Incorporated: 1906 as Associated Gas & Electric Company
Sales: $12 billion
Stock Exchanges: New York
Stock Symbol: GPU
SICs: 4911 Electric Utilities; 6719 Holding Companies, Not Elsewhere Classified
GPU, Inc., a public utility holding company, is an international firm that holds all the stock of three electric operating subsidiaries that provide over two million customers with 39 billion kilowatt-hours of electricity in a service territory covering about half the land area of New Jersey and Pennsylvania. Jersey Central Power & Light Company accounts for about half of the GPU system’s revenue and supplies about 43 percent of New Jersey with power. Pennsylvania Electric Company serves a largely rural 17,000-square-mile area that includes many mining, manufacturing, and agribusiness customers. Metropolitan Edison Company’s 3,274-square-mile service area in Pennsylvania contains a wide range of manufacturing, agricultural, recreational, and tourist facilities. In addition, through the GPU International Group, the company develops, manages, owns, and operates numerous transmission and distribution facilities that serve another 2.3 million people overseas. GPU Advanced Resources, Inc. sells retail energy and services throughout the mid-Atlantic States, GPU Generation, Inc. and GPU Nuclear, Inc. operate the company’s domestic generating facilities, while GPU Services, Inc. provides an extensive network of corporate support to all the operations within GPU.
GPU was originally incorporated as Associated Gas & Electric Company (Ageco) in 1906. A group of small-town promoters around Ithaca, New York, created Ageco as a holding company for 12 small gas and electric properties: ten in south central New York and one each in Pennsylvania and Ohio. The total value of the properties was $1.2 million. In spite of some minor acquisitions over the next several years, Ageco remained a group of small, rural New York companies as late as 1921, with assets under $7 million. In 1922, however, Ageco entered a period of almost two decades of dramatic growth tied in with incredibly convoluted and often illicit financial manipulations.
In 1908 at the age of 26, Howard C. Hopson had been hired by the New York State Public Service Commission as chief of its division of capitalization. In this position, Hopson was a central figure in New York state public utility regulation from 1908 to 1915. Here he met John I. Mange, general manager of Ageco and president of several of its operating subsidiaries. Hopson and Mange became close friends. In 1915 Hopson left the commission to become an independent consultant. In 1922, through an amazing series of transactions involving dummy companies, Hopson and Mange bought all the stock in Ageco. With the pair now firmly in power, Mange became president of Ageco, and Hopson became treasurer and vice president. The expansion that followed turned Ageco into a utilities giant, including about 180 intricately connected subsidiaries and service companies, possessing properties in 26 states and in the Philippines.
By 1924 Ageco’s assets were up to $65 million, and more than tripled to $217 million in 1925. The most significant acquisitions of this period were the Pennsylvania Electric Corporation and the Manila Electric Company. Hopson funded these purchases by issuing the first of several unusual types of convertible securities that were to become his standard operating method. Hopson’s method involved complex juggling of assets between holding companies and subholding companies. The process was so complicated that accountants, lawyers, and shareholders could not follow it, enabling Hopson to derive huge sums from the system by way of his personally held service companies, which performed various tasks for the operating companies and charged them outrageous rates. In the three years preceding the stock market crash of 1929, Hopson sold nearly $500 million worth of Ageco debentures convertible to stock. Because stock prices were rising so fast during this time, people were anxious to exercise these conversion rights and bought up the bonds quickly. Ageco ended 1929 as one of the five largest holding-companies in the nation. With the collapse of the stock market, however, Hopson was no longer able to support Ageco’s pyramid-like structure through the sale of new securities.
The Great Depression and World War II
By 1932 Ageco was in a desperate situation. The Depression had slowed revenue growth of the operating companies, and Ageco had difficulty raising money to pay off maturing bonds. In an effort to save his empire, Hopson announced in early 1932 that over the last few years all of Ageco’s income-producing assets had been shifted into a subsidiary, Associated Gas & Electric Corporation (Agecorp), formerly called Associated Utilities Investment Corporation. Ageco security holders suddenly discovered that their stock was subordinate to any debt that Agecorp might create.
Then, in a further attempt to avoid bankruptcy, Hopson unveiled his plan for recapitalization, in 1933. Under the plan, investors were given the option of exchanging their Ageco debentures for Agecorp securities. The catch was that they would have to take either a 50 percent reduction in their principal amount, or retain their principal and accept a significant cut in interest rate.
Although the recapitalization plan was somewhat successful as a stalling tactic, a group of security holders attempted to force Ageco into receivership. This litigation and similar legal attacks lasted until 1937, when a compromise was struck. The compromise required Hopson to appoint three independent directors to his board to help work out a more equitable reorganization plan and to protect the shareholders’ interests. At the same time as this battle raged, the Treasury Department was trying to collect $54 million in back taxes from Ageco. Throughout these attacks Hopson personally continued to fare very well financially. He and his family collected at least $3.6 million between 1934 and 1938 from the service companies alone.
