Potomac Electric Power Company Business Information, Profile, and History

History of Potomac Electric Power Company

Potomac Electric Power Company (PEPCO) is an investor-owned utility serving the electricity needs of 1.9 million people in the Washington, D.C., area. Its territory, which includes the District of Columbia as well as major portions of Montgomery and Prince George's Counties in Maryland, is characterized by an affluent population and balanced economy and is unique among major metropolitan areas in that it contains virtually no heavy industry.

PEPCO's initial development was tied to that of its home city. Washington, D.C., was slow to adopt the electric light. Though the city saw its first demonstration of electric lights in 1872, city commissioners, who were appointed by the United States Congress as opposed to being elected by the District of Columbia's population, did not contract for the installation of even a few arc lamps until 1882. Replacement of gas lamps was further slowed when city officials ruled that all wires must be laid underground. It was not until the 1890s, when rapidly expanding electric street railways demanded a source of power, that the electric industry in Washington experienced its first real growth.

PEPCO began operations in this environment and was incorporated in Virginia in 1896. Its organizer and first president was Oscar T. Crosby, a New York financier, pioneer in electric street railway technology, and one-time general manager of the Sprague Electric Railway and Motor Company. Crosby built what was then considered an immense plant on the Virginia side of the Potomac River at Chain Bridge. On March 12, 1896, he applied for permission to extend PEPCO's lines into Washington, D.C. Hoping that lower rates would follow from competition between PEPCO and the then-dominant United States Electric Lighting Company, commissioners agreed on June 21, 1896, to let PEPCO begin operations.

Crosby's first move upon gaining access to the District of Columbia market was to bid on the District's streetlighting contract. Though his offer was the lowest, it was rejected because the District of Columbia corporation counsel believed that the United States Electric Lighting Company was the only company entitled to light the streets of Washington. Crosby appealed the decision first to the District commissioners and then to the courts. He ultimately won the case, and on December 17, 1896, PEPCO signed a contract to light the city.

What followed was a commercial 'war' between PEPCO and United States Electric Lighting. The conflict, however, was short-lived, and in January of 1889 the Crosby-Stevens Syndicate, which already controlled PEPCO, acquired the stock of the United States Electric Lighting Company and merged these two companies into the Potomac Electric Power Company.

Crosby had visions of combining all of the District's power and railway interests. In 1899 he consolidated ten of the smaller independent car lines and two electric power companies, including PEPCO, into the Washington Traction and Electric Company. He named a congressman from Jersey City as the company's president, but since all but two participating entities were weak earners with heavy debts, Washington Traction itself was soon encumbered. It defaulted on interest payments and in June 1901 was declared bankrupt. The following February, Crosby's floundering traction empire was taken over by the Washington Railway and Electric Company.

In its first years under the Washington Railway and Electric Company, PEPCO was a captive of the traction interests. It supplied electricity to railroads, and its service generally stopped where the trolley ended. In 1905 PEPCO surpassed $1 million in revenues for the first time. The following year the company began construction of the first unit of the Benning Station along the Anacosta River. When its last unit was completed in 1931, Benning had a 185,000-kilowatt capacity.

By 1912 PEPCO President Clarence P. King boasted two power plants and eight substations. That year Washington Railway and Electric Company transferred to PEPCO its two-thirds interest in the Great Falls Power Company. By the end of 1914 PEPCO was running 24,818 meters and had 8,215 street lamps. It had surpassed $2 million in revenues, and its connected load--excluding railways--was 58,776 kilowatts, 6,522 kilowatts more than it had in 1913.

The entry of the United States into World War I spurred demand and caused inflation, which pressured earnings. To meet increasing demand, King added units to the rapidly growing Benning Station. At the same time, the widespread use of the motor car moved the company's focus away from trolleys and toward residential and business customers. By 1925 PEPCO was running more than 100,000 meters.

In 1928 the North American Company gained control of Washington Railway and Electric, and therefore Potomac Electric Power Company. The North American Company was a utility trust with extensive holdings in northern California; Cleveland, Ohio; upper Wisconsin and Michigan; and metropolitan St. Louis, including areas of Missouri, Illinois, and Iowa.

Under North American, PEPCO continued to expand. In 1929 it surpassed $10 million in sales for the first time. By January 1930, PEPCO had 1,486 employees and in December 1933, it placed into service a new steam electric generating plant at the junction of the Potomac and Anacosta Rivers. Known as Buzzard Point Station, the new facility had an initial operating capacity of 35,000 kilowatts. With the addition of further units, Buzzard Point's capacity ultimately reached 200,000 kilowatts.

