Declaring their responses to questions related to FERC’s probe into energy price manipulation to be either glaringly incomplete or simply not credible, the Federal Energy Regulatory Commission last week ordered four suppliers — El Paso Electric Co., Avista Corp., Portland General Electric and Williams Energy Marketing & Trading — to show why they shouldn’t be stripped of their authority to sell energy at unregulated rates dating back to Feb. 13 of this year, when the Commission opened its investigation into potential gaming of western power and natural gas markets.

“We captured everyone’s attention” with this order, Commissioner Nora M. Brownell told NGI, but she said she doesn’t believe FERC will have to resort to revoking the companies’ market-based rate authority. “We feel certain the companies will get in compliance as quickly as possible” by amending their original responses, which would void the need for further action, she noted. The Commission has threatened on several occasions to strip energy suppliers of their market-based rate authority, but it has never actually done so.

In other developments in FERC’s sweeping investigation into trading irregularities, the bulk of the energy suppliers last week told the agency that while they engaged in natural gas deals that resembled round-trip, or “wash,” trades in western markets and Texas during 2000 and 2001, the transactions did not swell their trading volumes, revenue or prices. Williams Energy Trading & Marketing, however, identified El Paso Energy Merchant as a counterparty in a possible “wash” trade.

El Paso Electric, Williams Energy, Avista and Enron-affiliated Portland General “are indicative of a failure…to cooperate with our investigation,” the Commission said in its show-cause order last Tuesday, adding that they are “hindering the Commission’s ability to determine whether the western markets have been manipulated.” Noting that it still is combing through more than 150 affidavits filed by energy suppliers, the agency said “additional orders of this nature may well be forthcoming.” FERC directed the four suppliers to respond to the order by June 14. In the affidavits, which were submitted last month, suppliers were instructed to either admit or deny that they engaged in questionable practices that mirrored or were similar to those used by Enron — such as Fat Boy, Ricochet and Death Star (see NGI, May 13).

In its affidavit, El Paso Electric, which is not affiliated with El Paso Corp., said it had “no knowledge” of the Enron-style practices that were employed to allegedly game energy prices in California and other western states, while at the same time it acknowledged it had “extensive joint dealings” with Enron in those markets during the critical 2000-2001 time period, the order noted. El Paso Electric’s reply is “simply not credible” in light of its own admission that Enron employees manned its trading desk 75% of the time during the two-year period, the agency noted.

In addition, FERC cited a letter previously submitted by El Paso Electric in which it “boasts of $7.3 million of revenue” it received as a result of joint transactions with Enron Power Marketing Inc. during June 2000 alone. But “El Paso’s affidavit claims it derived only revenue in the neighborhood of $700,000 from Enron-related transactions…El Paso does not even refer to the letter in its affidavit, much less attempt to explain this discrepancy.”

The FERC order also casts doubt on Portland General’s claim that it engaged in only a limited number — 17, to be exact — of so-called “Ricochet” transactions to take advantage of the price spread between capped energy prices in California and uncapped prices in out-of-state markets. “Transcripts of Portland’s trading activity between April and June 2000 reveal that Portland merchant and transmission personnel took an active role with Enron and other market participants in arranging exports, as well as transactions designed to further the ‘Ricochet’ and ‘Death Star’ trading strategies. Portland’s assertion that these transactions were isolated incidents is contradicted by the transcripts, which show that such transactions were a standard and routine practice.”

The agency further said Portland General’s transcripts “reveal that Avista personnel were, indeed, actively involved in such [Ricochet] transactions with Enron as well as Portland,” although Avista has claimed otherwise. Avista “has failed to respond fully and accurately to [FERC] staff’s inquiry.”

Likewise, FERC was dissatisfied with William Energy’s non-committal response about its involvement in ‘Ricochet’ transactions. In its affidavit, Williams Energy told the Commission it was unable to admit or deny with complete certainty that it engaged in the deceptive activity, while it conceded that it may have been involved in transactions with the expectation of reselling energy at a higher price to buyers outside of California. “Williams does not indicate that it took any steps to ascertain the details about such transactions,” the order said. The company’s failure to “straightforwardly answer a portion of the inquiry and to seek further details about its transactions represents an unacceptable failure to cooperate with staff’s investigation.”

