Consumers Power Co.

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Consumers Power Co.

212 W. Michigan Ave.
Jackson, Michigan 49201
U.S.A.
(517) 788-0550
Fax: (517) 788-0258

Wholly Owned Subsidiary of CMS Energy Corp.
Incorporated: 1910
Employees: 9,382
Sales: $3,340 million
SICs: 4939 Combination Utility Not Elsewhere Classified

Consumers Power Co., a subsidiary of CMS Energy Corp. since 1987, is the largest utility company in Michigan and the fourth largest in the United States; it has provided electricity and gas to Michigan homes throughout the 20th century and services six million people across the state.

The Consumers Power Company was formed in 1910 through the merger of the properties of the two largest Michigan power company owners, W. A. Foote and the partners Anton G. Hodenpyl and H. D. Walbridge. Through the Commonwealth Power holding company, Foote controlled almost all the electric utilities in western Michigan including the Jackson, Albion, Kalamazoo, Battle Creek, Plainswell, and Grand Rapids electric companies. Foote also had interests in a number of “traction lines,” the electric trolley systems that were one of the most important customers for his electric power. The long-time partners Hodenpyl and Walbridge, in turn, controlled most of the gas companies in eastern Michigan, along with some electric power facilities and traction lines. The Hodenpyl and Walbridge interests also extended into New York, Pennsylvania, Illinois, and Indiana, where the partners had been consolidating gas, electric, and tram lines into multiutility “railway and light” companies. The merger of the properties of these entrepreneurs into the Consumers Power Company created the largest utility company in Michigan and formed the basis for what was to become, for a brief period, one of the most important utility conglomerates in the United States.

The primary source of power for these pioneering electric utilities was the swift-flowing rivers of Michigan. They had been crucial in the earlier development of the state, providing transportation for the logging industry that had opened up western Michigan. By the late 1800s, however, both the customers for wood products and the supply of timber had dried up, and the rivers, surrounded by decimated forest land, had lost their commercial value. W.A. Foote, a miller by trade, had been accustomed to harnessing water to run his flour mill. When a local entrepreneur asked him if he could set up a small electric dynamo in his flour mill, Foote became intrigued by the potential of this new way of exploiting water power. In 1885, Foote sold his mill and entered the electric utility business. Like all electric companies at that time, Foote’s first plants in the towns of Adrian and Jackson were small in scale and were intended only to generate enough electricity to power street lights and some residential and business lighting. These needs could be met by local hydro- or coal-powered generators, but as electric trolley cars became more and more popular the demand for plentiful and (even more important) consistent electric power began to exceed the output of small local power plants. In 1898, William Foote, with the help of his engineer brother, James, undertook construction of the first large-scale dam in Michigan along the Kalamazoo River. Although at first beset by problems of power loss because of the then daunting 25 miles of wire needed to stretch to the nearest town, the Trowbridge dam and its successors, the Rogers and Croton dams, provided the bulk of the electric power in western Michigan for the next 30 years.

While W. A. Foote was building his tiny electric empire in western Michigan, the partners Anton Hodenpyl and Henry D. Walbridge were buying up local gas and traction line companies and merging them into larger interregional concerns. Gas power was the older cousin of the lighting industry. By the turn of the century gas companies had already had some fifty years of experience in lighting the streets and homes of America, and whereas electric power was still a risky venture, gas companies had a secure financial basis. Gas not only had the advantage of being first on the scene, but residential customers preferred its soft light to the harsh glare of the incandescent bulbs. Financiers rather than engineers, Hodenpyl and Walbridge operated out of a New York City office from which they controlled an evergrowing network of utilities and electric railway companies. The turn of the century was the heyday of the electric transportation industry in the United States. Not only had local tram lines become an essential part of town life, but “interurbans” — the intercity electric railways—were increasingly stealing the business of the more expensive and dirtier steam locomotives. With the internal combustion engine still only a novelty, the clean, comfortable interurbans seemed to be the wave of the future. Even old railroad barons like Cornelius Vanderbilt were convinced that control of the electric railways was essential to continuing in the train business. In 1906 Vanderbilt offered Hodenpyl and Walbridge an astounding $1 million for their New York area traction lines. The partners quickly accepted the offer, thereby obtaining the much needed capital to expand their acquisition of utilities.

