Gambling on power to burn, and sell

Constellation unit rises to forefront in marketing industry

February 27, 2000|By Shanon D. Murray | Shanon D. Murray,SUN STAFF

In the glass-encased trading floor at Constellation Power Source's Inner Harbor offices, up to 120 traders work round the clock buying and selling orders as they sit glued to computer monitors.

But instead of stocks, bonds or pork bellies, they are trading blocks of electricity, putting 3-year-old Constellation Power Source at the forefront of a new industry.

Constellation Power is a subsidiary of BGE parent Constellation Energy Group, and is advised by an affiliate of Goldman Sachs Group Inc.

Power marketing is the business of agreeing to sell electricity to utilities, municipalities and other bulk customers at a set price while trying to make it or buy it for less from another source. Because electricity cannot be stored and is priced by the hour, price fluctuations can be extreme, exposing the company to huge risk.

A megawatt-hour of electricity -- enough to power 1,000 homes -- could sell for $30, but the price could skyrocket to more than $1,000 or more when demand spikes, typically during a heat wave.

For a power marketer that is locked into a fixed-price contract, the impact could be disastrous. There have been instances where some companies have defaulted on contracts and others have left the business.

Nonetheless, Constellation Energy Group has embraced power marketing as a key component of its post-deregulation business strategy to become a major power provider.

"Electricity is a real-time commodity," said Charles W. Shivery, Constellation Power Source's president and chief executive officer. "A trader does not have the ability to take it and hold on to it, and it's very volatile pricewise. But the less risk, the less growth potential. We're building an energy business in an uncertain time."

Constellation Power has been successful. It has become a major contributor to its parent's bottom line, adding 23 cents per share to earnings last year, up from a contribution of 5 cents per share in 1998.

"In three years, we're very happy with our progress," Shivery said. "We're beginning to get a good reputation in the marketplace."

Analysts agree, saying Constellation Power has distinguished itself as a major player in the $200 billion power marketing industry that promises to expand.

"Based on what Constellation Power has done so far, it seems like it is well-suited for power marketing," said Matt Stith, an analyst with First Union Securities in Richmond, Va.

"The strategy seems to be working, but it's an evolving industry. It'll take many years for it to become a sophisticated market."

A 1996 Federal Energy Regulatory Commission rule ordering utilities to open their transmission lines to competitors sparked the power marketing industry.

Now, hundreds of utilities and power companies can use transmission lines throughout the country to deliver power from one region to another to make good on their power marketing contracts. Constellation Power Source's top competitors include Enron Corp. in Houston and American Electric Power in Columbus, Ohio. Other utilities such as Charlotte-based Duke Energy and Atlanta-based Southern Co. have joined the fray.

Constellation Power Source isn't the biggest power marketer, but it is among the fastest growing.

In 1997, the company traded 3 million megawatt hours, 27.6 million in 1998, and 69.8 million last year, jumping from No. 57 to No. 11 nationally, according to Power Markets Week, a national newsletter and authority on the deregulated electricity industry.

PHB Hagler Bailly, a Washington energy consulting firm, named it the best power marketing company of 1999.

Constellation Power Source has been effective because of its affiliation with Goldman Sachs, Stith said.

"Goldman Sachs has brought in its expertise, and has helped Constellation Power establish its trading operation," he said.

Stith said some utilities haven't been as fortunate as Constellation Power Source.

During the summer's heat wave, Cincinnati-based Cinergy Corp. defaulted on a number of power-marketing contracts when heavy demand left the utility short of power. The ordeal cost Cinergy $73 million. During the summer of 1998, volatile prices also lead to losses of $225 million for LG&E Energy Corp. of Louisville, Ky. The company shut most of its trading operations.

The two utilities erred because they did not have the generating capacity to meet the needs of their customers and their power-marketing contracts, analysts said.

As of July 1, Constellation Power will be insulated from such a squeeze. That's when Constellation Energy Group is due to transfer its $1 billion in power plants from Baltimore Gas and Electric Co. to a newly created subsidiary which will supply Constellation Power with electricity. Also, Constellation Power said it has plans to build an additional 3,000 to 5,000 megawatts of electricity in the next three to five years.

"When you have a lot of electricity supply, you have a lot of opportunity," Shivery said.

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