Immediately following FERC’s show-cause order last Tuesday, Williams issued a press statement saying that it now denied ever engaging in “Ricochet” transactions. Under such deals, suppliers purchased energy from the California Power Exchange at capped prices, sold it to out-of-state customers, repurchased it and then sold it at higher, uncapped prices within California. The practice was designed so that suppliers could circumvent the low, capped prices in California.

“Based on a thorough evaluation, Williams has not identified any transactions of this type,” said Bill Hobbs, president of Williams’ energy marketing and risk management business. “Williams strongly disagrees with FERC’s characterization of our response as uncooperative. And threatening to take away our market-based rate authority is inappropriate. It always is, has been and will continue to be our intent to fully cooperate with the FERC.”

The show-cause action came on the heels of a New York Times article in which a former employee said Williams’ traders intentionally drove up the price of natural gas in California during the critical 2000-2001 period. Williams defended itself against the report, and asked FERC to conduct an “independent review of our records to satisfy any questions they may have concerning these allegations.”

Spokane, WA-based Avista and Portland General attributed their being among the four companies taken to task by FERC as mostly “a misunderstanding” by the federal regulators, with whom they pledged to continue to work on resolving their differences. Avista said its initial FERC submittal included the results of interviews with all of its trading floor personnel, but “now we have been asked for additional explanation regarding specific trading activities and will provide an appropriate response.”

“We have not knowingly withheld any information about Avista Utilities related to FERC’s request,” said Chairman Gary G. Ely. The trades being questioned were conducted over 18 days during a three-month period between April and June 2000, according to Avista. The total number of megawatts traded was limited to less than one-tenth of 1% of Avista Utilities’ trading activity during that period, it said, adding that the company earned less than $2,500 from the transactions.

To comply with the Commission’s request, Avista “is now reviewing hundreds of hours of recorded conversations from trading activities during the period in question,” the company said in its statement.

A Portland General spokesperson noted the company was generally “surprised and perplexed” by the FERC action, emphasizing as it said in its May 8 response to the federal regulators that it found “no evidence of deception or market manipulation on PGE’s part. We hope to work with FERC to help them better understand our response.”

There “were instances where we may have unwittingly participated in trades with Enron,” conceded Portland General spokesman Kregg Arntson. He noted that Portland General had a separate trading floor from Enron, which he believes undercuts claims that the two affiliates were actively involved in questionable trading transactions. Asked how Portland General would be affected if FERC yanked its authority to sell power at unregulated rates, Arntson said, “That’s one of the things we’re looking at right now.”

Portland General said it will attempt to identify the main points of misunderstanding and get them resolved with FERC by the June 14 deadline, recognizing that the company has already provided what it considers a “very thorough, thoughtful and in-depth response. We think it was one of the most thorough responses from any company that provided data.”

California Gov. Gray Davis wants the Commission’s rebukes to be followed by refund orders. “A bank robber is required to give the stolen money back. Unless it orders full refunds, FERC will be letting generators keep their ill-gotten gains. FERC’s failure to punish the generators will only encourage future gouging,” he said.

“I am delighted that FERC is finally demanding that the generators that manipulated California’s energy market last year give straight answers instead of platitudes. [Tuesday’s] order is a departure from the Commission’s historical rubber-stamping of what the generators tell them. It reflects the sea change that Chairman (Patrick) Wood and Commissioner Brownell have brought to the commission in recent months. FERC is finally beginning to show that it is serious in its probe into the manipulation of electric and natural gas prices in California.”

In the meantime, California’s governor said he hoped that FERC will “continue to hold generators’ feet to the fire. The answers to these and other questions in FERC’s investigations are long overdue. But there is still more work to be done. FERC needs to continue to be vigilant in its investigation and order the $8.9 billion refund that California deserves.”

