Exelon Corporation

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Exelon Corporation

10 South Dearborn Street, 37th Floor
Chicago, Illinois 60690-3005
U.S.A.
Telephone: (312) 394-7398
Fax: (630) 663-7599
Web site: http://www.exeloncorp.com

Public Company
Incorporated: 1902 as Philadelphia Electric Company
(PECO) and 1907 as The Commonwealth Edison Co.,
Inc. (Unicom)
Employees: 29,200
Sales: $15.1 billion (2001)
Stock Exchanges: New York
Ticker Symbol: EXC
NAIC: 221122 Electric Power Distribution; 221113 Nuclear Electric Power Generation; 221112 Fossil Fuel Electric Power Generation; 551112 Offices of Other Holding Companies

Exelon Corporation was formed from the 2000 merger of PECO Energy Company and Unicom Corporation. The deal created one of the largest utilities in the United States, with over $15 billion in revenues. Exelon serves five million electric and natural gas customers and operates with three main business segments: energy generation, energy delivery, and unregulated enterprises. With headquarters in Chicago, the company provides electricity to customers in both Illinois and Pennsylvania and also distributes natural gas in Pennsylvania. Through Exelon Nuclear, the firm operates ten stations and 17 nuclear units, making it the largest nuclear fleet in the United States.

The History of PECO

The Philadelphia Electric Company 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 ten of Philadelphia’s wealthiest entrepreneurs to invest in a company in “the business of manufacturing, procuring, owning and operating various apparatus used in producing light, heat, or power by electricity or used in lighting buildings.” 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.

Electric utilities customarily focused on a particular product, such as street lighting or industrial applications, in the late 1800s. As its name implied, The Brush Electric Light Company was primarily involved in commercial and street lighting. The Brush Company’s first president was Henry Lewis, a dry goods merchant who served until his death in 1886. Dolan, who had been treasurer, chairman of the executive committee, and de facto head of the company, assumed the presidency at that time. He deflected early criticism of Brush’s poles and wires, oversaw the construction of its first permanent generating facility, and helped increase the company’s capitalization to $1 million to finance construction and expansion.

Throughout this early stage in the history of electric utilities, competition and fragmentation characterized the industry. Within the same city, varying voltages, currents, and frequencies provided by a multitude of companies made it difficult to develop standardized products. Utilities began to consolidate near the end of the 19th century to end competition and coordinate service. Brush merged with its most powerful rival, The United States Electric Lighting Company of Pennsylvania, in 1885.

The merged companies secretly formed an “Electric Trust,” known more commonly today as a holding company, in 1886. Secrecy was required because of the mistrust in which the public and politicians held such combines. The Trust soon acquired or controlled four more small local utilities, issuing $3.5 million in bonds as financial backing. However, as its existence came to light in the early 1880s, public and media criticism of the “monopoly” intensified. The Trust’s “unpopularity stemmed from its very name. Its behind-doors management of the operating companies could never bring it goodwill,” according to Nicholas B. Wainwright in his History of The Philadelphia Electric Company, 1881–1961.

Competition hurt Brush as well. Its competitor, the Edison Electric Light Company of Philadelphia, had grown to equal the Trust in profits by 1892. Around the same time, local entrepreneur Martin Maloney reentered the electric industry after a successful gas venture. Maloney hoped to eliminate wasteful competition by consolidating Philadelphia’s electric companies and standardizing service. He chartered the Pennsylvania Heat, Light and Power Company in 1895 with a massive capitalization of $10 million and immediately began to acquire competitors, taking over Columbia Electric Light Company and courting the Philadelphia Edison Company. By March 1896, he had merged with Edison and earned a seat on its board of directors.

When Maloney’s Pennsylvania Heat acquired the Electric Trust and all its subsidiaries later that year, Thomas Dolan joined its board of directors. Unlike the Electric Trust, Maloney’s consolidation scheme proceeded relatively smoothly in part because of a good public perception of his goals, which he stated in his first annual report: “To secure that class of service that would enable the Company to furnish to its patrons electricity under such conditions that they could use it more generally and apply it in many ways that the high prices prevailing prevented, and to demonstrate to the citizens of Philadelphia that a corporation could work for the benefit of the public and its stockholders at the same time.” Maloney did, in fact, cut residential rates to below the national metropolitan average.

In 1898, Maloney absorbed five of Philadelphia’s eight remaining independent arc lighting companies. A threat to his progress arose the following year with the formation of the $25 million National Electric Company. This new entity immediately acquired the Southern Electric Light and Power Company, one of the few strong competitors remaining. Maloney negotiated a merger of the two big companies that year. The combination had assets of $19.9 million and net profits of $518,000. The companies incorporated as the Philadelphia Electric Company (PE) in 1902.

