Puget Sound Energy Inc. Business Information, Profile, and History

Company Perspectives:

Delivering the highest quality of service at the lowest cost.

History of Puget Sound Energy Inc.

Puget Sound Energy Inc. is the largest investor-owned utility in the state of Washington. The company serves more than 1.7 million people in a 6,000-square-mile service area that includes eight counties bordering Puget Sound in western Washington and part of Kittitas County in central Washington.

Over a Century of Power Begins

Puget Sound Energy's history began in 1885 when Sydney Z. Mitchell and F.H. Sparling opened an office in Seattle as northwest regional agents for the Edison Electric Light Company. In the early 1880s, Mitchell, at the age of 23, had been appointed exclusive agent for Edison Electric Light Company, covering the state of Oregon and the territories of Washington, Montana, and Alaska. Mitchell convinced Sparling, his best friend, to come west to Seattle with him. From their small office, the two launched a promotional campaign that would later become a model for developing electric services throughout the territory.

The first step was to convince the city of Seattle of the advantages the new incandescent electric light bulb offered. By the end of October 1885, Mitchell and Sparling had organized the Seattle Electric Light Company. The following month, the Seattle City Council granted the company a 25-year franchise. On March 22, 1886, Mitchell and Sparling gave a successful demonstration of electricity to Seattle citizens, and soon after Seattle Electric's initial system had grown to 250 lamps, the first central station system for incandescent electric lighting west of the Rocky Mountains. Mitchell and Sparling quickly expanded their operation and over the next 15 years built steam-powered central station systems in Tacoma, Spokane, Portland, Bellingham, and many smaller towns in Washington, as well as Oregon, Idaho, and even British Columbia, Canada.

Meanwhile, other ambitious entrepreneurs founded other electric companies that would eventually become part of Puget Power. In the 1890s, civil engineer Charles H. Baker saw Snoqualmie Falls, located about 25 miles east of Seattle, and drew plans to harness the power of the Snoqualmie River. Remarkably, construction on the Snoqualmie Falls Plant, the first completely underground electric generating facility in the world, was begun and completed in 1898. The plant's powerhouse contained four great water wheels and generators capable of delivering a total of 6,000 kilowatts. In 1905 and 1910, two other generating units were added. In 1992, 93 years after their initial start-up, the original generators were still producing their rated output of 6,000 kilowatts.

Surviving New Competition

Meanwhile, Dr. E.C. Kilbourne, a Seattle dentist, founded the Pacific Electric Light Company in 1890 when he saw the advantages of serving lighting and streetcar power loads on combined systems. Many individual companies and systems, providing combinations of power, lighting, and streetcar loads, sprang up, including 12 in Seattle alone. Nearly all of them were wiped out in the financial panic of 1893. To revive the fledgling utilities industry in the Pacific Northwest, Mitchell called upon Charles Augustus Stone and Edwin Sidney Webster, partners in a Boston-based operation that advised or operated troubled electric utilities and also financed, refinanced, or even acquired them.

Stone and Webster realized that the utilities industry not only needed reorganization but strong local leadership. They approached Jacob Furth, a prominent Seattle banker, and convinced him to become president in 1900 of the newly formed Seattle Electric Company. The new enterprise not only consolidated all the surviving lighting, traction, and related subsidiary businesses in Seattle, but began to expand its interests throughout the Puget Sound region. In 1912, Seattle Electric incorporated as the Puget Sound Traction, Light & Power Company. Later the word "traction" was dropped from the name.

Between 1912 and 1920, eight more utility companies in the Puget Sound region were bought and integrated within the company. From 1920 to 1940, the utility pursued an aggressive policy of acquiring utility companies in central and estern Washington, and ten more were added. During the first 50 years, the succession of mergers and consolidations involved more than 150 companies.

Innovation, Industry Leadership, and the Depression

During this formative period, Puget Power became a leader in the utilities industry. In 1913 near Lynden, for example, the company constructed what is believed to be the first power line in the United States built specifically to serve farm customers. In 1925 at Puyallup, it established the Farm Power Laboratory, a unique research center where laborsaving uses of electricity on the farm could be demonstrated and promoted. Another first for Puget Power came in 1926 when it installed a cross-Sound submarine cable from Richmond Beach, north of Seattle, to President's Point, south of Kingston on the Kitsap Peninsula.

In 1928, Puget Power began construction of the Rock Island Dam on the Columbia River, one of the most ambitious projects in its history. The first four units were brought online in 1933 with a capacity of 80,000 kilowatts. Unfortunately, construction on the dam was started one year before the stock market crash and the onset of the Depression, distressing events that brought a downturn to the company's fortunes.

