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(12/4/02) - NEW YORK -(Dow Jones)- The energy industry could see more arrests and charges following the indictment of a former El Paso Corp. natural gas trader Wednesday for supplying fabricated natural gas data to an energy publication, legal experts said Wednesday.

Prosecutors in the U.S. Attorney's office in Houston, which charged former El Paso Vice President Todd Geiger, declined to say whether other traders at El Paso or other companies could face similar charges, saying only that their investigations continue.

But the probes will almost certainly reveal similar behavior at other trading companies, a handful of which have already admitted to submitting false data to publications that produce indexes and to doing fake trades solely to boost trading revenue and volume, lawyers said.

"It's not going to be a single episode here," said Michael Greenberger, a law professor at the University of Maryland and former director of the Commodity Futures Trading Commission's trading and markets division. "This was a problem that was not limited to El Paso."

The U.S. Attorney's office in Houston on Wednesday charged Geiger, who traded natural gas on El Paso's Canadian desk, with wire fraud and false reporting for supplying 48 fictitious trades in November 2001 to Inside FERC, which is published by Platts, a unit of McGraw-Hill Cos. .

The prosecutors in Houston could put pressure on Geiger, who was a relatively low-level El Paso employee, to determine whether others were involved in the misreporting, lawyers said.

Geiger's arrest could also encourage other employees to turn themselves in, in the hope of negotiating plea bargains, a lawyer said.

The indictment should send a signal to other traders - in the energy sector and in other derivatives markets - that misreporting has grave consequences, Greenberger said.

"It's going to cause a lot of sleepless nights by people who were involved in this," Greenberger said. "Time in prison is the greatest disincentive to a fraudulent system."

Ongoing Investigations

American Electric Power Co. and Dynegy Inc. each dismissed a handful of employees in October for providing false data to publications that compile natural gas indexes. Williams Cos. and CMS Energy Corp. have also said some of their employees reported inaccurate gas prices to industry publications.

The revelations of false reporting have triggered investigations by the Federal Energy Regulatory Commission and the CFTC.

Federal investigators said they learned of the trading irregularities at El Paso as a result of FERC's review of the company's natural gas trades earlier this year. FERC praised the federal prosecutors Wednesday for cracking down on the false reporting.

"We applaud the Justice Department for taking such swift action based on evidence developed by FERC staff in its ongoing investigation," FERC Chairman Pat Wood III said in a prepared statement. "The commission is dedicated to vigilant oversight and enforcement to make competitive markets work in the public interest."

The U.S. Attorney's office in Houston has also probed so-called "round-trip" or "wash trades" by El Paso, Duke Energy and Dynegy. Such trades involve offsetting positions with the same counterparty and serve no apparent economic purpose.

Dynegy paid $3 million to settle a Securities and Exchange Commission investigation into its trading practices in September.

Geiger is the second energy trader to be charged by the Justice Department in its wide-ranging investigation into trading practices following the 2000-2001 energy crisis in the West and Enron Corp.'s bankruptcy a year ago.

The U.S. Attorney's office in San Francisco obtained a guilty plea from Timothy Belden, Enron's former top western electricity trader, on a count of wire fraud related to attempts to manipulate California's power market.

The San Francisco office is also looking into the behavior of California power suppliers Mirant Corp., Southern Co. , Reliant Resources Inc., Duke, Dynegy, Williams and AES Corp. during the energy crisis, the companies have said.

Effect On El Paso Unclear

It's difficult to gauge the effects of the arrest on the company, Paul Patterson, an independent energy analyst at Glenrock Associates LLC, said.

"It's not clear what this means for El Paso," Patterson said. "It's clearly not good news. It's one more negative data point in the energy trading sector."

El Paso shares closed Wednesday down 29 cents, or 4%, at $7.05.

The criminal charges could pave the way for companies to file civil fraud charges against El Paso, though the viability of such cases isn't clear, said Alan Bromberg, a professor of contracts and securities law at Southern Methodist University's Dedman School of Law.

Legal experts generally don't see Geiger's arrest triggering a wave of litigation. Companies are often reluctant to file civil cases, because they know they're also likely to face accusations of wrongdoing, Greenberger said.

"A lot of people take beatings silently, because they know if they go after some wrong committed to them, other wrongs they've committed will come up," Greenberger said.

(12/4/02) - HOUSTON (Reuters) - Federal prosecutors unsealed an indictment on Wednesday charging a former El Paso Corp. natural gas trader with reporting bogus trades to allegedly influence price indices, giving a strong indication of the shape future illegal trading cases may take.

The indictment against former El Paso vice president and natural gas trader Todd Geiger is likely to send a wave of fear throughout the battered energy trading community, where several companies have admitted their employees provided false trade price data.

The indictment charges Geiger, 38, with wire fraud and filing a false commodity report for allegedly fabricating 48 trades and providing them to Inside FERC Gas Market Report during a Nov. 30, 2001, interview with an editor, the indictment says. Geiger was in charge of El Paso's Canadian natural gas trading desk.

