A Perfect Storm 

One of the coldest winters on record --and some questionable judgment calls at MLGW -- led to Memphians paying the highest gas bills ever.

Without electricity Mamie Parker's son Keith's life hangs in the balance, and there's nothing she nor modern medicine can do about it. If 19-month-old Keith has an asthma attack while the power is turned off, his electrically powered breathing machine is useless. Memphis Light, Gas & Water has already shut off her power once and Parker says the utility has threatened to turn it off again if she does not pay $500 by April 12th. She has asked MLGW representatives numerous times about their publicized payment plans but each time she has been told that the plans do not exist. Parker, who makes $600 a month, is trying to cope with a $700 utility bill. She is frustrated and she wants to know why it was so high.

Parker is not alone. A lot of Memphians want to know why their utility bills were so high this winter. Unfortunately, the answer isn't as simple as plugging a cord into a socket. It's much more complicated.

Over the past year a number of forces coalesced, and unforeseen factors materialized and meshed and rolled over the utility's customers like a storm, a perfect storm. Perfectly horrible. Perfectly breaking bank accounts across Shelby County. If anything good came from this winter's astronomical gas bills it was that everyone -- black, white, Hispanic, Asian, young, old, rich, poor, gay, straight -- was united in their anger at Memphis Light, Gas, & Water.

It was a storm brewed with a powerful combination of elements: record cold weather, inexperienced gas purchasers, a badly-timed customer warning, poorly executed or nonexistent payment plans, and a discrimination lawsuit filed by a former manager. The result: gas bills that were 25 percent over the national average.

Unfortunately, the storm hit low-income Memphians like Mamie Parker the hardest. Elderly poor, those on fixed incomes, single mothers, middle-class families staggering under hefty Christmas bills -- these are the people who got hurt the most. Now two questions remain: How did it happen, and will we ever get the money back?

In the Storm's Wake

When the first steep heating bills began arriving in January, you can be sure city council members heard about it. It was the coldest winter in recorded history, we were told, and as icicles lengthened and pipes froze, the highest utility bills most people had ever seen began to arrive in the mail. Many Memphians simply couldn't pay their utility bills; elderly citizens told of being forced to choose between food and heat; and most people below the middle-income line feared their power would be turned off. Something had to be done.

On January 30th MLGW and city council member Rickey Peete announced a payment plan that would prevent cutoffs and allow utility customers to spread their bill payments over several months. Peete and MLGW crafted three payment policies: "Smart Pay," a 12-month program that would average winter bills into equal monthly installments; a plan for lower-income customers that would spread December and January's bills over 12 months; and a plan to credit customers for water leaks.

However, Parker and other Memphians interviewed by the Flyer say they went to the MLGW offices to sign up for these programs and were told the alternate billing plans, particularly Smart Pay, were not available. Parker's experience, and others', also indicate that the utility did not cease power cutoffs as they'd promised.

When Diane Moore-Trombi's heating bill increased from $54 for the month of November to $333 in December, she tried to take advantage of the advertised payment options. When she went to the MLGW bill payment office on Main Street, she too was told that no such plans existed.

"I asked the girl behind the counter specifically about the 12-month payment option," says Moore-Trombi, "and she became very coy and said, 'We're finding out that that plan doesn't really work.' There was no 12-month plan. I was not offered any other plan and I asked about all of them. The payment plans simply didn't exist."

"If in fact this is true," says Peete, "I'm totally shocked and concerned that MLGW would make a public commitment to the citizens and the council and not honor that commitment."

Mark Heuberger, MLGW's director of corporate communications, says the utility has signed up more than 7500 people on the Smart Pay and emergency pay plans.

While citizens like Parker and Moore-Trombi were being frustrated by a lack of payment options and assistance, the utility was still putting on a good face for the city council. At City Hall on February 6th, members of the council praised MLGW for the utility's willingness to work with rate-payers and establish payment plans. Brent Taylor and Rickey Peete read a lengthy proclamation from the North Little Rock City Council thanking MLGW for its help during that community's December ice storm.

Was the lack of payment options available to some customers simply a service error, a matter of MLGW personnel being ignorant of their employer's own payment plans? Or was the utility trying to keep participation down? Memphians will probably never know, but by publicly introducing the payment plans the utility undoubtedly deflected much of the negative attention it had been receiving.

However, another critical omission does call MLGW's motives into question. In promoting the new payment programs the utility neglected to mention that Smart Pay would not be available until March -- after gas prices and high gas usage dropped.

