Features

Former trader says natural gas index prices manipulated

By Jennifer Coleman The Associated Press
Wednesday November 20, 2002

SACRAMENTO – A former employee of a natural gas trade journal and energy trader told California lawmakers Monday the daily lists of gas prices were manipulated to boost prices. 

Michele Markey, formerly with the trade journal Gas Daily, said the natural gas indices relied on unchecked and self-reported information from natural gas companies. 

Markey gave the committee several examples of reports she considered suspicious, including one company’s reported sale of 7 billion cubic feet of natural gas in one morning — enough to run California for a day — which she called improbable. 

Other times, companies would leave out trades when reporting, or not report at all, she said. In February 2001, Enron left out a 1.3 billion cubic feet trade, which Markey said changed the index price of natural gas by 3 cents. 

While it doesn’t sound like much, Markey said, a small change like that can inflate the cost of natural gas. About half of the nation’s gas trades rely on the published indices to set price, and if that benchmark is higher, so are those contracts. 

Granted immunity for her testimony, Markey appeared at the Senate Select Committee to Investigate Price Manipulation of the Wholesale Energy Market, with her attorney, who recommended she take the Fifth Amendment if not granted immunity. 

With immunity, the documents and testimony subpoenaed by the committee cannot be used against Markey in federal or state criminal proceedings. 

The committee is probing the cause of California’s energy crisis. During 2000 and 2001, extremely high gas prices were blamed in part for a spike in electricity costs. 

Utilities complained to Gas Daily about the inaccuracy of the indices, primarily toward the end of 2000 and early 2001. Markey said she pushed for an audit of the gas indices, but it was canceled when the publication changed owners. 

“Enron Online was the party we were going to audit,” Markey said. 

Markey wanted a more transparent system that would show individual trades, she said, which would have deterred energy companies from reporting false data. 

Gas Daily surveys gas traders and reports daily prices paid for natural gas at interstate and intrastate pipeline points, and other prices for gas in major markets. 

The indices, weighted averages of gas trades, are used for everything from calculating the cost of California’s refund from energy providers, to the cost of gas delivered to consumers’ homes. 

They are also used in calculating the “soft cap” on wholesale electricity sold in the western markets. That cap was set by the Federal Energy Regulatory Commission to prevent the state from seeing the sky-high energy costs that led to blackouts in 2001, and caused three utilities to incur billions in debt. 

The gas trades that form the basis for the indices are collected by researchers for the publication. Any unusual trades are further investigated, but most trades are not checked, Markey said. 

Additionally, said Markey, a former trader before heading Gas Daily’s natural gas and electricity research team, some gas trades are purposely exaggerated or prices are stretched. 

“It was common industry knowledge that exaggeration was acceptable practice,” Markey said. 

The effect of the indices, said Larry Drivon, an attorney for the committee, is “if the index goes up, consumers in California pay more.” 

Gas Daily does not archive gas trades that are reported to them after two weeks, she testified. Markey said faxes, e-mails and telephone messages used to record the trades are destroyed, leaving no record of which companies were reporting higher rates or volumes. 

The California Public Utilities Commission is mandated to use the published indices to set wholesale rates for qualified facilities — electricity generators that use renewable sources such as solar, wind or cogeneration. 

Indices “became a formalized tool they were never intended to become,” Markey said, adding there isn’t anyway to verify the information, track trades or get information from the entire natural gas market. 

Chris Schreiber, an investigator with the committee, said Markey wanted immunity because she was concerned that some of the documents she turned over may implicate her. 

“She’s trying to be safe in that she was involved,” he said. “She was on the receiving end of some of the phone calls that reported trades she felt may have been manipulated.” 

Markey has also been subpoenaed by the Commodity Futures Trading Commission and FERC.