The unseen hand of the market

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Federal regulators 'knew about bogus trades'
By Nancy Dunne in Washington and Julie Earle in New York
Financail Times May 15 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 t o 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.