Unicom Corporation

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Unicom Corporation

One First National Plaza
Chicago, Illinois 60690
U.S.A.
(312) 394-7399
(800) 950-2377
Fax: (312) 394-7251
Web site: http://www.ceco.com

Public Company
Incorporated: 1907 as The Commonwealth Edison Co., Inc.
Employees: 16,700
Sales: $7.15 billion
Stock Exchanges: New York Chicago Pacific
Ticker Symbol: UCM
NAIC: 221122 Electric Power Distribution; 221113 Nuclear Electric Power Generation; 221112 Fossil Fuel Electric Power Generation; 551112 Offices of Other Holding Companies

Unicom Corporation was created in 1994 as a holding company for The Commonwealth Edison Co., Inc. (ComEd), which is responsible for the production, transmission, and distribution of electricity to more than three million wholesale and retail customers in northern Illinois. The company serves 70 percent of the state’s population, including Chicago and its greater metropolitan area. ComEd uses nuclear-generated power to supply the majority of its electricity, to a greater extent than any other investor-owned electric company in the United States. Other Unicom subsidiaries generate cool air for business districts, manufacture power generators, and perform energy-related consulting.

19th-century Origins

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 one 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 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 Com Ed 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.

Growth in the Early 1900s

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.

Company Perspectives:

As a leading generator and provider of energy, we recognize that excellence in Nuclear and Fossil Operations and maintenance of our high standards of system reliability are imperative. The competitive market further compels us to focus on our customers, improving their satisfaction and our corporate reputation. We must continue to aggressively reduce our operating costs to meet the mandated rate reduction and provide value to our shareholders. New systems have been put in place to allow for profitability-based decision-making throughout the organization, from the operation ofComEd’s generating facilities to improved purchasing functions. All of our strategic initiatives are designed to work toward the most important goal of all: ensuring that customers choose ComEd when they have a choice. We will invest to build shareholder value, tailor our business to profitably deliver what the marketplace wants and maximize our competitiveness.

Weathering the Depression

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. Moreover, they wondered, would legal fees 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.

1960s-70s: The Pros and Cons of Nuclear Power

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 told a reporter 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. In 1973 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 the ComEd faced soaring operating and expansion costs, 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.

New Leadership in the 1980s

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 390 per customer, according to a study by a committee of the Chicago City Council.

Rate Rollbacks and Refunds in the 1990s

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.

As the company sought to turn its fortunes around, the failures of its nuclear power strategy still needed to be dealt with definitively. The moves to develop new energy businesses and implement cost-cutting were the first steps in preparing it for the level playing field deregulation would bring. While it was uncertain how that scenario would play out, ComEd’s well-established infrastructure and long history of energy production gave it a decided head start on the competition.