Rwe Group Business Information, Profile, and History

History of Rwe Group

RWE AG is the dominant electricity producer in Germany, supplying 34% of the country's electricity in 1990 via a distribution and transmission network that extends over 139,000 kilometers--that is, a distance over three times around the world. The company was founded at the end of the 19th century to supply electricity to the city of Essen. Originally known as Rheinisch-Westfälisches Elektrizit&auml×werk AG, the company's name was officially changed to RWE AG in February 1990 as part of a major restructuring exercise. Since then, RWE AG has been the holding company for the RWE Group, which has six independently operating divisions. The entire field of mains-borne energy and water supply was taken over by RWE Energie AG, a subsidiary company of RWE AG. Electricity production remains its core business but there has been some diversification in recent years into other energy sectors, namely oil, natural gas, and petrochemicals.

The timing of RWE's foundation was fortuitous. At the end of the 19th century, Germany underwent the most rapid industrialization to date. In the decades before World War I, Germany moved into second place behind the United States among the world's industrial nations. Between 1880 and 1913 German coal output increased fourfold and production of steel tenfold. Chemicals manufacturing and heavy engineering were other strengths. Given its location at the heart of Germany's coal and steel industry and the presence of factories owned by Krupp, Thyssen, Siemens, and other German industrial giants, Essen was an appropriate base for the company that would come to dominate Germany's electricity supply. Even today, following the relative decline of heavy industry, Essen's state of North Rhine Westphalia still produces over one-quarter of German gross domestic product. Essen itself remains the energy center of Germany, playing host also to Ruhrgas and Ruhrkohle.

Such a dynamic economy, with its predominance of energy-intensive industries, needed power. Towards the end of the 19th century, only Friedrich Krupp AG generated electricity in Essen; this power was consumed primarily by Krupp plants. However, the municipal authorities were debating the desirability of establishing electricity supplies for electric trams and street lighting; small-scale electric street lighting was introduced in 1888 and the debate about power for trams was well under way in 1890.

In 1896, Elektrizit&auml× AG vorm W. Lahmeyer & Company of Frankfurt am Main applied to the authorities of Essen for approval to build and manage a small power station. Despite heavy competition from Allgemeine Elektrizit&auml×-Gesellschaft (AEG) and Siemens & Halske, in 1898 Lahmeyer signed a 40-year contract to supply Essen with electricity. On April 25, 1898, Lahmeyer, together with banks from Frankfurt, founded the Rheinisch-Westfälisches Elektrizit&auml×werk Aktiengesellschaft (RWE). The company began operating with a steam generator to supply a few thousand consumers in the immediate environs of Essen. The first RWE-generated electricity was supplied on April 1, 1900.

From the beginning, RWE's leaders were conscious of the key role electricity would play in the industrial economy. Hugo Stinnes, a leading industrialist in the region, became chairman of the board. He was convinced the electricity industry would grow into an industrial giant and that an integrated supply industry able to take advantage of economies of scale was the best way forward. RWE throughout its history has been heavily involved in the development of larger-scale generating units and high voltage transmission and distribution networks.

Stinnes also believed the task of developing this new industry was too important to be left solely to private enterprise. He concluded that the way forward lay in the coming together of private business and public authorities in a synthesis of the principles of private enterprise and public service. The city fathers of Essen, Mülheim an der Ruhr, and Gelsenkirchen, persuaded by Stinnes of the advantages of this approach, bought shares in RWE. By the beginning of World War I, a majority of the seats on the RWE board--17 out of 29--were occupied by public representatives. The mixed economy of RWE was established from an early stage. Private entrepreneurs managed the daily affairs of the company but the public authorities retained an influence on all fundamental policy questions.

It was in the first decade of the 20th century that the basic structure of Germany's industry took shape. In 1908, RWE and Vereinigte Elektrizit&auml×werke Westfalen AG (VEW) signed the first demarcation contract--a contract which remains in force to this day. Demarcation contracts mark out the supply areas of a utility and enable the larger companies to carve up the country by agreeing to keep out of each other's territory. Demarcation contracts are bolstered by concession contracts, which grant utilities exclusive rights to public land for cables in return for concession payments to public authorities. In view of its growing contracts with a number of municipal authorities, RWE was rapidly able to build up its business and extend its supply area.