Michael Shelby, U.S. Attorney for the Southern District of Texas in Houston, said the Geiger indictment was the first fruit of a host of energy trading investigations involving El Paso and other companies. The case was "of such an egregious nature" that they decided to move ahead.

"It is safe to assume that we are looking at anyone who has publicly disseminated false information for the purpose of price manipulation," Shelby said.

Dynegy Inc. and American Electric Power Co. have both fired employees for allegedly passing bogus price data. Duke Energy Corp., Dynegy, El Paso and Reliant Resources Inc. have all said they are under investigation for their trading practices.

Geiger was arrested at Houston's Bush Intercontinental Airport after returning from Detroit. He is set to appear before U.S. Magistrate Judge Frances Stacy on Wednesday. If convicted, Geiger could face up to five years in prison on each count, and fines totaling $750,000.

Houston-based El Paso, the largest U.S. pipeline operator issued a statement saying only that it was cooperating with the investigation. Shares of El Paso fell 20 cents, or 2.7 percent, to $7.14 in afternoon trading on the New York Stock Exchange.

SHAPE OF FUTURE CASES

Robert Mintz, a former federal prosecutor now leading a white collar criminal defense practice at the Newark, N.J., office of McCarter & English, said the indictment is a clear signal of the government's intentions.

"There are any different number of theories prosecutors can pursue here, and as long as they can prove that the intent was to manipulate the pricing of the commodity, they can present a compelling case" Mintz said.

Shelby, whose office is a major part of the U.S. Justice Department's Corporate Fraud Task Force developed in the wake of Enron Corp.'s collapse, said price manipulation can take many forms, such as an inflated price or volume.

The false trades were discovered in a review of El Paso's natural gas trades by the U.S. Commodity Futures Trading Commission and FERC earlier this year, Shelby said.

Geiger resigned from El Paso on Nov. 12, Shelby said, four days after the company announced its exit from the energy trading business.

Submissions of trade information are used by trade publications to figure indices of volume and pricing for commodities. The indices are then used by buyers and sellers to determine the prices for commodities like natural gas.

Inside FERC, which is owned by The McGraw-Hill Companies subsidiary Platt's, is acting in the capacity of a witness in the case, Shelby said.

"An initial review of our records shows the information was received, reviewed and rejected because it was outside the market price," Platt's editorial vice president Jim Nicholson said in a statement. The prices were submitted for inclusion in the December 2001 gas index, the indictment says.

Shelby would not say whether the prices were above or below the November averages. Calculations to determine the total economic benefit to Geiger and El Paso and the detriment to consumers are not yet finished, he said.

(12/2/02) - RALEIGH - GridSouth - a bold-but-failed initiative to drive the Carolinas into retail energy deregulation - has laid off all of its employees and closed shop, leaving in the dust $70 million in investments by three electric utility giants.

One of the partners in funding GridSouth, Columbia, S.C.-based Scana, is proposing that consumers pick up its $13 million in losses.

Officials with the other two companies, Raleigh-based CP&L, a unit of Progress Energy, and Charlotte-based Duke Energy, say no decision has been made on how they might recoup their investments of $25 million and $32 million, respectively.

Launched in July 2000 to take over the electricity-transmission function for the three companies, Fort Mill, S.C.-based GridSouth was an effort to cost-effectively move CP&L, Duke and Scana into a deregulated retail power market.

But failed experiments in other states, combined with the illegal movement of power by Houston-based Enron to artificially inflate prices, put an end to any momentum that retail deregulation ever had.

"GridSouth is history," says Kevin O'Donnell, president of Raleigh-based Nova Energy and a proponent of a deregulated utility market. "There won't be another GridSouth."

But O'Donnell, who negotiates wholesale rates on behalf of municipal and business clients, hasn't given up hope for retail deregulation. He believes GridSouth was a good idea, but with only three companies, he says it was too small to be effective.

James D. Hinton, a former Duke Energy employee who served as GridSouth's chief operating officer, has left the company. Other employees have been let go over the past few months or absorbed within the three utilities, officials at the utilities say.

Known officially as GridSouth TransCo, it was what is known in the industry as a regional transmission organization, or RTO. O'Donnell believes the three Carolinas utilities could combine with other RTOs in the future, when retail deregulation might get another chance.

The establishment of GridSouth was a response to a recommendation by the Federal Energy Regulatory Commission that utilities combine their transmission facilities to save on costs and thereby cut residential rates.

But GridSouth and utility company officials say FERC guidelines remained a moving target, with the federal agency first recommending regional transmission companies and later mandating uniformly established power markets nationwide.

"We have office space leased, computers installed and employee infrastructure in place and are eager to proceed, but we need a greater degree of regulatory clarity," Jim Hicks, a senior vice president for Duke Power, complained in February.

Now, a Nov. 7 study by the Southeastern Association of Regulatory Utility Commissioners concludes that the cost of setting up an organization such as GridSouth never was a good idea. "The GridSouth and GridFlorida regions do not appear to receive positive net benefits," the study, which was overseen by James Kerr of North Carolina, concludes.

