Oklahoma scandal probed in Southwest Gas merger

David Strow

Monday, Aug. 30, 1999 | 11:15 a.m.

Arizona's top utility regulator is expressing grave concerns over the conduct of Southwest Gas Corp. merger partner ONEOK Inc. in previous dealings with the Oklahoma Corporation Commission.

Specifically, Arizona Corporation Commissioner Chairman Carl Kunasek is examining a gas contract ONEOK awarded to a natural gas transmission company in 1993 -- and whether the Tulsa, Okla.-based ONEOK was attempting to bury an investigation into allegations that its attorneys had bribed Oklahoma regulators in the past. ONEOK vehemently denies those allegations.

But in a 1997 memo to Oklahoma commission Chairman Bob Anthony, James Proctor, then Anthony's aide, suggested that the contract ONEOK gave to the company was designed to quash any investigation.

"The primary motivating factor for (ONEOK) entering into (the deal) must have been to eliminate adverse publicity and potentially damaging civil litigation in a way which avoided a direct reduction in shareholders' equity," Proctor's memo said.

"It's certainly going to be a matter we want discussed and explained," Jerry Porter, spokesman for Kunasek, said. "Obviously, it's troubling, and it's going to be an issue, their prior course of actions with the Oklahoma commission."

An ONEOK spokesman said the transaction is irrelevant in considering ONEOK's suitability to acquire Las Vegas-based Southwest Gas and operate in Arizona.

"This kind of conspiracy theory has continued over the years," Don Sherry said. "That contract was perfectly proper, the ratepayers were never harmed and we were repeatedly exonerated."

It is apparent that the relationship between ONEOK and some Oklahoma regulators is rocky. In 1997, when ONEOK sought Oklahoma approval for a merger with Western Resources Inc., Anthony ripped ONEOK's track record.

"Over recent decades certain individuals, especially attorneys for (Oklahoma Natural Gas, ONEOK's subsidiary), have allegedly been associated with questionable activities, unprofessional behavior, or possibly fraudulent and illegal conduct," Anthony wrote. "When an attorney violates certain laws ... there is a presumption he was acting for the corporation involved."

The Oklahoma case now under scrutiny revolves around a former Norman, Okla., gas distribution company called Gage Corp. and a massive supply contract ONEOK awarded to its buyer.

Starting in the late 1980s, Gage began sparring with ONEOK over its supply contract with ONEOK. ONEOK claims it discovered that its audits uncovered price fixing schemes that resulted in overcharging by Gage, and it took the company to court and the Oklahoma commission as it tried to shut the gas operation down. Over a four-year period, the Oklahoma commission repeatedly ruled in favor of ONEOK.

But in 1992, a bribery scandal erupted in Oklahoma City. In a public meeting of the Oklahoma commission, Anthony stated that he had been receiving thousands of dollars in cash from "a utility attorney, a utility lobbyist and/or a utility officer" over a four-year period. Anthony further revealed that he had been taping these encounters for the FBI.

The person involved in the alleged buyoffs was later identified as William "Tater" Anderson, former general counsel for the Oklahoma commission and attorney representing ONEOK, Southwestern Bell and Arkansas Louisiana Gas Co., a natural gas company owned by former White House chief of staff Mac McLarty. During his trial, it was revealed Anderson was representing Southwestern Bell when he gave funds to Anthony. A connection between the buyoffs and ONEOK was never established, and Sherry said no such connection ever existed.

"I think it's fair to say substantial efforts have been made to continue that guilt by association," he said.

But Gage officials thought if Anderson was funneling cash to Oklahoma regulators for Southwestern Bell, they could prove he was buying influence for ONEOK as well. So in 1992 the company filed a lawsuit against Anderson, hoping to reveal that Anderson had been trying to buy off Oklahoma regulators to win their battle against Gage, despite ONEOK's denials.

Just days before that lawsuit was set to go to trial in November 1993, it was suddenly dismissed. Gage had been bought out by a company called Dynamic Energy Resources for $6.5 million.

With the deal came a 10-year, $150 million to $200 million natural gas supply contract with ONEOK. In exchange for this contract, the Gage lawsuit against Anderson was dropped, and with it any exploration of Anderson's activities on behalf of ONEOK.

Sherry denies ONEOK was trying to hide anything by signing the deal.

"They (Dynamic) came to us out of the blue," Sherry said. "The rationale was that the contract was comparable to others we had, and clearly, an opportunity to end a long and costly round of litigation. If there would be nothing to recover (through legal action against Gage), then we saw no point in going forward."

Dynamic Energy Resources was owned by Eugene and Nora Lum, both powerful fundraisers for the Democratic Party. They were represented in their Gage deal by John Tisdale, an attorney for President Clinton, and immediately hired Michael Brown, son of Ron Brown, the late U.S. commerce secretary. In 1997 the Lums pled guilty to arranging $50,000 in illegal campaign contributions in the 1994 campaign.

ONEOK denies have any knowledge of the Lums' political connections at the time of the sale.

"If there were any revelations, they would have come out a long time ago," Sherry said.

Soon after acquiring Gage, Dynamic Energy Resources quickly sold off the ONEOK supply contract to Pan Energy Field Services Inc. and Enogex Services Inc. for about $20 million. In a 1997 report PBS' Frontline estimated the Lums made a $12 million profit from the deal.

"The public still deserves to know why ONG would give corrupt political operatives from out of state a contract to sell about $175 million of natural gas over a 10-year period when the principal owner had no gas reserves, had no experience in the natural gas business," Anthony wrote in 1997.

A former Gage executive is trying to reveal just that.

In April 1998, Michael McAdams, a former Gage executive, filed an application with the Oklahoma commission demanding a review of the supply contract awarded by ONEOK to Dynamic in 1993.

Anthony aide Proctor in 1997 estimated that ONEOK would be paying $40 million to $65 million more for natural gas under the Dynamic contract than it would pay on the wholesale market. Proctor, now a regulatory financial consultant living in Lawrence, Kan., is acting as a consultant in McAdams' petition. Proctor says the intent of McAdams' petition before the Oklahoma commission is to get up to $65 million "returned to the ratepayers of Oklahoma."

"We are seeking documents ... as to the relationship between Dynamic and ONEOK," Proctor said.

Sherry acknowledges that ONEOK paid more than the market price of natural gas under the contract, but defends the contract, saying business practices of the time called for locking in long-term gas supplies by paying more than the market price for natural gas. That practice has been discontinued, he said.

In its racketeering lawsuit against ONEOK and Southwest Gas, spurned Southwest suitor Southern Union Co. accused Arizona Commissioner Jim Irvin and former ACC executive secretary Jack Rose of attempting to influence Nevada and California regulators, as well as Southwest's board, to oppose Southern Union's efforts. The lawsuit alleges that Rose was on ONEOK's payroll when he met with regulators in other states, but that he said he represented the Arizona commission.

On Friday hearings in Arizona were delayed 60 days to allow further investigation. ONEOK and Southwest Gas must receive regulatory approvals from both California and Arizona before they can consummate their merger.