _____________________

            	 


    

    


    
      
        
           

          


          
          

        

        
          14

          
            

          

        

        
          
          

        

      

    

    


    


    SETTLEMENT
      AGREEMENT AND RELEASE

    


    IN
      WITNESS WHEREOF, the CITIZENS UTILITY BOARD, by authorized signature herein,
      executes the Settlement Agreement entered into on January 17, 2006 between
      and
      among the PEOPLE OF THE STATE OF ILLINOIS, through LISA MADIGAN, ILLINOIS
      ATTORNEY GENERAL (the "Illinois Attorney General") and the CITY OF CHICAGO
      (the
      "City of Chicago"), PEOPLES ENERGY CORPORATION, an Illinois Corporation, THE
      PEOPLES GAS, LIGHT AND COKE COMPANY, an Illinois Corporation ("Peoples Gas"),
      PEOPLES MW, LLC., a Delaware Limited Liability Company, PEOPLES ENERGY RESOURCES
      COMPANY, LLC., an Illinois Limited Liability Company, and NORTH SHORE GAS
      COMPANY, an Illinois Corporation ("North Shore Gas") and agrees to be bound
      by
      all terms therein. A copy of said Settlement Agreement is attached
      hereto.

    


    


    THE
      CITIZENS UTILITY BOARD

    


    By:
        /s/
      David Kolata

    


    Title:
      Executive
      Director

    


    Date:
      February 27, 2006

    


    


    
      
        
           

          


          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    


    EXHIBIT
      2

     

    Settlement
      Agreement Amendment and Addendum

    Page
      1
of 
      7

    


    Amendment
      and Addendum to January 17, 2006 Settlement

    Agreement
      among and between Peoples Energy Corporation,

    Peoples
      Gas Light and Coke Company, Peoples MW, LLC, Peoples

    Energy
      Resources Company, LLC, North Shore Gas Company, the

    City
      of Chicago, the State of Illinois and the Citizen’s Utility
      Board.

    


    


    Pursuant
      to Section VI, F of the Settlement Agreement (“Settlement Agreement”) entered
      into on January 17, 2006 between and among the PEOPLE OF THE STATE OF ILLINOIS,
      through LISA MADIGAN, ILLINOIS ATTORNEY GENERAL (the “Illinois Attorney
      General”) and the CITY OF CHICAGO (the “City of Chicago”), PEOPLES ENERGY
      CORPORATION, an Illinois Corporation, THE PEOPLES GAS, LIGHT AND COKE COMPANY,
      an Illinois Corporation (“Peoples Gas”), PEOPLES MW, LLC., a Delaware Limited
      Liability Company, PEOPLES ENERGY RESOURCES COMPANY, LLC., an Illinois Limited
      Liability Company, and NORTH SHORE GAS COMPANY, an Illinois Corporation (“North
      Shore Gas”) (Peoples Energy Corporation, Peoples Gas, Peoples MW LLC, Peoples
      Energy Resources LLC and North Shore Gas are collectively hereinafter referred
      to as the “Peoples Companies,” unless otherwise designated individually), and
      entered into on February 27, 2006 by the CITIZEN’S UTILITY BOARD (“CUB”), This
      Amendment and Addendum is intended as an Agreement to Amend the Settlement
      Agreement as follows:. 

    


    This
      Amendment and Addendum is intended to comply with the requirements of the
      Settlement Agreement, Section VI, F, requiring all modifications to the
      Settlement Agreement to be in writing.

    


    Other
      than as specifically stated below, this letter is not intended to modify or
      amend any terms of the January 17, 2006 Settlement Agreement.

    


    In
      addition to, or where otherwise noted below in modification of, the terms of
      the
      January 17, 2006 Settlement Agreement, it is hereby agreed to by the Illinois
      Attorney General, the City of Chicago, CUB, and the Peoples Companies as
      follows:

    


    Amendment
      Section A: 

    


    Peoples
      Gas and North Shore Gas’ future HUB Revenues: 

    


    Upon
      approval of the settlement agreement, Peoples Gas and North Shore Gas and all
      Peoples Companies shall account for all of their HUB revenues and third-party
      non-tariff revenues, and any other revenues referred to as HUB revenues or
      non-tariff revenues (as those terms have been used in ICC Docket 01-0707) in
      accordance with 83 Ill. Admin. Code 525.40(d)). All such revenues shall serve
      to
      offset “recoverable gas costs” to arrive at the “gas charge” as those terms
      are

    


    
      
        
           

          


          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    


    Settlement
      Agreement Amendment and Addendum

    Page
      2
      of  7

    


    used
      in
      the Illinois Commerce Commission rules part 525.40(d) and in accordance with
      the
      Public Utilities Act. 83 Ill. Admin. Code 525.40(d); 220 ILCS 5/1-101
et.
      seq.
      The
      Peoples Gas and North Shore Gas and all Peoples Companies agree that this
      accounting of these revenues shall apply to all future Purchased Gas Adjustment
      reconciliation cases and rate cases filed by Peoples Gas and North Shore
      Gas.