As for recouping their investments, Gisele Rankin, an attorney with the North Carolina Utilities Commission Public Staff, suggests that the companies could make a claim with the FERC since they were following that agency's recommendations.

(12/2/02) - The predictions came from every direction: Energy-trading operations would retrench. Deregulation would be sideswiped.

The electric power industry would face more financial problems.

Most of those expectations came true in the year after Enron Corp.'s bankruptcy filing on Dec. 2, 2001. The dizzying collapse of one of the biggest names in energy put a spotlight on the industry - and added even more problems to a volatile environment.

A year later, few power companies have emerged unscathed.

Enron's disgraceful downfall altered their course and redefined perceptions of the industry.

Energy trading as an independent business model is on its way out. Several states have stalled their electric deregulation plans after seeing the debacle among energy firms. Banks and credit markets have tightened their reins as investors flee the sector.

"The impact of the Enron situation was to sharpen the loss of investor confidence," said credit analyst Ellen Lapson, a managing director in Fitch Ratings' Global Power Group. "The problems of overinvestment, overcapacity and excessive debt leverage would have surfaced eventually. ... It just might not have unrolled at the same speed."

Enron's transformation from a staid natural gas pipeline company into one of the most admired companies in the world had attracted plenty of attention. Enron chairman Kenneth Lay and chief executive Jeffrey Skilling became two of deregulation's most vocal proponents, aggressively lobbying top state and federal officials.

Competitors rushed in to grab profits, believing the new energy-trading model would define the industry's future.

"People looked at Enron's success with energy trading and decided to make it the core of their business when, for most companies, it can't be sustained as your major business," said Loren Fox, author of Enron: The Rise and Fall.

And key fundamentals were ignored amid the excitement, said Michelle Michot Foss, executive director of the University of Houston's Institute for Energy, Law & Enterprise.

"When all the followers started to catch up, the Enron strategy was already pretty mature, and a lot of valid questions that probably should have been asked didn't get asked," Dr. Michot Foss said.

As Enron was collapsing last fall, investors learned that the company had inflated earnings and concealed debt with a string of off-balance-sheet financial maneuvers. The fall of such a prominent energy giant drew attention to other problems that companies created during the late-1990s boom.

"When you have a high-speed economic growth like we've had, a lot of management practices weren't as sharp as they should have been," Dr. Michot Foss said. "The repercussions clearly are being felt from that." The decade-long economic exuberance had offered easy access to financing, which led to a bonanza in power-plant construction in some markets. When an economic downturn crossed paths with an excess of wholesale power, many firms were left with billions in debt and unprofitable power plants.

The industry had already been dealing with the repercussions from California's failed deregulation project. New allegations of market manipulation, sham trades and false accounting soon emerged and contributed to the loss in investor confidence.

Most companies that traded energy or sold wholesale power felt the backlash.

"We're still seeing companies whose problems are far from resolved," Ms. Lapson said. "The most severe cases are probably going to be resolved by great losses being realized" through bankruptcy or other reorganizations.

Houston's Reliant Resources Inc., for one, warned investors last month that it might have to file for bankruptcy if it fails to restructure its debt.

Until this fall, Dallas-based TXU Corp. had averted some of the effects of Enron's collapse. But TXU's European investments from a late-'90s expansion splurge took their toll, and the post-Enron drop in investor confidence forced the company to sever its European operations to preserve its credit ratings.

After slashing its dividend and issuing stock, TXU is among the companies that have stabilized their credit situations, Ms. Lapson said. But others will continue facing shortfalls for at least two years.

As for Enron, the company's future remains unclear, interim CEO Stephen Cooper said this fall. It could emerge as a smaller company focused on hard assets such as pipelines and power plants. Or it could fully liquidate to pay off creditors.

Firms that were once some of Enron's biggest competitors face similar prospects. Dynegy Inc., the crosstown rival that backed out of acquiring Enron last November, has pulled out of energy trading. Williams Cos., El Paso Corp. and Reliant are among the firms that have sharply cut or abandoned energy trading.

And UBS Warburg, which bought Enron's trading operations, plans to shut down its Houston trading floor this month.

Meanwhile, Enron's financial speculation and maneuvering - combined with its now-infamous culture - have tarnished the legitimate practice of energy trading, said Peyton Feltus, president of Randolph Risk Management in Dallas.

In its basic form, energy trading is supposed to help control volatile prices, allowing companies to buy and sell energy to manage the risks of rising or falling prices.

Even today, the same amount of energy is being bought and sold as during the Enron days, Mr. Feltus said. But tighter credit markets have forced out many trading partners, requiring more time - and less success - to manage risks with energy purchases.

"This need to exchange price risk is there, and it's even more pressing than it was before because the markets are extremely volatile," he said. "The bad part about the Enron debacle is it's much harder now to arrange those exchanges."

Legislators and regulators at the state and federal levels are still investigating Enron's downfall and its effects on the industry. Several proposals have emerged to increase oversight of companies and prevent further abuses.

