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AEP Fined $81M for Reporting Fake Gas Trades, Favorable Treatment of Affiliates

Three federal agencies last Wednesday said they have assessed a total of $81 million in penalties against American Electric Power Co. Inc. (AEP) and subsidiaries to settle charges and/or avoid criminal prosecution for reporting false trades in order to manipulate natural gas prices and providing preferential treatment to affiliates.

The Columbus, OH-based electricity producer and affiliates entered into separate settlements with the Department of Justice (DOJ), the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission. The three agencies coordinated their investigations of AEP.

AEP's affiliated gas marketer, AEP Energy Services, entered into a deferred prosecution agreement with the DOJ and the U.S. Attorney's Office for the Southern District of Ohio to avoid federal criminal charges for false reporting of natural gas trades. The deal requires Energy Services to pay a $30 million criminal penalty to resolve the federal government's probe into the affiliate's fake gas trading activities.

If Energy Services should commit any federal crime within a 15-month probationary period, federal prosecutors under the agreement could bring charges against Energy Services for false reporting and attempted manipulation as well.

The CFTC said it entered into a final judgment and consent order with AEP and its subsidiary, AEP Energy Services, that requires them to pay $30 million in civil penalties to resolve charges that they falsely reported gas trades and attempted to manipulate gas prices. The judgment and order was entered by the U.S. District Court for the Southern District of Ohio.

The action resolves a CFTC lawsuit brought against AEP and affiliates in September 2003 for deliberately reporting false gas trading data, including price and volume information, to index publishers between November 2000 and October 2002. The complaint further alleged that AEP and Energy Services sought to skew the indexes for their financial benefit.

"Under the terms of the judgment and order, [Energy Services] acknowledges and accepts responsibility for submitting knowingly inaccurate data, including incorrect volumes and/or prices, fictitious trades, or incomplete reports of actual trades, relating to one of more of the 38 delivery points or hubs for which [Energy Services] provided information during the period," the CFTC said.

"The $81 million penalty assessment today reflects the gravity of the defendant's illegal conduct in the natural gas markets," said CFTC Enforcement Director Gregory Mocek. CFTC Acting Chairman Sharon Brown-Hruska noted the CFTC to date has assessed nearly $300 million against individuals and companies for illegal activity in natural gas markets.

The settlement with FERC calls for AEP to pay a $21 million civil penalty under the Natural Gas Policy Act (NGPA), the largest civil penalty ever assessed by the Commission, to resolve charges related to preferential treatment by two intrastate pipeline units that were formerly owned by AEP. This eclipsed the agency's prior record penalty of $20 million, which was levied against Transcontinental Gas Pipe Line Corp. in March 2003.

The agreement closes an investigation by the Commission's Office of Market Oversight and Investigations (OMOI) into allegations that AEP's former intrastate pipelines provided preferential treatment to affiliated gas marketers in transportation and storage. AEP neither admitted nor denied the violations, the agency said.

Specifically, the FERC probe found that Jefferson Island Storage & Hub Intrastate pipeline failed to disclose to the Commission a non-public agreement in which Jefferson Island put AEP Energy Services in control of injections and withdrawals at its gas storage facility in Louisiana, the agency said. The agreement allowed Energy Services to receive storage services that Jefferson Island did not provide to any other customer, as well as exclusive, continuing access to confidential storage information about Jefferson Island's other customers, the CFTC said.

In addition, OMOI staff concluded that Louisiana Intrastate Gas pipeline, when it was owned by AEP, gave undue preferences in transportation services to Energy Services.

On top of the monetary penalty, FERC's agreement requires AEP, Energy Services, American Electric Power Service Corp. and other affiliates to adhere to a four-year compliance plan to avoid future violations. The plan provides for continued monitoring by Commission staff of AEP's compliance with the agency's standards of conduct, market behavior rules and its NGPA regulations.

"This settlement is good for customers and represents a relatively rare opportunity to exercise FERC's rather limited civil penalty authority," said FERC Chairman Pat Wood. "Our ability to protect customers will be enhanced if Congress acts to expand the Commission's civil penalty authority so it is on par with those of other federal agencies."

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