    


    Amendment
      Section B: 

    


    Peoples
      Gas and North Shore Gas’ HUB Revenues addressed in dockets 05-0748 and 05-0749
      and in any fiscal year 2006 reconciliation cases regarding Peoples Gas’ and
      North Shore Gas’ Purchased Gas for the 2005/2006 Heating Season:


    


    Peoples
      Gas and North Shore Gas and all Peoples Companies agree that they will not
      oppose an adjustment for the reconciliation years 2005 and 2006 based on HUB
      revenues that have not, to date, been used to offset consumer gas charges in
      those years. 

    


    Peoples
      Gas and North Shore Gas and all Peoples Companies will account for all HUB
      revenues and third-party non-tariff revenues, and any other revenues referred
      to
      as HUB revenues or non-tariff revenues (as those terms have been used in ICC
      Docket 01-0707) for fiscal year 2005 as offsets to the Gas Charge in accordance
      with 83 Ill. Admin. Code 525.40(d) and have agreed not to oppose any offset
      of
      PGA costs addressed in Dockets 05-0748 and 05-0749. Peoples Gas and North Shore
      Gas and all Peoples Companies also agree not to oppose any HUB revenue offset
      of
      PGA costs to be addressed in any purchased gas reconciliation case regarding
      Peoples Gas and North Shore Gas that address periods after fiscal year 2005
      and
      prior to the effective date of new rates approved by the Illinois Commerce
      Commission in the rate cases that the utilities have announced they will file.
      For Dockets 05-0748 and 05-0749 Peoples Gas and North Shore Gas agree to re-file
      and amend any testimony filed in those dockets that is not consistent with
      this
      Amendment and Addendum.

    


    Amendment
      Section C:

    


    Peoples
      Companies’ Agreement to Findings 7, 8, 9, 11, 12, 14 and 15 of the ALJ Proposed
      Order Dated September 20, 2005:

    


    Peoples
      Companies hereby agree to implement prospectively findings 7,
      8, 9,
      11, 12, and 14 of the Administrative Law Judge’s Proposed Order in Docket
      01-0707, entered on September 20, 2005 (“ALJ’s Proposed Order”).

    


    
      
        
           

          


          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    


    Settlement
      Agreement Amendment and Addendum

    Page
      3
      of  7

    


    Peoples
      Companies also agree to comply with finding 15 of the ALJ’s Proposed Order for
      the purpose of allowing the ICC to be able to consider fiscal years 1999-2004
      in
      making prospective behavioral and other recommendations, but not to suggest
      any
      further monetary adjustments beyond the refunds included in the January 17,
      2006
      Settlement Agreement. 

    


    The
      relevant findings of the ALJ’s Proposed Order are attached as Exhibit A to this
      filing.

    


    Amendment
      Section D:

    


    Refund
      To Be Paid In Manner Ordered By the Illinois Commerce
      Commission:

    


    As
      already provided in Section I, C, 3 of the January 17, 2006 Settlement
      Agreement, the Parties agree that the $100 million refund shall be paid by
      any
      method that is acceptable to the ICC. 

    


    Amendment
      Section E:

    


    Interest
      To Be Paid On Refund Amounts:

    


    Peoples
      Companies hereby agree to calculate interest on all refund payments made at
      the
      interest rate provided for in 83 Ill. Admin. Code Part 280.70(e)(1). Interest
      paid on refunds will be calculated prospectively from the date of the Illinois
      Commerce Commission order approving the Settlement Agreement until the refunds
      are paid. 

    


    


    Amendment
      Section F:

    


    Peoples
      Companies agree to forgive all outstanding bad debt for Fiscal Years 2000
      through 2005.

    


    Peoples
      Companies agree to forgive all outstanding bad debt from fiscal years 2000-2005
      existing at the time of the execution of this addendum. Bad debt shall be
      defined as those accounts which have been disconnected and on which no payment
      has been made for six months. Peoples Companies represent that this amount
      totals approximately $207 million and comprises over 250,000 customer accounts.
      Peoples Companies also represent that these amounts are currently in, or subject
      to, collection. 

    


    
      
        
           

          


          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    


    Settlement
      Agreement Amendment and Addendum

    Page
      4
      of  7

    


    For
      both
      the Hardship cases within the projected $52.3 million debt for fiscal year
      2006
      identified in the January 17,2006 Settlement Agreement Section V and the $207
      million identified above, the Peoples Companies agree that they will not pursue,
      directly or indirectly, collection of these amounts from customers or use any
      forgiven amounts as a reason to deny gas service to any customer, and that
      they
      will communicate with the credit reporting agencies for each of these customers
      to remove the adverse credit effects of any reporting of these past due amounts
      and expunge this debt from consumers’ account records, relieving said consumers
      from the debt forever and always.

    


    Amendment
      Section G:

    


    Peoples
      Companies Not To Seek Recovery of Debt Write-Off or Forgiveness In Any Future
      Rate or Reconciliation Cases.