"Not every electric company was bad, but these changes created opportunities for deceit and illegal behavior," Mr. Fox said.

"Once you see that the changes to the system create these things, you have to patch the hole."

(12/2/02) - This time last year, energy executives pulled out their calculators and began tallying up their exposure to Enron's sudden plunge into bankruptcy.

In short order, Enron's trading partners delivered specific predictions. El Paso gauged its damage at $50 million. Dynegy, which had just scrapped plans for an Enron buyout, set its exposure at $75 million. Williams and Duke conceded that they could lose as much as $100 million each. Given the lavish multibillion-dollar valuations the companies carried in a marketplace still agog with visions of vast trading profits, the price tag didn't seem too steep.

Indeed, many of Enron's rivals expected to recoup their losses and then some by gobbling up market share in a business that sprouted out of the 1990s belief that private enterprise could solve virtually any problem. With newly created energy trading operations simultaneously relieving pressure on the nation's decaying electricity grid and churning out massive profits, analysts saw in Enron's demise a win-win situation for investors.

"We feel that all energy merchants -- including Dynegy, Williams, Duke and El Paso -- will ultimately benefit from Enron's collapse," Prudential analyst Carol Coale said just ahead of Enron's bankruptcy.

But a year later, it's apparent that Enron was merely the first casualty in the now deeply distressed energy-trading business. Of the four competitors mentioned by Coale, only Duke still operates a major trading business, and it's a money-losing venture. The others, now saddled with mounds of junk-rated debt and cash flows that have slowed to a trickle, are struggling for the means to fund more routine -- and affordable -- operations like energy production and transportation. All the energy-trading companies have seen their stocks decline sharply.

Meanwhile, huge trading divisions lay near ruin, sullied by questionable business and accounting practices that have triggered myriad governmental investigations. Dynegy, for one, has already paid a $3 million fine to end a high-profile probe by the Securities and Exchange Commission. All the same, Duke remains stubbornly committed to the fallen trading business.

"We're very proud of our trading and marketing operation," CFO Robert Brace told investors, even after the division's dismal third quarter. "We're not looking at pulling back."

Duke spokesman Randy Wheeless has since reinforced that commitment.

"We have one [division] that's not doing that well," Wheeless said of the trading unit. "But with any kind of modest upturn, it will return to its very healthy ways."

Still, some merchant energy critics insist that the excesses underlying the industry that Enron built will continue to plague investors for years to come.

High Stakes

These days, energy companies are lucky to collect a sliver of profit from the electricity they sell. Once-mighty power producers like Calpine and Mirant spend nearly as much fueling their power plants as they earn for the electricity those plants spit out. They describe this decline in "spark spreads," and the resulting erosion of profits, as unthinkable a year ago.

But the thinking back then was still influenced by the heady rise of Enron. Although most industry players acknowledged even then that huge profit margins -- like those realized during the California energy crisis -- were unsustainable, they assumed that sinking margins had already hit "reasonable" levels. But their own bank accounts, fattened by the recent volatility, should have told them just how violently energy prices can swing.

At its cheapest, during a brief period on the day California launched deregulation, wholesale electricity was actually free. But roughly 100 days later, Dynegy set a new tone for the business. Exploiting a loophole in California's deregulation system, Dynegy offered to sell standby power to the state for a whopping $9,999 a megawatt hour (compared to pre-deregulation rates of $10 a mwh) -- an offer that, by law, California was forced to accept. Official records show that this strategy allowed Dynegy, together with two other energy companies, to reap $8 million in profits for simply keeping their power plants on call for five short hours.

The high-stakes California power business -- likened by some at Enron to a giant video game -- had only just begun.

Crafty energy traders honed their skills to near perfection by the time the "perfect storm" of extreme weather and power imbalances hit California in 2000. The average merchant energy stock would double that year. Dynegy tripled, ranking among the top performers on the New York Stock Exchange. Enron, noted as much for its political clout as its aggressive business strategy, ended the year within dollars of its all-time $90 high.

The stock, celebrated by most analysts as a phenomenal investment, was less than a year away from being worthless.

Hijacking Deregulation

During Enron's heyday, critics of the company could barely find an audience.

Apache, a onetime owner of Dynegy's predecessor, screamed aplenty about shenanigans in the industry. But the company has only recently gained a platform before Congress and other powers that were once under Enron's financial thumb.

All along, Apache has blamed a handful of companies -- most notably Enron and Dynegy -- for poisoning a deregulation movement that could have been good for the country.

Ken Malloy, CEO of the Center for the Advancement of Energy Markets, said the turmoil could cripple the nation's power system for years. He's seen progress on deregulation come to a virtual standstill since Enron's demise.

"We had a few companies that spent a lot of money in Washington to get legislation passed that allowed them to operate totally in secret with no regulation whatsoever," said Obie O'Brien, director of governmental and regulatory affairs at Apache. "They literally hijacked and corrupted the deregulation process, and they didn't even provide much of a service -- except to line their own companies' pockets."

