Inherently gameable markets

[Sabri Oncu <soncu@xxxxxxxxxxx>]

Federal regulators 'knew about bogus trades'

By Nancy Dunne in Washington and Julie Earle in New York
Financial Times,  May 16 2002


The electricity free market is threatened by mounting evidence of
abuses, regulators warned, as one company admitted more than 80
per cent of its reported trades were bogus.

William Massey, a member of the Federal Energy Regulatory
Commission, said revelations about manipulative trading practices
were undermining public confidence. David Freeman, chairman of
the California Power Authority, cast doubt about the future of
deregulation, which he described as "inherently gameable."

The energy traders have "100 people on the floor down there in
Houston for every one person we can hire . . . the fertile minds
of the gamers will always be one game ahead of people trying to
stop it", he said.

Ferc itself came under attack from Californian officials who
claimed it knew about electricity market manipulation by Enron
and other traders more than two years ago.

US senators presented evidence that regulators were warned of
price manipulation by traders shortly after California's
electricity prices began spiking in June 2000 and well before
they acted to curb prices. Senator Dianne Feinstein on Wednesday
released a copy of an August 2000 memo from Southern California
Edison, the utility, to Ferc, which discussed several strategies
similar to those mentioned in Enron memos written four months
later.

The Enron memos show Enron manipulated the market in California
in 2000 and 2001. The Southern California Edison memo said that
in the week of June 14 1999 Duke Energy, an energy trader and
marketer was able to extract $1m a day by getting paid by the
Independent System Operator, to reduce its output unnecessarily.

CMS Energy admitted on Wednesday that bogus "round trip" trades
with rivals Dynegy and Reliant Resources inflated its trading
volumes by 80 per cent, and added $4.4bn to revenues in 2000 and
2001.

The Securities and Exchange Commission is investigating the round
trip trades, in which power was simultaneously bought and sold
with the same counterparty at the same time and price to boost
trading volumes.

Revelations of the fake trades have hit energy company shares in
recent days. Reliant shares closed down 10.8 per cent at $7.73 in
New York while Dynegy was 9.24 per cent down at $8.35.

CMS said it had stopped round-trip trades in January 2002.

Separately Standard & Poor's, the credit ratings agency, said on
Wednesday that 12 US energy companies were vulnerable to a
liquidity crisis if their credit ratings were cut.