It was by the unlikely means of a small-time Michigan lumberman, Edward Loud, that the Foote and Hodenpyl-Walbridge interests became merged. Loud had been slowly buying up lands along the Au Sable River with the long-term plan of shoring up his family’s crumbling lumber business by selling the power of the swift Au Sable current. Loud discussed his plans for a dam with Foote, and though both men were convinced that the project had merit, neither had the capital necessary for such a large undertaking. In 1908, Hodenpyl-Walbridge & Company’s attention was drawn to the Au Sable, and so they invited Loud to New York to discuss a possible purchase. Foote saw his chance to merge some of the Hodenpyl-Walbridge capital, his company’s technical expertise in hydropower, and Loud’s Au Sable holdings. It soon became apparent that the benefits of this limited deal could be extended to the entire operations of the two utility firms, and by 1909 the merger had been completed.

The birth of Consumers Power, however, was not without complications. The same financial pressures and incentives that had given rise to the company had caused mergers and buyouts to spring up throughout the utilities industry. Critics were beginning to question the wisdom of allowing control over such an essential service to be concentrated in the hands of so few. Michigan politicians responded to this concern by giving the already existing Railroad Commission additional jurisdiction over electric rates and utility securities. This meant that any new offer of securities in connection with the founding of Consumers Power would have to be approved by the commission. There was no particular reason to believe that this approval would not have been given in the long run. The financiers, however, did not relish the idea of an intensive and lengthy public investigation of the assets and earnings of the myriad of small utility companies involved in the merger. They chose instead to simply bypass the commission by incorporating Consumers Power as a holding company in the state of Maine. The new company would have control over Foote’s old operating company, Commonwealth Power, as well as the other Michigan utilities held by Foote or Hodenpyl-Walbridge. Consumers Power would in turn be controlled by a super-holding company to be called the Commonwealth Power Railway and Light Company, which also controlled a variety of utility and electric railway companies in other states. This system of nested holding companies not only allowed the financial management of these diverse companies to be under the control of a single group of men, it permitted the operating companies to retain their independence to raise funds through stock offerings.

World War I was a turning point for Consumers Power and its holding company, Commonwealth Power Railway and Light. Not only had the war sapped capital needed for the construction of large hydro dams and electric railway lines, but the automobile was making serious inroads into the electric railway business. The electric interurbans, which had seemed the great new trend in transportation through the first two decades of the century, suddenly seemed awkward and expensive when compared to the gasoline-powered automobile. Thus the electric railway business that had provided the bulk of Commonwealth Power’s profits during the height of W. A. Foote’s presidency had dropped to a distant third behind electricity and gas by the early 1920s. The decline in the electric railway had serious repercussions for Consumers Power, which had relied on the interurbans for the bulk of their electric power sales.

Under the leadership of B. C. Cobb, Consumers Power took two important steps in securing a future despite this harsh climate. Because the company could no longer rely on major sources of capital, they began to offer preferred shares to all of their customers. By the end of 1920, 6, 378 shares had been sold and the tradition of broad public ownership of utility stocks had been established. It was more difficult to respond to the lost sales caused by the decline in the electric railway. Electricity and gas were still seen primarily as sources of light. Consumers Power realized that it would have to create the market for its utilities by promoting new uses for the power it provided. The company began an intensive effort, including theatrical demonstrations and a bevy of traveling salesmen, to introduce the many gadgets and appliances that could be powered by electricity. Thanks in part to these promotional campaigns (as well as an aggressive new spate of acquisitions), net income grew from $4.2 million in 1922 to $14.3 million in 1929.

By the early 1930s Consumers Power’s holding company, Commonwealth Power, divested of its failing electric railways, had acquired a large number of smaller utility companies. In a race to become one of the major players in the utilities field, Commonwealth Power, now called Commonwealth and Southern, had bought and operated properties in Michigan, Illinois, Ohio, Indiana, Alabama, Georgia, Mississippi, Florida, and Tennessee. It was the last acquisition that brought Commonwealth Power into its most bitter confrontation with the Franklin D. Roosevelt administration.