Meanwhile, Congress had begun its work on the Public Utility Holding Company Act, passed in 1935. Hopson’s furious lobbying against the act helped to make him a target for investigation by the Securities and Exchange Commission (SEC) and other federal agencies. In the course of its investigation, the SEC put a halt to certain illegal accounting practices used by Ageco and Agecorp, and both companies filed for bankruptcy in January 1940. Hopson himself eventually was convicted of mail fraud and sentenced to five years in prison.
The reorganization that followed bankruptcy was a success. The reorganization staff included Albert F. Tegen, who had served on the SEC investigation team and then became president of Ageco, and Willard Thorp, a leading economist, who became chairman of the board. During this period of trusteeship, creditors received Ageco stock, claims were settled, reduced power rates improved customer relations, the tangle of securities and holdings was simplified, and $14 million a year in interest savings was filtered back into previously delayed maintenance and new construction projects. By 1945 Ageco stock was six times as high as it had been in 1942, and the new streamlined Ageco was the pride of the SEC. The company’s name was changed in 1946 to General Public Utilities Corporation.
Growth During the Postwar Era
The end of World War II led to increased growth for utility companies throughout the country. Although CPU’s growth in territory was about average, its gains in earnings were considerably higher than the industry average during these postwar years. In the decade after the war, GPU’s operating revenues more than doubled, surpassing $174 million in 1955. A major reason for this exceptional growth in earnings was tremendous progress in operating efficiency. In 1948 1.35 pounds of coal was required to generate one kilowatt-hour of electricity. By 1955, 36 percent less coal was needed. The new Shawville station of the Pennsylvania Electric subsidiary was highly efficient, requiring less than 0.75 of a pound of coal to produce one kilowatt-hour. By 1955, even after divesting several properties by order of earlier SEC rulings, the GPU system was making electricity for 1.2 million customers in New Jersey, Pennsylvania, and the Philippines. Of these customers 43 percent were residential, 29 percent industrial, 21 percent commercial, and seven percent in other categories. The variety of industries that comprised the industrial sector was extremely wide, with the metals industry making up ten percent of this segment.
It’s not important whether GPU is the largest player in the business. It is important to be among the best players. Therefore, we ’re defining our business and focusing on the quality of our organization. Our vision is to become the premier provider in any business line we pursue. Many companies will vie to supply kilowatts, natural gas or telecommunications services. Customers who want to buy these products and services need someone to deliver them. GPU wants to provide that link.
In the 1960s GPU began turning to nuclear power. In 1963 the Jersey Central Power & Light subsidiary signed a $68 million contract with General Electric for construction of a nuclear facility at Oyster Creek, New Jersey, making it the first U.S. company to lay out money for a nonexperimental nuclear generator. The Oyster Creek station was scheduled to begin producing in mid-1967, but did not actually go into service until December 1969—the kind of delay that would come to be expected in the construction of nuclear facilities. Because of this delay, GPU was forced to spend $79 million in these two years on power from other sources in order to meet its expanding electricity demands. Despite the fact that the Oyster Creek generator cost $60 million more than expected, and GPU’s capital outlays had tripled in the latter half of the 1960s—largely due to nuclear projects—GPU President William Kuhns remained committed to a growing emphasis on nuclear energy, including construction of two generators at the now-notorious Three Mile Island site in Pennsylvania. Throughout the decade, operating revenues rose slowly but steadily, from $205 million in 1960 to $384 million in 1970. By 1970 the combined service area of CPU’s three utility subsidiaries was approaching its early 1990 size.
The 1970s and 1980s
Nuclear power remained CPU’s great hope for the future into the mid-1970s. With oil prices skyrocketing, nuclear generation was increasingly seen as the method of choice. The cost of nuclear fuel to generate one kilowatt-hour in 1974 was less than one-third that of coal and about one-eleventh that of oil. That year, the fuel used by GPU for generating was 58 percent coal, 22 percent nuclear, and 20 percent oil. This was also the year that the first Three Mile Island unit went into commercial operation.
GPU entered 1979 as the 17th-largest utility in the United States, with assets of $4.6 billion. In the previous year, GPU had earned $139 million on $1.3 billion of operating revenues. On March 28, 1979, an accident occurred at the new, second nuclear generator at Three Mile Island, which had been producing electricity for only a few months. A valve at the unit failed to close, allowing cooling water to escape from the reactor. The plant, run by a Metropolitan Edison subsidiary, was operating at 97% of capacity at the time, and the absence of the cooling water caused the plant’s core to overheat, damaging fuel rods and releasing radioactive particles, thereby contaminating the building.
The costs of the accident were enormous. GPU estimated the cost of cleaning up Three Mile Island at $1 billion. In addition, it would cost GPU $2.3 billion to maintain electrical service to all of its customers, including $24 million per month to purchase power to replace that which was no longer being produced at Three Mile Island. At this time, $400 million came due on maturing securities. With net earnings drastically reduced, investors wary, and the Pennsylvania Public Utility Commission threatening to cancel Metropolitan Edison’s franchise, it appeared that GPU could become the first public utility to go bankrupt since the Depression.
