Long Island Lighting Company Business Information, Profile, and History

History of Long Island Lighting Company

Long Island Lighting Company (LILCO) supplies electric and gas service in Nassau and Suffolk counties and the Rockaway Peninsula in Queens County, all on Long Island, New York. The company serves approximately 2.8 million people in an area of 1,230 square miles. As a utility, LILCO has played an indispensable part in the economic growth of Long Island. At the same time, this investor-owned company has been embroiled throughout much of its history in a succession of disputes over rate increases, environmental issues, and other concerns that have buffeted its fortunes and threatened its stability. With the settlement in 1989 of a protracted controversy over a nuclear power plant, LILCO sees itself headed for new financial health.

Long Island Lighting Company traces its genealogy back to the offices of E.L. Phillips and Company, located in 1910 on the 16th floor of a new skyscraper at 50 Church Street, New York City. Ellis Phillips, born in 1873 in western New York, held degrees in both mechanical and electrical engineering. He had worked for Westinghouse, Church & Kerr, one of the largest engineering and construction firms in the United States, and advanced to become head of design and construction for the company, but in 1904 he left to set up his own engineering consulting and contracting firm. Under the patronage of J.P. Morgan, Phillips also served the New York Stock Exchange as a utilities analyst.

As Phillips worked throughout New York, New Jersey, and Pennsylvania, he noticed many small electric light companies in need of more transmission lines and greater operational efficiency. Seizing an opportunity near his boyhood home, Phillips linked four communities together by forming the Genessee Valley Electric Company. Part of the capital for this endeavor was supplied by George W. Olmsted of the J.C. Curtis Leather Company in Ludlow, Pennsylvania. Olmsted and Phillips were business acquaintances, and as partners they soon sold Genessee to a larger adjacent company.

In similar fashion, the partners purchased small electric companies in Percy and Warsaw, New York, and sought to develop them into a larger enterprise. Over two decades they made many other acquisitions, creating the New York State Electric Corporation. Further growth transformed this firm into the Rochester Central Power Corporation. Simultaneously, Phillips and Olmsted sought like opportunities on Long Island, where Clarence R. Dean, a supplier of generating equipment, became a valued source of information on many local electric companies.

On the last day of 1910, the Long Island Lighting Company was organized. The new company merged four small Suffolk County utilities: the Amityville Electric Light Company, the Islip Electric Light Company, the Northport Electric Light Company, and the Sayville Electric Company. On June 1, 1911, the New York Public Service Commission (PSC) allowed Long Island Lighting to begin to function. Five directors--including Phillips, Olmsted, and Dean--were authorized to issue $300,000 of common stock and sell $295,000 in bonds. Phillips became general manager at a salary of $200 per month. By the end of 1911, LILCO had grossed $70,000 serving 1,048 accounts. The company's business was conducted by four officers, four general office workers, and 34 other employees.

As revenues grew steadily, LILCO made rapid improvements to its system for generating and delivering electric power. New turbines were constructed and older ones relegated to standby or emergency status. In 1915 the company acquired the Babylon Electric Light Company. Two years later it added the Suffolk Gas & Electric Light company and the South Shore Gas Company to its holdings. The company charter was amended in 1917 to provide coverage for all villages and towns in Suffolk County plus parts of adjacent Nassau County.

During World War I, LILCO made a special effort to supply electric service to the U.S. Army's Camp Upton in Yaphank. By the time of the arrival of the first draftees in September 1917, the company had installed four transmission lines, a main distribution ring, and a substation to provide the new soldiers with the electrical comforts of the day.

In 1918 LILCO established a centralized billing service from an office in Bay Shore, and meter reading became a continuous task, with two readers working six days a week. Further acquisitions immediately followed the war: The Huntington Light & Power Company, the Huntington Gas Company, and the North Shore Electric Light & Power Company were all bought in 1919.

A major gas explosion at the Bay Shore works in 1919 interrupted service for three days. The accident pointed to the need for upgrading facilities and improvements followed. Major acquisitions continued through the 1920s and so did projects to buy land and build gas works and power plants. The company set as its goal the accumulation of all its holdings into one company, simplifying rates, and standardizing operations, but also creating a monopoly. By 1925, with Long Island experiencing a real estate boom, LILCO was in a very favorable position. Loans were readily available, and 97% of all stockholders regularly attended meetings.

Still, the public was not entirely satisfied with LILCO's performance. A group of consumers who had first organized to oppose a rate increase by the Long Island Railroad moved against LILCO in 1927. They presented a petition for a rate decrease to the Public Service Commission. The petition failed, but the PSC initiated comprehensive audits of LILCO and all other utilities in New York. Simultaneously, the state legislature established a committee to investigate the utility business.

Over the next decade, LILCO officers spent a good deal of time in hearings, confronting new regulations, and opposing rate cuts. In 1930 a series of hearings began that subjected the company to intense scrutiny. Nearly every aspect of LILCO's business was examined, including salaries, dividends, legal fees, contracts with E.L. Phillips and Company, and construction costs.