Beginning in the 1930s, Puget Power began to face a series of problems that challenged the very existence of the utility. Company morale was low, due in part to salary cuts and layoffs. In 1930 state voters passed the District Power Bill, which allowed the formation of county Public Utility Districts (PUDs) to enter the electricity distribution business. Puget Power had fought hard against the bill, fearing that its passage would inhibit the company's financing of new construction projects. Other problems included the city of Seattle's default on payments of the streetcar revenue bonds it had issued to Puget Power to purchase the system and the Bremerton City Council's declaration of its intention to take over Puget Power's distribution system at the expiration of the current franchise in 1931.

The Growing Public Power Movement

Puget Power's greatest challenge was disarming the growing public power movement, which sought to disenfranchise the utility. The rallying cry of Puget Power's opponents was "this God-given water power resource belongs to the people--not the utility barons." The utility countered in a public campaign that tried to show what it considered to be the unfairness of tax-subsidized government competition. Initially, the company had some success. Bremerton decided against a takeover of the Puget Power operation in its city and renewed the Puget Power franchise in 1931. PUD elections in Skagit, Whatcom, Snohomish, and Island Counties were defeated in 1932. Despite these victories, by 1936 13 counties had voted to form PUDs. With the company's service area and revenue base threatened, the utility found that financing new construction projects was extremely difficult.

The struggle between public-owned and investor-owned utilities was temporarily suspended during World War II because the federal government mandated power pooling to serve the huge war industry, but it quickly resumed as the war drew to a close. In November 1943 the Seattle City Council adopted a resolution to expand its power-generating capacity with the intention of taking over service to Puget Power's customers at the expiration of the company's 50-year franchise in 1952. In 1950, Seattle made a formal offer to purchase Puget Power. The company's board of directors accepted the proposal, which became Proposition C on the November 7, 1950, ballot.

The proposition was hotly debated. Puget Power President Frank McLaughlin supported it as the best alternative for the company, and he urged employees to join him in support. In the late 1940s, the utility had been forced to sell off perimeter territories and non-electric subsidiary operations. In 1948 perimeter electric utility properties (excluding power plants), constituting about 10 percent of the company's customer and revenue base, were sold to eight county PUDs, reducing the company to 40 percent of its previous holdings.

The vote was extremely close: 65,616 for yes; 64,892 for no. On March 5, 1952, McLaughlin signed the papers completing the sale at a purchase price of $26,834,232. Following the vote, six country PUDs offered to pay $89.5 million for all the company's remaining properties except for those in Whatcom County. Puget Power accepted a purchase agreement calling for final closing on February 27, 1953. The utility's future, however, became complicated when another utility, Washington Water Power, proposed a merger with Puget Power.

By now, a controversy had been ignited, as many Puget Power customers opposed any sale of Puget Power. On November 12, 1953, the utility's board of directors voted not to accept either proposal. When McLaughlin emerged from the meeting, he told the press, "Puget will remain in business!"

Need for More Power Supply Sources

During the political turmoil, a new challenge for the utility had emerged: because demand for electricity had continued to grow, the utility needed to catch up in power supply sources. Puget Power began to purchase distribution system areas in an effort to regain the 60 percent of its business it lost in the late 1940s. At the same time, the utility began to reverse its reputation of instability, acquired through its difficulties in the previous decade, which had become a key roadblock to major financing. In 1956, McLaughlin presented his board with a construction budget of about $20 million--double the previous year's and the biggest in 25 years. Work began in that year on the $27 million Upper Baker River development, which was expected to provide 110,000 kilowatts, and the expansion of the Lower Baker River dam by 70,000 kilowatts for an additional $8 million.

In 1960, the Washington Utilities and Transportation Commission granted Puget Power a 10 percent rate increase, the first increase in the company's history. Financially more stable, Puget Power experienced an impressive period of growth in the 1960s. The number of customers and per capita use of electricity increased significantly. During this period, the utility sought to develop innovations that would improve the quality of electric services and the value of the homes served. In addition to developing new field installation techniques, including underground system installation, Puget Power worked with the Federal Housing Administration (FHA) for recognition of appropriate increases in the value of houses incorporating these advances. In 1964 the utility helped the U.S. government enact a treaty with Canada that substantially increased the energy production capacities of Columbia River hydropower dams.

In the late 1960s, Puget Power began planning for a new age when it joined with other private utilities to construct several coal and nuclear plants. It joined two nuclear power projects in the early 1970s--the Skagit Nuclear Power Plant and the WPPSS Nuclear Project No. 3--as well as a joint venture with the Montana Power Company, to build two units of a coal-fired thermal power-generating station at Colstrip in southeastern Montana.