    


    Peoples
      Companies hereby agree that they will not seek recovery in any future rate
      or
      reconciliation cases of any amounts of debt written-off or relieved under
      Sections IV and V of the January 17, 2006 Settlement Agreement. Peoples
      Companies hereby agree that they will not seek recovery in any future rate
      or
      reconciliation cases of any amounts of debt written-off or relieved under
      Section F of this Amendment and Addendum. This agreement does not affect the
      ability of Peoples Companies to recover any future bad debt as specifically
      authorized by the ICC now or in the future. Peoples Companies hereby agree
      that
      they will not seek recovery in any future rate or reconciliation cases of any
      amounts associated with the Conservation and Weatherization Program described
      in
      Section II of the January 17, 2006 Settlement Agreement. 

    


    Amendment
      Section H:

    


    Peoples
      Companies agree to permanently enact the hardship reconnection program described
      in Section IV of the January 17, 2006 Settlement Agreement.

    


    


    


    
      
        
           

          


          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    


    Settlement
      Agreement Amendment and Addendum

    Page
      5
      of  7

    


    


    IN
      WITNESS WHEREOF, the
      parties hereto have executed this Amendment to the Settlement Agreement and
      Release on March 6, 2006.

    


    


    


    THE
      PEOPLE OF THE STATE OF ILLINOIS

    


    /s/
      David Adams, Assistant Attorney General

    By:
      The
      Office of Illinois Attorney General

    


    


    THE
      CITY
      OF CHICAGO

    


    


    By:
      /s/
      Mara S. Georges

    


    Title:
      Corporation
      Counsel

    


    


    THE
      CITIZEN’S UTILITY BOARD

    


    By:
      /s/
      David Kolata

    


    Title:
      Executive
      Director

    


    


    THE
      PEOPLES COMPANIES (as defined in this letter above)

    


    


    By:
      /s/
      Theodore R. Tetzlaff

    


    Title:
      General
      Counsel

    


    


    


    
      
        
           

          


          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    


    Settlement
      Agreement Amendment and Addendum

    Page
      6
      of  7

    


    Exhibit
      A to Settlement Agreement Amendment and Addendum

    


    
      	 	
              (7)
                

            	
              Peoples
                Gas Light and Coke Company shall update its operating agreement,
                which was
                approved by this Commission in Docket No.
                55071;

            


    

    
      	 	
              (8)
                

            	
              Peoples
                Gas Light and Coke Company shall account for all gas physically injected
                into Manlove Field by including the cost associated with maintenance
                gas
                in the amount transferred from purchased gas expense to the gas stored
                underground account, Account 164.1;

            


    

    
      	 	
              (9)
                

            	
              Peoples
                Gas Light and Coke Company shall account for the portion of gas injected
                into the Manlove Storage Field to maintain pressure, as credits from
                Account 164.1, Gas Stored Underground, as charges to Account 117,
                Gas
                Stored Underground, in the case of recoverable cushion gas, or to
                Account
                101, in the case of non-recoverable portions of cushion
                gas;

            


    

    


    *  *  *

    


    
      	 	
              (11)
                

            	
              Peoples
                Gas Light and Coke Company shall revise its maintenance gas accounting
                procedures related to gas injected for the benefit of the North Shore
                Gas
                Company and third-parties to require those entities to bear the cost
                of
                maintenance gas, and it shall revise its maintenance gas accounting
                procedures to ensure that all customers/consumers bear equal
                responsibility for maintenance gas;

            


    

    
      	 	
              (12)
                

            	
              Peoples
                Gas Light and Coke Company shall submit its revised maintenance gas
                accounting procedures to the Commission’s Chief Clerk with a copy to the
                Manager of the Accounting Department within 30 days after the date,
                upon
                which, a final Order is entered in this
                docket;

            


    

    


    *  *  *

    


    
      	 	
              (14)
                

            	
              Peoples
                Gas Light and Coke Company shall submit quarterly reports reflecting
                its
                use of journal entries regarding maintenance gas to the Manager of
                this
                Commission’s Accounting Department within 45 days of the end of each
                quarter, after the date of a final order is entered in this docket,
                through the quarter ending September 30,
                2009;

            


    

    
      	 	
              (15)
                

            	
              Peoples
                Gas Light and Coke Company shall engage outside consultants to perform
                a
                management audit of its gas purchasing practices, gas storage operations
                and storage activities. The firm selected to perform the management
                audit
                shall be independent of Peoples Gas Light and Coke Company, its
                affiliates, Staff, and all parties in this docket, and approved by
                this
                Commission. Monthly reporting of the progress of the conduct of the
                management audit shall be submitted to the Bureau Chief of the
                Commission’s Public Utilities Bureau, with a copy to the Manager of
                the

            


    

    


    
      
        
           

          


          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

    


    Settlement
      Agreement Amendment and Addendum

    Page
      7
      of  7

    


    Commission’s
      Accounting Department, until the management audit report has been submitted.
      Completion of this management audit shall occur no later than eighteen months
      after the date, upon which, a final order is entered in this docket. Upon
      completion, copies of the management audit reports shall be submitted to the
      Commission’s Public Utilities Bureau Chief and the Manager of the Commission’s
      Accounting Department;

    


    ALJ
      Proposed Order at 135-136.