Commonwealth Edison Company

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Commonwealth Edison Company

One First National Plaza
Chicago, Illinois 60690
U.S.A.
(312) 294-4321
Fax: (312) 294-2995

Public Company
Incorporated: 1907
Employees: 18,910
Sales: $5.26 billion
Stock Exchanges: New York Midwest Pacific

Commonwealth Edison (Com Ed) is responsible for the production, transmission, and distribution of electricity to more than three million wholesale and retail customers in northern Illinois. This company serves 70% of the population of Illinois, including Chicago and its greater metropolitan area. Commonwealth Edison uses nuclear-generated power to supply 80% of its electricity, more than any other investor-owned electric company in the United States.

Samuel Insull helped make Commonwealth Edison the giant company it is today. In fact, he 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 today.

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. In 1892 the company merged with Thomson-Houston Electric Company, forming General Electric Company. Insull was offered a $36,000-a-year executive position at General Electric (GE). 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% 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 in Insull, told them to “sell at the lowest possible price.” Insull was not lowering prices to compete. Insull thought competition was “economically wrong,” and was, in fact, lowering prices in an attempt to wipe out competition. 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 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. In order to get monopolies, 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, the number was up to 100,000. Com Ed’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 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 8C 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. Insull was progressive in his dealings with workers not because of personal conviction, but to ensure the smooth operation of Com Ed’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. His rate cuts were well timed and well publicized. 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 Com Ed.

The post-World War I period was a time of immense growth in demand for the electric industry. In 1923, the year the electric refrigerator became available to residential customers, Commonwealth Edison added over 75,000 new customers to its service area, its largest annual increase up to that time. Commonwealth Edison 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, and launched a hugely successful customer ownership drive. From 1919 to 1921 the number of Com Ed 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. Insull made several less-than-wise, if not illegal, financial moves in 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 the company and on his many philanthropic endeavors. He was perhaps most recognized for his contribution to the Chicago Civic Opera. Com Ed continued to grow and its stock continued to rise.

Much of this growth, however, was artificial. 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. Insull was forced to resign, and claimed a personal loss of nearly $15 million. Eventually he was tried for fraud and embezzlement. Though Insull was not found guilty, he was out of the picture for good.

Commonwealth Edison itself, however, weathered the Depression relatively well, and business carried on. Modern conveniences like 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; and in 1943 about 40% of the company’s yearly output was tied to war production. In 1947 the city of Chicago conducted a study of Commonwealth Edison’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, Commonwealth Edison was allowed a “reasonable rate of return.” There was a great deal of debate over what “reasonable” meant. In comparing utilities in the nation’s 23 largest cities, Commonwealth Edison was found to spend twice as much on advertising as any other utility. Should customers pay high rates to support advertising of a monopoly? If the city took Commonwealth Edison to court, would legal fees be passed on to customers? 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 Commonwealth Edison, 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 Commonwealth Edison, although the ICC did set a maximum rate.

Com Ed’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 Commonwealth Edison 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 Com Ed. In 1954 Com Ed created the Northern Illinois Gas Company to own and operate its gas properties. In 1955 the company began using an electronic computer for billing. In 1959 Com Ed reached 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 Com Ed 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 Commonwealth Edison began operating the nation’s first privately financed commercial nuclear power station, a 200,000-kilowatt facility called Dresden I near Morris, Illinois. Commonwealth Edison was leading the national charge toward nuclear power. J. Harris Ward became Com Ed’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% 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. Commonwealth Edison 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 Forbes, September 15, 1969. This adjustment in Com Ed’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 promise 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 Commonwealth Edison 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 Com Ed, began bringing in low-sulfur coal from Montana, cutting sulfur emissions by 60% by 1973. In 1973 he was elected chairman and CEO of Commonwealth Edison. By 1972 Commonwealth Edison was using nuclear power to generate 22% of its capacity, more than any other investor-owned utility in the nation. In the interest of assuring a uranium supply, Com Ed 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. 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 company 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. Commonwealth Edison sent teams of nuclear experts to assist and study the situation.

In 1980, in the middle of Com Ed’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, Edison’s sales slowed drastically.

Into this bleak picture stepped Commonwealth Edison’s newly appointed CEO, James O’Connor. Beginning in 1980, the ICC granted the utility a series of large rate increases. Com Ed began to rebound, and by December 1984, O’Connor was predicting that rates would increase about 2.5% a year for three years, level off in 1988, and then stabilize.

In 1986, as Edison struggled to finance the $7.1 billion building program for the last 3 of 12 nuclear plants, problems with the company’s Braidwood nuclear plant increased its construction cost more than 40%. This meant Edison would need a 4.8% annual increase for 11 years to cover the cost. Many observers felt that Com Ed 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, Commonwealth Edison’s generating capacity exceeded average peak demand by 33% in 1990—most utilities maintain a 15% surplus. Thus, while many major utilities around the nation were found to be spending $15 to $51 on conservation per customer, Commonwealth Edison was spending 39C 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 22C 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 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, Commonwealth Edison 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 to allow more time to study the utility’s reliability. Negotiations on a new franchise concluded in 1991, and Commonwealth Edison was granted a 29-year contract.

Principal Subsidiaries

Commonwealth Edison of Indiana; Edison Development Company; Commonwealth Research Corporation; Cotter Corporation; Edison Development of Canada; Concomber Ltd.