Oil Embargo during the 1970s

In 1973, Puget Power, like other utilities across the country, faced an unexpected crisis when the Organization of Petroleum Exporting Countries (OPEC) instituted an oil embargo. Fuel costs skyrocketed and the utility was forced to implement emergency customer rate increases. Over the next decade Puget's costs increased dramatically, plant completion schedules lengthened, and concern over nuclear power increased. After an accident at the Three Mile Island Nuclear Power Plant in Pennsylvania in 1979, the planned construction of Puget Power's Pebble Springs and Skagit Nuclear Power Projects were canceled. Fortunately for the utility, a ruling by the Washington Supreme Court in December 1985 allowed the utility to recover most of its investment in the two canceled projects.

During the 1980s and into the 1990s, Puget Power was faced with two major national trends: the growth of the environmental movement and the rise of public participation in the development of utilities. The company implemented a series of conservation measures, including the "Power Conservation" program, which provided incentives for large industrial customers and schools to interrupt their loads when requested at daily high-load periods during the high-demand months during the winter.

Panel Gains National Attention

In 1980 the utility instituted what was then the largest customer involvement program in the country, forming a series of 13 customer advisory panels throughout its service territory to review company policies. The program has been nationally recognized, and many other utilities have adopted similar programs.

Successful Despite Recession

Despite the recession of the early 1990s, Puget Power maintained a sound financial footing: from 1987 to 1991, the company experienced a rate of customer growth twice that of the national average for all other utilities in the nation, and net income was up from $120 million in 1987 to $133 million in 1991. The economy of its service area, while not immune to national problems, remained vigorous, and it was expected that the growth in both customers and usage that the company had experienced in the past would continue.

Puget Sound Energy struggled with mergers, drought, high-energy costs and shifting economies, yet maintained its position as the largest utilities provider in Washington. In a costly 1997 merger, Puget Sound Energy (PSE), was created by uniting Puget Sound Power & Light Co. with Washington Energy Co. After paying over $36 million in after-tax charges the company's net income dropped approximately 60 percent.

Technology Advancement

In 1999, PSE made wide strides in technology by installing meters that communicate with each other over a wireless network system. This proves to be cost efficient to consumers who can now access timely information regarding their energy use and prices. Another savvy move PSE made that year was to buy the PURPA Plant, which is a natural gas-fired co-generation plant that reduced their annual power cost by 17 percent.

In December 1999, PSE completed the year by being ranked one of the ten most efficiently run utility companies in the nation. Electric Light & Power magazine awarded this accolade based on quality customer relations and consistently low energy bills.

PSE lost one of it's biggest industrial clients, The Boeing Co., in the summer of 2001. Boeing wouldn't agree to pay daily market prices for power and PSE argued that if they gave Boeing a fixed-rate plan instead, they'd have to raise rates for residential customers. After a legal battle with PSE, Boeing discontinued their contract after 88 years.

The resilient energy company resumed its leader status with the inception of their Time-of-Day Rate Plan, in 2001. This innovative plan allows the consumer, either over the Internet or by calling the customer call center, to access pricing information daily which encourages energy use during cost-efficient times of day. The technological advancement and high efficiency of the program, which is included in the national energy policy, garnered PSE the "2001 Utility of the Year" from Electric Light & Power magazine.

Corporate Responsibility

Although their net income dropped from the previous year's $184.8 million to $98.4 million for 2001, and its credit rating was reduced to junk bond status by Wall Street in 2002, PSE stayed optimistic that their new CEO, Steve Reynolds, would turn things around. Reynolds expressed a commitment to make the company profitable and change the public's lackluster perception of PSE as well.

Aspects of the energy business that are consistent are the fluctuating weather, stock market, net income, and public opinion. Aware of changing conditions, over the years Puget Sound Energy has moved toward corporate responsibility and goodwill with programs such as their creation of "fish taxis" which enabled the almost extinct sockeye salmon to maneuver safely around hydroelectric projects.

PSE employees established TreeWatch, a program that removes trees that have the potential to fall during rainstorms. The removal of specific trees causes less danger and fewer power outages. Although PSE had laid off 500 employees, the company expected the remainder of 2002 to be profitable due to the hydroelectric system returning to a normal water level, unlike the previous year's drought. Reynolds stated that PSE is in good shape until 2004 for electricity generation and has expressed plans to "improve relations with the community, employees, customers, and investors. We need to be more collaborative."

Principal Competitors:PacifiCorp; Avista; Portland General Electric.

Chronology

• Key Dates:
• 1950: The city of Seattle makes an officer to purchase Puget Power.
• 1953: In February, Puget Power accepts a purchase agreement from the city of Seattle; in November they reject the purchase.
• 1997: Puget Sound Energy (PSE) is created by merging Puget Sound Power & Light with Washington Energy Co.
• 1999: The company acquires the PURPA Plant.
• 1999: Electric Light & Power magazine ranks the company among the ten most efficient utility companies in the United States.
• 2001: The company launches the innovative Time-of-Day Rate Plan and is awarded "2001 Utility of the Year" by Electric Light & Power magazine.