In related developments, El Paso Merchant Energy LP. last week reported making natural gas trades that resembled round-trip, or “wash,” transactions in Texas and the West during the past two years, but it said none were of the type that were intended to deceive energy markets. Williams Energy Marketing & Trading, however, cited El Paso Merchant as a counterparty to a possible “wash” trade.

El Paso Merchant said it identified approximately 99 transactions that “met [the] criteria” for round-trip trades: purchases and sales of the same quantity of gas at the same price with the same counterparty on the same day. Upon closer review, however, it found “none constituted ‘wash’ trades” that were meant to “artificially” inflate trading volumes, revenues or manipulate prices, El Paso Merchant told FERC in an affidavit.

But Williams Energy reported it was involved in two financial transactions that “may have facilitated a ‘wash’ sale” by the counterparty, which happened to be El Paso Merchant. It said the two financial swaps — one for 233,333 MMBtu/d at $2.47/MMBtu for nine months, and the other for 100,000 MMBtu/d at $4.30/MMBtu for one month — were executed in March 2001 with El Paso Merchant, at El Paso’s request. The transactions were based on the SoCal border index.

El Paso Merchant, which is the target of a pending price-manipulation case at FERC, disavowed any participation in bogus “wash” trades. These trades, which some energy companies have used to pump up their trading volumes and revenues, currently are not illegal, but critics contend they are deceptive and should be prohibited. Energy companies that have already admitted to engaging in round-trip trades (mostly electric) — Dynegy Inc., CMS Energy and Reliant Resources — claim that they were not used to drive up commodity prices (see NGI, May 13).

The news of the bogus trading activity has led to the resignations of the chairmen at Dynegy and CMS, and prompted shareholders to call for Reliant Chairman Steve Letbetter to step down last week (see NGI, June 3). FERC has launched a full-scale review of energy suppliers’ round-trip trades as part of its sweeping probe into price manipulation and deceptive trading practices in the West and Texas (see NGI, May 27). The Securities and Exchange Commission also has opened an investigation into the so-called round-trip trading transactions of companies.

Williams disclosed it also engaged in three other transactions that resembled round-trip trades with El Paso Merchant outside of the western markets. Williams initiated the transactions to “facilitate hedging of price risks of natural gas reserves of Williams Exploration & Production, and to facilitate hedging of price risks associated with power sales by Williams Energy Marketing & Trading,” it told FERC.

“None had the purpose or effect of increasing Williams’ reported volumes or revenues since Williams reports its revenues on a net basis. None of these transactions had any market price effects because no brokers were used. All were financial swaps rather than purchases or sales of natural gas for physical delivery,” according to Williams. The three trades, which were executed between July and November 2001, were for 50,000 MMBtu/d for $4.25 MMBtu for 10 years; 66,000 MMBtu/d for $3.20 MMBtu for one year; and 37,998 MMBtu/d for $3.65 MMBtu for five years.

Credit Suisse analyst Curt Launder defended El Paso and criticized the Commission for allowing one party (Williams) to infer a possible “wash” trade by another party, which in this case was El Paso. This “sets a new standard…for the difficulty this matter is presenting to the industry,” he said. “Our analysis shows that legitimate business purposes, including credit review, counterparty issues and hedging risks, are the source of certain transactions that have characteristics of wash trades even though they are not.”

Reliant Energy Resources, Reliant Energy Services and Reliant Energy Power Generation, all affiliates of Houston-based Reliant Energy, said their investigation turned up a “range of transaction types” resembling round-trip trades that were executed in western markets, but that these appeared to have occurred for “reasons of coincidence or mistake.”

Reliant disclosed publicly last month that an average of 10% of its energy trading revenues over the past three years came from sham transactions. It estimated that it engaged in a total of 139 million MWh of power “wash” trades over the past three years, and 45 Bcf of gas “wash” trades in 2001 (see NGI, May 14). Most, if not all, of these phony trades were executed outside of the western markets, and primarily involved CMS Energy as the counterparty.

