Traders Also Swapped Broadband, Data Show
By DAVID BARBOZA
The New York Times
HOUSTON, May 16 — Big energy trading companies engaged in scores of transactions aimed at creating the appearance of activity as they tried to build a market for trading high-speed communications capacity, according to records and interviews with former employees and executives at the companies.
The companies — led by Aquila, El Paso Energy Partners, Enron and Reliant Resources — made the trades in late 2000 and 2001, as the Internet bubble peaked and they sought to sell Wall Street on the idea that a fast-growing communications market was emerging. The energy traders were also trying to persuade telecommunications companies to do business with them.
In the last week, the shares of energy traders have been driven down as several, including Reliant and Dynegy, acknowledged that they engaged in round-trip trades of electricity. Federal regulators have said that the trading practices could have sent false price signals and eroded the credibility of deregulated markets.
The energy companies hoped to build a big business in the so-called broadband market, where telephone companies and Internet service providers buy capacity to send high-speed transmissions over advanced fiber optic networks. The market's promise helped drive the shares of the energy traders to their peaks last year. But even some analysts who gave the broadband business multibillion-dollar valuations a year ago said that they now doubted whether an active market ever developed.
"Everybody knew they were all trading with each other," said Anatol Feygin, an analyst at J. P. Morgan Securities in New York. "They were working off the premise that this was the same way electricity got started."
As the energy companies struggled to attract broadband business, the records show that they repeatedly sold the same routes to each other at the same price on the same day. Reliant, for example, engaged in more than 50 round-trip same-day trades from April to October of last year, trading records from the company show.
"The same circuit got traded back and forth," said a former Reliant executive who worked with the company's trading unit. "The idea was to book more transactions and get a market going."
The energy companies denied that they were party to any questionable transactions. "We absolutely did not engage in round-trip trades," said Norma Dunn, a spokeswoman at El Paso Energy, which is based in Houston. "The trades go through a broker so you don't know who you're dealing with."
Richard Wheatley, a spokesman for Reliant Energy, the parent of Reliant Resources, said: "We never undertook any wash trades in bandwidth. We never engage in wash trades."
An Aquila spokeswoman, Mary Amundsen, said the company did not engage in round-trip trades; an Enron spokesman declined to comment. Dynegy could not be reached for comment last night.
The Securities and Exchange Commission and the Federal Bureau of Investigation have been examining swaps of broadband capacity involving Global Crossing, Qwest Communications and other telecommunications companies. With those firms, accounting questions have been raised, including whether revenues were booked on round-trip trades.
Likewise, Enron's trading, which ranged beyond power and broadband to include commodities, is part of broad criminal and regulatory investigations. The broadband trading volumes and revenues of other energy companies were much smaller than Enron's or those of the telecommunications companies.
Now, the broadband marketplace has largely collapsed, and the energy companies have closed their broadband trading operations.
But little more than a year ago, these energy traders were investing heavily in fiber optic networks. The companies were following Enron, which had estimated that it would generate $17 billion in revenue from the broadband market by 2005, according to a February 2000 report by J. P. Morgan Securities.
One Wall Street energy analyst, who asked not to be identified for fear of inviting the attention of regulators, said, "They all promoted it, but only Enron quantified it."
Several employees who were identified in trading documents, but spoke only on the condition that they not be named, disputed the suggestion that they engaged in round-trip trades. They said that there were no prearranged deals and no effort to increase trading activity artificially.
"I know these look suspicious, but I'm telling you they are not," a trader said. "These are normal trades."
But several employees who worked in the Enron trading group said that traders from the different companies sometimes met for lunch and that some of them kept charts near their desk with their production goals — the numbers needed to impress Wall Street.
Another former Enron employee said, "This is about: `Let's get trading volume going.' They wanted to create a market faster than they created gas and power."
Two former Enron broadband executives and one former Reliant executive also said in interviews that there was pressure to trade simply to inflate volumes.
One veteran of the broadband market, Brent Wilkins, a managing director at Cantor Fitzgerald Telecom Services, said that when he was evaluating the broadband market, several energy companies that were considering the market were skeptical of the companies already in it.
"They didn't want to participate. They called it DS3 Bingo," said Mr. Wilkins, referring to trading in the high-capacity lines. "There was no money there."
Former Enron and Reliant officials who insisted on anonymity, said that the trading was so lethargic at times that traders felt pressed to do round-trip trades, or sometimes even to trade at a loss.
Still, Enron and analysts valued the broadband division last year at about $25 a share, or about $20 billion. Amid the Internet mania, such figures spurred other energy companies to jump into broadband, though none was as aggressive as Enron in its wooing of investors. At a presentation to investment analysts early last year, Enron said that its transaction volume had jumped from 3 broadband trades in the first quarter of 2000 to 581 trades in the first quarter of 2001.
But Enron could not meet its goals for the broadband unit. A deal with Blockbuster to deliver movies over Enron's fiber optic lines fell apart. Enron sold a part of its unusedfiber to LJM2, an off-balance-sheet partnership controlled by Andrew S. Fastow, then the company's chief financial officer, in a transaction executives later said was intended to help meet earnings expectations.
The energy industry's broadband trades were criticized in December by William S. Lerach, the lead lawyer in a shareholder class-action lawsuit against Enron. "There were only 20 legitimate broadband trades. Everything else was just a dark swap," he said in a federal court hearing in Houston, referring to trades of surplus, unlighted optic cable.
Mr. Lerach named Reliant, El Paso, Level 3 Communications and Qwest as having engaged in trades meant to impress Wall Street by inflating broadband volume. But he offered no evidence, and his remarks were disputed by those companies.
In interviews this week, El Paso executives said that broadband trading was never a core business and that the company realized about $2 million in revenue before it dropped out of broadband trading in January. The goal of its trading unit was not to make a profit, but to "test the market to see if there were other interested parties out there," said Ms. Dunn, the El Paso spokeswoman.
Reliant officials said that company's broadband unit generated only about $1 million in revenue. Mr. Wheatley, the Reliant spokesman, said that the company quit the market because of a lack of participation by others. "Let's just say it wasn't a lucrative business," he said. |
