Peco Energy Company Business Information, Profile, and History

History of Peco Energy Company

PECO Energy Company ranked among America's top 25 electric and gas utilities in terms of annual sales in 1994. With a service area of 2,475 square miles in southeastern Pennsylvania, including the city of Philadelphia, the company serves over three million customers. Known as Philadelphia Electric Company for most of the twentieth century, the utility changed its name to PECO Energy Company in 1994: it had long been referred to by the acronym. In the early 1990s, PECO prepared for a less regulated electric industry with a corporate reorganization.

The Philadelphia Electric Company was incorporated in 1902, but finds it origins in The Brush Electric Light Company of Philadelphia, which was formed in 1881. In 1880, Thomas Dolan convinced ten of Philadelphia's wealthiest entrepreneurs to invest in a company in "the business of manufacturing, procuring, owning and operating various apparatus used in producing light, heat, or power by electricity or used in lighting buildings." The new venture traded a 50 percent share, or $100,000, of its stock for a license of the Brush arc dynamo, an electric generator that was then considered the best way to generate power for lighting.

Electric utilities customarily focused on a particular product, such as street lighting or industrial applications, in the late 1800s. As its name implied, The Brush Electric Light Company was primarily involved in commercial and street lighting. The Brush Company's first president was Henry Lewis, a dry goods merchant who served until his death in 1886. Dolan, who had been treasurer, chairman of the executive committee, and defacto head of the company, assumed the presidency at that time. He deflected early criticism of the Brush's poles and wires, oversaw the construction of its first permanent generating facility, and helped increase the company's capitalization to $1 million to finance construction and expansion.

Throughout this early stage in the history of electric utilities, competition and fragmentation characterized the industry. Within the same city, varying voltages, currents, and frequencies provided by a multitude of companies made it difficult to develop standardized products. Utilities began to consolidate near the end of the nineteenth century to end competition and coordinate service. Brush merged with its most powerful rival, The United States Electric Lighting Company of Pennsylvania, in 1885.

The merged companies secretly formed an "Electric Trust," known more commonly today as a holding company, in 1886. Secrecy was required because of the mistrust in which the public and politicians held such combines. The Trust soon acquired or controlled four more small local utilities, issuing $3.5 million in bonds as financial backing. But, as its existence came to light in the early 1880s, public and media criticism of the "monopoly" intensified. The Trust's "unpopularity stemmed from its very name. Its behind-doors management of the operating companies could never bring it goodwill," according to Nicholas B. Wainwright in his History of The Philadelphia Electric Company, 1881-1961.

Competition hurt Brush as well. Its competitor, the Edison Electric Light Company of Philadelphia, had grown to equal the Trust in profits by 1892. Around the same time, local entrepreneur Martin Maloney reentered the electric industry after a successful gas venture. Maloney hoped to eliminate wasteful competition by consolidating Philadelphia's electric companies and standardizing service. He chartered the Pennsylvania Heat, Light and Power Company in 1895 with a massive capitalization of $10 million and immediately began to acquire competitors, taking over Columbia Electric Light Company and courting the Philadelphia Edison Company. By March 1896, he had merged with Edison and earned a seat on its board of directors.

When Maloney's Pennsylvania Heat acquired the Electric Trust and all its subsidiaries later that year, Thomas Dolan joined its board of directors. Unlike the Electric Trust, Maloney's consolidation scheme proceeded relatively smoothly in part because of a good public perception of his goals, which he stated in his first annual report: "To secure that class of service that would enable the Company to furnish to its patrons electricity under such conditions that they could use it more generally and apply it in many ways that the high prices prevailing prevented, and to demonstrate to the citizens of Philadelphia that a corporation could work for the benefit of the public and its stockholders at the same time." Maloney did, in fact, cut residential rates to below the national metropolitan average.

In 1898, Maloney absorbed five of Philadelphia's eight remaining independent arc lighting companies. A threat to his progress arose the following year, with the formation of the $25 million National Electric Company. This new entity immediately acquired the Southern Electric Light and Power Company, one of the few strong competitors remaining. Maloney negotiated a merger of the two big companies that year. The combination had assets of $19.9 million and net profits of $518,000. The companies incorporated as the Philadelphia Electric Company (PE) in 1902.

Maloney retired and was succeeded as president by 29-year-old Joseph B. McCall, who guided the company through the difficult period of legal, financial, and technical reorganization that ensued. Demand had risen rapidly, and by the turn of the century, it was clear that the utility would need a massive central generating station. When PE's Station A on the Schuylkill River was completed in 1903, it was the largest in the state, generating over 7,000 kilowatts (kw). Although PE standardized much of its service as alternating current, most of downtown Philadelphia, which was served by the Edison division, continued to operate on direct current until 1935 (reflecting Thomas Edison's conviction that alternating current was dangerous). PE moved to a new, larger headquarters at the corner of Tenth and Chestnut streets in Philadelphia in 1907. That location would remain the center of PE operations until 1973.