In response to this negative publicity, the company inaugurated a community responsibility program in 1932. The company developed display models of its electric system, produced a movie about itself, and promoted tours of its facilities by school groups and clubs. Employees were encouraged to participate in a variety of activities such as cooking schools, light demonstrations, and an employee orchestra.

In 1938 and 1944, hurricanes tested LILCO's ability to cope with severe natural disasters. On September 21, 1938, a hurricane, preceded by ten days of rain that softened the ground considerably, caused damage estimated at $500,000 to LILCO's equipment. Most service in Nassau County and 85% of service in Suffolk County was restored within four days. In September 1944 another hurricane knocked out 91% of LILCO's system. Most power was restored in about 12 days, aided considerably by LILCO's use of Nassau County's police radio network.

In the wake of this storm LILCO installed its own radio system. There were other changes in the 1940s, too. During World War II the company was forced to abandon its policy of not employing married women, as many single women resigned to marry men in military service. As restaurants closed during the war, the company also decided to open its own cafeterias. The first one, in the Mineola office, served lunch at cost.

Ellis Phillips retired as chairman of the board in 1945. His position was not immediately filled, but Edward F. Barrett, later to serve as chairman, was named chief executive officer.

As World War II came to a close, LILCO's service area was still not much more than a conglomeration of small towns, large estates, and vacation retreats amidst miles of farmland. Long Island's greatest period of growth, spurred by the migration of thousands of returning veterans and their new families to hundreds of bedroom communities such as Levittown, was just about to begin. LILCO positioned itself to meet this challenge by building new facilities, constructing new main lines, and establishing a connection to Consolidated Edison, its corporate neighbor to the west. All New York State power systems, in fact, were interconnected by 1948, a cooperative arrangement that played a key role in the great blackout of 1965.

In 1945 the company sought permission from the Securities and Exchange Commission (SEC) and the PSC to effect a corporate reorganization by bringing most of its subsidiaries into a consolidated Long Island Lighting Company. It was not until 1950, following many negotiations and preliminary decisions, that the reorganization gained final approval.

LILCO's managers continued to look ahead. In 1952 a 60-acre tract in Hicksville became the site of a new central headquarters housing facilities for system gas and electric controls, line crews, warehouses, repair shops, automotive maintenance, training classes, and, later, administrative offices. The company also established an equity annuity plan to supplement the fixed benefits paid retirees since 1937. In 1953 the state granted LILCO a 3.5% rate increase, the first general electric rate boost in the company's history. At the close of 1954 LILCO joined Atomic Power Development Associates, composed of 43 companies looking for practical ways to use atomic materials to generate electricity.

While safe and inexpensive nuclear power remained a goal, the company continued to cope with other aspects of its business. Three hurricanes in 1954 caused severe damage and added $1.4 million to the year's operating expenses. In 1957 plans were made to purchase land in Northport for what would become the largest power station in the country. By 1959, when Ellis Phillips died at 85, LILCO's residential customers numbered more than half a million and annual revenues topped $100 million. Peak load electric use passed one million kilowatts in 1960, the same year that saw the number of customers using gas heat jump to six times what it had been just a decade before.

President John J. Tuohy announced LILCO's intention to build a nuclear power plant on Long Island at a stockholders' meeting in April 1965. A year later the company bought 450 acres in the north shore village of Shoreham for a 540-megawatt plant estimated to cost between $65 million and $75 million. A proposal to construct a second nuclear facility in Lloyd Harbor led to the creation of a citizens' group in opposition. Their study, completed in 1969, branded both plants uneconomical and unsafe.

The Lloyd Harbor proposal was withdrawn, but LILCO pressed on with Shoreham. In fact, when the demand for electricity increased in the summer of 1968 at twice the anticipated rate, the company redrew its plan and proposed an 820-megawatt plant. By September 1970, when federal construction permit hearings began before the Atomic Energy Commission--precursor of the Nuclear Regulatory Commission (NRC)--citizen awareness of environmental hazards had grown considerably. In addition, the federal Environmental Policy Act of 1970 forced developers to guarantee that their projects would do no ecological harm.

The hearings set records for length and complexity: 100 witnesses were heard in 70 sessions, 401 legal briefs were filed, and 20,000 pages of transcripts resulted. Three issues became paramount: the environmental impact of the plant's construction, safety measures in case of an accident, and the effects of radiation. The opposition also raised a new concern--how Long Island would be evacuated in the event of an emergency. The Atomic Energy Commission ruled that this issue need not be addressed until Shoreham applied for an operating license, and on April 12, 1973, the commission granted LILCO a construction permit.

Before construction began, however, the Organization of Petroleum Exporting Countries (OPEC) oil embargo drove petroleum prices skyward, and consumers conceded the need for alternative energy sources. LILCO had converted most of its plants from coal to oil in the 1960s and, due to the fast-rising price of oil, raised its rates 13 times in 12 years to offset rising costs. Every time rates were increased, however, demand dropped, and the company's fiscal woes deepened.

