For some time I've suggested that there was a high risk of throwing out the baby with the bathwater in the aftermath of the Enron debacle, at least as far as energy trading was concerned. It seems that at least a few companies saw it the same way. Last week's Economist profiled Constellation Energy, formerly Baltimore Gas & Electric, which has been busily expanding its energy trading so that it now accounts for the largest slice of the firm's revenue and profits.
As the article indicates, the enormous uncertainties in the primary energy markets, particularly natural gas, combined with continued deregulation at the wholesale electricity level create both a need and compelling argument for sophisticated risk management products that can only be offered by energy traders with a deep "book"--one that can make up for gaps in market liquidity.
I still wonder if the stock market truly understands how to value a company that has much of its flows made up of this kind of activity. While accounting rules have been tightened post-Enron, do P/E ratios for such firms reflect the unique risks and rewards inherent in energy trading?