In their affidavit, the Reliant companies also identified other transactions that “superficially” mirrored round-trip trades, but said the deals were entered into for “conventional business purposes,” not to build volume or revenues. “Reliant has, in the past, executed simultaneous buys and sells with a third party to manage [its] internal risk limitations and/or hedged positions of its generation assets and fuel costs. Some transactions of this type were part of structured transactions entered into in 2001 that were intended to qualify for hedge accounting.”

Of nearly 52,000 trades that it reviewed, San Jose, CA-based Calpine Corp. said it discovered 15 transactions that involved the simultaneous purchase and sale of the same gas product with the same counterparty in 2001. While these had the appearance of round-trip trades, Calpine said the transactions were completed for risk-management purposes and did not inflate revenue. There were no round-trip-like transactions carried out in 2000, it noted.

Duke Energy conceded that affiliate Duke Energy Field Services was involved in three round-trip-like trades involving the physical delivery of gas in western markets. However, it said the trades, which were entered into with an unidentified counterparty, were not meant to boost revenues, trading volumes or prices. The company revealed on Friday that the SEC has requested additional information on the matter.

Of the thousands of trades under review, Duke said it identified three transactions in which affiliate Duke Energy Field Services physically sold gas to “another company with a simultaneous purchase of the same product at the same price.” The company said the trades were carried out at the request of the counterparty, not Duke Energy. It also reported that two other transactions “may have had the same characteristics,” but it said it could not determine from “available evidence” whether the trades were executed simultaneously.

“The de minimis number of such transactions belies any intent or practice to inflate reported revenues, trading volumes or prices. The three [identified] transactions, over a two-year period, represented a tiny fraction of the more than 30,000 wholesale forward transactions entered into by Duke Energy in the [western markets], and accounted for a tiny fraction of total MMBtus and notional value sold by Duke Energy,” wrote Duke Energy attorney Keith L. Head in an affidavit filed at the Commission. Duke Energy disclosed few details about the transactions publicly, saying that they involved “confidential and propriety information.”

Duke Energy said the two gas trades that may have had characteristics similar to round-trip transactions were reported to all the major price indexes, including the index published by NGI.

Duke Energy said it has begun a “risk management verification practice” to confirm that its traders do not engage in round-trip trades. Under this practice, Duke Energy noted it conducts a next-day review of all trades from the prior day that possess six characteristics: simultaneously executed, same counterparty, same price, same volume, same terms and period for physical delivery, and same delivery point within the Western Systems Coordinating Council (WSCC).

“In the event that simultaneous transactions are detected, a company risk officer seeks explanations from the trader and or the analyst to ensure compliance with the company’s policies,” according to the Duke Energy affidavit.

Other energy traders — Aquila Merchant Energy, Dynegy., NRG Energy Inc. and TransCanada PipeLines Ltd. — said they conducted thorough reviews of their gas trading transactions in western markets and Texas, and found their operations to be as clean as a whistle.

“After a thorough review of more than 24,000 gas trades for the years 2000 and 2001, we are confirming that our gas trading practices were proper and in full compliance with the FERC regulations and standards,” said Aquila Merchant President Ed Mills. “In all three recent FERC reviews, we’ve stated that none of our trades were for the purpose of increasing volumes or revenue, impacting market prices, or for any other improper business purposes. Our policy continues to be very clear on this.”

While a few trades “may have some of the characteristics of sell-buyback trades,” also known as round-trip trades, they were conducted for “legitimate business purposes” such as determining market price, depth and direction, and to manage the risk of Aquila’s portfolio due to changing market information, according to the Kansas City, MO-based company.

Dynegy noted it previously identified two gas round-trip trades with CMS Energy, but it told FERC that these were not executed in the West, and did not boost the company’s trading volumes or benefit it financially. NRG Energy and TransCanada denied any wrongdoing as well.

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