Eddie Baker, manager of customer-service field operations for MLGW, says that if customers attempted to enroll in Smart Pay during the month of February they would have been turned down because the program did not begin until March.

Baker did say that customers like Moore-Trombi can now enroll in the Smart Pay program, and if their winter bills are not yet paid off, they can begin the program with a balance.

"We'll work with customers to find an arrangement that's mutually satisfactory," says Baker.

But finding a way for customers to pay their bills still begs another question: Why were they so high in the first place?

Fuzzy Math

The Flyer reported in its March 22nd issue that MLGW charged its customers 25 percent more for natural gas than the national average for the months of December and January. Using information provided by the gas industry publications Inside FERC and Gas Daily, the Flyer compared the monthly and daily amounts billed by natural-gas suppliers Texas Gas Transmission Corporation and Trunkline Gas Company to the amount MLGW reports that it paid for the same resource this past winter.

For the months of November, December, January, and February MLGW billed its residential customers $0.50, $0.82, $1.31, and $0.41, respectively, per 100 cubic feet (CCF) of gas. For the same months the average amounts paid by other customers of Texas Gas and Trunkline were $0.45, $0.60, $0.99, and $0.62.

MLGW's Dana Jeanes, assistant manager for budget, plant, and rates, told the Flyer that there were other factors to consider.

"You compared what appears to be the first-of-the-month index prices on each pipeline to the PGA," said Jeanes, referring to the Purchase Gas Adjustment (PGA) amount the utility adds to the embedded cost of gas to establish the billing amount. "A more valid comparison is that between MLGW's gas costs and the index prices. Even then, some caution is in order. MLGW could not purchase its entire requirements at the first-of-the-month index prices."

Jeanes explained that in periods of extremely cold weather, when gas usage increases, MLGW has to buy gas on the spot market to supplement the gas already purchased by the utility. He says that the spot market cost of gas is typically higher than the index price.

However, when the Flyer compared gas costs as billed by MLGW to Gas Daily's price indices, which report the average daily price paid for natural gas, the numbers still did not match up. The Gas Daily indices show that the highest average price paid for any day in December was $10.52 per thousand British Thermal Units (mmbtu). Adjusted for delivery costs and converted to CCF, this equals $1.12 per CCF. MLGW billed $1.31 per CCF, a significantly higher amount. Furthermore, in December natural gas prices only reached this highest level for five days. For most of the month the gas prices were much lower, making the $1.31 per CCF figure billed by MLGW even more out of line.

How Your Bill is Calculated

Understanding the gas portion of your MLGW bill is tricky.

Here's a nuts-and-bolts explanation: In 1993, the Memphis City Council approved a gas rate adjuster as a part of the residential rate. In addition, the council approved an assumed purchase cost of gas of $0.22 per CCF that would also be embedded in the residential rate. These two components added together should reflect MLGW's purchase cost for gas.

To cover its own fixed costs, MLGW subtracts the assumed cost of gas from the residential rate. When the purchase cost of gas for MLGW is different from this assumed gas cost, MLGW adds or subtracts a purchase gas adjustment (PGA) amount to determine the final amount billed to customers. The PGA is listed on each customer's monthly bill.

The city council approved the PGA in 1993 because the Federal Energy Regulatory Commission (FERC) had deregulated the natural gas market and MLGW felt that having a variable PGA would allow it to stay flexible during market fluctuations. But in order to adjust the price, the utility had to have an assumed cost of gas to adjust from, so it established the embedded adjuster, which is currently $0.22 per CCF, according to Dana Jeanes.

The upside (and the downside) to the gas rate adjuster for residential customers is that MLGW can pass fluctuations in the cost of gas on to its customers. For the last few years, though, the utility has not purchased gas at less than $0.22 per CCF.

Unfortunately there appears to be little financial incentive for MLGW to secure natural gas contracts at the lowest prices. If the utility pays more for gas than it should, the increased amount can simply be passed on to the customers.

By instituting the gas rate adjustor, MLGW gained financial security, assuring that it would be repaid for gas purchased regardless of what it paid. The utility could then "hedge" gas on the spot market to minimize price fluctuations to its customers. Unfortunately, it appears MLGW did not hedge significant amounts of gas for this winter, despite several warnings and the advice of their futures consultant.

Here's how it played out this winter: In November 2000, the embedded cost was $0.22, the PGA was $0.28, and the gas cost component of the amount billed to customers was $0.50. These numbers add up to near the national average and everything's kosher, right? Wrong.