The price tag for completing the Shoreham plant, which ran well behind schedule, jumped to $1.2 billion by 1977. LILCO blamed most of the cost overruns on increased federal regulations, but outside studies pointed to poor supervision and abusive labor practices as well. The company took over design and construction responsibilities from an outside firm, but costs continued to rise.

The March 1979 accident at the Three Mile Island nuclear reactor in Pennsylvania delayed the NRC's consideration of an operating license for Shoreham. It also stimulated the anti(c)Shoreham faction and crystallized the debate around the evacuation issue. With the threat of a nuclear accident now a demonstrated possibility, the fate of Shoreham was thrown into mainstream politics on Long Island and throughout New York state. Governor Hugh Carey and Nassau County Executive Francis T. Purcell continued to support the project, as did The New York times and Long Island's Newsday. The estimated cost of completing the plant continued to rise, to $4.6 billion by 1986, an increase of more than $1 million a day between 1981 and 1986.

After Three Mile Island, the NRC required all nuclear plant operators to develop an evacuation plan in conjunction with local and state government. Suffolk County officials clashed with LILCO over virtually every aspect of the proposed plan, and eventually the county ended attempts to come to an agreement. One by one, county leaders dropped their support of the plant. County Executive Peter Cohalan, once in favor, changed his mind when he attempted to visit the plant site and found the gates locked. In February 1983 the county's legislature voted 15 to 1 that it believed Suffolk County could not safely be evacuated, a position bolstered by the support of Governor Mario Cuomo. In office only a month, he ordered state officials not to sanction any emergency response plan sponsored by LILCO.

The company's general financial health declined gravely during this crisis. Bond-rating agencies downgraded LILCO's bonds, and bankruptcy became a possibility. Critics accused the company of pushing ahead for an operating license for Shoreham simply to begin charging customers for the construction. Nevertheless, the plant neared completion. In August 1983, however, LILCO discovered cracks in the crankshafts of all three back-up diesel generators, two of which would be needed to shut the plant down in an emergency. The following January, the company's directors voted to withhold payment of $26.2 million in county and local property taxes to protest opposition to the plant. With the crisis at its height, LILCO's president, Wilfred O. Uhl, retired, and its chairman, Charles Pierce, was replaced by board member William J. Catacosinos, a computer-industry entrepreneur with little experience in utilities. Catacosinos commenced a massive austerity program, including cutting 1,000 jobs from a 5,900-member work force, but stood by Shoreham resolutely.

The fight dragged on, and LILCO persisted against considerable opposition from government, the public, and the local business community. The company completed construction in 1984 without fanfare and repaired the generators, even installing a second back-up set. The NRC in July 1985 approved operation at 5% of capacity, a low-level test prior to final licensing. LILCO's position got a sudden and unexpected boost when Peter Cohalan, fearful of financial ruin for Suffolk County, dropped his opposition in exchange for receipt of the company's back taxes.

The public rejected Cohalan's reversal and paid little heed as LILCO employees simulated a successful evacuation of the area within a 10-mile radius of the plant. Whatever credibility this drill might have engendered, however, had been lost in September 1985, when Hurricane Gloria knocked out electricity to 750,000 customers. LILCO took more than a week to restore power during which time Catacosinos absented himself from Long Island.

Support grew slowly in New York state for a bill to create the Long Island Power Authority (LIPA) to take over LILCO and close Shoreham. Some legislators backed the bill because of LILCO's increasingly high rates; others were convinced by the Soviet nuclear disaster at Chernobyl that nuclear power could never be safe. The bill passed the New York General Assembly on July 3, 1986, and Governor Cuomo signed it.

LILCO placed its hopes for survival as an investor-owned company with the NRC, which decided in 1987 to relax its rule that government had to participate in formulation of a disaster plan. A week later, the state PSC exerted its fiscal leverage for the first time. It denied LILCO's request for an $83 million rate hike and ordered the company and the state to end their deadlock.

After more than a year of intense negotiations, the disputing parties did just that. The PSC endorsed a wide-ranging settlement in April 1989, and LILCO stockholders approved it that June. Under its terms, Shoreham was fully licensed to operate, transferred to LIPA for $1, and closed. LILCO was granted permission for a series of annual rate increases, targeted at 5% per year, for a ten-year period. The company also settled a lawsuit that Suffolk County had brought under the Racketeer Influenced and Corrupt Organizations (RICO) Act, resumed dividend payments, and refinanced its long-term debt. The fuel rods were removed from Shoreham's reactor vessel in August 1989, and the plant stood idle. The cost of absorbing the Shoreham debt pushed LILCO's rates to the highest of any utility in the country.

LILCO seemed to recover some fiscal stability in the wake of the settlement. The price of its common stock rose, and it sold a $1.1 billion offering of debentures. Events in 1990, however, threw the company's future into doubt. Oil prices and inflation rose at rates higher than anticipated, threatening the adequacy of the proposed 5% annual rate increases. As the international situation in the Persian Gulf deteriorated in late 1990 and early 1991, LILCO requested rate hikes for the next three years with certain adjustments that would keep the 5% ceiling intact, thereby forestalling what would likely be another long and divisive controversy.