Many factors encouraged a dramatic expansion of the electric industry during the first two decades of the twentieth century. Larger, more efficient equipment was developed and service areas were expanded to include rural areas. Company-sponsored sales departments promoted appliances like the electric washer, iron, refrigerator, and vacuum cleaner to encourage increased use of electricity. As new applications for electric power developed, demand increased significantly. PE raised its generating capacity to meet this ever-expanding demand: each of the 30,000- and 35,000-kw units installed in 1915 and 1916 had a higher capacity than the entire PE system of 1903 (at 20,000 kw).

After the United States entered World War I the following year, the manufacture of munitions, ships, and steel in the Philadelphia area kept PE operating at capacity throughout the era. The company was often challenged by coal shortages and government rationing during the conflict. A centennial history published by PE in 1981 quoted an employee of the era who affirmed "the sigh of relief" felt at Schuylkill Station on Armistice Day.

By 1918, PE had 103,000 customers, a figure that nearly tripled within five years to 306,000 in 1923. During that period, the electric utility added twelve generators with a total capacity of over 300,000 kw. Joseph B. McCall advanced to the chairmanship of the company in 1924, and was succeeded as president by Walter H. Johnson, who served for four years. Later that decade, PE completed its first hydroelectric project on the Conowingo River in northeast Maryland. The company obtained land and financing, met political and regulatory requirements, and overcame construction obstacles to complete the unit in 1928. With a generating capacity of 252,000 kw, the hydroelectric dam ranked second only to the one at Niagara Falls. That same year, William H. Taylor assumed PE's presidency.

PE recorded another influential event during the prosperous decade of the 1920s; the Pennsylvania-New Jersey Interconnection was created in 1927. This cooperative linked Public Service Electric and Gas Company of New Jersey (which had had a partnership with PE since 1923) and Pennsylvania Power & Light Company (of Allentown) with Philadelphia Electric. The organization took advantage of regular fluctuations in each utility's power requirements to achieve economies of scale. For example, Allentown experienced morning peaks in October due to its coal mining activities, while Newark and Philadelphia scored highs in the December holiday season. The three original members were joined by the General Public Utilities Corporation and the Baltimore Gas and Electric Company in 1956, when the cooperative's name was changed to the Pennsylvania-New Jersey-Maryland Interconnection (PJM). The Potomac Electric Power Company (PEPCO), serving metropolitan Washington, D.C., joined in 1965. The cooperative promoted savings and reliability.

In the early twentieth century, Philadelphia Electric's service area was surrounded by three major electric and gas utility companies under the aegis of United Gas Improvement Company (UGI) (which, coincidentally, had Thomas Dolan as a board member in common with PE). In spite of the general public's suspicion of monopolies, the financial community viewed the consolidation of UGI and PE as ultimately inevitable and beneficial. UGI acquired a controlling stake in Philadelphia Electric in February, 1928, and the two merged on October 31, 1929, adding 1,380 square miles, 88,000 electric customers and 112,000 gas customers, as well as 78,000 kw of electric generating capacity and three gas producing plants to Philadelphia Electric's operations. PE was reorganized into the Philadelphia and five suburban operating and commercial divisions.

The effect of the Depression on Philadelphia Electric was characterized by company historian Nicholas Wainwright as "harassing but not crippling." Net income actually increased in spite of a steady decline in residential and industrial customers. There were no large-scale layoffs; PE relied on attrition to shorten its payrolls. The company was surviving well enough, in fact, that during the depth of the Depression in 1932, it ordered one of the era's largest generating units. The 165,000 kw machine known as "Big Ben" was the first in the country to burn pulverized coal and employ electrostatic emissions reducers. It ran from 1935 to 1977. In 1938, Horace P. Liversidge, who had first been employed by PE in 1898 as a wiring inspector, advanced to the company's presidency. Liversidge has been credited with shaping the company's modern history.

The Depression also brought Franklin D. Roosevelt's New Deal and with it the Securities and Exchange Commission, which regulated the activities of holding companies, in 1935. Electric utilities had been regulated since the 1910s, but holding companies were not regulated early in the twentieth century. Although some holding companies were legitimate structures created to coordinate associated industries, many were precarious "pyramids" of companies. The organizers of these corporate entities could use the combined value of subsidiaries to finance loans, then charge the subsidiaries outrageous rates for the redistributed funds. As the oldest public utility holding company in the world, UGI was reluctant to submit to a breakup order, but by 1943, Philadelphia Electric was once again an independent company. PE retained the suburban gas and electric utilities that had been merged into it in 1929.

World War II once again forced a concentration of manufacturing capacity on war production: Philadelphia produced ships, tanks, and armaments, and PE supplied the power to do so. Before the United States entered the war in December 1941, these preparations were made in addition to normal civilian production. Voluntary and mandatory restrictions on the use of power, as well as curtailment of civilian production, prevented a wartime power shortage.

The postwar era brought a new focus on PE's gas operations, especially after 1948, when the "Big Inch" and "Little Big Inch" interstate pipelines were converted from oil to natural gas transmission. Philadelphia Electric completed its conversion from manufacturing gas locally to purchasing gas produced in the Gulf states in 1964, and even undertook its own exploration and production efforts in the late 1970s.

