By Carrie Spencer
The Associated Press

COLUMBUS - A company hired to negotiate volume discounts on natural gas for state and local governments saved its clients tens of millions before expenses mushroomed and it stopped paying suppliers, officials and the company's attorney said.

Now government agencies are on the hook for millions in utility bills they thought they'd paid.

IQ Solutions owes Ohio $5.8 million, according to a state audit released Wednesday. The state Department of Administrative services filed a lawsuit seeking at least $5.5 million in May in Franklin County Common Pleas Court.

The Cleveland company doesn't deny keeping the payments - but doesn't have the money, said one of its attorneys, Tom Rosenberg.

"We're going to do our best to try to negotiate a resolution with the state," he said. "We don't know if we're going to be able to."

Rosenberg blamed the collapse on a steep increase in natural gas prices and "an inability to completely control all the associated expenses" of natural gas trading.

"There were aspects of this we just didn't understand," he said.

Ohio was the only state government contract held by IQ Solutions. Its second-largest client was Chicago public schools, Rosenberg said.

Other clients included school districts that formed buying coalitions, he said.

Ohio hired IQ Solutions, owned by Robert Kendall, in 1995 to buy natural gas in large quantities and manage payments for all state-owned buildings, agencies and commissions. Another 119 municipalities, schools, libraries and eligible local entities enrolled in the program, which the state said could save up to 30 percent on gas bills.

The company collected payments from the agencies and was to pay the seven suppliers.

"That's what they did for the first several years of their contract," Auditor Betty Montgomery said. "After 2001, it started to unravel."

Participants in Ohio's program saved $20 million in the first six years of the contract, said Jeff Westhoven, head of the procurement office in the Administrative Services department.

After 2001, the state's payments were used to pay general expenses of Kendall's businesses, Montgomery said. The state first heard complaints from gas companies in March 2002.

"He (Kendall) was paying from crisis to crisis," Montgomery said. "It (IQ) never paid the bills, and left Ohio holding the bag."

The state reduced the contract in December and canceled it this spring, when the audit began. Kendall cooperated with investigators, she said, but she did not yet know if there would be criminal charges.

Kendall never personally profited, he said. The company had dozens of employees at its height and is now down to five.

The state is still negotiating with the gas suppliers on the overdue bills, Montgomery said.

Montgomery criticized Administrative Services for not adequately overseeing IQ's three consecutive three-year contracts, saying the department should have obtained audited financial statements and verified that an independent bank account was created.

The contract was the only one of its type, and the department will change oversight policies to meet Montgomery's recommendations, Westhoven said.