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June 24, 2013

McGraw Hill Manipulation Déjà Vu: Once Again Media Company At Center of Energy Price Fixing Scandal

Statement of Tyson Slocum, Director, Public Citizen’s Energy Program

Reports that at least three major oil companies—BP, Statoil and Shell—allegedly conspired to submit false trading data to a for-profit media company, McGraw Hill, in a successful effort to rig crude oil prices for U.S. and international consumers, raise serious questions about whether such privately-controlled, nontransparent energy price indexes should continue to play a role in price setting.

The allegations of price fixing of crude oil benchmarks is particularly alarming since McGraw Hill was at the center of a very similar price-fixing scandal involving U.S. natural gas prices a decade ago.

For a large fee, a McGraw Hill subsidiary, Platts, sells energy price data that it compiles from voluntary submissions from energy traders. This price data, in turn, serves as a key “benchmark” price upon which thousands of other trades, contracts and products’ prices are derived. As a result, these proprietary price benchmarks directly affect the retail prices consumers pay, and lack the transparency of similar trading data found on public exchanges, such as the New York Mercantile Exchange (NYMEX) and IntercontinentalExchange (ICE).

The European Union launched an investigation into the latest scandal, involving allegations that oil companies submitted false trading data to Platts in order to manipulate prices for their firms’ financial benefit. Although the crude oil benchmark is European, it impacts U.S. prices as there are many domestic regions and products priced off the European benchmark.

And, as the Wall Street Journal reported, when the International Organization of Securities Commissions proposed external regulations to improve transparency of these influential price benchmarks, Platts fought back, claiming such rules posed “an unacceptable intrusion on its rights as a publisher to convey information, opinion and data.” As a result of Platts’ aggressive lobbying, the regulatory proposals were scrapped.

Indeed, McGraw Hill has a sizable DC lobbying presence, spending $330,000 lobbying the federal government in just the first three months of 2013. Included in this total is a retainer for top lobbyist Tony Podesta to work on “Dodd-Frank financial reform implementation” and “International financial regulation.”

This is the second major price-fixing scandal involving a Platts energy benchmark. From 1999 to 2006, numerous energy companies paid settlements to settle civil market manipulation rules for submitting false natural gas trading data to Platts for their firms’ financial benefit. This widespread false reporting occurred during the historic U.S. natural gas price run-up that resulted in significant harm to families and industries.

During the investigation of the natural gas bid-rigging, regulators at the Commodity Futures Trading Commission accused Platts and its parent, McGraw Hill, of being uncooperative, titling a 2003 press release: “McGraw-Hill Companies Flouted Federal Agency Subpoenas.” The CFTC finally prevailed in 2007, when the U.S. District Court for DC ordered McGraw Hill to hand over the subpoenaed information to the CFTC.

Because the allegations of crude oil price-rigging exactly mirror manipulation strategies involving similar McGraw Hill price benchmarks more than a decade ago, it is clear that McGraw Hill has a pattern of lax oversight of criminal activity on data collection products that represents a significant source of profits for itself.

After getting burned in the early 2000s by natural gas price rigging on Platts’ products, and again on Platts’ crude oil benchmarks, it is clear that consumers cannot and should not trust Platts to operate proprietary energy benchmarks that directly influence retail prices.

Congress must take immediate action to subject Platts’ operation of energy benchmarks to immediate federal regulatory oversight (under the Commodity Exchange Act), and initiate public Congressional and regulatory hearings into the obvious failure of internal controls at Platts.

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