[BETA] Fortnightly

A MASSIVE, WORLD WAR I-era building in downtown Baltimore houses Constellation Power Source, an unregulated, wholly owned power-marketing subsidiary of Baltimore Gas and Electric Co. Upon introducing the new company in February, BG&E announced that Goldman Sachs would serve as "exclusive advisor" for the start-up.

Later, when asked to clarify the relationship between the two companies, Charles W. Shivery, chair, president and CEO of Constellation Power Source, acknowledged that, "We always get asked this question and it's covered by a whole set of confidentiality requirements."

Constellation Power Source he explained, has an "exclusive advisory and risk management relationship" with a Goldman Sachs subsidiary, Goldman Sachs Power. "The benefit we get is that Goldman Sachs Power has a lot of experience in trading commodities and they have a lot of experience in managing risk associated with trading those commodities. We have a lot of experience on the physical side of electricity1/4 What we've really done is melded the core competencies together1/4 into a company that brings together the best of those worlds."

Constellation Power began trading long-term electricity in May, when it received its wholesale power marketing license from the Federal Energy Regulatory Commission. CPS is just getting into the hourly and daily markets, Shivery explains, during a tour of the company's temporary electricity trading floor. (A move to permanent quarters in the Inner Harbor area is set for January.)

Constellation Power's efforts marks just one example of evolving commodity markets in electricity. As the power market grows from regional to national in scope, utilities turn increasingly to spot traders, brokers and futures trading, just as the natural gas industry did a decade ago. Some utilities are setting up separate, unregulated subsidiaries to do their power marketing. Others are simply adding electricity trading floors to their regulated business, which, it can be argued, is a natural outgrowth of the dispatch center.

Part of a New Culture

BG&E's gas marketing subsidiary, Constellation Energy Source, migrated into the marketing and trading arena three or four years ago, Shivery says, but its gas trading floor will remain in Houston for now. Although gas and electric deals exhibit certain obvious physical differences (em primarily the lack of storage capability for power (em the two do share similar "philosophical" issues, he notes. "The ability to price gas and manage the risk associated with gas is conceptually the same as managing the risk of any commodity1/4 except the database for electric is not anywhere near as lengthy or complete as the database for gas."

Cynthia Kase, a former oil trader who teaches technical trading, derivatives and risk management courses, confirms that assessment. Kase, who publishes GasFax, a weekly analysis and forecast report for the natural gas industry, notes that the gas futures market is liquid, actively traded and has a statistical base to watch. Electricity, on the other hand, represents a new contract with limited activity. Most electric markets don't even deal in futures contracts.

The "real dividing line," she says, lies between East and West. There is no transparent pricing in electricity (em no East Coast trading hub,