Maloney retired and was succeeded as president by 29-year-old Joseph B. McCall, who guided the company through the difficult period of legal, financial, and technical reorganization that ensued. Demand had risen rapidly, and by the turn of the century, it was clear that the utility would need a massive central generating station. When PE’s Station A on the Schuyl-kill River was completed in 1903, it was the largest in the state, generating over 7,000 kilowatts (kW). Although PE standardized much of its service as alternating current, most of downtown Philadelphia, which was served by the Edison division, continued to operate on direct current until 1935 (reflecting Thomas Edison’s conviction that alternating current was dangerous). PE moved to a new, larger headquarters at the corner of Tenth and Chestnut streets in Philadelphia in 1907. That location would remain the center of PE operations until 1973.

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-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. A centennial history published by PE in 1981 quoted an employee of the time who affirmed “the sigh of relief’ felt at Schuylkill Station on Armistice Day.

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 twelve 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.

PE recorded another influential event during the prosperous decade of the 1920s: the creation of the Pennsylvania-New Jersey Interconnection in 1927. This cooperative linked Public Service Electric and Gas Company of New Jersey (which had had a partnership with PE since 1923) and Pennsylvania Power & Light Company (of Allentown) with Philadelphia Electric. The organization took advantage of regular fluctuations in each utility’s power requirements to achieve economies of scale. For example, Allentown experienced morning peaks in October due to its coal mining activities, while Newark and Philadelphia scored highs in the December holiday season. The three original members were joined by the General Public Utilities Corporation and the Baltimore Gas and Electric Company in 1956, when the cooperative’s name was changed to the Pennsylvania-New Jersey-Maryland Interconnection (PJM). The Potomac Electric Power Company (PEPCO), serving metropolitan Washington, D.C., joined in 1965. The cooperative promoted savings and reliability.

Company Perspectives:

At Exelon, everything we do is guided by our four core values: 1) boldness in staking out a leadership role in tomorrow’s energy markets; 2) creativity in improving the quality of life through energy; 3) accountability to our customers, shareholders, employees, and communities; 4) commitment in operating facilities safely, protecting the environment, and developing our businesses responsibly.

In the early 20th century, Philadelphia Electric’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 Philadelphia Electric 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 effect of the Depression on Philadelphia Electric was characterized by company historian Nicholas Wainwright as “harassing but not crippling.” Net income actually increased in spite of a steady decline in residential and industrial customers. There were no large-scale layoffs; PE relied on attrition to shorten its payrolls. The company was surviving well enough, in fact, that during the depth of the Depression in 1932, it ordered one of the era’s largest generating units. The 165,000 kW machine known as “Big Ben” was the first in the country to burn pulverized coal and employ electrostatic emissions reducers. It ran from 1935 to 1977. In 1938, Horace P. Liversidge, who had first been employed by PE in 1898 as a wiring inspector, advanced to the company’s presidency. Liversidge has been credited with shaping the company’s modern history.

The Depression also brought Franklin D. Roosevelt’s New Deal and with it the Securities and Exchange Commission, which regulated the activities of holding companies, in 1935. Electric utilities had been regulated since the 1910s, but holding companies were not regulated early in the 20th century. Although some holding companies were legitimate structures created to coordinate associated industries, many were precarious “pyramids” of companies. The organizers of these corporate entities could use the combined value of subsidiaries to finance loans, then charge the subsidiaries outrageous rates for the redistributed funds. As the oldest public utility holding company in the world, UGI was reluctant to submit to a breakup order, but by 1943, Philadelphia Electric was once again an independent company. PE retained the suburban gas and electric utilities that had been merged into it in 1929.

World War II once again forced a concentration of manufacturing capacity on war production: Philadelphia produced ships, tanks, and armaments, and PE supplied the power to do so. Before the United States entered the war in December 1941, these preparations were made in addition to normal civilian production. Voluntary and mandatory restrictions on the use of power, as well as curtailment of civilian production, prevented a wartime power shortage.

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. Philadelphia Electric 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 ten 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 minemouth 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. Keystone began running in 1967, the same year that Pennsylvania Electric’s Muddy Run pumped-storage hydroelectric generating plant (the largest of its type) on the Susquehanna River began operation.