If anything, power consumers suffered more from Enron's participation in, not exit from, the energy trading business. The last blackout occurred when Enron was at the top of its game. Since then, governmental investigations have uncovered mounting evidence that not just Enron, but also surviving companies like El Paso and Williams, may have schemed to drive California power prices to outlandish highs.

This week, on the one-year anniversary of Enron's bankruptcy, El Paso must fight to prove its innocence in a pivotal hearing before the Federal Energy Regulatory Commission. The company, which once pinned its future on energy trading, recently joined the parade of battered players fleeing the business in a panic to survive.

No company -- except Enron -- has managed to sell its trading division. UBS Warburg, which got Enron's prized trading arm for nothing, hardly flourished because of that "sweetheart" deal. UBS announced last month that it will pack up its business in Houston, where the taint of Enron still lingers, and focus on a much smaller trading operation in Connecticut.

Elsewhere, energy companies are taking billions of dollars in charges to shut down trading operations that nobody wants to buy. But the weaker players may have stayed in the game too long. Some companies, like Dynegy and Williams, have already skidded close to bankruptcy and still remain at risk. Others, including debt-laden AES and Reliant Resources, are viewed by some as even more vulnerable.

Experts believe casualties are inevitable. They're just waiting to see which company will be the first to follow Enron into bankruptcy.

They see the shakeout as a necessary step toward successful deregulation and a legitimate trading industry.

"We absolutely need a place for buyers and sellers to come together," Malloy insisted.

But Malloy acknowledged that much of the past energy trading, like that conducted by Enron, was unnecessary. And O'Brien called Enron's business strategy, once touted as the "new American business paradigm," an outright fraud.

"It turned out to be the oldest way of making money -- stealing it -- even if it was wrapped up in a new package," O'Brien said. "They got greedy, and they got caught. Otherwise, they'd still be doing it today."

(12/9/02 Issue) - By You'd think that by now--in this annus horribilis for the once highflying energy-trading sector--all the bad news would have come out. The sham trades that boosted revenues have been exposed. The stocks have been crushed, with companies such as Mirant, Dynegy, Calpine, and AES down about 90% over the past year. The rating agencies have downgraded much of the industry's debt to junk status. The SEC and the Federal Energy Regulatory Commission (FERC) are investigating several companies. In November the New York Stock Exchange notified Dynegy, which ranked No. 30 on last year's FORTUNE 500, that its shares may be delisted. In fact, many of the largest energy traders, including Dynegy and El Paso, have publicly announced that they will abandon trading altogether--which is where they made most of their money. Instead the plan is to revert to the old-fashioned model--generating power, transporting natural gas, and exploring for hydrocarbons. It may not be as sexy as the old "asset lite" strategy popularized by Enron--and copied by the rest of the industry--but the hope is that at least it will allow the companies to survive.

Guess what: It might not work. The reason? Debt. During the boom times--and anticipating a glorious new era of deregulation--power companies borrowed a stunning $600 billion. They used that money in part to bulk up their speculative trading operations. But mostly they used it to buy entire power companies or construct natural-gas-fired power plants.

That bill is coming due. Starting next year and continuing through 2006, a whopping $90 billion of debt has to be either repaid or renegotiated, according to Standard & Poor's. Few of the companies appear able to repay it; the collapse of energy trading has put them in a severe cash crunch, and several are close to bankruptcy. Speculative trading is no longer profitable, of course, but far worse is the fact that power plants aren't generating much cash flow either. The overbuilding has helped lower the cost of energy--and the economic downturn has meant that the country simply isn't using as much power. Power prices are severely depressed.

Welcome to the next great debt disaster. "The debt bubble in this industry is massive," says Karl Miller, a former energy executive who is now a senior partner at Miller McConville & Co., a private firm that is buying distressed assets. Starting next year many energy firms teetering on the edge of Chapter 11 are going to fall into it. Once again the brunt of the losses could land on some of the nation's largest banks. For instance, J.P. Morgan Chase, which has acknowledged lots of bad telecom and cable loans, says it has another $2.2 billion in exposure to merchant energy companies. "People have been focused on the bankruptcies of Enron, Global Crossing, and WorldCom," says Miller, "but this sector is the sleeping giant."

What set the wheels in motion for the energy meltdown? The same thing that got the telecom disaster going--botched deregulation. The federal government had already deregulated oil and natural gas when it turned its attention to electricity in the 1990s. For decades local utilities were essentially regulated monopolies. The utilities owned the power plants and the lines they used to provide service to corporations and consumers. To hold the monopoly in check, state or local boards set caps on what the utilities could charge customers. With deregulation, local utilities had to compete to provide power to their area--and customers could shop around for the cheapest power. Still, it was left to each state to decide how--and when--to deregulate its retail electricity market.

