Public Company
Incorporated: 1902 as Philadelphia Electric Company
Employees: 19,214
Sales: $18.64 billion (2010)
Stock Exchanges: New York
Ticker Symbol: EXC
NAICS: 221122 Electric Power Distribution; 221113 Nuclear Electric Power Generation; 221112 Fossil Fuel Electric Power Generation; 551112 Offices of Other Holding Companies
Exelon Corporation is one of the largest electric companies in the United States and it ranks as the nation’s second-largest nuclear power company. Through subsidiaries Commonwealth Edison Co. and PECO Energy Co., Exelon provides electricity to 5.4 million customers in northern Illinois and southeastern Pennsylvania. PECO also provides natural gas to 490,000 customers in the Philadelphia area. Exelon operates 17 nuclear reactors in 10 nuclear power plants in Illinois and Pennsylvania. The company, formed from the 2000 merger of PECO Energy Company and Unicom Corporation, boasts generating capacity of 31,758 megawatts.
PECO’S FIRST DECADES: 1902–28
Philadelphia Electric Company (PE) 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 10 of Philadelphia’s wealthiest entrepreneurs to invest in a company that would generate electricity. 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.
Many factors encouraged a dramatic expansion of the electric industry during the first two decades of the 20th 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-kilowatt (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. 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 12 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.
PECO EXPANDS: 1928–68
In the early 20th century, PE’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 PE 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 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. PE 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 10 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 mine-mouth 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 that aided in the efficient supply of bulk power throughout North America.
PE 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 50 other utilities to build a prototypical reactor dubbed Peach Bottom No. 1. It took almost a decade for the unit to go into production. 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.
THE CONSTRAINTS OF REGULATION: 1971–99
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 PE’s total assets exceed $5 billion for the first time.
PE faced 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. Amy Barrett of Financial World alleged in a May 29, 1990 article that “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. In 1990 Paquette instituted cost-cutting measures that included an early retirement program, reduced advertising budget, and executive pay cuts of 2 percent to 10 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 PE’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 created five strategic business units: Consumer Energy Services, Gas Services, Nuclear Generation, Power Generation, and Bulk Power Enterprises. During 1994 the utility changed its name to PECO Energy Company.
By the mid-1990s, PECO ranked among the nation’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 served over three million customers. Paquette retired in 1997 leaving Corbin A. McNeill, Jr., at the helm. Under his leadership, PECO prepared for deregulation by buying troubled nuclear power plants on the cheap, and then reorganizing the facilities to operate at a profit. Even as PECO faced increased competition, earnings per share during 1999 grew by 17 percent, which was more than double the industry average at the time.
SAMUEL INSULL AND COMMONWEALTH EDISON: 1882–88
Samuel Insull helped make Commonwealth Edison an industry giant and in fact laid the foundations of the electrical power industry. Insull popularized mass production and selling at the lowest possible cost, developed modern public relations, and devised methods for marketing securities in a way that led to the large public corporations of the later 20th century.
At the age of 21, Insull possessed outstanding financial acumen and unwavering ambition to succeed in business. In the early 1880s he traveled from his home in London to the United States to take his position as Thomas Edison’s personal secretary. Insull gained from his employer vast financial responsibilities and decision-making power, while quadrupling sales at Edison Electric Light Company’s main factory and selling central power plants to cities across the country.
Edison’s company was renamed Edison General Electric Company in 1889. Soon thereafter it merged with Thomson-Houston Electric Company, forming General Electric Company. At the time, Insull was offered a $36,000-a-year executive position at General Electric (GE), but instead he took a $12,000-a-year position as president of Chicago Edison Company. The 32-year-old Insull borrowed $250,000 from Chicago businessman Marshall Field, purchased a large share of the company’s stock, and then went to work selling electricity.
There were almost four dozen electric companies competing for Chicago’s electricity business when Insull came on the scene. At the time, less than 1 percent of Chicago’s homes used electric lamps. Insull’s goal was to grow exponentially. Expansion spelled greater volume, which meant lower unit costs of production, which meant greater profit. More income meant more investment, and more growth, and so on.
Insull formed a 25-person sales department and instructed his staff to sell at the lowest possible price. Insull was not lowering prices to compete. He maintained that competition was economically wrong and was instead lowering prices in an attempt to wipe out competition entirely. Insull quietly bought exclusive rights to electric equipment manufactured by General Electric and most other U.S. manufacturers to thwart competition. In his first 42 months in Chicago, Insull increased Chicago Edison’s sales almost five times. He also expanded Chicago Edison by buying out competitors.
