A trader at BP Plc, the world's third-largest oil company, may have profited from phony power trades in the western US by using a now-banned accounting method pioneered by Enron Corp, a federal regulator said.
The BP trader on three occasions in 2000 bought power from a Reliant Energy trader and immediately sold it back at the same price, a "wash" trade designed to "manipulate" prices, the Federal Energy Regulatory Commission said this week in findings from its 13-month probe of California's energy crisis.
The regulator's findings mark the first time a company has been accused by US authorities of using wash trades to inflate profit through so-called mark-to-market accounting, said Donald Gelinas, who headed the commission probe and wrote the March 26 report. Rival energy companies such as Dynegy Inc admitted using wash trades to inflate revenue, but not profits.
"These allegations highlight the concerns that many investors have had for some time, that wash trades have the potential to inflate profits," said Paul Patterson, an analyst at Glenrock Associates in New York, who has written several reports on mark-to-market accounting.
Shares of the largest energy traders, including Mirant Corp, Dynegy and Duke Energy Corp, have tumbled since Enron's bankruptcy in December 2001, as credit-ratings services and regulators heightened their scrutiny of the industry's accounting and trading practices.
London-based BP, whose North American business was among the 10 largest traders of natural gas and power in the US last year, was one of more than three dozen companies accused in the energy commission's report of manipulating western power and natural-gas prices in 2000 and 2001.
BP began an internal investigation of the trades after the company was contacted by the energy commission's staff, said Hugh Depland, a BP spokesman.
"We were unable to come to a conclusion that there was any market manipulation on the part of our traders," Depland said.
Shares of BP have fallen 33 percent in the past year.
Several companies, including CMS Energy Corp, Dynegy, Williams Cos and Reliant, a unit of Reliant Resources Inc, have admitted making wash trades, mostly in an attempt to boost revenue and the number of transactions to appear busier and more successful than they really were, according to the commission's report.
Though the commission has no rules against wash trading, the practice "is viewed as damaging to the integrity of a market," the report said. Wash trades were "commonplace" on Enron's Internet-based power exchange, EnronOnline, the report said. Wash trades would violate the commission's rules if they were used to manipulate prices.
In an order March 26, the energy commission said BP and Reliant faced losing their power-trading licenses if they can't prove their actions didn't violate the Federal Power Act, which governs wholesale power transactions.
The BP trader's alleged actions might also constitute fraud, because the wash trades were done with an intent to artificially inflate profits, said Alan Bromberg, a professor of corporate and securities law at Southern Methodist University's Dedman School of Law.
In an interview, Gelinas said the transactions were being scrutinized by another federal agency, though he declined to say which one. The commission is cooperating with the US Securities and Exchange Commission, the Department of Justice and the Commodity Futures Trading Commission, he said.
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