Enter the big energy-trading companies. Most of them were already operating in the deregulated oil and natural gas markets--and had seen how open markets created profit opportunities for them. Now they believed they could do the same with electricity. The wind, they believed, was at their backs--not only was electricity about to be deregulated, but thanks to the booming economy there was also growing demand for power. Furthermore many utilities operated outdated coal-fired and nuclear power plants that needed to be phased out. And the big banks--not just J.P. Morgan but also Citigroup, Bank of America, and Bank One--were eager to lend. It wasn't long before Calpine and Duke Energy (among others) began constructing power plants.

In theory, once a power plant was up and running, the company that had built it would sign long-term contracts for up to 80% of the plant's output, guaranteeing electricity to its customers at a fixed price. And how would the energy firm ensure that it could supply the electricity at that price? That's where trading came in: The firm could sell its excess power in the marketplace--and it could apply hedging techniques to lock in a price for its biggest expense, natural gas, which would also protect against volatility. Indeed, hedging was the original impetus behind energy trading. Hedging, however, is not a high-margin business. Speculative trading--that is, making leveraged bets on both the demand and the price movements of electricity--can be hugely profitable, assuming you're on the right side of the trade. Of course, that kind of trading has nothing whatsoever to do with guaranteeing the delivery of electricity, but by the late 1990s nobody was too worried about that. Speculative trading was generating such big profits for the merchant energy firms that it became, in effect, the tail that wagged the dog.

It wasn't long before problems began to surface. First, even though the feds had deregulated wholesale electricity, the states did not uniformly race to deregulate their local retail markets. By the end of 1996, the year the feds deregulated the wholesale market, only three states passed laws freeing up their electricity markets. (One of them, however, was California.) Second, it turned out that electricity was simply different from other commodities. Unlike corn or wheat--or natural gas--it can't be stored. It must be generated and delivered on demand. Because of the nature of electricity (it's a physics thing), it's not easy to move it from the Northeast Corridor to Los Angeles at three in the afternoon on a Tuesday in July. For that same reason electricity prices can be far more volatile than those of most other commodities. An unexpectedly hot summer afternoon can cause demand to spike quickly. Electricity typically runs $30 to $40 per megawatt hour. (A megawatt hour is essentially enough power to provide electricity to 1,000 homes.) But on a single day in June 1998, in the middle of a spectacular heat wave in the Midwest, local utilities bought electricity for between $900 and $3,500 per megawatt hour, which they then had to resell to customers at a much lower fixed price.

Then came the California energy crisis in the summer of 2000--the moment when everything came to a head. With prices soaring more than $1,400 per megawatt hour, energy-trading firms raced in. As we have since discovered, their primary interest was not to help assuage the situation but rather to exacerbate it.

After all, speculators make money when prices are most volatile--and most of the firms were now dominated by a speculative mindset. Enron employed its now infamous "Fat Boy" and "Death Star" strategies, which were clearly designed to game the system. FERC recently released transcripts of phone conversations between employees at Williams and AES from that same period, in which employees at the two companies discussed prolonging a work outage at one of the plants to take advantage of higher prices that the state was paying to replace the missing power. (Williams and AES say they did nothing wrong. Williams says the transcripts reveal nothing more than an "improper" conversation between employees.)

Some energy companies began doing "roundtrip" or "wash" trades, in which traders bought and sold power at the same price merely to boost revenues. These wash trades accounted for 23%, or $5.3 billion, of revenues at CMS Energy between 2000 and 2001. Several energy firms gave false or inaccurate price data to publications that compile price benchmarks--which were used by utilities to lock in prices for long-term contracts with power generators. And on, and on.

It is this series of scandals--all of which came to light in the wake of Enron's collapse last December--that has brought the energy-trading industry to its knees. And most of the moves taken by both the industry and its regulators have been designed to help put the scandals behind it. For instance, in November, Williams agreed to pay California a $417 million settlement for its role in the energy crisis--and to make changes to its $4.3 billion contract. The need to put the scandals behind them also explains why so many energy companies have announced that they will abandon the trading business--or at least the speculative trading business. (Most of them plan to continue trading as a hedging strategy, which, you'll recall, was its original purpose.) Of course, this decision has been made much easier by the fact that in the current environment, trading simply isn't very profitable anymore.

Meanwhile regulators are also working to fix the problems. The Financial Accounting Standards Board has outlawed certain aggressive accounting techniques that merchant energy companies used to goose revenues and profits. But Pat Wood III, the chairman of the FERC, concedes that there is much that still needs to be done--in no small part because the feds still don't fully understand what took place in California. "We're at the low point in the transition from the old world to the new," he says, "but we're eager to get through to a thoughtful resolution and move forward."

Fearing regulators may not move fast enough to save them, top energy firms are also taking drastic steps. A group of 31 chief risk managers from firms including Mirant and American Electric Power banded together to push the industry toward greater disclosure and to work for the adoption of new trading and marketing standards. They hope the move will restore the confidence not only of investors but also of the credit-rating agencies and lenders. Ultimately, though, speculative trading may fade completely from the energy firms and wind up--surprise, surprise--in the hands of Wall Street traders, where speculation is a way of life. Already Bank of America is planning to start energy-trading operations, while Goldman Sachs is beefing up its own desk.