In the 1930s the activities of such utility trusts as the North American Company had become a political issue. In response to the controversy, Congress passed the Public Utilities Holding Company Act (PUHCA) of 1935, which regulated utility companies' activities and through its 'death sentence clause,' forced trusts to divest themselves of all but one integrated utility.

But before Securities and Exchange Commission (SEC) regulators could break up North American, the United States was drawn into World War II. After the war, North American simplified its holdings and prepared for divestiture. It transferred ownership of Braddock Light & Power, a small Virginia company, to PEPCO and then dissolved Washington Railway and Electric. Finally, in December 1946, North American distributed PEPCO shares to its stockholders.

The post-World War II period was one of high growth and falling rates. In 1949 PEPCO completed construction of the 80,000-kilowatt first unit of its Potomac River plant. Units were added throughout 1957, ultimately giving the plant a capacity of 499,000 kilowatts. Seeking new sources of power for the fast growing metropolitan area that it served, PEPCO also became a participant, along with a substantial number of other utility and industrial concerns, in an atomic energy research and development program conducted by Atomic Power Development Associates.

By 1954 the company had surpassed $50 million in revenues. Three years later R. R. Dunn, who became president of PEPCO in 1951, reincorporated the company under the new District of Columbia Business Corporation Act. Finally, at the decade's end, Dunn completed unit one of the company's Dickerson Plant. With an initial capacity of 175,000 kilowatts, Dickerson grew to 570,000 kilowatts when the last unit was installed in 1962.

While the Washington, D.C., area had grown quickly in the 1950s, it expanded at an even more rapid pace in the 1960s. Between 1960 and 1970 the population of PEPCO's service area grew by 38 percent--more than twice the rate of any of the nation's other top ten urban areas. At the same time demand increased by 161 percent, rising from 4,639 million kilowatt hours in 1960 to 12,122 million kilowatt hours in 1970.

The increased use of the air conditioner led to a sharp difference between summer demand and winter demand. To balance the load, PEPCO began promoting 'Gold Medallion' all-electric homes. The company was able to lower rates despite summer peak periods, which forced it to add more capacity, including the 365,000-kilowatt Chalk Point Generating Station, completed in 1965.

PEPCO's financial situation changed dramatically in 1969, when rising construction costs squeezed earnings and caused PEPCO Chairman Dunn and President Stephen R. Woodzell to suspend cash dividends and declare a three and one-eighth percent stock dividend for the year's last two quarters. The company's leaders applied for and were granted rate relief from regulatory authorities in Virginia, Maryland, and the District of Columbia. By the beginning of 1970 they were able to reinstitute PEPCO's cash dividend, albeit at a somewhat lower rate.

The environment began to be a regulatory concern during this period. PEPCO had taken pollution control measures since the 1930s, but the passage of federal, state, and district regulations regarding thermal pollution and sulfur emissions caused it to evaluate its plants and to plan the installation of cooling towers for its steam-generating facilities. The company also built such devices as higher chimneys to collect fly ash.

National economic problems were also producing problems for PEPCO, which faced high inflation, high capital costs, and high fuel costs. The company repeatedly asked for rate increases but often felt regulatory responses were inadequate. To make matters worse, officials projected a doubling of customer use every seven years, a situation that entailed PEPCO's pursuance of a rigorous program of new construction.

By 1970 PEPCO had completed the first unit of its Morgantown Generating Station. Located along the Potomac River near U.S. Route 301 in Charles County, Maryland, Morgantown Unit 1 added 573,000 kilowatts of net generating capacity to PEPCO's system. When Morgantown's last unit was installed in 1973, the plant's total capability of 1,412,000 kilowatts had increased the utility's generating capacity by one-third.

In 1971 the PEPCO board elected Carolina Power & Light executive W. Reid Thompson president and chief executive officer (CEO) of PEPCO. Thompson was a smart executive constantly searching for ways to reduce costs and increase profits. Since oil was inexpensive at that time, he had coal plants in the construction stage redesigned, so they could burn up to 50 percent oil. He also negotiated long-term contracts for fuel oil.

This strategy backfired when oil prices skyrocketed in 1973. Thompson reacted by burning as much environmentally acceptable coal as he could and deferring some construction costs. Moreover, rises in wholesale fuel rates did not necessarily affect bottom-line earnings, since PEPCO's rate schedules included clauses designed to adjust rates for changes in fuel prices.

