Philadelphia Electric Company

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Philadelphia Electric Company

2301 Market Street
Philadelphia, PA 19101
U.S.A.
(215) 841-4000
Fax: (215) 841-4188

Public Company:
Incorporated: 1902 as The Philadelphia Electric Company
Sales: $3.71 billion
Employees: 9,600
Stock Exchanges: New York Philadelphia

Philadelphia Electric Company (PECO) is one of the oldest and largest utility companies in the United States, and a leading producer of nuclear power. A total of 65% of its power output is generated by its three nuclear power plants at Limerick and Peach Bottom, Pennsylvania, and Salem, New Jersey, compared to 20% for the United States as a whole.

PECO has its origins in the work of Thomas Edison. Between 1876 and 1900, Edison applied for over 1,000 patents for inventions produced by him and his team of research assistants. It was Edison’s idea that a single fiber charged with an electric current could glow indefinitely in a vacuum. Edison perfected his invention in 1879, and in a few years electric lighting supplanted gas light.

In 1836, the first gas plant in Philadelphia had been built, and shortly thereafter most of the city was lighted by gas. In 1881 the first electric arc lamps, predecessor to Edison’s incandescent light bulb, were installed on Chestnut Street, by Brush Electric Light Company. Brush Electric Light Company manufactured the most advanced form of electric light prior to Edison’s bulb. By 1881 numerous individuals sensed that considerable profits could be made from electric lighting, as well as from other applications of electricity. In 1882 two Philadelphia high school teachers, Edwin J. Houston and Elihu Thomson, established The Philadelphia Electric Lighting Company, a predecessor of General Electric Company, although it did not begin to do business until 1886. This company sold the electrical equipment invented and tested by Houston and Thomson to utilities. The Thomson-Houston electric lighting system was widely used by the many companies providing electric service in Philadelphia. With the city’s wealth, huge coal supplies, and a population in 1880 of 847,500, second in the United States only to New York City, Philadelphia became a lucrative field for entrepreneurs of electricity.

Throughout the 1880s and 1890s, intense competition faced the purveyors of electrical street lighting. A leader among these companies was Edison Electric Light Company of Philadelphia. It was not uncommon for several rival electric companies to set up wiring on the same street, using entirely different systems and leading to extremes in the quality of service. Many Philadelphians, however, objected to what they saw as dangerous and unsightly overhead wires strung up on every street, and put pressure on electric companies to come up with an effective means of burying cable underground. Ultimately, it was determined that the various electric companies should be consolidated, to provide uniformity and economy of service. The task of consolidating the approximately 20 electric companies into one company, with sole authority to produce electricity in the city, fell to Martin Maloney, a Philadelphia entrepreneur, and The Philadelphia Electric Company was formed in 1902. The Philadelphia Electric Company was the principal operating subsidiary of the nearly identically named Philadelphia Electric Company, a holding company.

Joseph McCall was president of the holding company and was responsible for consolidating and modernizing The Philadelphia Electric Company. In 1902 the company had 853 employees and 12,090 customers. In 1903 the company built its largest power station to date, Schuylkill station, using coal that was hauled from the company’s own wharf. No sooner was Schuylkill completed than electricity demand exceeded supply, and plans by 1913 were made for another generating station at Schuylkill. In 1917 the corporate structure was simplified, as Philadelphia Electric Company was dissolved, and its shares in The Philadelphia Electric Company distributed to stockholders. The Philadelphia Electric Company then consolidated its operations.

At first World War I had little effect on PECO, but as it became apparent that the war would last longer than had been expected, the strain on PECO increased. The U.S. war industries supplying the Allied effort in Europe began to make heavy demands on PECO, and when the United States entered the war in April 1917, the Philadelphia area quickly became a major industrial center geared to war production, necessitating the start-up of PECO’s Chester generating station. Labor and material, especially coal, became scarce and very expensive, culminating in a severe coal shortage in the winter of 1917-1918. In the end, supply simply could not keep up with demand, and electricity had to be strictly rationed with the backing of the federal government.

On the heels of Armistice Day of 1918 came a deadly influenza epidemic that struck the company’s work force. At the same time, PECO faced strikes and labor disturbances, as the recession following the war dampened returning soldiers’ hopes of employment. In 1919 a miners’ strike erupted, followed in 1920 by major walkouts in the steel, railroad, and coal industries. Nevertheless, growth in demand for electricity continued.

By 1923 PECO had 306,000 customers, up from 103,000 in 1918. PECO had made the mistake of adopting Edison’s direct current (DC) system over George Westinghouse’s alternating current (AC) system. The AC system prevailed, and PECO was rapidly switching from DC to AC. AC offered much greater electrical capacity, and demand kept growing. In the 1920s a new era in electricity began with a change of emphasis from traditional electric lighting to consumer products, in the form of washing machines, radios, cooking ranges, and refrigerators. The demand for electricity was so high that in 1928 the second-largest hydroelectric dam in the United States was constructed at Conowingo, Maryland, on the Susquehanna River.

At this time, three suburban gas and electric companies served areas bordering PECO’s own region. The three companies, American Gas Company, Philadelphia Suburban Gas & Electric Company, and Counties Gas and Electric Company, were controlled by a holding company known as United Gas Improvement (UGI). The advantages of a merger between UGI and PECO were clear; economies of scale and increased financial leverage were chief among them. Thus, in 1928, UGI acquired control of The Philadelphia Electric Company. The following year, UGI merged with The Philadelphia Electric Company. “The” was dropped from PECO’s name, and Philadelphia Electric Company became an operating subsidiary of UGI. This was the biggest merger of any two utility companies in the United States up to that point. From the perspective of PECO’s management, the merger offered the prospect of a significant increase in business. With its merger in 1929 with UGI, PECO entered the gas business for the first time, and in this way added 112,000 gas customers and 88,000 new electric customers, and increased its service territory by 1,380 square miles.