GPU’s recovery from the devastation of the Three Mile Island accident was slow. Profits were much lower through the first half of the 1980s. A major obstacle to GPU’s return to stability was the length of time it took for the Nuclear Regulatory Commission (NRC) to determine whether the undamaged Three Mile Island unit could be returned to operation, and if so, whether it could be operated by GPU. The company’s competency to run a nuclear facility was questioned, by the NRC and by many other critics. Members of Congress urged that GPU Chairman and Chief Executive Kuhns and President Herman Dieckamp be replaced. Criminal charges were filed against Metropolitan Edison alleging that records regarding the leakage of coolant had been falsified.
The turning point finally came in November 1985, when the NRC ruled that GPU could return Three Mile Island to operation, ending more than six years of inactivity. The ruling almost instantly added $1 per share to company earnings and allowed rates to be lowered in both New Jersey and Pennsylvania, since the need to purchase power from outside sources was dramatically reduced. In May 1987, GPU reinstated dividends to shareholders for the first time since 1980. In 1988 earnings rose to $284 million, from $259 million the previous year, and dividends were increased twice. These results were achieved partly due to record-setting operation by the company’s generating units, particularly those fueled by coal. CPU-owned generators produced 31 million megawatt-hours in 1988.
In 1989 Kuhns retired as president, chairman, and CEO, and was replaced by Standley H. Hoch. Kuhns, who had been chief executive for 20 years, had first retired two years earlier, but that initial retirement had proved temporary, as he had returned to active duty upon the death of his successor, John O’Leary. Hoch, who had been executive vice-president and chief financial officer of General Dynamics Corporation, continued to reshape GPU into a more streamlined and cohesive system, focusing on improved communication networks among the parent company and operating subsidiaries; on eliminating unnecessary work and positions; and on maximizing production efficiency. GPU increased its dividends twice in 1989 and once each in 1990 and 1991.
The 1990s and Prospects for A New Millennium
The year 1990 brought the completion of the Three Mile Island cleanup, a project that drained GPU financially and made consideration of further construction projects much more difficult. Also in 1990, a 6.1 percent rate increase was approved for Jersey Central, the first such hike since 1986, meaning an additional $95.5 million in revenue. The company’s operating and maintenance expenses were lower than in 1989, and when 24 officers retired in a 15-month period, only eight were replaced, reflecting the stated commitment to streamlining. In addition, an agreement was reached with DQE, a western Pennsylvania utility, which agreed to produce and transmit electricity from western Pennsylvania, where demand was lower, to the eastern part of the state over 240 miles of transmission line.
GPU’s status as a regulated public utility had helped to prevent its demise, in spite of regulations that sometimes hinder profits and require spending on safety and environmental control. By the mid-1990s, however, management at the company acknowledged that revenues were flat due to increasing competition within the electric utility industry, and a reassessment of GPU’s entire operation was required. The result of this internal evaluation was far-reaching and dramatic. GPU made the announcement that it was beginning a process to sell all of the fossil fuel and hydroelectric generating facilities owned by the company. Comprised of over 26 operating stations, the book value of the sale was estimated at over $1 billion. In addition, both the Oyster Creek Nuclear Generating Station and Three Mile Island Unit 1 were put up for sale. At the same time, the company reached an agreement with The Williams Company to jointly market electricity, natural gas, oil, and energy-related services to an expanded market from New York to Virginia. Management thought it beneficial to combine Williams’ background as America’s largest volume transporter of natural gas with its own expertise within the electric industry.
This was only the beginning of a comprehensive restructuring process. GPU also made a strategic decision to expand overseas, especially within Australia. In 1997, the company purchased PowerNet Victoria, from the state of Victoria, Australia for $1.9 billion. PowerNet Victoria owns and operates the electricity transmission system throughout Victoria, an area that covered over 87,000 square miles and had a population of approximately 4.5 million. A new management team had decided to focus on aggressively expanding the company’s international operations to offset fluctuations in the domestic market.
GPU’s continued success was expected to be greatly influenced by regulations imposed on the industry, as well as its ability to expand into related energy markets and services. Yet the company’s strategic vision of diversifying overseas would no doubt lessen the impact of any unforeseen developments within the domestic market.
Jersey Central Power & Light Company; Metropolitan Edison Company; Pennsylvania Electric Company; GPU Service Corporation; GPU International, Inc.
“Agreement Reached to Sell Stake in Australian Concern,” Wall Street Journal, December 1997.
“An End to Hopson’s Labyrinth,” Business Week, December 8, 1945.
“GPU Closes PowerNet Purchase,” Wall Street Journal, November 1997.
“New York Utility, GPU Aim to Sell Stakes in Generating Station,” Wall Street Journal, February 1998.
Stranahan, Susan Q, “Wanna Buy a Reactor? Three Mile Island Becomes a Hot Property,” Fortune, November 10, 1997, p. 40
“Through the Wringer with A.G.&E.,” Fortune, December 1945.
“Williams Cos. and GPU Venture,” Wall Street Journal, December 1997.
—Robert R. Jacobson
—updated by Thomas Derdak