Do Trading and Power Operations Mix? The Case of Constellation Energy Group 2008

73 Pages Posted: 11 Nov 2008 Last revised: 4 Nov 2014

See all articles by John E. Parsons

John E. Parsons

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: November 7, 2008

Abstract

Constellation Energy has been a leading performer in the merchant power business since 2001. In addition to its legacy utility, Baltimore Gas and Electric, Constellation is a merchant generator and a wholesale power marketer serving the load of utilities as well as industrial, commercial and retail customers. Constellation has developed sophisticated risk management capabilities and a large trading operation in electric power and related commodities. In a recent reorganization, Constellation gave its trading operations greater organizational independence and prominence. It also increased the scale of its proprietary trading, and used its trading operation as the tool for expanded investments into upstream natural gas and coal and international freight. In August and September of 2008, Constellation experienced a major liquidity crisis that saw its stock price fall by nearly three-quarters. In an emergency search for cash, it was forced to agree to sell itself at the low price. This paper reviews Constellation's history and the specific events precipitating its liquidity crisis. It then places Constellation's strategy vis-a-vis its commodity trading operations in the context of the larger history of commodity trading operations and discusses the key financial and strategic questions posed by Constellation's crisis.

Keywords: Electricity trading, liquidity

JEL Classification: G31, G32, G33, G24, L94

Suggested Citation

Parsons, John E., Do Trading and Power Operations Mix? The Case of Constellation Energy Group 2008 (November 7, 2008). Available at SSRN: https://ssrn.com/abstract=1299643 or http://dx.doi.org/10.2139/ssrn.1299643

John E. Parsons (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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