BGE sees marketing power as its future Subsidiary: Constellation Power Source, BGE's venture with Goldman Sachs, aims to be a big earnings winner in the changing utility industry.


On the east side of downtown, two buildings sit side by side, one holding Baltimore Gas and Electric Co.'s past and the other its probable future.

One masks a power relay station that pumps energy generated in BGE plants throughout the city, a fixture of its past. A decade ago, the utility considered developing a 23-story skyscraper above it, but those plans have long since evaporated.

By contrast, across a narrow alley called Concord Street in the 12-story Candler Building, BGE is putting the finishing touches on the high-tech offices of a new subsidiary. Utility executives are banking that Constellation Power Source Inc., formed by BGE and New York investment house Goldman, Sachs & Co. to broker power deals with other utilities and municipalities nationwide, will be a key to its ability to compete in the fast-changing electric industry of the future.

"As deregulation of the electric industry takes hold, we're looking at our nonregulated subsidiaries to supply a greater share of earnings," said Edward A. Crooke, BGE's vice chairman and the head of the utility's unregulated operations. "And we view this as being at the vanguard of our nonregulated activities."

BGE is hardly alone. Power companies across the country have set up marketing operations to take -advantage of industry deregulation, competition-squeezed prices and regulatory mandates ordering utilities to shed electric generators.

But unlike competitors like Houston-based Enron Corp., BGE believes Constellation's edge stems from its alliance with Goldman Sachs, a firm whose prowess in commodity trading is virtually unsurpassed on Wall Street.

"We know a lot about the physical side of the energy business," said Charles W. Shivery, Constellation Power's president and chief executive, who gave up a job as BGE's chief financial officer to head the subsidiary when it was created in February 1997.

"We know how to generate electricity and we know how to transmit it. But we didn't know a lot about the financial side."

The opposite was true for Goldman Sachs.

"We knew if we made a mistake we could black out New Jersey, which generally speaking would be considered a bad thing," said Timothy J. O'Neill, a managing director at Goldman Sachs, which advised BGE on its ill-fated merger with Potomac Electric Power Co. "So we knew we'd better find someone who knew what they were doing."

Together, they appear to make a solid fit.

And in fact, Constellation's new home houses a trading floor that looks nearly identical to those at Legg Mason and BT Alex. Brown -- young brokers with phones glued to their ears and eyes glued to computer screens, speaking in a language all their own. The difference: instead of stocks and bonds, Constellation trades power.

The benefit could be enormous. Some $200 billion worth of power is traded annually. Constellation, ranked as the 27th largest power broker, dealt about $600 million worth of energy last year, though it expects to double that figure this year.

To meet that goal, Constellation expects to hire 25 people by the end of the year, raising its work force to 85. Within three years, BGE executives predict, the power marketing group could have as many as 300 employees.

But Constellation will face uphill battles, according to analysts.

"There are about 150 power marketers in the country now, and many of them started before BGE," said Ronald S. Tanner, a Legg Mason Wood Walker Inc. utility analyst. "The business has huge potential but razor-thin margins. So, to be successful they've got to be huge. But, given Goldman's experience in making money, they should have an edge."

"It's a big part of [BGE's] strategy, but it'll be at least several years before it makes a dent in their earnings," Tanner added. "It's a good strategy, but it's a long-term strategy."

Both BGE and Goldman acknowledge that Constellation is a "work in progress," but contend that marketing power -- rather than generating it and sending it through substations like the one just outside their offices -- will ultimately be more lucrative.

"It's absolutely critical that we be viewed as a company that has its customers' long-term interest at heart," Shivery said.

Pub Date: 5/21/98

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