FERC Probe Expands Into Phony Trading

WASHINGTON — Widening their investigation, federal regulators on Tuesday ordered about 150 energy firms to declare whether they engaged in phony trades to bulk up their revenues, a practice officials say could have been employed to drive Western energy prices higher.

The Federal Energy Regulatory Commission said it also is interested in finding out how the sham trades may have affected daily price and volume information reported by specialized publications and news services that cover the energy industry.

The trade press is widely relied on to provide an accurate snapshot of the markets.

At issue are so-called round-trip or wash trades, in which a company sells electricity to another company and buys the same amount back at the same price.

Round-tripping is the latest questionable practice to surface as regulators heighten their scrutiny of the energy industry after the collapse of Enron Corp. The trades can be used to inflate energy trading volumes, overall corporate revenues and potentially energy prices.

FERC asked the companies to supply detailed information, including the names of traders who engaged in sham transactions. The firms must respond by May 31.

FERC previously ordered power sellers to state whether they engaged in any of the power-trading ploys designed to manipulate the California market that were revealed in recently released Enron memos. Those responses are due today.

Several companies have acknowledged that they engaged in phony trades, to varying degrees.

Reliant Resources Inc. said it used such trades in electricity and natural gas to inflate its revenue by about 10% in the last three years, and on Tuesday the Houston company and its parent, Reliant Energy Inc., restated 2001 first-quarter revenue down by $1.2 billion. For Reliant Resources, that represented a 9.2% decrease in revenue, and for Reliant Energy a 12.4% reduction.

Both companies said financial statements for 1999, 2000 and 2001 would be reissued to eliminate inflation caused by wash trades.

CMS Energy Corp. also reported a significant amount of such trading. Duke Energy Corp., Dynegy Inc., Williams Cos. and Aquila Inc. said their wash trading was very limited and did not affect revenue.

“This stuff is very funky,” said a FERC official, who asked not to be identified. “You could simply start trading and have an agreement to trade at a higher and higher price.”

Separately, the Securities and Exchange Commission is conducting a broad investigation to determine whether companies used phony trading to mislead investors about their prospects. The SEC is investigating round-trip trades in several industries, said Charles Niemeier, a senior enforcement official.

“We first found round-tripping transactions in the dot-com companies, but no one industry has a monopoly,” Niemeier said.

“If wash sales are used as a way to inflate revenue for financial reporting purposes, and as a result, investors are misled as to a material issue, that would be a securities law violation,” he added. “If done intentionally, it would be fraud.”

The effect of the practice on energy markets remains unclear, although it has the potential for harm.

For example, if two companies agree to buy and sell at gradually escalating prices, they could create the impression that the market is headed up. The two companies would not make money on the wash trades because they would be buying back the energy at the same price. However, they then could sell power to other buyers at a higher price, if their strategy succeeded in driving up the market.

“I believe this type of manipulative trading activity is but the tip of the iceberg,” said Sen. Dianne Feinstein (D-Calif.).

Sen. Barbara Boxer (D-Calif.) said such sham transactions provide more evidence that FERC should retain price caps in Western electricity markets and refund electricity overcharges and order the renegotiation of California’s long-term contracts with generators.

Gov. Gray Davis said FERC is “finally taking small steps and asking some of the right questions as it pieces together the puzzle about what happened in California.”

One of the leading energy trade publications said it has been reporting about the practice for several months, and that its price surveys were not distorted.

“We’re confident our indexes haven’t been manipulated in any significant way,” said Brian Jordan, an editor with Platts. “We have a very broad and deep survey, and that’s the best protection against manipulation.”