he turmoil in the deregulated electricity industry worsened yesterday after Reliant Resources, a big independent power producer and trader, canceled a $500 million bond sale amid questions about whether all of its trades are real.
Reliant revoked the sale after disclosing that it had bought power from another company while simultaneously selling the same amount back to the other company. Such a transaction might not change Reliant's profits or losses, but it could increase its reported trading volume, an important measure of the company's health.
The Securities and Exchange Commission is investigating two similar sets of trades between CMS Energy and Dynegy, two other energy trading companies.
Reliant, which priced its bond sale on Thursday, said it canceled the deal to quantify the matched trades and assess their effect.
Unlike traditional utilities, which are regulated monopolies with a limited service area, independent power producers can build plants and sell electricity anywhere. While utilities serve consumers directly, independent power companies generally trade power with one another or sell it into the wholesale market, where the buyers are utilities and a few big companies. In addition, many of the independent power producers also produce and trade natural gas.
Reliant's announcement deepened investors' worries about questionable accounting and business practices at the independent power producers. Earlier this week, federal regulators disclosed internal documents from Enron that appeared to show that Enron had manipulated electricity prices in California and ordered other power traders, including Reliant, to disclose whether they used strategies similar to Enron's.
Shares in Reliant, Dynegy, the Williams Companies and other big independent power producers and traders skidded yesterday after Reliant's announcement, worsening a yearlong slump.
Reliant fell $2.49, or 17.2 percent, to $12, while Dynegy dropped $1.17, or 10.6 percent, to $9.88. Williams fell $1.01, or 5.8 percent, to $16.49. Williams and Reliant have fallen about 60 percent in the last 12 months, while Dynegy is off more than 80 percent.
Companies that produce and trade power and natural gas are "in very deep trouble right now," said Paul Joskow, a professor at the Massachusetts Institute of Technology and an expert on electricity deregulation.
Investors have found that the risks in producing and trading power are higher and the potential for profits lower than they had hoped, Mr. Joskow said. "On the electricity side, Wall Street was overestimating the kinds of margins that could be made in this business in the long run," he said. Investors "way overestimated their inherent values."
But Mr. Joskow said shareholders' current fears might be damaging good businesses as well as bad. Many of the companies, including Mirant and Calpine, are mainly power producers, not traders.
"They're not just trading companies, and I think there's just an awful lot of misunderstanding about what their businesses are and what their future prospects are," he said.
James Chanos, whose hedge fund has sold short shares of several companies in the sector, hoping to profit if their prices decline, said power trading was much less profitable than the companies had told investors. To inflate their profits on long-term contracts, he said, many energy trading companies appear to have made dubious assumptions about future power prices.
"The business model just doesn't work," Mr. Chanos said. "You can't put a multiple on these reported earnings because they're not believable."
Reliant offered only the sketchiest details of its trades yesterday, saying that the disclosure of the Dynegy trades, which were reported on Thursday in The Wall Street Journal, had prompted the company to examine its own trading practices. Reliant said it "believes it had similar transactions and is working to quantify the amount and assess the impact of those transactions."
Reliant, already the subject of an inquiry by the S.E.C. because of an earnings restatement the company made earlier this year, did not identify the executives who knew about the trades or its trading partner.
Reliant and other companies "face a crisis of confidence among investors and the consuming public," said Jay Dobson, an energy analyst at Deutsche Bank Securities. "I'm not sure anything they did is illegal, but that's irrelevant. People out there are throwing up volumes and trying to look bigger than they are. The deregulated electricity market has to be transparent to be effective."
Already, some energy trading companies are having a difficult time making long-term trades, because their credit ratings have fallen below investment grade. They must settle trades over a few days or months, rather than years.
"If you take it to the nth degree, that crisis of confidence could derail deregulation," Mr. Dobson said.