Still, all the moves by the big energy companies to save themselves will be for naught if they can't figure out a way to pay back or refinance their debt. Just look at the numbers: Between now and 2006, Reliant Resources, which has a debt ratio of 52%, has to refinance almost $6 billion; CMS has $4 billion in debt coming due in that same time (its debt ratio is 70%); and Calpine owes $7.3 billion (its debt ratio is 72%). For a sense of how grim the situation is, take a look at the deal Williams struck last July with Lehman Brothers and Warren Buffett's Berkshire Hathaway. In return for a one-year $900 million loan, the energy concern agreed to a 30% interest rate and pledged $2 billion of assets as collateral. With all due respect to the Oracle of Omaha, these are terms that loan sharks command.

It will take a miracle to save some of these companies from bankruptcy--but there is one key difference between them and the telecom companies that have gone bust. Most of the telecom debt was spent laying thousands of miles of fiber-optic cable. By some estimates half of the cable has never been used. But, says Jerry L. Pfeffer, energy industries advisor at the law firm Skadden Arps, "this industry has never come close to the degree of oversupply that you saw in telecom." He adds, "We'll see groups come in and buy the assets. Buyout firms, financial investors, and European utilities are interested, but they're still waiting because they don't think we've hit bottom."

Other likely buyers will be the same stodgy, boring utilities that these former highfliers mocked in the late 1990s. "I think the local regional utilities will definitely have an interest in some of these assets," says Nancy DeSchane, head of trading at Duke Energy. "The demise of significant players doesn't mean energy won't be available in the marketplace."

Ultimately the energy industry is likely to go back to its roots: It will be a low-margin business dominated by power generators and local utilities that trade with one another and hedge against volatility. "We're back to a physical market where the participants are trading excess power they generate," says Amy Burns, vice president of bulk power trading for the Tennessee Valley Authority. Suddenly, that doesn't sound so bad.

(11/22/02) - A class-action suit filed Wednesday in Houston accused the El Paso Corporation of engaging in dozens of round-trip energy trades that artificially bolstered its revenues and trading volumes over the last two years.

The lawsuit, filed by Oscar S. Wyatt Jr., one of El Paso's largest shareholders, says the company engaged in what are commonly referred to as wash trades to drive up the value of El Paso's stake in a new online trading platform called the Intercontinental Exchange.

Earlier this year, some large energy traders admitted to engaging in round-trip trades, which are usually done on the same day at the same price with the exact same terms.

Duke Energy and Reliant Resources said in May that they had uncovered dozens of round-trip trades in their records. But El Paso executives have repeatedly denied engaging in such trades over the last few years.

El Paso filed an affidavit in May saying it did not engage in round-trip trades after the Federal Energy Regulatory Commission asked for statements from energy trading companies.

In June and July, El Paso again said that it had not been involved in round-trip trades after an inquiry from the Securities and Exchange Commission and the United States attorney's office in Houston.

Yesterday, El Paso, which is based in Houston, could not be reached for comment on the lawsuit.

According to the complaint, which was filed in federal court in Houston, El Paso offered its traders incentives, including $10,000 bonuses, if they could increase their trading volume on the Intercontinental Exchange.

''El Paso management blatantly and openly encouraged El Paso traders to engage in wash trading,'' the complaint says.

In April 2000, El Paso and five other gas and power marketers, including Duke and Reliant, formed the Intercontinental Exchange, an online trading platform that would compete against Enron's fast-growing online exchange, Enron Online.

Lawyers in the class-action suit say that energy companies with the heaviest trading volumes thought they would receive a larger stake in a planned initial public offering of the exchange, which was expected some time in 2002. The company has not yet gone public.

Executives at Reliant and a spokeswoman at the Intercontinental Exchange, which is based in Atlanta, declined to comment yesterday. A spokeswoman for Reliant, which is in Houston, also declined to comment.

Duke, which has admitted using the Intercontinental Exchange for some round-trip trades, said that the company had turned over records related to the trades to the S.E.C. The company declined to say whether any trades involved El Paso.

''It'd be inappropriate to discuss proprietary information,'' a spokesman for Duke, Pete Sheffield, said. But lawyers in the class-action suit said they had records of round-trip trades by El Paso in January 2002 involving Duke and Reliant. On Jan. 11, the records appear to show that El Paso and Reliant swapped 50 megawatts of power for June delivery on the East Coast for the same price, $35.75 a megawatt hour.

A similar set of trades occurred on Jan. 17 between El Paso and Duke, according to the records, which were included in the court filing. The complaint says that the trades in 2001 and 2002 resulted in gross revenues of up to $1.1 billion for El Paso.

Wednesday's filing involved an amended class-action complaint and accused El Paso of fraud and misleading investors.

Mr. Wyatt, 78, the former head of the Coastal Corporation, which El Paso acquired for $10 billion in 2001, is the lead plaintiff. He has been complaining for months that El Paso has relied too heavily on off-the-books partnerships and complex accounting to increase profits.

