Reliant Resources Inc., one of the country's biggest electricity traders, said yesterday that it had conducted fake transactions with four power companies that inflated its revenue by 10 percent over the last three years.þþThe disclosure follows an announcement late last week by Dynegy that it, too, had conducted such deals, called round-trip or wash trades. The other party in the Dynegy trades and in many of the Reliant trades was CMS Energy of Dearborn, Mich.þþYesterday's disclosures sent Reliant's share price plummeting $2.06, to $9.94. Dynegy's stock slid 57 cents, to $9.31, and CMS shares fell $3.24, to $16.05.þþThe news of the trades unsettled a market already skeptical about the integrity of the power trading sector, thanks to the fall of Enron and most recently, a series of revelations about suspected price manipulation in California. þþIndustry analysts and the companies themselves said the practice of trading just to build up volume was widespread and well known in the industry. Now, investors worry that other companies might make more damaging revelations, suggesting that much of an industry that had been trusted and toasted might be built on fiction.þþÿThe stocks are down because it shows a certain amount of unethical behavior,ÿ said Christopher Ellinghaus, an energy analyst with the William Capital Group. ÿWe knew some companies were doing this; we didn't know which ones and by how much. It makes you wonder who else is out there, makes everyone suspect out there.ÿþþRound-trip trades involve buying and selling a commodity at the same price, at the same time. They increase revenues and trading volumes, making companies appear larger and more active than they are, but because the company makes no profits from them, they do not appear to affect net income. þþReliant, based in Houston and controlled by Reliant Energy, initially said it was examining the possibility of such trades last Friday, when it canceled a $500 million placement of 10-year debt. þþDuring a conference call on Monday, Reliant said that although it was still completing its review, it had engaged in such transactions since 1999, trading more and more megawatts each year under the system, from 30 million three years ago to 78 million last year. þþÿThe transactions were inconsistent with our company philosophy,ÿ said Steve Letbetter, Reliant's chairman. He said the trades were made by misguided employees who are no longer with the company, and the practices had been stopped. Twenty percent of the company's trading volume last year could be attributed to such wash trades, he conceded. þþCMS and Xcel Energy, based in Minneapolis, acknowledged that they had engaged in such trades with Reliant. Xcel said its subsidiary, the Public Service Company of Colorado, had entered into such transactions in 1999 and 2000. CMS stopped conducting such trades in the last quarter of 2001, a spokesman said. He added that the company was analyzing its trades and would issue a statement on Wednesday morning. Reliant also named EnCana and the Merchant Energy Group of the Americas as partners in the wash trades.þþThe fallout from the disclosures could continue to rattle the market.þþReliant's investors are worried that an informal inquiry begun in April by the Securities and Exchange Commission into the company's restatement of 2001 earnings could turn into a formal investigation. Moody's Investors Service, the credit ratings agency, said yesterday that it was reviewing Reliant's debt for a possible downgrade to junk status.þþThe company, equity analysts and regulators said that Reliant's trades were probably not illegal. When over-the-counter trading in electricity was budding a few years ago, companies routinely conducted wash trades to create the impression that they had a sizable presence in the market, they said. That would attract business for their traders or for their online trading platforms, helping to promote a more liquid market and more competition. ÿThere's nothing illegal per se,ÿ said Thomas J. Erickson, a commissioner with the Commodity Futures Trading Commission. ÿAnd they're not inherently bad things.ÿþþThe concern, though, is that companies might have bid up prices with wash trades. ÿIf a company is long power and power costs $50 a megawatt, and it does a trade for $53, then it increases the price out there,ÿ said Gordon Howald, an analyst with Crédit Lyonnais in New York. ÿThe concern is that you can take it to that next level. Can you take trades like this and make a case that these companies manipulated the market?ÿþþWith questions mounting about trading practices, the beneficiary appears to be the regulated market. Over-the-counter and online trading is effectively unregulated, traders and regulators said. þþEnergy trading volume on the New York Mercantile Exchange has risen sharply this year. Through the week ended May 10, the average daily volume of energy contracts was up 40 percent from a year ago. Natural gas futures contracts and natural gas options contracts have led the way, with daily average futures volume up 88 percent, to 102,238 contracts, and options contracts up 195 percent, to 50,172 contracts.þþDisclosures about unusual energy trading activities have been trickling out since the Federal Energy Regulatory Commission sent a letter last week to 150 power traders, asking them to answer in writing and under oath by May 22 if they employed any of the questionable practices described in two Enron memos.þþSome industry analysts suspect that other companies may step forward with explanations of murky trading practices. ÿI don't like these specific transactions, but I'm not shocked they exist,ÿ said Steven I. Fleishman, energy analyst with Merrill Lynch. ÿI wouldn't be surprised if other companies reveal similar transactions.ÿþþReliant's disclosures, along with those last week, have emboldened those who advocate more regulation of power traders in the hope of increasing market transparency. þþA bill introduced by Senator Dianne Feinstein, Democrat of California, in the wake of Enron's collapse to authorize renewed controls over online energy trading was defeated by the power industry and Wall Street. But the Senate plans to hold hearings later this month on the subject.þþÿYou can't overpromise regulation's benefits,ÿ Mr. Erickson argued. ÿBut at least you have the chance to detect and deter these practices.ÿþþþ
Source: NY Times
