Big Business obscenity of the day. Full story in today's Wall Street Journal. Clear example why MORE government oversight is needed in certain sectors, not less. Does the phrase "price gouging" pop up in your mind?
Trade Disclosures Shake Faith
In Troubled Energy Markets
By MITCHEL BENSON, CHIP CUMMINS and JATHON SAPSFORD
Staff Reporters of THE WALL STREET JOURNAL
Concerns that power producers inflated the apparent size of their business with bogus trades are hammering the industry's stocks, disrupting its finances and raising new questions about the already-shaken credibility of deregulated energy markets.
The latest events, in the aftermath of the December bankruptcy-protection filing by the power industry's best-known player, Enron Corp., are likely to renew calls for greater government oversight of the freewheeling market.
On Friday, Reliant Resources Inc. felt compelled to cancel a $500 million private debt placement under urging from its underwriters, after the company disclosed that it had sold and simultaneously bought back power from an unnamed trading partner. Earlier in the week, The Wall Street Journal reported that the Securities and Exchange Commission was investigating Dynegy Corp. because of a similar arrangement with CMS Energy Corp. CMS said Friday that the SEC had included the company in the probe and said it would cooperate fully; Dynegy had also said it would cooperate.
Following the move by Reliant, other companies active in the wholesale power-trading market said they had not deliberately inflated the size or number of trades they had conducted. Mirant Corp. of Atlanta took the unusual step of issuing a public statement to that effect. But stock and bond prices throughout the industry dropped sharply on investors' fears of more such disclosures to come. Already the disclosures of the last week have implicated four firms in such trades, in an industry dominated by big players.
It's not clear why firms would have made the trades, or whether they may have broken any laws. The SEC is likely to investigate whether companies fraudulently claimed revenue from trades that didn't net any profits. If not aimed at booking extra revenue, such trades also could have helped companies exaggerate their market share in a drive to be perceived as bigger players and bring in more business. Dynegy, for its part, said its trade with CMS was only intended to test the movement of large volumes of energy; Reliant declined to give any details about its trades until a conference call with analysts scheduled for Monday.
Exaggerated Growth?
More broadly, the latest revelations about trading behavior suggest that the torrid growth in the three-year-old wholesale electricity market, which underpinned huge revenue growth and fat profits at these companies through much of 2000 and 2001, could have been exaggerated -- no one knows by how much. The revelations also are renewing suspicions among federal and state investigators that bogus trades may have been at least partly behind electricity prices soaring as much as 900% in California early last year ..... |
