Three federal government agencies, including FERC, the Commodity Futures Trading Commission (CFTC) and now the Securities and Exchange Commission (SEC), are investigating alleged “wash trading” by Entergy Corp., Entergy-Koch, LP or Entergy-Koch Trading, LP in 2001 and 2002.

Entergy disclosed Tuesday that it recently received an informal inquiry from the SEC relating to the “prearranged ’round trip’ or ‘wash’ trades” that were described in a recent FERC staff report on market manipulation (see Daily GPI, April 9). The company is one among many other energy trading firms targeted by the Federal Energy Regulatory Commission for questionable market activity.

A wash trade, in which a product is sold to a counterparty and then bought back at the exact same price, may be designed to inflate revenues and trading volumes or possibly to manipulate energy prices and price indexes. Entergy-Koch was named in the FERC staff report on “Price Manipulation in the Western Markets” as one of the companies that may have engaged in wholesale natural gas wash trading on EnronOnline (EOL) between January 2000 and November 2001. In fact, FERC staff said in its report that Energy-Koch was the counterparty for 16% of the total wash trades in natural gas (61 wash trades at the Henry Hub) on EOL during the period.

The CFTC investigation is looking into gas and power trading activities by Entergy-Koch Trading and affiliated companies, which would include Entergy Power Marketing Corp., which was in operation prior to the launch of Entergy-Koch on Feb. 1, 2001, Entergy said on Tuesday. The company added that it intends to cooperate fully with the SEC and the CFTC, and both Entergy and Entergy-Koch Trading are conducting internal reviews of these matters. Entergy-Koch also is conducting a review of trading activities in light of the FERC staff report on March 26.

“Based on information currently available, these trades [mentioned in the FERC staff report] represent less than one-half of 1% of Entergy-Koch Trading’s volume and less than one tenth of 1% of Entergy-Koch Trading’s revenues for the period under review by FERC had Entergy-Koch recorded revenues for the year ended 2001 on a gross basis,” the company said.

Regarding the SEC inquiry, the company said that Entergy-Koch adopted the net method of reporting for trading revenues in December 2001, more than six months before this method was required by generally accepted accounting principles. Entergy accounts for Entergy-Koch using the equity method of accounting. As a result, the revenues and expenses of Entergy-Koch and its subsidiary Entergy-Koch Trading are not consolidated into Entergy’s reported revenues and expenses. Entergy includes its share of Entergy-Koch earnings in its reported earnings.

Prior to the creation of Entergy-Koch, Entergy accounted for its power trading subsidiary Entergy Power Marketing Corp. (EPMC) from its inception through Jan. 31, 2001 using the consolidation method of accounting. As a result, the revenues and expenses of EPMC during that period were included in Entergy’s reported consolidated revenues and expenses.

Entergy-Koch Trading LP is a wholly owned subsidiary of Entergy-Koch, LP. Entergy-Koch, LP is a limited partnership that is a 50% owned investment of Entergy Corp. and 50% owned by Koch Energy Inc.

FERC is expected to act before the end of this month on 31 staff recommendations in the report. The recommendations are designed to clean up the industry and prevent another California from recurring in the future [PA02-2]. In two show-cause orders issued the same week as the staff report, FERC also directed eight Enron-affiliated companies, BP Energy and Reliant Energy Services to justify their questionable behavior in western energy markets or face losing either their ability to sell power at unregulated rates and/or their blanket gas marketing certificates. The Commission is contemplating similar show-cause actions against 37 other energy companies, not including Entergy-Koch. These are likely to result in show-cause hearings at the agency. In addition to being stripped of their market rate authorities, companies could be forced to return any profits gained from illegal activities.

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