The system of concession contracts has persisted until the present day. However, attempts are being made to open up electricity supply to competition again. In 1980 a 20-year limit was placed on the duration of a concession contract, and by the end of 1994 local authorities will be free to chose alternative electricity suppliers. Large amounts of money are at stake; Essen, for example, receives 20% of RWE's non-industrial tariff income, an arrangement the city may wish to leave intact. However, other utilities are known to wish to expand their activities into RWE's area and competition could become more intensive as the 1990s unfold.

In 1899 Stinnes took on the young engineer Bernhard Goldenberg as technical adviser. By 1902 Goldenberg had become chairman of the technical board and was deciding company policy. Goldenberg shared Stinnes's belief that it was necessary to take advantage of scale economies if electricity supply was to be cost-effective. This strategy of maximizing sales needed a secure and plentiful supply of cheap fuel and technological advances in generation and distribution.

From the beginning, coal has been central to the growth of the German industrial economy and to the development of RWE in particular. Coal retains its importance today. In 1990-1991, brown coal and hard coal accounted for 48.1% and 23% respectively of electricity generated by RWE. Nuclear power was responsible for a further 21%, with water accounting for almost 4%. Gas and oil accounted for RWE's remaining primary energy consumption.

Hugo Stinnes, the driving force behind the creation of RWE, was originally a coal merchant and was most conscious of the direct connection between coal and electricity. In the early days of RWE, brown coal was not at first considered for use in electricity generation. The Reisholz power station built by Goldenberg to the south of Düsseldorf in 1908-1909, for example, was designed for hard coal. Goldenberg was, however, aware of the potential of brown coal, which is mined from open-cast mines and hence is much easier and cheaper to mine than hard coal, which is mined from deep pits, and knew that Europe's largest reserve of this fuel was to be found west of the Rhine between Cologne and Aachen.

The end of World War I brought serious coal shortages as two million tons of hard coal had to be exported monthly as part of Germany's war reparations. This situation precipitated the use of brown coal in Germany and RWE set about securing its brown coal supplies. In 1920, a "common interest" contract involving an exchange of shares was signed between RWE and Roddergrube AG according to which Roddergrube, the first company commercially to exploit brown coal back in the 1870s, undertook to supply brown coal to RWE. Shortly afterwards, RWE acquired a majority holding in Roddergrube. Similar "common interest" contracts were signed with other coal producers in 1921.

In 1932 RWE developed its relationships with coal producers a stage further and acquired a majority shareholding in Rheinische Aktiengesellschaft für Braunkohlenbergbau (Rheinbraun). RWE's participation helped Rheinbraun, which owned the Fortuna power station, one of the largest power stations at that time and the subject of expansion plans, to extend its contract to supply electricity to the city of Cologne. Over the years, the Rheinbraun family of companies has been fully integrated into the RWE group. RWE's relationship with Rheinbraun is typical of the complex cooperation and ownership network, which RWE gradually developed with coal producers and other electricity suppliers.

German military requirements of the late 1930s and World War II made big demands on German heavy industry, including electricity. The end of the war brought with it the need for massive reconstruction, not only for the German economy but also for RWE. The Goldenberg works were destroyed, other plants were severely damaged, and coal mines, pipelines, and distribution networks were devastated. Massive external financial assistance was required as much as technical rebuilding.

The RWE leadership was more convinced than ever that the future of the electricity industry lay in the development of a fully integrated network of electricity producers, and was instrumental in the 1948 formation of the Deutsche Verbundgesellschaft (DVG). The membership of this organization, which provides a forum for national electricity cooperation, is composed of Germany's largest electricity utilities.

Reconstruction brought technical opportunities. Plant was not merely rebuilt or repaired; obsolete equipment was replaced by the most modern high pressure boilers and turbines.

In 1952 RWE and its subsidiaries were finally released from the postwar control of the Allies. At this time Franz Hellberg, an internationally recognized expert on brown coal, joined the RWE board. He was charged with the task of building up the production of electricity from brown coal, a comparatively cheap source of fuel.

