The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (14 page)

Joe Seeber owns TriStem Consulting in Hewitt, Texas. TriStem examines electric bills that utilities send to cities and state agencies, colleges, charities, factories and shopping malls. From his base in Hewitt, halfway between Austin and Fort Worth, Seeber dispatches teams across the country to count the streetlights for which utilities charge taxpayers, just to be sure they exist. Many do not. His teams compare the wattage shown on power bills to the actual bulbs in streetlights (often utilities charge for high-wattage bulbs, even though they install smaller lamps that consume less juice). TriStem finds streets that have been dark for months or even years, with lights that residents and business owners have complained need to be replaced, but for which the billing has never ceased.

New Orleans is not alone in being overcharged by Entergy on its electric bills. Seeber has caught the company cheating taxpayers in states throughout the South. Entergy owns four other utilities—one each in Louisiana, along the gulf coast of Mississippi, in East Texas and Arkansas.
All of these Entergy utilities have billed taxpayers large sums for power that was never used.

Late in 2009, the small East Texas town of Beaumont got a report from TriStem detailing how Entergy billed for nonexistent streetlights and overstated wattage on other lamps. Seeber included photographs with addresses so that anyone could check his work. Three decades earlier, one of Seeber’s first audits had uncovered $100,000 of bogus Entergy charges to Beaumont taxpayers, but in 2009 the City of Beaumont sued Entergy for fraud. “After an inspection and audit,” the Beaumont lawsuit charged, “shocking trends were discovered” about “Entergy’s unethical and fraudulent billing practices.” Within days four other East Texas towns—Conroe, Huntsville, Nederland and Port Neches—filed similar lawsuits based on TriStem audits of Entergy bills.

Although it serves many poor areas, Entergy is an enormously profitable company. From 2006 through 2008, Entergy reported profits of more than $5 billion. Customers of its utilities paid the company more than $800 million to cover its corporate income taxes for those three years. Yet Entergy did not pay a dollar of corporate income tax to the government. Instead, Entergy got back almost $58 million from the government. That gave Entergy a real federal tax rate of
minus
2.4 percent.

In 2009, Entergy paid just $43 million in income taxes on a pretax profit of nearly $1.9 billion for an effective income tax rate of just 2.3 percent, according to its own annual disclosure statement.

Although many of its customers are impoverished, Entergy’s chief executive officer, J. Wayne Leonard, is paid exceptionally well for his performance as head of a holding company with five monopolies, among other investments. According to Equilar, a company that tracks executive compensation, Leonard’s 2009 pay came to $27.3 million. Entergy’s board had been so generous that, as 2009 ended, Leonard’s stock equity and pension were worth more than $92 million. These figures are based on the way the government requires companies to calculate executive wealth, though history shows that official figures often understate the real wealth of executives.

Despite this fortune, Entergy directors awarded Leonard $15,871 to pay part of his 2008 income taxes. They also gave him life insurance and financial-planning assistance. He got free personal use of Entergy jets. The captive customers of this monopoly, together with customers of other electric utilities that buy power from Entergy’s electric-power plants, were the source of the money that ended up benefitting Leonard.

Sustaining this kind of pay would be difficult in a market economy, where competition would drive down prices as people shopped for the best bargains. That kind of shopping means thinner profit margins. Or, as Adam Smith observed in 1776, a business in a truly competitive market will make just enough profit to justify remaining in business. In a competitive market the bargaining power of shoppers drives down the price of executive labor to a level that correlates with the value the executives add to the company.

Disproportionate compensation wouldn’t exist if regulators set prices close to what a competitive market would produce. The various state utility commissions are supposed to set prices as a proxy for the market, achieving through investigation, hearings and policies a list of prices close to what a market would produce. But the utilities often convince regulators that they must earn very high profit margins. For utilities, rates of return are based on invested capital. The average return on shareholder capital, also known as equity, is more than 19 percent before taxes at utilities. For large corporations, on average, it is 6.7 percent, government data show.

Over all, the very biggest American companies earn an average profit of less than 10 cents on each dollar of sales. Entergy earned 17.5 cents thanks to the high rates it gets to charge customers, and other benefits, such as the more than $200 million taxpayers gave Entergy to repair damages to its equipment from Hurricane Katrina.

Indeed, of eight major electric utilities in 2007, J. Wayne Leonard ran the smallest by revenue and earned the smallest profit, but took home the biggest executive paycheck by far, the Web site entergypaywatch.org noted. That year Leonard was paid more than five times what the chief executive of PSEG, the New Jersey utility company of almost identical size and profit margin, was paid.

But back to Joe Seeber. Starting in 1988, his audits caught Entergy’s Texas utility overcharging two Texas colleges, three cities, and the Texas Department of Transportation. The customers got the following refunds from Entergy:

In Louisiana, Seeber’s audits prompted much larger refunds from Entergy, including:

The U.S. Coast Guard got back $50,000 from Entergy thanks to a Seeber audit.

The excessive billing Seeber uncovered was not the result of some minor glitch or of a billing error made one month and then corrected soon after. He uncovered inflated Entergy bills going back years and in some cases decades. The patterns were so evident that Seeber followed them back in time—he compiled records on Entergy and its predecessor companies back to the 1800s. He’s become convinced that overcharging was standard operating procedure at the utility from the start.

Seeber has examined the billing practices at many utilities, and TriStem audit teams have found utilities that charged more than they were entitled to in all fifty states and Canada. They’ve found meters that recorded a much greater flow of power than actually passed through them; customers billed at higher rates than those set by state public-utility regulators; and places where utilities installed two meters, making customers pay twice for the same juice.