In December 2000, the embedded rate was still $0.22, but market fluctuations caused the PGA to nearly triple to $0.60, and the cost of gas billed to customers was $0.82. However, the average price paid for gas nationally in December, according to Inside FERC, was $0.58 -- a full $0.24 cents per CCF less than MLGW customers paid.

Even worse, in January with the embedded cost still at $0.22, MLGW's PGA skyrocketed to $1.09, and customers were billed $1.31 per CCF. But the national average for January was $0.95, or $0.36 per CCF less than MLGW customers paid.

Ignoring the Forecasts

In a normal year, rate-payers probably wouldn't have noticed the fuzzy math on their bills. But coupled with this year's unprecedented natural gas prices, the sticker shock was too painful to ignore. And it's of little comfort now to learn that steps could have been taken to protect Memphians from rising natural gas prices.

Long before the skies darkened over the utility's billing and public relations departments, conditions were rocky in the utility's gas-purchasing system. MLGW officials knew as early as November of 1998 that gas prices this winter could soar but did not act to insulate the utility and its customers.

Prior to the 1993 deregulation of the gas market, purchasing gas for a major utility was a relatively easy job. Purchase prices were set by the Federal Energy Regulatory Commission (FERC) and utility officials responsible for purchasing entered into contracts with the pipelines serving Memphis. But as the 1993 deadline for deregulation loomed, the roles of gas purchasers began to change. Gas deregulation meant that MLGW would assume full accountability for purchasing. Executives responsible for gas purchasing now needed to analyze the market to ensure that they would be purchasing gas from reliable suppliers at the market's best prices. Utilities everywhere began restructuring their purchasing departments and MLGW was considered among the most innovative in the country.

A January 1994 article in the Journal of Commerce, a business magazine focused on supply planning and shipping, praised MLGW's futures contracts system as a model for other utilities to follow in the wake of deregulation.

Seth Wilson, then the industrial marketing representative for MLGW, was quoted by the Journal of Commerce as saying, "Futures contracts, which specify delivery by a certain date at a guaranteed price, have helped the city control its fuel costs by locking in prices when they are favorable."

MLGW was the first municipal utility to institute a program using natural gas futures, options, and financial derivatives to hedge MLGW's natural gas portfolio in order to provide price stabilization to customers in a deregulated market. The utility began this program in 1990 as a pilot program and then expanded it in 1993 when the gas industry became fully deregulated. At that time MLGW was able to hedge 100 percent of its anticipated gas needs.

From 1991 until 1999, the gas market stayed fairly flat. The only significant fluctuations in price were seasonal and therefore predictable. But the stable market wouldn't last, as executives at MLGW were aware. In hopes of circumventing major market changes, the utility enlisted the services of Walter Zimmerman.

Zimmerman, one of the nation's foremost experts on the gas futures market, is vice president of United Energy, Inc. and studied under Dr. Ilya Prigogine, who was named a 1977 Nobel Laureate in chemistry for a study titled "Non-Equilibrium Dissipated Structures." Using what he learned with Prigogine, Zimmerman applies chaos theory to the futures market in order to identify market price patterns. This is what he is currently paid to do for MLGW.

In November 1998 Zimmerman made his first official visit to Memphis when MLGW executives invited him to talk to the utility's executives about the changes in the gas market.

"I spoke to employees at MLGW about the outlook for natural gas prices," says Zimmerman of his 1998 lecture. "I predicted higher natural gas prices with a record high preseason rally in 2000. I didn't tell them that prices would get as high as $10 [per CCF] because it's hard to predict what panic can do to the market. I predicted that prices could get as high as $7 per CCF, though."

He also explained the 60-year nature of economic cycles to the MLGW execs. This theory holds that inflation and deflation follow 20-year patterns: inflation for 20 years followed by 20 years of deflation. Zimmerman explained to those in attendance that the new cycle would begin in February 1999, ushering in 20 years of inflation. Prices would then accelerate in January 2000, beginning the uptrend. Zimmerman specifically warned MLGW officials in 1998 that natural gas prices would likely double for the winter of 2000-2001.

Moving from lecturer to consultant, Zimmerman stayed on at MLGW. According to MLGW's Heuberger, Zimmerman receives $21,600 a year to advise the utility on the natural gas market fluctuations.

Zimmerman says that though this winter's brutally cold temperatures were unforeseeable, the market fluctuations occurred on cue.

