Exelon’s proposed $7.9 billion purchase of Constellation is either the end of an era in electricity trading, or the beginning of “power markets 3.0.”
Consensus remains elusive on the meaning of the deal within the industry, in which a one-time high-flying East Coast power company that sought to change the way the electricity industry operated is being acquired by a Midwestern power company giant built on large-scale, regulated baseload generating capacity.
Initial reactions to the deal largely painted it as the end of the era of power trading typified by Enron and other large power marketers that saw power plants as little more than “a basket of options”.
Traders place hedging bets based on power market moves that could maximize returns from the fixed costs of large power plants. Exelon has traditionally done power trading but traders said they have traditionally focused on “at the money” put options that allow them to sell power at a fixed price but themselves provide little further opportunity for income. The company focused on its ability to post smaller margins in hedging when presenting its merger plans.
Exelon’s acquisition of Constellation’s consumer-facing unit was cited by investment bank analysts as a good fit for the firm, diversifying it across the delivery chain in electricity from power plants into the home and shoring up its position as electricity competition at the domestic level continues to be steadily implemented in many US power markets.
The deal was largely painted within the industry as a final surrender by Constellation, which had suffered huge losses in electricity trading and was struggling for direction after a failed bid to build a new nuclear reactor unit at Calvert Cliffs. The new merged company will be based in Chicago, and current Exelon President and COO Christopher Crane will become President and CEO of the merged power company, which will have reach across much of the Eastern half of the US.
Since the merger was announced on April 28, however, a second strain of interpretation has emerged among power traders and bank analysts waiting for the deal to go through extensive regulatory overview.
“Exelon bought this firm in part because they wanted to pick up the trading group,” a broker for a large power trading firm told Breaking Energy. “This is not some final ‘discrediting’ of the trading model.”
Constellation’s power trading unit has a core of former investment banking traders now based in Baltimore, and those traders have been creative in trading around the Maryland firm’s assets.
“Constellation has done a good job, despite occasional cash shortages and missteps, in trading around their assets,” the broker said. “Exelon wasn’t doing a sophisticated job of selling their electricity, [because] they didn’t have the expertise.”
With customers increasingly paying for power based on an index, utilities accustomed to operating on a cost-plus regulated model are increasingly under pressure to actively trade around their power plant and transmissions assets in order to boost and protect income.
With the addition of Exelon’s large base of power plant assets to place hedge on, power traders expect liquidity to increase in power markets that have sometimes struggled to grow trading volume since the collapse of Enron in 2001 and the resulting slow-down on regulatory moves to open power markets.
Exelon’s decision to keep the merged company’s power trading unit in Baltimore is a sign of the acquiring company’s new commitment to a more-active hedging strategy, traders at Constellation argue.
“Exelon’s Power Team will be combined with Constellation’s wholesale and retail business under the Constellation brand and will be headquartered in Baltimore,” Exelon said in announcing the merger.