Local politicians soon caught wind of Edison’s success. Accustomed to receiving kickbacks from companies doing business in Chicago, a group of politicians reportedly devised a plan to extort $1 million from Chicago Edison. They formed a dummy company, called Commonwealth Electric Company, and gave it a 50-year franchise to provide the city’s electricity. The founders of Commonwealth planned to force Insull to buy their company for $1 million or be frozen out of the market. They did not realize, however, that Insull owned the rights to the equipment it would take to run this company. Insull therefore was able to buy Commonwealth with its 50-year electricity franchise for the city of Chicago for just $50,000.
MERGER CONSOLIDATES POWER: 1907
In 1907 Insull merged Commonwealth Electric Company and Chicago Edison Company to form Commonwealth Edison (ComEd), a company whose sales exceeded the combined sales of New York Edison, Brooklyn Edison, and Boston Edison. After the merger, Insull formed a holding company called Middle West Utilities (MWU) to own small interests in ComEd and other investor-owned utilities. MWU itself was also a publicly traded company. Insull controlled MWU, and by 1912 MWU, in turn, controlled utilities in 13 states through relatively small shareholdings. Insull wanted nothing less than a monopoly wherever he operated, and in order to achieve this, he was willing to sacrifice a degree of control. Therefore, Insull agreed that his exclusive franchises with municipalities should be regulated by a state commission.
In 1906 Insull’s customers numbered 50,000 and doubled during the ensuing three years. ComEd’s growth was both rapid and smart. Insull diversified customers, spreading the demand for power as much as possible. For instance, he obtained major contracts with Chicago electric streetcar companies, which drew the most power when residential customers were at work and not at home using electric lamps and appliances. He went after big industry, offering huge subsidies to induce these daytime users away from using small, private power stations. Insull termed this approach to business as “massing production” and was succeeding at it before Henry Ford gained fame as a mass producer of the automobile.
The post-World War I period was a time of immense growth in demand for the electric industry. In 1923, the year the electric refrigerator became available to residential customers, ComEd added over 75,000 new customers to its service area, its largest annual increase up to that time. ComEd proved to be the only major steam-power electric company in the nation that neither raised its rates nor cut its dividends during the postwar period, although money for expansion was scarce. Insull exploited an idea he got from Pacific Gas & Electric, launching a hugely successful customer ownership drive. From 1919 to 1921 the number of ComEd shareholders who lived in Illinois grew from 50,000 to 500,000. Insull’s name was equated with trust by small investors.
The phenomenal control Insull had been able to exercise over his empire’s destiny began to crumble around 1926. He made several less-than-wise, if not illegal, financial moves over the next few years. After the October 1929 stock market crash, Insull, who believed the Great Depression would be short, continued to spend great sums of money on both the company and his many philanthropic endeavors. ComEd continued to grow and its stock continued to rise.
FROM THE GREAT DEPRESSION TO NUCLEAR POWER: 1931–60
Much of this growth, however, was deceptive. Assets and earnings were inflated, and in 1931 utility stock prices plunged. MWU’s stock dropped from $570 to $1.25 per share. Insull had financed much of MWU’s growth by using other utility properties as collateral. In 1932 banks took over MWU and Insull was forced to resign, claiming a personal loss of nearly $15 million. Eventually he was tried for fraud and embezzlement. Although Insull was not found guilty, he had left the power industry for good. ComEd itself, however, weathered the Depression relatively well, and business carried on. Modern conveniences such as the air conditioner and the electric water heater came on the scene in the 1930s and continued to stimulate increased demand for electricity.
During World War II, reserve capacity attracted war industries to the Chicago area. In 1943 about 40 percent of the company’s yearly output was tied to war production. In 1947 the city of Chicago conducted a study of ComEd’s service and found the company was significantly overcharging, especially residential and commercial customers. The utility’s initial franchise with the city was soon to expire, and a battle involving politicians, the utility, and customers ensued.
In 1960 ComEd began operating the nation’s first privately financed commercial nuclear power station, a 200,000-kW facility called Dresden I near Morris, Illinois. ComEd was leading the national charge toward nuclear power. J. Harris Ward became ComEd’s chairman the next year. He linked the company’s growth to nuclear power and committed large sums of capital investment to this program.
The utility’s ambitious plans called for 40 percent of its entire generating capacity to be supplied by seven nuclear-fueled plants by 1973. By 1969, however, the company’s nuclear program was experiencing technical difficulties, falling behind schedule, and suffering rapidly escalating costs. ComEd was forced to begin building a $160 million coal-fired unit at its Powerton plant in Pekin, Illinois.
COMED’S NUCLEAR POWER EXPANSION: 1970–86
The company’s commitment to nuclear-generated power was due, in part, to nuclear power’s potential as a cleaner fuel. The problems associated with burning fossil fuels came to a head in 1970 when the Chicago Department of Environmental Control named ComEd the worst polluter in Chicago, accusing the electric company’s fossil-fuel plants of causing more sulfur pollution than all other companies in the city combined. Thomas G. Ayers, president of ComEd, began bringing in low-sulfur coal from Montana, cutting sulfur emissions by 60 percent by 1973. That same year, he was elected chairman and CEO of ComEd. By 1972 ComEd was using nuclear power to generate 22 percent of its capacity, more than any other investor-owned utility in the nation. In the interest of assuring a uranium supply, ComEd acquired Cotter Corporation, a uranium mining and milling company in 1974.