The stock market crash of 1929 and the ensuing Great Depression stopped growth of demand for electricity in PECO’s service area, although demand did not shrink. The slowdown or closure of businesses decreased the number of PECO’s commercial customers, but this loss was offset by the growth in private consumption. In the 1930s an aggressive campaign was launched to bring electricity to rural areas, and the retail sales department continued to market consumer products successfully, holding its first air conditioning sales campaign in 1934.

With growth halted, PECO canceled Christmas bonuses as well as pay raises, and froze hiring. In 1931 PECO became one of the first utility companies in the nation to establish a customer-service department. In the following year the largest generator in the world at that time, Richmond 12, was constructed, marking the transition to a new era of pulverized-coal-fired plants. Richmond 12 was ahead of its time in that it was equipped with the technology to control stack emissions, long before the emergence of widespread ecological awareness.

By the late 1930s the economy had entered an upswing. Schuylkill’s third generating station was constructed, and 1938 saw the inauguration of a new PECO president, Horace P. Liveridge, who would guide PECO for nine years, spanning World War II and the postwar boom.

World War II brought a shortage of labor and material, but the strain on PECO was less pronounced than during World War I. The labor shortage was resolved by inaugurating longer working hours, while many workers postponed retirement; in some cases, chauffeurs became machinists, and janitors found themselves learning to fit pipe. The company thus managed to maintain services. As early as 1944, the company had passed through the worst electrical and employment shortages of the war.

In 1943 the Securities and Exchange Commission, enforcing the Public Utility Holding Company Act of 1935, ordered UGI to divest itself of PECO. UGI and PECO had never operated harmoniously, mainly because PECO was in the electric business, and UGI in the competing gas business. Following PECO, PECO still carried on its gas business, but this fared poorly compared to its electricity business.

The postwar era was marked by increasing government regulation, by the advent of computers and nuclear energy, and by growing ecological concerns. R. George Rincliffe, president of PECO from 1952 to 1962, guided the company through this period of transition. Demand rose for both electricity and gas. Between 1939 and 1958, 13 new generating stations were built. Much of this demand arose from the growing popularity of television. The number of gas customers also expanded steadily, many converting from oil because of effective advertising of natural gas as a lower-cost fuel. Eddy stone 1, then the world’s largest and most efficient coal-fired generator, was completed in 1960.

In the late 1950s PECO, along with several other electric utilities, began studying the feasibility of nuclear power. In 1967 PECO’s first nuclear unit, a small prototype reactor at Peach Bottom, Pennsylvania, went into operation. That unit produced power until 1974, when two full-size nuclear units went into commercial operation at Peach Bottom. The company expanded its nuclear program in the 1980s, with the first unit of the Limerick generating station in Montomery County, Pennsylvania, going into service in 1986.

In March 1987 the U.S. Nuclear Regulatory Commission (NRC) ordered both units at Peach Bottom shut down because of management problems and operator inattention. During the subsequent overhaul of plant operations, PECO’s chairman at the time, James Everett, and its president, John H. Austin Jr., took early retirement. All other supervisory personnel with responsibility for the Peach Bottom Plant either resigned, retired, or were transferred. A group of shareholders sued Everett and Austin, alleging the two men failed to address the problems at the plant. Insurers for Everett and Austin settled the suit out of court with a $34.5 million payment, minus $6.5 million for attorneys’ fees and expenses, to PECO in 1990. The payment went to the company rather than the shareholders because the shareholders filed the suit on behalf of the company.

Joseph F. Paquette, Jr., a 30-year PECO veteran who had moved to Consumers Power in Dearborn, Michigan, returned to PECO in 1988 as chairman and chief executive officer. Corbin A. McNeill, Jr., came to PECO from Public Service Electric and Gas (PSEG) to be executive vice president-nuclear, with responsibility for revitalizing PECO’s nuclear operations and restarting Peach Bottom. Peach Bottom went back into operation in 1989, after the company incurred maintenance and replacement power costs totaling $225 million, which were not passed on to customers. McNeill was named president and chief operating officer of PECO in 1990.

Although PECO’s use of nuclear power met strong opposition from activists, the company continued developing this source of energy. A second nuclear unit at the Limerick plant went into service in 1990. To recover the unit’s cost, PECO sought a base rate increase of $549 million. The Pennsylvania Public Utility Commission (PUC) ruled that PECO had excess generating capacity and allowed only $242 million of the increase. As a result, PECO reduced its common stock dividend from $2.20 to $1.20 per share, froze salaries, and cut operating expenses by $100 million annually. This cut was achieved largely through an early retirement program accepted by 1,900 employees.

In April 1991 the PUC agreed to let PECO market its excess capacity to utilities outside its service territory, while PECO agreed not to file for a base rate increase until at least 1994. In May of that year the PUC released an report lauding PECO for its recovery from Peach Bottom’s troubles and from the austerity measures that resulted from the rate ruling. PECO was generating more than 65% of its electricity from its nuclear plants, which in addition to Peach Bottom and Limerick included the Salem Generating Station in New Jersey, whose ownership, like Peach Bottom’s, PECO shared with other utilities. Late in 1991 PECO increased its common stock dividend by IOC per share. Under the continuing leadership of Paquette and McNeill, the company appeared poised for further financial improvement.