The utilities industry was increasingly becoming consolidated in the hands of fewer and fewer large holding companies, and the newly elected Democratic government was determined to diminish the power of these corporate giants. The battle over utilities monopolies came to a head when Roosevelt signed a bill granting control over electric power production and distribution to the publicly owned Tennessee Valley Authority. This placed a publicly owned utility in direct competition with Commonwealth and Southern’s Tennessee Electric Power Company, and it brought Consumers Power’s president, Wendell Willkie, into direct confrontation with the Roosevelt administration. After a long, drawn-out battle and several trips to the U.S. Supreme Court, Willkie admitted defeat and sold Tennessee Electric to the TVA. The war over utilities, however, had just begun. Willkie’s campaign to halt public ownership of utilities had been very public and very vocal, prompting high-level Republicans to recruit the longtime Democrat to run against Roosevelt in the 1940 presidential race. Willkie’s electoral defeat by the immensely popular incumbent set the final stage for the dissolution of the giant privately owned utilities.

The Public Utility Act of 1935 had called for the dissolution of all utility holding companies that could not show that they controlled a regionally distinct and internally integrated system of operating companies. Commonwealth and Southern argued that the management of Consumers Power and its other operating companies was internally consistent and compact and that the holding company met the requirements of the law. Interpretation of the Public Utility Act was fraught with difficulties, however, and it would take six years—and Willkie’s defeat— before the Securities and Exchange Commission reached a final decision as to the fate of Commonwealth and Southern. In 1941 the ax finally fell and the holding company was ordered to divest itself of either Consumers Power or its southern operations. World War II would delay the enforcement of this decision, but in 1946 Commonwealth and Southern was dissolved and Consumers Power, under the direction of Justin R. Whiting, was left as an independent gas and electric utility company.

The postwar years were a boom period for Michigan industry. Given the abundance of large, new factories in need of Consumers Power electricity, kilowatt-hour sales nearly doubled between 1945 and 1955. Michigan’s new employment opportunities also gave rise to a surge in population, and Consumers Power residential sales boomed. Most of the increased sales were due to an almost eightfold increase in the use of gas furnaces over the same period. Although gas heating had been available since the turn of the century, the manufactured gas that Consumers Power supplied to its customers produced comparatively little heat per unit burned, making gas heating prohibitively expensive. In the mid-1930s natural methane gas had been used in small areas on an experimental basis; it was found that, with its higher heat value, gas costs for home heating could be cut by about 50 percent. By 1945 Consumers Power had converted entirely to natural gas and quickly made up for (and then far exceeded) the number of customers it had lost in the amount paid per household. During this same period a number of acquisitions of smaller regional utilities allowed Consumers Power to extend operations over most of central Michigan, from the northern tip of Michigan’s Lower Peninsula to the Ohio border.

In response to the increased demand for electricity and gas in the 1950s and 1960s, Consumers Power undertook the construction of a large number of new production, storage, and distribution facilities. Although hydro had delivered the bulk of Michigan’s electric power for the first decades of the century, it soon became impossible to meet the demands of a growing population, given the limited number of dams that could be built on Michigan’s waterways. Coal-powered, steam-driven turbines became the only viable alternative. Thus the two existing coal-powered facilities were enlarged and three new coal plants were built during this period. These five plants, all named after important past executives of the company, would continue to provide about 80 percent of Consumers Power electric power through the mid-1990s.

When Consumers Power gave up manufactured gas in favor of natural gas it traded its production problem for one of supply. Throughout the 1930s and 1940s the company’s main source for natural gas had been the Panhandle Eastern Pipeline Company, which piped gas from the resource-rich panhandle region of Texas, Kansas, and Oklahoma to population centers in the Northeast. In the 1950s this source was supplemented by supplies from the Trunkline Gas Company, with its wells in the Gulf Coast area (it later became Consumers Power’s largest gas source). The company also exploited local Michigan wells, but these could never produce what was needed for heating homes through the bitter Michigan winters. The problem of seasonal demand was ingeniously solved by using the Michigan gas fields as huge natural storage tanks into which excess gas could be pumped during the summers, when demand was low. This system of gas storage would remain an essential component of the company’s gas distribution system through the end of the century.

