As he had done against five merchant generators last year, California’s lieutenant governor Cruz Bustamante Wednesday filed a criminal lawsuit in a Los Angeles state Superior Court on behalf of the state’s taxpayers against energy traders and two McGraw-Hill industry publications that publish natural gas price indices relied on by state officials and the market to establish energy prices.

The filing is not now a “class action,” but Bustamante and his class-action lawyers are hoping it will gain that status from the court, according to a spokesperson in the lieutenant governor’s office in Sacramento.

The lawsuit alleged the publications and market participants “engaged in a scheme to report and publish false and fraudulent natural gas prices with the intent to affect the market price of gas and electricity.” Bustamante said in a press announcement of the lawsuit released Friday that “these publications and natural gas generators and traders engaged in shameless profiteering at the expense of California consumers,” alleging deliberate manipulation and misreporting of market information. Both Gas Daily and Inside FERC were named.

Also named in the legal suit are 38 energy trader/marketers, many of whom are traditionally relied on by the price reporters for the indices, and some of whom were named by a whistle-blowing former Gas Daily index employee in state legislative testimony two days before the suit was filed. The companies include many of the major marketers.

Bustamante, with the help of San Diego class-action attorney Michael Aguirre, took the legal action following testimony by Michele Markey, a former natural gas/electricity pricing director for Gas Daily, who told a special hearing of the state senate investigative committee looking at alleged energy market price manipulation in the 2000-2001 state energy crisis period that some of the same market sources relied on for prices used to establish gas indexes also were trading in the market on a daily basis, so they would try to inflate or deflate what they reported to help their mark-to-market positions on a daily basis.

Markey, who was taken off the index pricing job in late August 2001 soon after McGraw Hill’s Platts division bought FT Energy, Gas Daily’s parent and left the company last March, further said the price reporters were not taking the time to look at price quotes closely or analyze information coming in. McGraw-Hill, through a New York-based spokeperson, vigorously denied this Friday and accused Markey of badly misstating how the pricing index is compiled.

Regarding the California official’s lawsuit, Brian Jones, the publisher’s spokesperson, said the company views it as “baseless — without legal or factual merit.” He said McGraw-Hill intends to “aggressively defend” itself, expecting to prevail in the courts. The lawsuit alleges violations of California criminal laws against “willfully publishing false statements or employing fraudulent means with the intent to affect the market price of natural gas and electricity.”

Bustamante filed a more traditional civil class action suit on behalf of some specific consumers against five merchant generators in May 2001, alleging they “systematically engaged in price-fixing” to manipulate the state’s wholesale electricity market. To date, nothing has happened with that suit, although the lieutenant governor’s office said it is still pending.

Markey was removed from her position collecting data in August 2001 when Gas Daily was taken over by Platts. She is now employed by Apache Corp., which is a leading member of a group lobbying to have the federal government take over natural gas price surveys.

According to Markey’s testimony before the California Select Committee to Investigate Manipulation of Wholesale Energy Markets, when she and her colleagues pursued an audit of various price sources, including Enron Online, the review was abandoned when Gas Daily was sold. She noted that Enron was Platts’ largest customer.

Markey’s account of the incident is not even close to what really happened, the McGraw-Hill spokesperson said. EnronOnline had asked Platts to fund and audit a new index for which the data would be collected by Enron. “We would have been paying for non-verifiable Enron numbers. It was a bad idea and we didn’t support it.”

Before agreeing to testify under subpoena from the state legislative committee and to produce a three-inch-thick stack of documents, mostly e-mails, Markey was given full immunity. She and her attorney indicated she also had been subpoenaed by two federal agencies — the Federal Energy Regulatory Commission and the Commodity Futures Trade Commission. Word of her committee appearance had not been announced until the day she testified. Reporters tried in vain all last week to find out what was on the committee’s schedule. Committee aides later revealed they had kept her appearance quiet fearing an injunction attempt by McGraw Hill.

“It was common industry knowledge that exaggeration was an accepted practice” in the trading and price reporting sectors, Markey told the investigative committee, meeting in a rare between-legislative-sessions hearing in Sacramento. Industry price surveys, such as the one conducted by Gas Daily, became tools in the industry that they never were intended to become, she said, noting that earlier witnesses confirmed the reliance that the California Public Utilities Commission and state independent transmission grid operator, CAISO, placed on the indexes.

McGraw-Hill said she got the exaggeration right. “In any industry people exaggerate. The reason Platts is the market leader is because we take all the information available, both confirmed and unconfirmed, and apply our expertise to come up with an index or assessment. We understand that sometimes information provided may not be reflective of the trade. Just because information is submitted doesn’t mean it automatically is included in the index. There is no evidence of that. Everyone was aware when the information was not necessarily accurate, and it would be discarded.”

At one point one of the state senators said that it was “important in reporting (energy) prices there be some sort of oversight” and eventually the “publishing” of each individual transaction, and Markey, who is also a former energy utility trader, agreed. Opponents of government involvement in price surveys have labeled it the first step toward government price controls.

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