"It happens most every year that prices will spike up fast and then come down just as fast," says Zimmerman. "They tend to peak out between late October and late December. The worst month is usually January. We usually get pummeled early in the month of January, and then prices collapse later in January."

Though no one could have predicted the staggering heights that prices in the natural gas market would eventually reach, MLGW officials had been warned that the market could hit a high in January and then fall to near-normal levels at the end of the month. With Zimmerman's warnings two years ago and his ongoing consultations, MLGW should have been one of the most insulated utilities in the country against the wild gas-price spikes. One option would have been for the utility to purchase gas futures in advance when prices were relatively low.

Zimmerman, though, is quick to add that it's unfair to judge MLGW for not acting differently.

"I've learned that looking back is just fruitless speculation," says Zimmerman. "Any company that survived this winter's fluctuations did something right. What happened during the fourth quarter with natural gas is unprecedented with physical commodities in history."

He also says that MLGW officials may not have taken his predictions seriously because they were so dramatic.

"If your forecasts are too far outside the normal price range, they tend to be dismissed," says Zimmerman. "Nobody thought natural gas would go from $2 to $10."

Inadequate Warnings

MLGW's decision to keep Zimmerman's warnings under wraps is a bit like the National Weather Service deciding that there's no point in worrying people over a potential tornado. But the utility soon learned that when you ignore the forces of nature, there's public-relations hell to pay.

Should MLGW have used Zimmerman's predictions to warn customers of upcoming higher prices? Doing so would certainly have given customers a better chance to budget for upcoming increases. Other gas companies, like Mississippi Valley Gas of Jackson, Mississippi, seemed to think this was a prudent plan. That utility mailed a warning letter to all of its customers on September 20, 2000, which read, in part: "At Mississippi Valley Gas, we expect prices could rise as much as 50 percent. But, if our winter is colder than normal, gas bills could rise even more."

MLGW, however, did not make an official announcement until January 2, 2001 -- just days before customers would begin receiving their hefty December bills. Prior to the January announcement the utility had made no public mention of the gas-price increase other than in an October 6th Commercial Appeal article. Even then the article only hinted at rising prices and focused instead on the highly publicized 13 percent temporary rate decrease MLGW was initiating.

The Commercial Appeal article quotes Mark Winfield, MLGW's manager of budget, plant, and rates, as saying that the rate decrease would "soften the blow" to customers, causing them to pay on average $77 more for the January to March heating period than in years past. This was well below the increase most customers actually received on their bills, many of which were triple and quadruple what they had paid in recent years.

In fact, instead of issuing a warning about the increase, the utility made much ado about its temporary rate decrease. According to the October 6th article, without the rate decrease, MLGW customers would be paying on average $112 more than they had the year before.

This action caused many MLGW customers to believe that they would be protected from the nationally predicted gas-price increase this past winter. Only when they received their utility bills did rate-payers realize that they were not protected by the rate "decrease" but were in fact were paying higher rates than ever before.

Herman Morris
Jumping Ship

Just as the sailors in Sebastian Junger's novel The Perfect Storm needed a skilled captain and crew to sail as far as they did, MLGW customers needed an experienced captain and crew at the helm this year. Unfortunately, many of MLGW's experienced hands have left the utility in recent years.

On December 31, 1996, Bill Crawford stepped down as president of MLGW. Crawford had spent 39 years with the utility, five-and-a-half of them as president and eight as senior vice president. He was replaced by Herman Morris, an appointee of Mayor Willie Herenton. Morris had worked as general counsel in MLGW's legal department since 1989. But aside from advising the utility on legal issues, Morris had little prior hands-on experience with light, gas, or water operations.

Next to go was Sandy Novick, vice president of operations and a critical figure in the creation of the futures contract program. Novick retired in March 1997 and was replaced by Alonzo Weaver. Weaver, like Morris, has strong connections with MLGW board members and leaders, but little experience with regulatory issues or gas purchasing. He has been manager for electric operations and has a strong engineering background. His MLGW job description states that he is now "responsible for the control and operation of the electric, gas, and water utility systems and for the acquisition/production of electric power, natural gas, and water supplies for the utility."

Paul Harris, senior vice president and chief operations officer, retired from MLGW in 1998 after 30 years of service. The utility promoted Larry Thompson to the position, who has had relatively few dealings in gas acquisition. Though Thompson has worked for MLGW since 1965, he dealt primarily with construction-related issues.

Henry Nickell, manager of systems operations and energy resources, was replaced in April 2000 by Lee Smart, who has a degree in electrical engineering and has spent 22 years working for MLGW in the construction department. He has no prior experience in supply planning or gas acquisitions.