In the postwar years, brown coal was increasingly mined from new deep-lying open-cast mines. These mines, which could reach a depth of 300 meters, were part of a transition to bigger management units and required new mining technology. Excavators and diggers were developed which could move 100,000 cubic meters of coal a day.

By 1957, 45% of RWE's brown coal supply originated from the new open-cast mines. This transition made big investment demands. An extraordinary general meeting in October 1959 increased authorized capital by DM147 million to DM575 million. These funds were used to acquire 85% of the brown coal company Neurath AG.

Increasing electricity demand necessitated productivity increases. RWE chose to bring these about through a major rationalization of Rhine brown coal. In December 1959 it transferred its shareholding in Neurath AG to Rheinbraun. In the same month, several other brown coal subsidiaries of RWE were brought under the umbrella of Rheinbraun. The assets so transferred included those of the Braunkohlen- und Brikettwerke Roddergrube AG, the Rheinische AG für Braunkohlenbergbau und Brikettfabrikation and the Braunkohlen-Industrie AG (Biag).

As the German economic miracle got into its stride in the early 1960s, electricity demand surged ahead and a new phase of power station construction orders began. Brown coal provided the basis for this expansion, but it was also in the early 1960s that RWE became involved in the development of nuclear power. By 1990 nuclear power was responsible for over 20% of RWE-generated electricity. However, questions have been raised in Germany about the safety of nuclear power, which will limit the contribution of this source of electricity in the foreseeable future.

The development of secure and cheap fuel supplies was only one factor in RWE's growth. Bernhard Goldenberg initiated the policy of the development of coal and the technology of larger generating units, but Arthur Koepchen, Goldenberg's successor in 1917 as chairman of the technical board, was responsible for implementing the distribution of electricity over much longer distances than had hitherto been possible.

Koepchen was firmly anchored in the RWE tradition of optimizing economies of scale. He believed electricity production was justified on economic grounds only through the generation of electricity in favorable locations and through the supply of large districts, and envisaged increasing cooperation between neighboring utility companies. In short, he had a vision of a fully integrated national electricity supply industry with cooperation between power stations regardless of fuel basis.

In order to achieve this, Koepchen had to connect RWE with the south where, since World War I, utilities in Prussia, Bavaria and Baden had developed rapidly, with a particular reliance on hydroelectric power. Koepchen's goal was to connect the Alpine hydroelectric plants with the stations on the Rhine and the Ruhr. This brought legal, technical and economic challenges.

Koepchen drew on the experience of the South Californian Edison Company which, since 1921, had demonstrated the possibility of transmitting electricity over high tension cables of 220 kilovolts, rather than the previous technical limit of 110 kilovolts. This breakthrough made possible a more extensive distribution network possible and in 1924 RWE began the construction of a north-south network with the assistance of Germany's biggest electrical engineering companies, Siemens and AEG.

By April 1930, Germany's first "electric highway" was completed, linking the densely populated areas of the Rhineland and Westphalia with the South. It was only within such a union that the development of the water power of Bavaria made economic sense, as Bavaria was sparsely populated in comparison to RWE's main supply area and by itself could not justify the construction of large production units. With work on the distribution network underway, RWE became involved in the construction of power stations in the southern part of the country. For example, in 1924 RWE participated, along with Grosskraftwerk Würtemberg, in the founding of the Voralpberge Illwerke and in 1928 work on the massive Schluchseewerk in the southern Black Forest began.

Electricity production has always been and remains one of the main sectors of RWE's activities. In 1988 RWE took a major step towards diversification with the acquisition of Deutsche Texaco. This deal prompted a reorganization of RWE's activities into the following six divisions: energy, mining and raw materials; petroleum and chemicals; waste management; mechanical and plant engineering, and construction. All divisions operate independently. RWE AG fulfils the role of a holding company and serves to steer and coordinate Group interests in all strategically important matters.

The two main revenue-generating divisions were energy, organized under RWE Energie AG, and petroleum and petrochemicals, organized under RWE-DEA AG für Mineralöl und Chemie (RWE-DEA). In the financial year 1990-1991 RWE Energie contributed 37% of the total earnings of the RWE group and RWE-DEA 41% (including petroleum tax).