R. George Rincliffe advanced through the executive ranks to PE's presidency in 1952. He assumed the company's chair and newly created chief executive office ten years later, holding those positions until his retirement in 1971. During his tenure, Rincliffe oversaw the unabated expansion of PE's capacity through a variety of methods, including traditional generators, hydroelectric plants, and nuclear power. The company brought its Eddystone plant, which featured the world's most efficient coal-fired generating unit, on line in 1960. A joint minemouth generation project among members of the PJM to create the Keystone plant in Indiana, Pennsylvania, was undertaken in 1962. Located at the fuel source, Keystone generated power and linked the PJM with other cooperative systems on the National Electric Reliability Council, a U.S./Canada grid which aided in the efficient supply of bulk power throughout North America. Keystone began running in 1967, the same year that Pennsylvania Electric's Muddy Run pumped-storage hydroelectric generating plant (the largest of its type) on the Susquehanna River began operation.

Philadelphia Electric first participated in studies on the feasibility of using nuclear energy to drive power plants as a member of the Atomic Power Development Associates, Inc., in 1952. Then, in 1958, the company joined over fifty other utilities to build a prototypical reactor dubbed Peach Bottom No. 1. It took almost a decade for the unit to go into production, but by that time, PE had committed itself to shares in four 1-million-kw nuclear units. The company regarded nuclear power generation as vital for two reasons. First, during the 1950s, demand for electricity rose sharply due to the advent of television, increased commercial and residential use of air conditioning, and industrial expansion. Second, the federal government established the first stringent emissions controls in 1960. The company reasoned that nuclear capabilities would enable it to maintain standards of service while conforming to clean air and water standards. PE's employment of nuclear energy seemed to be progressing well until 1968, when regulatory and other delays prevented completion of two wholly owned nuclear power plants at Limerick, Pennsylvania, until the mid and late 1980s.

Robert F. Gilkeson assumed PE's helm in 1971 at the outset of a decade characterized by federal, state, and local regulation of virtually every aspect of its business, from employment to environmental practices. Economic fluctuations influenced decisions about capital investment and rate increases. Gilkeson launched a Corporate Communications Department in 1975 to act as a liaison between the utility and the media, government agencies, and the general public. J. L. Everett, III succeeded Gilkeson in 1978, just in time to see Philadelphia Electric's total assets exceed $5 billion for the first time.

PE was faced with another series of regulatory and financial hurdles in the 1980s. The utility suffered one of the most damaging and traumatic episodes in its history when inspectors from the Nuclear Regulatory Commission (NRC) found a control room employee "inattentive to duty," or, as Amy Barrett of Financial World alleged in a May 1990 article, "operators were found playing video games and having rubber band fights in the control rooms" at the Peach Bottom nuclear facility. The plant was ordered closed within 24 hours and remained shut down for over two years. During that time, criticism from the NRC and the influential Institute of Nuclear Power and Operations poured in. Joseph F. Paquette, Jr. was called back to PE after a brief hiatus to accept the chair and chief executive office of the troubled company in 1988. He set out to transform the company by focusing on long-term strategic planning, human resource management, and downsizing.

Over the course of the 1980s and into the 1990s, the Pennsylvania Public Utilities Commission (PUC) executed several policy reversals with regard to Philadelphia Electric, its nuclear operations, and its rates. In 1982, the PUC refused to allow a rate hike to pay for the second phase of the plant and halted the project. Three years later, as Limerick's first phase was nearing completion, the Commission gave PE the green light on Limerick II, but set stringent time and financial limitations on the project. Although the plant came in almost $400 million under budget and nine months ahead of schedule, the PUC refused to increase rates to help cover capital costs, citing "excess reserve power capacity," and thereby implying that Limerick II was inherently wasteful. Earnings in the late 1980s and early 1990s reflected the rate ruling, as per share income plummeted from a high of almost $3 million in 1984 to $2.33 million in 1987 and $0.07 million in 1990. That year, CEO Paquette instituted cost-cutting measures that included an early retirement program, reduced advertising budget, and executive pay cuts of two percent to ten percent. Paquette himself took his second salary cut that year.

These cost-cutting efforts bore fruit before the middle of the decade, as per share earnings recovered somewhat to $2.45 million in 1993 on year-to-year revenue and profit increases of 0.6 percent (to $3.99 billion) and 23 percent (to $590.6 million), respectively. The importance of nuclear generation to Philadelphia Electric's operations was reflected in the fact that the nuclear segment of the company's total electric power output was 60 percent in 1993. A reorganization undertaken that year planned to create five strategic business units--Consumer Energy Services, Gas Services, Nuclear Generation, Power Generation, and Bulk Power Enterprises--by January 1995. Paquette and his team of executives hoped that the revision would prepare the company for the more competitive (and less regulated) environment anticipated by the electric industry in the 1990s.

Principal Subsidiaries: Conowingo Power Co.; Eastern Pennsylvania Development Corp.; Eastern Pennsylvania Exploration Co.; Philadelphia Electric Power Co.; The Susquehanna Electric Co.