Key Dates:

1902:: The Philadelphia Electric Company (PE) is incorporated.
1907:: Samuel Insull merges Commonwealth Electric Company and Chicago Edison Company to form Commonwealth Edison (ComEd).
1927:: The Pennsylvania-New Jersey Interconnection is created.
1929:: PE merges with United Gas Improvement Company.
1932:: Banks take over Insull’s MWU holding company; Insull is forced to resign amid fraud and embezzlement charges.
1943:: PE becomes an independent company once again.
1953:: The Public Service Company of Northern Illinois merges with ComEd.
1960:: ComEd operates the nation’s first privately financed commercial nuclear power station.
1968:: Regulatory delays prevent the completion of PE nuclear power plants in Limerick.
1974:: ComEd acquires Cotter Corporation.
1980:: ComEd’s earnings per share sink to their lowest level in 15 years.
1987:: PE’s earnings fall after the Public Utilities Commission refuses to allow a rate hike.
1994:: PE adopts the name PECO Energy Company; ComEd becomes part of a new holding company, Unicom Corporation.
2000:: PECO and Unicom merge to form Exelon Corporation.

Philadelphia Electric 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 fifty other utilities to build a prototypical reactor dubbed Peach Bottom No. 1. It took almost a decade for the unit to go into production, but 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.

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 Philadelphia Electric’s total assets exceed $5 billion for the first time.

PE was faced with 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,” or, as Amy Barrett of Financial World alleged in a May 1990 article, “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.

Over the course of the 1980s and into the 1990s, the Pennsylvania Public Utilities Commission (PUC) executed several policy reversals with regard to Philadelphia Electric, its nuclear operations, and its rates. In 1982, the PUC refused to allow a rate hike to pay for the second phase of the plant and halted the project. Three years later, as Limerick’s first phase was nearing completion, the Commission gave PE the green light on Limerick II, but set stringent time and financial limitations on the project. Although the plant came in almost $400 million under budget and nine months ahead of schedule, the PUC refused to increase rates to help cover capital costs, citing “excess reserve power capacity” and thereby implying that Limerick II was inherently wasteful. Earnings in the late 1980s and early 1990s reflected the rate ruling, as per share income plummeted from a high of almost $3 million in 1984 to $2.33 million in 1987 and $0.07 million in 1990. That year, CEO 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 Philadelphia Electric’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 America’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.

The History of Unicom

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, and 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 the newspaper tycoon 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, according to Forrest McDonald’s biography of Insull, told them 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 all together. 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.

In 1907, Insull merged Commonwealth Electric Company and Chicago Edison Company to form Commonwealth Edison, 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; in 1909, that number had reached 100,000. 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 “massing production” and was succeeding at it before Henry Ford gained fame as a mass producer of the automobile.

Taking an idea he learned from the English electricity business, Insull charged a dual rate for power: a higher rate for the first several hours of electrical usage, and a progressively lower rate thereafter. This covered the costs of adding equipment for new customers and encouraged greater use. He also kept cutting rates. The company, from early on, regularly paid out an eight cent dividend to shareholders.

Insull approached generating electricity with the same zeal he showed for selling electricity. He ignored the apparent limits of the day’s technology, pushing his engineers to build generators that were several times larger than any other generators in existence. Historical accounts suggest that Insull was progressive in his dealings with workers, not out of personal convictions but rather to ensure the effective and continuous operation of ComEd’s facilities. Insull hired women and minorities, gave his employees relatively generous benefits, and maintained a cooperative relationship with labor leaders.

Insull was ahead of his time in yet another significant way—he was a master at public relations. He established an advertising department as early as 1901, and his rate cuts were well timed and well publicized. Moreover, he published and distributed a free tabloid, Electric City, which shaped a positive public opinion of electricity, and, of course, the electric company itself. Insull began publishing annual reports 15 years before they became standard.

During World War I, Insull was a fervent supporter of England. He personally spent $250,000 attempting to sway public opinion in favor of the U.S. entry into the war, after which Insull worked to raise money for the war effort. After World War I, Insull was able to capitalize on the high profile he had cultivated during the war to promote the interests of ComEd.

The postwar 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, though 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. During that time, he was perhaps most recognized for his contribution to the Chicago Civic Opera. ComEd continued to grow and its stock continued to rise.

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. Though 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.

As a utility overseen by a regulatory commission, ComEd was allowed a reasonable rate of return, but there was a great deal of debate over what “reasonable” meant. In comparing utilities in the nation’s 23 largest cities, ComEd was found to spend twice as much on advertising as any other utility. Critics questioned whether customers should pay higher rates to support advertising of a monopoly. They also wondered if legal fees would be passed on to customers if the city were to take ComEd to court? Although these and other criticisms were addressed in the report, in the media, and by members of the city council, a powerful faction in the city council supported ComEd, and the city ultimately signed a 42-year franchise that did little to address these criticisms. Some observers believed that neither the franchise agreement nor the state regulatory body, the Illinois Commerce Commission (ICC), clearly defined “reasonable rate of return.” It was left up to ComEd, although the ICC did set a maximum rate.

