Energy Firms Are Likely to Tell
Of Inflated Natural-Gas Trades
Amid recent disclosures that energy companies artificially boosted
electricity-trading volumes and revenue, evidence also has emerged that
similar transactions occurred in the even larger market for natural-gas
trading.
Many companies are combing through their trading books in the wake of
disclosures of so-called round-trip power trades by Dynegy Inc., CMS
Energy Corp. and Reliant Resources Inc. Round-trip trades are essentially
mirror-image transactions, in which two companies swap the same amount
of a commodity for the same price. The transactions boost volume, but don't
appear to have other economic benefit.
In the wake of these
disclosures, traders and analysts
say other companies are likely to disclose similar trading practices in the
natural-gas market, which, like electricity, is unregulated. "It's the next shoe
to drop," says Mark T. Williams, a visiting scholar at Boston University and
an energy consultant.
The wholesale natural-gas market is more established, much larger and
more liquid than the relatively new electricity market. Utilities and heavy
industrial users can buy gas directly from producers or from third-party
marketers. Large energy companies have turned gas trading into a
profitable business, buying and selling gas contracts many times to capture
even small differences in pricing across the country.
The New York Mercantile Exchange offers a popular natural-gas futures
contract, although trading on the exchange is scrutinized by regulators.
Reliant Resources, in disclosing large-scale, round-trip electricity trades, said
last week the company conducted similar trades in the wholesale gas
markets. Those trades were with EnCana Corp., a large Canadian energy
company. The gas trades between the two were modest compared with
recent power-trading disclosures, but they illustrate how the practice was
used to make some gas-trading operations appear more active.
EnCana said round-trip natural-gas trades boosted revenue by about 1.13
billion Canadian dollars (US$720 million ) for 2001. Last month, the
company amended its revenue numbers to erase the effect of the round-trip
trades. EnCana said the trades were equivalent to about 250 million cubic
feet of gas per day, or about 8% of the company's gas-trading volume.
An EnCana spokesman said the trades were made to build market presence
and to attract business at the company's energy-trading subsidiary in
Houston. "It was part of a marketing strategy," said Alan Boras, the
spokesman. EnCana halted the practice last year and has been looking for a
buyer for the trading subsidiary, Mr. Boras said.
EnCana was formed last month when PanCanadian Energy Corp.
completed its acquisition of Alberta Energy Co. The trades with Reliant
Resources helped PanCanadian Energy qualify as the 22nd largest North
American natural-gas marketer last year, as tracked by Gas Daily, a trade
publication.
Round-trip trading doesn't appear to be illegal in unregulated wholesale
markets, though the practice is specifically restricted in other financial
markets. In addition to boosting volumes, the trades could potentially move
prices or create a false impression of liquidity. The Securities and Exchange
Commission and the Commodity Futures Trading Commission are looking
into the practice.
On Friday, Duke Energy Corp. said a small portion -- less than 1% -- of its
power and gas trades during the last three years may appear similar to
round-trip trades. The Charlotte, N.C. company said, however, the
transactions, which it identified as "sell/buy-back" trades, were commonly
done to validate real-time prices. "None of these trades were entered into to
increase volume," the company said. |
