Houston-based Entergy-Koch Trading LP revealed last Tuesday that it received a subpoena from the Commodity Futures Trading Commission (CFTC) seeking information on its gas and power trading activities. Entergy-Koch already is conducting a review of its 2000 and 2001 trading activities in response to a March 26 Federal Energy Regulatory Commission staff report which detailed alleged wash trading activities.

FERC staff said Energy-Koch was the counterparty for 16% of the total wash trades in natural gas (61 wash trades) on Enron Online (EOL) during the January 2000 through November 2001 period. 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 gas prices and price indexes.

“The heaviest wash trading of gas products occurred on March 26, 2001 when Entergy-Koch Trading LP completed 12 pairs of wash trades in the next day contract for physical delivery at Henry Hub,” FERC staff said in its report on Price Manipulation in the Western Markets. “It is difficult to identify any legitimate reason why Energy-Koch Trading LP would need to complete 12 buys and 12 offsetting sells in the same product in a period of less than 10 minutes especially when no other company made any EOL trades in this product and the price remained unchanged.”

FERC staff said that it also determined that three Energy-Koch Trading LP traders participated in the wash trades. One of the three “always acted as the buyer or the seller in every pair of wash trades but never completed both sides of the transaction,” staff said. “The two other traders took turns completing the opposite side of each wash transaction. This suggests the first trader may have recruited other Energy-Koch Trading LP traders to participate in these wash trades in an effort to avoid detection.”

While FERC staff said the trades took place “at or near prevailing market prices,” it added that “even a few wash trades at any price other than the average index price could have a substantial manipulative effect on prices because the index would be skewed in the direction of the wash trades.”

FERC staff found the wholesale natural gas and electricity markets in California and other western states were the target of pervasive manipulation during the critical 2000 and 2001 period. Staff made 31 recommendations to the full Commission to clean up the industry and prevent another California from recurring in the future [PA02-2]. FERC Chairman Pat Wood said FERC may act on the recommendations before the end of April.

In two show-cause orders issued, 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.

Entergy-Koch Trading said it would respond promptly to the CFTC subpoena. The CFTC has launched probes of many other energy companies in its investigation of potential wash trading and energy price index manipulation. Last December, the agency ordered Dynegy Marketing and Trade and affiliate West Coast Power LLC to pay a fine of $5 million to resolve charges that they colluded to manipulate natural gas prices for more than two years by submitting bogus trading information to energy newsletters that publish gas price indices (see NGI, Dec. 23).

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