The formation of RWE-DEA signals the fact that, although electricity remains the core business of the RWE group, diversification within the energy field is an important theme of the future. RWE-DEA has its roots in the 19th century. It was established in 1899 as the Deutsche Tiefbohr AG. In 1911 its name was changed to Deutcesh Erdöl AG. In 1966 the Texaco Group acquired over 97% of the capital and altered the name to Deutsche Texaco in 1970. On June 29, 1988, Texaco sold its share in the company to RWE, giving rise to the reorganization is RWE and the creation of RWE-DEA. This new division of RWE was responsible for sales of DM20.2 billion in 1990-1991. RWE-DEA is involved in exploration for and processing and marketing of crude oil and natural gas, and the production of chemicals of petrochemicals.

The petroleum business of RWE-DEA's dominant source of income and is likely to remain so. The company has rationalized its retail network. It is engaged in some expansion in eastern Germany and is examining the possibility of involvement in other European countries. Interest in the former East Germany is not confined to petroleum products. In June 1991 an international consortium led by RWE and VEBA, with shares of 37.5% each, was reportedly poised to take over east Germany's largest oil refinery, Schwedt, which has an annual capacity of 11 million tons and a pipeline link to the USSR. RWE-DEA also intends to build up its chemical business and with a view to this it made a bid for Vista Chemicals of the United States in December 1990. The bid was ultimately successful. RWE-DEA finalized the acquisition in June 1991.

By taking over RWE's core business of electricity production, RWE Energie represents the greatest continuity with the past. The 1990s hold out exciting possibilities for this division as a result of the unification of Germany in 1990. The east German electricity supply industry was unmodernized, inefficient, and polluting. The joint venture Vereinigte Energiewerke AG (VEAG) was formed in 1991 to rectify the situation. In return for investment in the supply of electricity to eastern Germany of DM30-40 billion, VEAG has been accorded a major slice of the market. The main participants in the venture are RWE Energie and PreussenElektra, with 35% each, and Bayernwerk, with 30%. Electricité de France is expected to exercise its option to participate in VEAG and further foreign participation cannot be ruled out. Eastern Germany will preoccupy the electricity arm of RWE for some years. However, the demands of European integration and continuing environmental vigilance will also provide major challenges in the 1990s.

Principal Subsidiaries: RWE Energie Aktiengesellschaft; Kernkraftwerke Gundremmingen Betriebsgesellschaft mbH (75%); Koblenzer Elektrizit&auml×werk und Verkehrs-AG (57%); Kraftwerk Aftwürttemberg AG (92%); Lech-Elektrizit&auml×werke AG (75% ); Main-Kraftwerke AG (70%); Moselkraftwerke GmbH; Rhenag Rheinische Energie AG (54%); Rheinbraun Aktiengesellschaft; Maria Theresia Bergbaugesellschaft mbH; Reederei und Spedition "Braunkohle" GmbH; Rheinbraun Australia Pty Ltd; Rheinbraun US Corporation; Rheinbraun Verkaufsgesellschaft mbH; RWE-DEA Aktiengesellschaft für Mineraloel und Chemie (99%); Condea Chemia GmbH; DEA MINERALOEL AKTIENGESELLSCHAFT; Vista Chemical Company (USA); RWE Entsorgung Aktiengesellschaft; American NuKEM Corp; R + T Entsorgung GmbH (51%); Lahmeyer Aktiengesellschaft für Energie-wirtschaft (64%); Rheinelektra AG (62%); Heidelberger Druckmaschinen AG (57%); Heidelberg Harris GmbH; Lahmeyer International GmbH (55%); NUKEM GmbH; Starkstrom-Anlagen-Gesellschaft mbH; Starkstrom-Gerätebau GmbH; Stierlen-Maquet AG; HOCHTIEF AKTIENGESELLSCHAFT vorm. Gebr. Helfmann (56%); D & M Partner, Inc (USA); MIT Gesellschaft für Management-Beratung, Informationssysteme und Technologie mbH (MIT-Beratung).