After Enron collapsed, shares of El Paso also plummeted amid federal investigations into the company's trading practices and concerns about its accounting.

Wednesday's complaint accused El Paso of concealing billions of dollars in debts with the partnerships and ignoring accounting rules in the hope of driving up the share price. The complaint also says El Paso kept about $1.9 billion of debt related to a partnership called Chaparral off its books by deeming the partnership independent and 80 percent owned by an outside investor, which is one of its investment bankers, Credit Suisse First Boston. But partnership documents indicate that El Paso controls Chaparral, and the complaint says that the debt should have been consolidated on El Paso's books.

El Paso executives have defended the use of the partnerships and have said they followed proper accounting procedures.

(11/22/02) - So now we know, thanks to documents just released by federal regulators, that energy providers Williams and AES conspired to drive electricity prices higher during the worst of the California power crisis.

What most people don't know, though, is that board members of both companies have links to the White House, as do directors of other energy heavyweights that have received subpoenas for their alleged role in fleecing California ratepayers.

There's no evidence of any wrongdoing on the part of these board members. But their ties to the first and second Bush administrations once again raise troubling questions about what federal authorities knew about the energy crisis and when they knew it -- and why they didn't act sooner.

Take the case of Thomas Cruikshank, who has served on the Williams board for the past 12 years. He also happens to be the retired chief executive officer of Halliburton and personally selected Vice President Dick Cheney to succeed him at the helm of the Dallas oil services giant.

Cheney subsequently engineered Halliburton's acquisition of Dresser Industries, which saddled the company with huge asbestos liabilities, and approved accounting practices that are now under investigation by the U.S. Securities and Exchange Commission.

Kelly Swan, a Williams spokesman, indicated that Cruikshank likely knew of Williams' shenanigans with AES no later than the summer of 2001, when the company agreed to play ball with federal investigators.

Williams' documents and phone records show that the company colluded with AES to keep power plants offline as California grid operators were scrambling in 2000 to avoid blackouts. A limited supply of juice caused electricity prices to soar.

"The board is routinely updated on the company's business," Swan told me, "but we don't comment on their discussions."

Shortly before Williams agreed to cooperate with investigators, Cheney was meeting with a variety of energy-industry bigwigs, including former Enron Chairman Ken Lay, to determine the White House's official response to California's difficulties.

(The energy pros got their way: Cheney and President Bush all but told California to deal with things itself, setting the stage for the bankruptcy of Pacific Gas and Electric Co. and a huge state budget deficit.)

Did Cheney contact his corporate mentor to discuss the situation in California? Did Cruikshank ever mention that Williams was profiting handsomely from the state's troubles (it made an extra $10 million in just two weeks)?

Who knows? The White House is keeping details of Cheney's energy-policy talks to itself, including who the vice president and his people spoke with and what was said during the meetings.

"The vice president and the president should be able to receive unvarnished advice so they can put forth the best policies," said Jennifer Millerwise, a spokeswoman for Cheney. And that's all she'd say on the matter.

Nevertheless, the General Accounting Office, Congress' investigative arm, and other parties sued to gain access to Cheney's records. A federal judge has given the White House until the end of the month to finally come clean on at least some of the documents.

Maybe then we'll know whether Cheney discussed the California energy crisis with David Lesar, who took the reins as CEO of Halliburton once Cheney dove back into public service two years ago.

Cedric Burgher, Halliburton's vice president of investor relations, told me earlier this year that Cheney and Lesar have remained in touch since the corporate baton was passed. "He'll call us back," Burgher said of Cheney. "He has a lot of friends here."

There's more at stake, though, than just a couple of old pals chewing the fat. Lesar is also a director of energy provider Mirant, which has been subpoenaed by the U.S. attorney's office to explain its actions as California suffered rolling blackouts.

Three successive Halliburton CEOs, each with a unique tie to the energy crisis. A strange coincidence, to say the least.

And what of AES, the company Williams was conniving with to send electricity prices skyrocketing? Richard Darman, who worked with Cheney in the first Bush administration (he headed the Office of Management and Budget) has sat on the AES board since August.

Darman is also a managing director of the Carlyle Group, the Washington investment firm led by some of the world's most influential men, including former Secretary of State James Baker and former Defense Secretary Frank Carlucci.

The first President Bush is affiliated with Carlyle as well. Prior to Sept. 11, so was the family of Osama bin Laden.

Has Darman discussed AES' questionable business practices with his Carlyle cronies? Could any of those talks have made it back to the White House, one way or another?

Carlyle spokesman Chris Ullman insisted that Darman "doesn't discuss any issues with anyone in the government. Period." An AES spokeswoman declined to comment.

At this point, it's hard to know what to believe. It has taken more than two years for Californians to learn of the Williams-AES collusion. We found out only last month that Enron's top West Coast energy trader was rigging power prices as early as May 1999.

The energy crisis was clearly more complex, and criminal, than we ever imagined. Exactly how complex, and how criminal, has yet to be seen.