During the 1970s, ComEd faced soaring operating and expansion costs, a situation that was exacerbated by problems of getting rate increases and plant construction clearances. The widely publicized nuclear accident at Three Mile Island, Pennsylvania, in 1979 heightened attention of both the public and regulators, and ComEd sent teams of nuclear experts to assist and study the situation. In 1980, in the middle of ComEd’s $4.5 billion construction of six new nuclear plants, earnings per share sank to their lowest level since 1965. As heavy industry in the area stopped growing, ComEd’s sales slowed drastically.
Into this bleak picture stepped ComEd’s newly appointed CEO, James O’Connor. Beginning in 1980, the Interstate Commerce Commission granted the utility a series of large rate increases. ComEd began to rebound, and by December 1984 O’Connor was predicting that rates would increase about 2.5 percent a year for three years, level off in 1988, and then stabilize.
In 1986, as ComEd struggled to finance the $7.1 billion building program for the last three of 12 nuclear plants, problems with the company’s Braidwood nuclear plant increased its construction cost more than 40 percent. This meant that ComEd would need a 4.8 percent annual increase for 11 years to cover the cost. Many observers felt that ComEd should have canceled or postponed some of its plants in the early 1980s due to underestimated construction costs and overestimated demand.
As a result of overbuilding in its nuclear program, ComEd’s generating capacity exceeded average peak demand by 33 percent in 1990 (most utilities maintain a 15 percent surplus). Thus, while many major utilities around the nation were found to be spending $15 to $51 on conservation per customer, ComEd was spending 39 cents per customer, according to a study by a committee of the Chicago City Council.
FORMATION OF UNICOM: 1994
In 1994 ComEd became part of a newly created holding company, Unicom Corporation. The company had recently been granted legislative approval to create an unregulated energy subsidiary, and the new corporate structure was intended to facilitate this. A subsidiary, Unicom Thermal, was also formed to develop new types of cooling systems to take advantage of laws mandating reductions in ozone-depleting cooling agents. Other subsidiaries would become involved in energy consulting and the manufacture of power generators although revenues from these operations were small.
Troubles with the company’s nuclear power plants continued to bring down profits, and in 1995 a 16 percent reduction in the workforce was announced. Moreover, ComEd was being fined regularly by the NRC for incidents ranging from workers planting a small quantity of radioactive material in a coworker’s pocket, to an employee being allowed to work while visibly drunk. By the mid-1990s only half of the company’s reactors were typically online, with the Zion plant the most seriously troubled. Other problems arose when the company announced the possibility of rolling blackouts, when peak energy demands exceeded production capacity. Critics pointed out that the company was still charging one of the highest rates for power in the country, yet was openly resisting buying extra electricity during the peak summer cooling season to keep its customers supplied with power.
In January 1998 ComEd finally moved to permanently close its Zion plant, and the following month CEO O’Connor stepped down. His successor was 52-year-old John W. Rowe, former CEO of New England Electric System and a lawyer with a strong background in nuclear power issues. Rowe’s challenge was not only to bring up the company’s ailing bottom line but to develop a strategy for the impending power industry deregulation that Illinois legislators had enacted. This would finally open up the power marketplace to all comers, with business customers available in 1999 and residential users to follow in 2002.
Rowe’s strategy, which he had developed in his years with New England Electric, was to focus more on delivery of power than production, opening the door to purchasing energy from outside providers. To that end he sold 16 of ComEd’s non-nuclear plants for $4.8 billion in early 1999, while the company also sought approval of a $3.4 billion bond issue. He also announced the company’s intention to purchase more energy industry service companies, such as heating and air conditioning contractors. Perhaps his boldest gesture was to publicly admit that ComEd’s longtime nuclear power strategy had been a mistake.
THE 2000 MERGER
Both PECO and Unicom were facing challenges related to deregulation when they announced their merger in September 1999. PECO, for example, had lost over 34 percent of its customer load since the market had opened for competition in January. Unicom’s ComEd was also experiencing a rash of problems caused by its out-of-date wires, cables, and transformers in the Chicago area. The region experienced power outages from July through August and the firm was forced to spend $20 million to remedy the situation.
Management of both companies believed that in order to operate in the highly competitive environment, it was necessary to evolve from a stand-alone regional utility concern into a large, formidable industry player. As such, PECO and Unicom eyed the merger of equals as a unique opportunity to strengthen their foothold on the U.S. utilities industry. The proposed deal was met with some opposition. The two companies seemed like an odd fit due to PECO’s strategy of acquiring nuclear power plants and Unicom’s focus on electricity delivery rather than power generation. However, both Rowe and McNeill believed that together the combined company would be a huge force in both generation and distribution.
