CFTC files civil suit against AEP

COLUMBUS, Ohio, Oct. 1, 2003 — The Commodity Futures Trading Commission (CFTC) has filed a civil action against American Electric Power (AEP) in the U.S. District Court for the Southern District of Ohio.

AEP and its subsidiary AEP Energy Services Inc. (AEPES) with violations of federal law for false reporting and attempted manipulation of natural gas prices.

The complaint charges that from at least November 2000 through October 2002, AEP and AEPES reported false natural gas trading information, including price and volume information, to certain energy index firms such as Platts.

After learning in September 2002 of false reporting of gas price information at an unrelated company, AEP immediately undertook its own internal investigation of gas price reporting practices.

AEP determined that five then-current employees had submitted inaccurate gas trading information to trade publications. The company immediately terminated the five employees, self-reported the incident to the Federal Energy Regulatory Commission (FERC) and the CFTC, publicly announced the employee terminations and put into place procedures to prevent a reoccurrence of the inaccurate submission of gas trading information.

“We have been cooperating with the CFTC in an attempt to seek resolution to this matter,” said Jeffrey D. Cross, AEP’s general counsel. “While the possibility of civil action always existed, we are surprised the CFTC chose to file at this time. We still believe that a settlement is possible and we are open to that possibility.

According to the complaint, Platts and others use price and volume information in calculating surveys or indexes (indexes) of natural gas prices for various hubs throughout the United States. The complaint asserts that AEP and AEPES knowingly delivered false information to firms such as Platts in an attempt to skew those indexes for their financial benefit.

According to the complaint, participants in the natural gas markets use these indexes to price and settle commodity transactions. Additionally, as alleged, natural gas futures traders refer to the published indexes for price discovery and for assessing price risks. The CFTC charges that the conduct of AEP and AEPES violated the Commodity Exchange Act (CEA).

The complaint further alleges that AEP and AEPES attempted to manipulate natural gas prices by knowingly delivering false or misleading or knowingly inaccurate trade prices and volumes. According to the complaint, AEP’s and AEPES’s conduct constitutes an attempted manipulation under the CEA, which, if successful, could have affected prices of NYMEX natural gas futures and options contracts.

The complaint charges that AEP and AEPES knowingly delivered to Platts reports containing over 3,600 purported natural gas trades. According to the complaint, of those trades, approximately 78%, or about 2,800, were false or misleading or knowingly inaccurate.

Additionally, according to the complaint, AEP and AEPES knowingly delivered thousands of trades to a separate energy index firm. A substantial number of those natural gas trades were also allegedly false or misleading or knowingly inaccurate.

The CFTC is seeking various sanctions against AEP and AEPES, including permanent injunctive relief, monetary penalties, and other remedial and ancillary relief.

On May 20, 2003, the CFTC filed a subpoena enforcement action against The McGraw-Hill Companies, Inc. (of which Platts is a division) for failing to comply with subpoenas issued in the CFTC’s ongoing investigation into corrupt energy-trading practices.

Since December 2002, the CFTC has entered into six settlements with energy companies, collecting a total of $96 million in civil monetary penalties (In the Matter of Duke Trading Energy and Marketing, L.L.C., In the Matter of Enserco Energy, Inc., In the Matter of Williams Energy Marketing and Trading and The Williams Companies, In the Matter of WD Energy Services Inc. , In the Matter of El Paso Merchant Energy, L.P., and In the Matter of Dynegy Marketing and Trade and West Coast Power, L.L.C.)

The Commission appreciates the cooperation of the President’s Corporate Fraud Task Force in this matter and in the Commission’s ongoing energy investigations.

The Commission also thanks the United States Attorney’s Office for the Southern District of Ohio, Eastern Division, for their assistance as local counsel in Columbus, Ohio.

This case reflects the work of the following CFTC investigators and attorneys: Gregory Compa, Armand Nakkab, Michael C. McLaughlin, David W. MacGregor, Lenel Hickson, Jr., Stephen J. Obie, and Vincent A. McGonagle.

American Electric Power owns and operates more than 42,000 megawatts of generating capacity in the United States and select international markets and is the largest electricity generator in the U.S. AEP is also one of the largest electric utilities in the United States, with almost 5 million customers linked to AEP’s 11-state electricity transmission and distribution grid. The company is based in Columbus, Ohio.

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