The odds of finding such cheating are so high that Seeber charges clients only if he finds improper charges. That Seeber turns a healthy profit even though he bears all of the risk of an audit’s upfront costs is a damning indictment of the corporate-owned electric-utility industry’s dishonest practices. Utilities often overcharge the schools, libraries and other government services you support with your tax dollars. Few governments, businesses or individuals check their routine monthly bills. Out of some sort of blind faith, most just pay them without question.

That utilities overcharge local governments is no surprise to Ed Doherty, who spent more than twenty-five years as budget director and later commissioner of environmental services for the City of Rochester in western New York.

“Many street lights exist only on electric bills,” Doherty said. “Charges for higher levels of service, nonexistent services and lamps that burned out or were removed a long time ago, are everywhere—and it’s worse in
the suburbs.” That is because many suburban governments are lightly staffed and affluent enough that widespread overbilling for municipal electricity gets little attention. Most suburban towns miss streetlight overbilling because they use special lighting districts. “The only government people who review the bills are clerks who see their job as only converting the utility bill to a tax levy for the district—typically, no one ‘owns’ the charges and so no one takes responsibility for making sure they are accurate,” Dougherty said. Without audits, overcharges can go on for months, years and even decades.

Streetlights are just part of the problem. Telephone, natural gas, water, and sewer utilities have been caught overcharging. In Oklahoma, Seeber once got the City of Tulsa more than $358,000 in refunds, partly from AT&T, which billed for unused telephone equipment. In Los Angeles an internal audit in early 2010 found that the city was being billed for twelve thousand telephone lines that were not in use. That cost $3 million per year, or about a dollar annually for each city resident. That may not sound like a lot, but a dollar here and a dollar there in bogus charges to governments and individuals adds up.

Auditing firms like TriStem thrive because cheating has become pervasive. The problem is exacerbated by automated bill-payment systems that states and municipalities are buying in the name of efficiency. That these vendors are often significant contributors to the campaigns of politicians who control budgets for acquiring such equipment is not surprising, but has received very little attention from the news media.

According to a
New York Times
report in 2007, every fifth dollar the state of New York pays doctors, hospitals and other providers is for care either not rendered or not needed. A lengthy investigation of state health-care spending revealed how automated bill paying, which was intended to save money, enabled fraud. The state controller pronounced the newspaper’s estimate solid.

What makes Joe Seeber unusual among utility-bill auditors is how he charges clients. Seeber’s contract calls for a fee of just under half of any refund his clients collect for past overcharges. No refund, no fee. The clients’ future savings are just that: pure savings to the customer. TriStem’s competitors usually demand a piece of future savings, which gives them a predictable flow of income for two or three years as the clients pay smaller electric bills, and then a third or half of what they save to the energy auditor. But, Seeber says, that system makes it easier for the utility to negotiate not paying full refunds for past cheating, and that a focus on future savings rewards wrongdoing. And, Seeber adds, sustained overcharging is wrongdoing.

Seeber’s opinion rankles utility executives. Entergy executives have told me and others that refunds corrected simple mistakes; they cite the costs of fighting in court over what they characterized as bogus claims of excess charges. Like other utilities, Entergy prefers to address only future billing, giving back as little as possible from past overcharges—and certainly not with interest paid in cash.

Marcus V. Brown, one of Entergy’s lawyers, told me the company would like Seeber to just go away. He described Seeber as zealous and difficult to work with (auditors who do their jobs tend to be seen that way). Entergy once asked Seeber how much he wanted for his business, including a clause that would prevent him for starting a new a firm that would audit electric bills. Such a clause would ensure that Seeber retired from such auditing, and stay retired.

In what Seeber now concedes was an act of stunning stupidity and weakness, he gave Entergy a price in writing. Ever since, Entergy has argued that Seeber was trying to extort the company.

Why would Seeber respond to such an offer? Because, like all human beings, he makes mistakes. Seeber was tired of fighting to get paid, weary from battling an opponent that used its political power to reduce the fees he made and that forced him to divert a lot of time to dealing with their backroom efforts to avoid making refunds. He was at retirement age and thinking about selling when the offer appeared. That it might have been a trick should have been obvious, but Seeber just thought it was a way to get rid of all the hassle and to retire.

The company may or may not have been serious, but Seeber was obviously not thinking clearly when he responded with a price instead of ignoring the offer. But it is also true that Entergy has always had it in its power to make Seeber go away in an instant. Seeber’s business would collapse if firms like Entergy just stopped overcharging its customers. If Entergy billed honestly, market forces would end Seeber’s ability to make money auditing Entergy’s bills.

Instead of ending its gouging ways, however, Entergy decided to get Joe Seeber put away over that broken light pole.

SEEKING TO JAIL JOE SEEBER

The effort was rooted in Seeber’s 1994 audit of a City of New Orleans contract with Entergy to maintain and power 50,000 streetlights. TriStem auditors found that Entergy charged the city for numerous bulbs at
higher wattage levels than those it installed, as well as for 600 streetlights that did not exist. Entergy eventually reimbursed the city $6 million, about half of what Seeber said it should have returned. That 1994 audit did result in one reform, and the city and Seeber hoped that the new penalties clause specifying high penalty fees would deter future cheating.

In 2001, Seeber’s firm audited bills that two Entergy utilities sent to the Louisiana Department of Transportation. He concluded that the state was due $5 million, a sum that included $3 million in interest. Most of the money was for streetlights paid for by local governments but for which the state also was being charged. In some instances, the double-billing went back a half century. Entergy said the TriStem estimates were out of line with actual overcharges. Entergy offered the state about $151,000, or three cents on each overcharged dollar.