ComEd’s customers did not feel the sting of this arrangement until many years down the road, when Edison’s nuclear program ran into decades of cost overruns. In the short term the company flourished, and customers benefited. By 1951, ComEd had assets of $1 billion. In 1953, the Public Service Company of Northern Illinois—which had been created in 1950 by the merger of Western United Gas & Electric Company and Illinois Northern Utilities Company—merged with ComEd. The following year, ComEd created the Northern Illinois Gas Company to own and operate its gas properties. In 1955, the company began using an electronic computer for billing, and by 1959 ComEd was reaching two million customers.

Rate reductions averaged more than $36 million a year between 1962 and 1967; the utility’s operating revenues rose from $492 million in 1962 to $658.7 million in 1966. In 1966, ComEd absorbed the Central Illinois Electric and Gas Company, basically establishing an integrated electric system for all of northern Illinois and further capitalizing on economies of scale.

In 1960, ComEd began operating the nation’s first privately financed commercial nuclear power station, a 200,000-kilowatt 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. “The delays forced us to double-build,” Ward was quoted as stating in the September 15, 1969 issue of Forbes. This adjustment in ComEd’s nuclear program was only one in a long line of costly setbacks.

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.

In 1971, planning began on a joint proposal with the Tennessee Valley Authority to build and operate the United States’ first commercial fast breeder reactor. This kind of power plant would produce more fuel than it used. It would also produce more highly radioactive waste than its predecessors. The project was approved by the Atomic Energy Commission in 1972, and though that breeder reactor was completed and more followed, the problems of disposing of the high-level nuclear waste continued. Nevertheless, in 1973 the company, for the third time in its history, received the industry’s Edison award for its leadership in the development of the breeder reactor.

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 ICC 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.

In 1990, the company’s net income fell to $128 million, or 22 cents per share, from the previous year’s $693 million, or $2.83 per share, largely because of court-ordered refunds and rate rollbacks. Also in 1990, at a time when customers were growing increasingly unhappy with paying some of the nation’s highest rates, the utility’s franchise term with the city of Chicago was due to expire. A coalition of community and environmental groups had formed in 1988 to pressure the city to stir up public debate over the city’s electricity options. These amounted to a renegotiated franchise or municipal acquisition. Meanwhile, ComEd waged an advertising campaign to tout the quality of its service.

In the summer of 1990, two major substation fires caused 60,000 customers to lose power for up to three days. The city postponed its decision on the franchise issue to allow more time to study the utility’s reliability. Negotiations on a new franchise concluded in 1991, and ComEd was granted a 29-year contract.

The company’s costs were still high, and with a series of lawsuits on the verge of settlement ComEd cut its dividend in 1992 by a whopping 47 percent. A year later, the company agreed to the biggest refund in utility industry history. Over the next 12 months, ComEd would pay back $1.34 billion to its customers, primarily because it had passed the costs of building unnecessary nuclear plants on to them. A rate reduction of $339 million was also effected.

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, though 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 work force was announced. Moreover, ComEd was being fined regularly by the Nuclear Regulatory Commission 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 long-time 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. For instance, The Philadelphia Business Journal reported in July 1999 that PECO 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. Rowe claimed in a 1999 United Press International article that the merger would create “a base from which we will build a leading energy delivery business and establish ourselves as a significant competitor in the emerging retail energy marketplace.”

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 Exelon Corporation, the company had three main business divisions, including Exelon Generation, which included its nuclear, fossil, and hydro fleet operations, as well as a wholesale marketing division; Exelon Energy Deliver, which included the electricity and gas retail operations of both ComEd and PECO Energy; and Exelon Enterprises, a unit that 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—a group that focused on forays into new ventures, especially in the telecommunications market—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 mid-sized 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.

By February 2002, electricity prices were down nearly 30 percent and the power generation sector of the industry was experiencing an over supply. In fact, the power generation industry overall was faltering due to the public collapse of Enron Corporation, a disaster that left consumers leery of the competitive energy market. To make matters worse, Exelon was hit by a class action law suit in May 2002 by shareholders that claimed the company reported misleading statements regarding its financial position in April through September 2001. The suit claimed that Exelon failed to reveal significant information regarding the losses experienced by its Enterprises group. While the company claimed that it would meet its projected $4.50 per share earnings for 2001, it instead secured consolidated earnings of $4.43 per share.

Despite these challenges, Exelon management was confident that the company would continue to grow as a leading utility concern. With a long-standing history behind it, the newly formed entity was indeed prepared to handle the obstacles brought on by the changing marketplace. How the company chose to handle these obstacles however, remained to be seen.