But Nickell's story is not so simple. He's going down fighting.

Manager Sues

On December 18, 1997, Nickell filed an Equal Employment Opportunity Commission (EEOC) charge of discrimination based on race and age against MLGW when he was passed over for a promotion. Nickell, who is white, claims that after he filed the complaint working conditions for him at MLGW worsened. He then filed a lawsuit against the utility claiming that he was harmed by MLGW's retaliatory actions against him and that he suffered humiliation, depression, anxiety, and other emotional and physical suffering. Nickell is asking $5.2 million in compensatory and punitive damages.

Nickell's suit specifically alleges that in 1997 Herman Morris began intentionally excluding Nickell from meetings that he was required to attend in order to perform his job. Nickell claims that Morris would not inform him of the time or location of these meetings. He also says that he was assigned additional responsibilities but not allocated the staff or resources to complete the work and that deadlines for completing assigned tasks were changed without Nickell receiving notice.

Nickell declined comment for this story because his lawsuit is still pending.

In January 1999 Nickell received notice from MLGW's human resource department that a survey conducted by the American Gas Association showed that Nickell was the only employee in his department who was substantially underpaid. Mike Magness, director of human resources for MLGW, told Nickell that he (Magness) had recommended that Nickell's salary be increased. However, no adjustment was made.

While Nickell was still employed by the utility, he says that MLGW security circulated "wanted" posters with Nickell's picture on them and guards were told that Nickell was no longer allowed in the building. Nickell alleges that MLGW employees were instructed to take detailed notes during any conversations with him and that those notes were to be turned in to Alonzo Weaver. While Nickell was technically still the manager, the access code to the door was changed and the new code was not given to Nickell. The acting manager, Bill Bullock, is alleged to have told employees to use their discretion when deciding whether or not to allow Nickell, still their boss, in the office.

Nickell also alleges that his replacement, Lee Smart, is less than qualified and received his job based on connections rather than competence.

An excerpt from MLGW's Alonzo Weaver's deposition in Nickell's lawsuit is revealing:

Nickell's attorney, Kathleen Caldwell: "Have you ever put your name on a report written by Henry Nickell? Did you change the name on any report so that it showed that it was coming from you?"

Alonzo Weaver: "I don't remember."

Caldwell: "Is it possible?"

Weaver: "It's possible."

Caldwell: "Would you agree that you had a lot to learn in a short amount of time in order to effectively handle the job of vice president of operations?"

Weaver: "I've had a lot to learn, yes."

Caldwell: "Did you talk to Herman Morris about an executive position before he became president of MLGW?"

Weaver: "I do not remember; it's possible that I did."

Caldwell: "Did you meet with Franketta Guinn [chairman of the board for MLGW] for about half a day just prior to you being named acting vice president?"

Weaver: "I do not recollect."

Caldwell: "Have you ever discussed your future with her?"

Weaver: "I may have."

Caldwell: "Have you ever told any of your co-workers at MLGW that you know the mayor?"

Weaver: "It's possible."

On April 21, 2000, Nickell tendered his resignation on the advice of his physician. Nickell says in his complaint that working conditions at MLGW were so difficult or unpleasant that a reasonable person in Nickell's shoes would have felt compelled to resign.

MLGW's Heuberger responded to the Flyer's request for information on Nickell and on other former employees with this faxed statement:

"In order to protect the privacy of our employees, we will not discuss personnel records or conditions of employment about any current or former MLGW employee."

After the Storm

Recovering from the financial pain MLGW inflicted on its customers this winter will take time. Some, like Mamie Parker, will keep trying to have excessive bills spread out so that she can make smaller payments. Others, who could afford the increase but wrote their checks reluctantly, are no doubt thinking of ways they would have rather spent the money. Everyone wants to know if such a thing could happen again.

Unfortunately, the answer is probably yes. MLGW is still managed by those who brought on this year's financial and public relations fiasco, a group that didn't properly heed the cautions of its own paid consultant. Cronyism is rampant, insiders and former employees say. And as long as MLGW is allowed to use a PGA to determine the amount to bill customers, the utility will have the leeway to adjust prices up or down to cover its losses -- alleviating a major incentive to purchase gas at the lowest prices. The bottom line: If MLGW could charge its customers 25 percent more than the national average in December and January with no repercussions, then what's to stop it from doing the same -- or worse -- next winter? n

You can e-mail Rebekah Gleaves at gleaves@memphisflyer.com.

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