The ever-growing problem of energy supply created the biggest challenges for Consumers Power executives throughout the 1960s and 1970s. As the supply of coal shrunk and prices rose, Consumers began to look seriously toward other ways of producing electricity. In the 1950s scientists and the public were determinedly seeking a peaceful use of the enormous potential of atomic power. In a 1950s replay of the turn of the century, when it seemed electric trains would dominate transportation in the 20th century, nuclear power seemed poised to become the solution to the world’s energy problems. Under the directorship of James H. Campbell, Consumers Power teamed up with Detroit Edison, the second largest utility in Michigan, to build an experimental “breeder” reactor; then in 1958 it built a small boiling-water reactor at Big Rock Point, Michigan. The Big Rock project was initially fraught with technical difficulties and cost overruns, but this was expected given the pioneering nature of the enterprise. As senior vice-president Robert Allen put it in the official history of the company, “Big Rock had a tremendous facility for demonstrating things in a negative way.” By the late 1960s Consumers Power felt it had learned enough about nuclear power generation to build a larger, and hopefully profitable, nuclear reactor: It was the Palisades nuclear plant that would mark the end of Michigan’s honeymoon with nuclear power and the beginning of Consumers Power’s financial problems.

Big Rock had been built with little controversy, but by the 1960s public awareness of potential environmental problems with nuclear power had grown. Consumers Power was confronted with considerable organized objection to the Palisades plant from environmentalists concerned with the discharge of hot water from the plant into Lake Michigan. Construction cost overruns, the delays caused by the environmental intervention, and the environmental safeguards that were eventually added to the plant ended up costing Consumers Power millions more than had been budgeted. By 1971 the effect of the Palisades debacle, in addition to soaring energy costs, seriously affected Consumers stock, which fell to $30 per share from a high of $54. To make matters worse, the Michigan Public Service Commission refused to authorize a large rate increase to offset these costs.

Even before the completion of the Palisades plant plans had been under way to construct a second nuclear facility at Midland, Michigan; in spite of the problems at Palisades the company decided to go forward with this huge project. The Midland facility was originally scheduled to open in 1975 at a cost of about $500 million. Ten years and $3.5 billion later, Consumers Power pulled the plug on the still unfinished plant. If Consumers Power found itself in trouble with investors in the early 1970s because of the Palisades overruns, by 1984 the ill-fated Midland project caused a crisis. Shares bottomed out at $5 and the company suspended the common stock dividend. Investors bailed out in droves and Barron’s was suggesting that bankruptcy might be an attractive option. The monumental cost overruns were blamed in part on mismanagement. The reputation of the 75-year-old company was at an all-time low. In 1985 William T. McCormick Jr. was hired to save the beleaguered utility.

McCormick’s first move was to restructure Consumers Power and create a holding company, CMS Energy, to manage the utility. With the holding company McCormick could expand the company’s nonregulated energy business and take risks that might be considered inappropriate for a publicly regulated utility. His next priority was to try to salvage some of the $4 billion white elephant at Midland. Dow Chemical had previously agreed to buy steam and energy from Midland and in 1984 had filed suit against Consumers, alleging mismanagement and cover-ups by Consumers management. Clearly, McCormick needed to make peace with Dow to get Midland and Consumers on their feet again. He reached a deal with the giant chemical company whereby Midland would be converted to a natural gas cogeneration plant that would produce steam, which would be used for Dow’s chemical processing needs, as well as electricity, which would be sold to CMS’s primary subsidiary, Consumers Power. Forty-nine percent of the venture was to be owned by CMS, and 51 percent by a group of investors led by Dow. With this structure the Midland Cogeneration Venture (MCV) would be governed by the Public Utilities Regulatory Policy Act (PURPA), which allows independent power producers to sell their power to utilities for the avoided cost of production by the utility.

The Midland Cogeneration Venture was plagued by years of lawsuits and disputes with regulators over the amount and cost of the energy to be provided to Consumers Power and its customers. By 1994 CMS Energy had reached an agreement in principle with most concerned parties that allowed Consumers Power to buy a substantial portion of MCV s energy output at the avoided cost of production. The difference between the original contract with MCV and this agreement would, however, result in substantial ongoing losses for the utility in the purchase of this energy. McCormick’s restructuring and the authorization of substantial rate increases by the Michigan regulators succeeded in restoring Consumers Power to profitability. Continuing troubles with Midland, as well as cost increases surrounding the decommissioning and waste disposal at its nuclear facilities, would, however, continue to depress CMS stock price and dividends into the late 1990s.