While convincing and collecting thousands of power supply customers over the last two years as other power marketers exited the business, Constellation Energy is still struggling to impress the ratings agencies, which appear to be operating on the principle that “all trading is bad” and no participant in the deregulated market deserves an “A” rating.

“Across the industry that has been the driving force as to why so many traditional utility players ended up exiting this business” and focusing on the basic regulated sphere, said Constellation Energy Chairman Mayo A. Shattuck III in a conference call last week explaining the company’s trading operations.

While the industry has been working on educating the ratings agencies, Shattuck believes it will take time to bring them around. “They are still running scared from the end of ’01 and early ’02.” He is pushing for them to include input from more bank analysts into utility analysis “to teach them more about the kind of assets and liabilities that we put on our balance sheet.”

Meanwhile, although Standard & Poor’s (S&P) dropped Constellation’s rating to BBB earlier this year, it hasn’t affected the company’s financing or trading. Shattuck said the downgrade was the result of “a directive from senior people at S&P that ‘no participant in a deregulated market is going to get an A out of us.'”

Constellation, very much a physically oriented trader, maintains “a vastly more conservative balance sheet posture than banks, and yet our hedging strategies and way we run risk operations are virtually identical,” said Constellation CFO Follin Smith. Since the company runs a conservative book that is largely hedged and very balanced, “it would take multiple downgrades” to affect the way the company does business.

The fact that other utilities have exited the trading business has meant increased business for the company’s wholesale sales unit, Constellation Power Source, and its retail marketing arm for commercial and industrial customers, Constellation NewEnergy. The number of customers has grown from about 3,000 in 2002 to more than 8,000 today, and Constellation now is “the largest competitive supplier in North America,” according to Thomas V. Brooks, president of Constellation Power Source.

“We have fewer competitors than we had five years ago and demand has continued unabated,” Brooks said. Constellation listed its main competitors in the physical market as Dominion Clearinghouse, Entergy-Koch, Select Energy and Sempra Energy Trading. The main financial players are Goldman Sachs and Morgan Stanley.

Constellation does not regard the financial players, strictly speaking, as competitors, but uses them to lay off risk. While not directly adding liquidity to the physical power trading market, the financial players, nevertheless, enable liquidity by taking over the risk of traders focused on the physical market such as Constellation. “What we do depends on the ability to have counterparties out there to lay off the risk. We’re not in the business of taking huge risk positions on ourselves,” Brooks said.

The large number of customers allows the company “to aggregate the components of a full-requirements, load-serving product more efficiently and at a lower cost. The large base also reduces the overall impact of any one market event.” The Constellation marketing operation has capitalized the risk management base gained during its years in partnership with Goldman Sachs, which it bought out in 2001, and now claims to operate “a leading risk management platform.”

The company sees itself as “an intermediary, structuring the products our customers need,” Brooks said. Constellation, which has some operations in natural gas, is looking to expand in that area and in coal where it sees substantial opportunities. It describes the power and natural gas market as a $325 billion market.

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