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Tuesday, 4 June, 2002, 22:33 GMT 23:33 UK
Inquiry deadline looms for US energy traders
Dynegy logo on the streets of downtown Houston
Energy traders such as Dynegy face greater scrutiny

The second suicide of a top energy executive in Houston has brought increased scrutiny to a sector already feeling the heat of US investigators.


What these wash trades do is to boost up the books

Rhone Resch
energy analyst

The death of El Paso Corp treasurer Charles Dana Rice sent share prices plunging on US markets on Monday as shaken investors unloaded stocks.

But with a Wednesday deadline looming to explain controversial natural-gas trades to US officials, energy-trading firms have more than investors to answer to.

El Paso is believed to be among dozens of firms ordered to turnover documents regarding possible sham natural-gas trades.

As if the huge shadow cast by bankrupt energy-trader Enron was not enough, suspect energy traders must now answer to government regulators about what they knew and when they knew it.

Inflating revenues

Knowledge of the sham trades is believed to be the source of at least two high level resignations at two energy giants, including chief executives at Houston-based Dynegy and CMS Energy, which has headquarters in Dearborn, Michigan.

All sellers of natural gas to western states are required by Wednesday to submit to the Federal Energy Regulatory Commission (FERC) information about so-called "round-trip" trades that many firms engaged in 2000 and 2001.

A round-trip trade (also called a "wash" or "sell/buyback") is conducted when a seller of natural gas sells it to another energy-trading firm and then buys it back again in the exact same quantity at the exact same price.

Houston skyline
Houston has been rocked by numerous scandals
No cash is exchanged in the transaction.

"What these wash trades do is to boost up the books," says Rhone Resch, energy-markets analyst for the Natural Gas Supply Association.

The exchange inflates revenues and gives the appearance the firms are trading in larger volumes of natural gas that are not making it to market, he says.

Looking good

Despite the appearance of such trades, they are not illegal. But they can be used to manipulate trading volume.

In doing so, the firm appears to Wall Street and others as a more active trader of natural-gas supplies and seemingly making greater profits than are actually being realised.

Nevertheless, such trades were not necessarily authorised or condoned by the firms. Instead, they may have been conducted by rogue traders.

"Many of the companies did not knowingly practice in wash-trading," says Mr Resch.

"Rather, these trades were conducted by individuals within their company in order to increase the appearance of their own personal performance."

Bogus trades

In its order, issued in February, FERC seeks documents, correspondence and other materials as they relate to round-trip trading.

Aside from El Paso, it is believed FERC and other regulatory agencies, such as the Securities and Exchange Commission (SEC), are seeking documents from Williams Companies, Enron and CMS Energy.

News of questionable trading activities has undermined investor confidence in stocks in general and energy-related issues in particular.

Investor wariness was blamed for Monday's 215-point drop in the Dow Jones Industrial Average, as well as the continued fall in blue-chips during Tuesday's trading.

In addition to the weekend suicide of Mr Rice, Clifford Baxter, a former vice chairman of Enron, shot himself through the head in his car in January, not long after the giant energy trading firm's financial collapse.


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