El Paso Merchant Energy LP. has reported making natural gas trades that were similar to round-trip, or “wash,” transactions in Texas and the West during 2000 and 2001, but it said none were meant 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. El Paso was among the 150 energy suppliers who were ordered to submit affidavits Wednesday disclosing their culpability in the questionable round-trip trading activity.

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 — Dynegy Inc., CMS Energy and Reliant Energy — claim that they were not used to drive up commodity prices. FERC has launched a 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. 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, El Paso in this case. 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 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.”

The Commission’s interest in round-trip or “wash” trading was sparked by the disclosure last month by Reliant Energy that an average of 10% of its energy trading revenues over the past three years came from sham transactions. Reliant Energy had estimated that it engaged in a total of 139 million MWh of power “wash” trades over the three years, and 45 Bcf of gas “wash” trades in 2001 (See Daily GPI, May 14). Most, if not all, of these phony trades were executed outside of the western markets, and 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 has 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 (See Daily GPI, June 6).

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