Indeed, the combined entity would operate as one of the largest utility firms in the United States, controlling nearly 20 percent of the country’s nuclear generation market and serving approximately five million customers. The $31.8 billion merger was officially completed in October 2000. Operating under the new name ExelonCorporation, the company had three main business divisions. Exelon Generation included the company’s nuclear, fossil, and hydro fleet operations, as well as a wholesale marketing division. Exelon Energy Deliver included the electricity and gas retail operations of both ComEd and PECO Energy. Exelon Enterprises included the company’s utility and energy services that catered to businesses.
Exelon’s first year of operation proved to be rocky. The firm’s aggressive expansion of its Enterprises business group failed to pay off. The company laid off over 1,500 employees in that division as it reported losses through 2002. Then, in March 2002, co-CEO McNeill announced his resignation amid rumors that he was unable to see eye-to-eye with Rowe on the expansion direction of the company. McNeill, ready to pursue a large acquisition to bolster Exelon’s generating capacity, was challenged by Rowe, who felt that a purchase of a midsized utility offering both generation and distribution would best fit Exelon’s portfolio. In the end, McNeill stepped down as both an executive and director of the firm, leaving Rowe at the helm.
ROWE’S SEARCH FOR A MERGER: 2003–10
Rowe, who gained sole control over Exelon because he opposed a large acquisition, spent the next decade pursuing a large acquisition. The chase for a massive merger, ironically, defined his leadership tenure, marking an about-face in his strategic approach. Soon after taking command, Rowe reiterated to investors that a utility acquisition was low on his agenda. However, when confronted with the reality that Exelon operated within a mature industry and needed to act as a consolidator to increase its profits, he launched a $2.5 billion bid to purchase Illinois Power Co., the state’s second-largest electric utility, from Houston-based Dynegy Inc. in 2003.
Rowe failed to acquire Illinois Power. His lobbying efforts within the Illinois General Assembly fell short of their goal, which derailed the acquisition. Rowe needed to secure state approval for a rate increase in 2007, but lawmakers rebuffed his proposal. He pressed on, convinced that an acquisition represented the only way to increase Exelon’s earnings. In late 2004 he struck again, reaching an agreement to acquire New Jersey’s Public Service Enterprise Group. The transaction, a $17.8 billion takeover, dwarfed the Illinois Power deal. It promised to significantly widen Exelon’s lead as the nation’s largest utility company. Rowe’s hopes for a corporate marriage faded, however, dying a slow death as the deal sat before the New Jersey Board of Public Utilities for more than 19 months, hobbled by regulatory complications.
Rowe dropped Exelon’s bid for Public Service Enterprise Group and considered splitting up the company, dividing its regulated utility business and its power plant business. Exelon remained intact, however, and Rowe continued his search for an acquisition candidate, telling analysts and investors in 2007 that he was willing to step down as CEO if Exelon found the right merger partner. In November 2008 Rowe made his third attempt to complete a major acquisition, launching a hostile, $6.4 billion takeover of New Jersey-based NRG Energy Inc., a power plant operator. Because NRG did not own a regulated utility, Rowe would be spared contending with state regulators for once, but the opposition to the deal mounted by NRG’s management proved formidable. NRG’s management urged shareholders to reject the merger and after a nine-month-long bidding process Rowe backed down, unwilling to increase Exelon’s offer.
Rowe, whose term as CEO was scheduled to end in 2012, continued to search for a merger partner. While the hunt continued, Rowe launched a $4.6 billion program in 2010 to increase the capacity at the company’s nuclear plants. The capital expenditure program was designed to add 1,300 to 1,500 megawatts of capacity, an amount equivalent to the capacity of a new nuclear plant. The expansion was expected to take seven years to complete.
COMPANY PERSPECTIVES
Exelon strives to provide superior value for our customers, our employees and the communities we serve. Our vision is to become the premier energy company in the nation through environmental leadership, world-class operations and disciplined financial management.
| 1902: | Philadelphia Electric Company (PE) is incorporated. |
| 1907: | Samuel Insull merges Commonwealth Electric Company and Chicago Edison Company to form Commonwealth Edison (ComEd). |
| 1960: | ComEd operates the nation’s first privately financed commercial nuclear power station. |
| 1994: | PE adopts the name PECO Energy Company and ComEd becomes part of a new holding company, Unicom Corporation. |
| 2000: | PECO and Unicom merge to form Exelon Corporation. |
| 2006: | Exelon fails in its attempt to acquire Public Service Enterprise Group, a $17.8 billion deal. |
| 2010: | A $4.6 billion program to increase capacity at the company’s nuclear power plants is launched. |
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