Insurer may be stuck with tab for Southwest Gas settlement

David Strow

Tuesday, Aug. 7, 2001 | 11:17 a.m.

A recent shareholder settlement won't come at the expense of ratepayers, Las Vegas-based Southwest Gas Corp. said.

Late last month Southwest agreed to pay certain shareholders between $9.5 million and $27 million in settling a two-year-old shareholder lawsuit. The lawsuit accused Southwest of providing misleading information to investors regarding competing takeover offers for the utility; shareholders who bought or held stock between Dec. 14, 1998, and Jan. 21, 2000, will be eligible to participate.

In two circumstances, funds for the settlement won't come from the company.

If the company is awarded damages in its lawsuits against its former suitors -- ONEOK Inc. of Tulsa, Okla., and Southern Union Co. of Austin, Texas -- shareholders would receive up to $22 million from the award. If Southwest is acquired in a merger, the shareholder class would be entitled to $27 million.

But if neither of those scenarios develops within three years, Southwest would be obligated to pay the shareholder class $9.5 million. But Southwest isn't allowed to take those funds from ratepayers, said Timothy Hay, Nevada's consumer advocate.

When Southwest originally agreed to a takeover by ONEOK, it entered into an agreement with Nevada that any costs of the merger -- or any ramifications of an unsuccessful deal -- wouldn't be passed on to ratepayers, Hay said.

"We're assuming that assurance will be honored ... I'm relatively certain there won't be an impact to ratepayers," Hay said. "If they attempted to shift any of those costs to ratepayers, we would vigorously oppose it."

But Southwest won't be paying the settlement directly, said Thomas Sheets, the company's general counsel.

"The company has insurance coverage, and it (the settlement payment) comes out of the liability insurance coverage, as does any attorney fees to lawyers representing the shareholders," Sheets said. "There's nothing direct (to shareholders)."

The settlement, however, could have an indirect impact on shareholders. If the insurance company does have to make the payment, it could hike Southwest's insurance rates. The company might then pass along those increased costs in what's called a "general rate case" -- a filing designed to adjust Southwest's rates based on its costs of doing business.

But that's unlikely to happen any time soon, Sheets said, since Southwest just filed a general rate case last month, and increased insurance costs weren't a consideration in the time frame used by Southwest to justify higher rates.

In mid-July, Southwest asked the Public Utilities Commission of Nevada for a general rate increase of 7.7 percent in Southern Nevada. The increase would raise the average Southern Nevadan's monthly bill by $4.11 per month, and raise an additional $29.4 million a year for the utility.

It is Southwest's first general rate case since 1995. Such increases are designed to reflect the true costs of operating the company's distribution system, and can result in an increased profit for the company.

The three big rate hikes seen in the last seven months, however, are meant solely to pay for the increased cost of buying wholesale natural gas. Rates were raised 9.2 percent in December, 23.8 percent in January and 21 percent in July.

The general rate case "will be heavily scrutinized from our standpoint," Hay said. "But it is too early to conclude what an appropriate increase may or may not be."