The Fine Print: How Big Companies Use Plain English to Rob You Blind

by David Cay Johnston

  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:

  Sam Houston State University $155,000

  Lamar University $60,000

  Beaumont $100,000

  Huntsville $60,000

  Orange $31,000

  Texas Department of Transportation $280,000

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

  New Orleans Sewer and Water Board (1992) $1,000,000

  City of New Orleans (1993) $400,000

  City of New Orleans (1994) $1,800,000

  New Orleans Centre (Superdome mall) $70,000

  Louisiana State University $90,000

  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 wit
h (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.

  Entergy also told state officials and a reporter for the New Orleans Times-Picayune that Seeber was merely a self-taught energy auditor. Seeber did not have credibility, Entergy said, and besides, he was really hard to deal with. An Entergy spokesman said that Seeber was just in it for the money.

  Eventually the state transportation agency met Entergy more than halfway. A government lawyer wrote Seeber that the state “does not wish to pursue collection of interest” on any overcharges. The agency disputed neither the legitimacy of collecting interest nor the $3 million estimated interest charge, but, in the end, the state settled with Entergy for about fifteen cents on the dollar. Seeber went public with his criticism, saying the state gave away too much in looking out for the interests of Entergy to the detriment of Louisiana citizens.

  The next year, Lillian Regan, the city public-utilities director, brought Seeber back to New Orleans to audit Entergy’s streetlight bills again. Seeber found that, despite having been put on notice eight years earlier, Entergy had committed more billing abuses. According to Seeber, Entergy charged the city excessive amounts for the repair and maintenance work of its own power lines. And there were still plenty of phantom streetlights. Indeed, Seeber said he found that some of the imaginary streetlights that Entergy billed the city for in 1994 were still on the city’s bills.

  “Vindictive billing,” Seeber called it. “The abuses were far worse than what we found in the first streetlight audit.” Seeber calculated the overcharges, after eight years, at about $15 million. When the penalties negotiated under the terms in the 1994 deal were added in, the bill came to $25 million.

  Mayor Marc Morial’s aides said the figure could be more than $40 million, but they met with the president of the Entergy utility to work out a settlement. When the mayor got nowhere, the city took Entergy to court. The lawsuit charged that Entergy did not simply make mistakes, but engaged in systematic overbilling. When caught, the lawsuit said, Entergy refused to allow inspection of its records, a tactic the city described as “clearly calculated to obstruct a legitimate investigation of its actions and the failure of performance of its obligations to the city.” Entergy claimed it was just protecting records that were not relevant to the audit.

  In a front-page article, the Times-Picayune characterized the litigation as “the extraordinary step of filing suit against the city’s electric and gas provider, a subsidiary of New Orleans’ only Fortune 500 company.” That a mainstream newspaper regards suing a vendor for overcharging taxpayers as “extraordinary” speaks volumes about what has become a widespread bias in the news these days. The gratuitous mention of Entergy as the only Fortune 500 company in town helps make clear the journalistic tilt toward the rich and powerful, rather than to their readers, the people forced to pay Entergy more than it was legally due.

  Unmentioned in the news was the relative size of the dispute. At the time, the New Orleans city government budget was about $500 million a year. In 2002 the city was facing a $25 million shortfall between revenue and expenses. Even after paying Seeber’s full fee, the city would have recovered enough to pay all of its bills for a week. Instead, the local newspaper left the impression that the $25 million was a burden to Entergy.

  As the lawsuit proceeded, a new mayor was elected. A man with a deep understanding of monopolies, Mayor Ray Nagin had been the general manager of Cox Cable New Orleans, the local Cox cable television monopoly. He had many close ties to Entergy executives and even appointed a senior Entergy lawyer as New Orleans city attorney.

  Nagin quickly fired Lillian Regan, the city official who had hired Seeber and been adamant that the utility should make a full refund on the overcharges. Regan found herself facing criminal charges in a taxi-license case, although the case was so weak that the judge who heard the accusations dismissed the charges. Regan’s alleged crime had been to waive fifty-dollar fees for a handful of down-on-their-luck taxi drivers, including a cabbie whose leg had been amputated. In dismissing the case, the judge said in open court that he would have done the same thing had he been in charge of cab licenses.

  Still, no one in New Orleans missed the message that was being sent by the mayor’s office. Nagin, a native son who grew up to become a monopolist executive, would go after petty corruption with a vengeance. But for his fellow monopolists at Entergy, the biggest and most powerful company in town? A very lenient standard of justice awaited them.

  Evidence of this was soon at hand: Nagin agreed to settle with Entergy for $6.7 million, ending the lawsuit. Entergy got to keep more than half of the overcharges. After the penalties that were waived, Entergy paid just twenty-six cents on each dollar owed to the city. Mayor Nagin explained that he settled because of the costs and risks of litigation, but he did not publicly lecture Entergy or speak of the company in the moralistic tones that he used in referring to Regan, who had been wrongly accused of petty corruption. That’s solidarity among monopolists.

  The big discount for cheating sent a clear signal to Entergy: overcharging pays because, even when caught, the company can still keep most of the money. What Entergy needed to do next was make sure that Seeber never came back to audit the bills it sent the city.

  That Entergy wanted to make sure Seeber would not ever get another chance to audit its records became clear when Seeber obtained an internal Entergy report and posted it on the Internet. The report details an Entergy strategy to “eliminate
the need” for the city to hire an electric-bill auditor. Entergy says the report should not have been released and that it should be interpreted as part of a plan to make sure all bills were proper, thus eliminating any need for independent audits. But Entergy had another strategy to keep the insistent Seeber from sniffing out the misdeeds in its big invoices to the City of New Orleans.

  That brings us back to the light pole on Tulane Street.

  Nathaniel Joseph had been a fruit seller with a stand on the sidewalk outside Charity Hospital. At closing time one day in March 1996, fifty-eight-mile-per-hour winds snapped the light pole at its rusty base, dropping 626 pounds of steel on his Joseph’s head. He survived, but after several surgeries, he suffers constant pain and will require lifelong medical care for his disabilities. He sued Entergy, which had the contract to maintain the pole, and the city, which owned it.

  Entergy denied any liability for the rusty pole, but the courts ruled otherwise, saying the contract Entergy had with the city made clear that it alone was responsible. Nathaniel Joseph was paid more than $3 million in damages and his wife, Kecia, received an additional $100,000 for loss of consortium, legalese for an inability to have sexual relations with her husband.

  Entergy turned around and sued TriStem, claiming that Seeber should have to pay Joseph for his injuries and medical care. Entergy argued Seeber’s company, not Entergy, had been negligent. As the city’s energy billing auditor, Entergy asserted, Seeber knew or should have known that the light pole on Tulane Avenue was rusted. Entergy said that Seeber had a duty to inform Entergy and had failed in that obligation. (Seeber’s contract, by the way, contained no requirement that he review safety conditions; his brief was to identify excessive and unwarranted charges by Entergy.)

  An angry Seeber saw Entergy’s strategy as payback: the company was trying to punish him for repeatedly exposing their overcharges. So Seeber wrote to each of the company’s directors and to J. Wayne Leonard, the chief executive, complaining that Entergy was trying to ruin his business with a baseless lawsuit.