Initially regarding the conservation effects of the energy crisis as temporary, Thompson continued planning for new capacity. On July 2, 1973, PEPCO filed a 15-volume application with the Atomic Energy Commission for a construction permit, which covered the Douglas Point Nuclear Generating Station in Charles County, Maryland, some 30 miles south of Washington.

By the second half of the 1970s, it became apparent that population growth trends in the Washington metropolitan area had changed. After growing faster than any of the nation's major metropolitan areas, the capital region's annual population rate dropped to its lowest level in the 20th century. Since this situation meant a slower increase in demand, it played into Thompson's emerging strategy of eliminating capital costs. In his 1976 annual letter to stockholders, Thompson wrote of 'Intensifying studies and efforts in energy-use management to better influence the shape of future load growth so as to keep capital requirements to a minimum.'

In the late 1970s Thompson repeatedly restructured and cut funds from PEPCO's construction program. The Douglas Point nuclear plant was indefinitely deferred, while new units at Chalk Point and Dickerson were postponed.

With the onset of the 1980s the company was once again in a good fiscal position. In PEPCO's 1980 annual report, Thompson called 1980 'one of the best years in our company's history.' One of the reasons for PEPCO's renewed financial health was its 85 percent reliance on coal, which had a cost increase of only 6 percent in 1980, while the cost of oil increased by 45 percent. Another reason for the company's success was its low capital expenditures. In view of low demand growth, Thompson had canceled all construction except Chalk Point No. 4, a 600-megawatt unit that was completed in 1981.

In order to further cut the cost of capital, the company, which earned more than $1 billion in 1981, adopted a plan to defer capital investment. The plan entailed curbing peak load growth through customer conservation programs such as time-of-day rates; adopting cost effective programs to ensure continued efficiency of older generating units over an extended service life; and purchasing low-cost capacity and energy under long-term contracts.

For a variety of reasons, the program worked, and spending on new capacity ceased. By 1982 PEPCO was ranked 73rd of 75 major electric utilities in terms of planned construction expenditures as a percentage of existing capital investment. Its major expenses for the year were pollution control modifications for Chalk Point Units Nos. 1 and 2.

In step with Thompson's policy of avoiding capital expenditures, PEPCO began buying low-cost excess capacity from utilities in the Ohio Valley. It also began studying the feasibility of extending the life of its Potomac River Plant in Alexandria, Virginia, a project that would cost $80 million; a new plant would have cost PEPCO $635 million. In 1983 the company began a seven-year program to keep the Potomac River facility operating beyond the year 2000.

While carefully managing PEPCO's utility balance sheet, chief executive officer Thompson and newly elected company president Edward F. Mitchell began seeking additional sources of income. In 1983 they created Potomac Capital Investment Corporation to seek out such sources. Potomac Capital's first investments were securities and so-called 'safe harbor' leases. By 1985 the investment arm of PEPCO was active in the leveraged equipment lease financing market and was leasing such goods as a Boeing 747 aircraft and satellite communications equipment.

Meanwhile, as the 1980s wore on, Thompson and Mitchell were still searching for ways to defer building new capacity. In 1986 they negotiated a long-term contract to buy 450 megawatts of capacity from Ohio Edison and Allegheny Power systems. That same year, they began a major customer marketing campaign to recruit voluntary participation in a residential load cycling program. Customers who volunteered to participate in the project agreed to have their air-conditioning equipment and electric water heaters cycled off briefly during times of peak demand, in return for a credit on their summer electric bills.

In the latter half of the 1980s, PEPCO again began preparing to meet increasing demand. In 1987 it initiated the licensing applications for new generation capacity based on advanced coal gasification--combined-cycle technology--which offered fuel use flexibility. In 1991 PEPCO installed four combustion turbines totaling 380 megawatts at its Chalk Point generating facility. These were designed to meet near-term peaking requirements.

In 1989 Mitchell took on the additional title of chief executive officer, succeeding Thompson. That same year the company announced that it planned to complete two new 138-megawatt units at Dickerson Generating Station in 1992 and 1993.

The company faced a variety of challenges, including meeting requirements of the 1990 Clean Air Act Amendments. PEPCO planned to conform to these standards without installing costly sulfur dioxide scrubbers for its coal burning units, and instead devising a two-part compliance strategy. At an expected cost of $400 million, Phase I emission levels were to be reached by 1995, and Phase II by the year 2000.

Principal Subsidiaries: PEPCO Enterprises, Inc.; Potomac Capital Investment Corp.