4 Irving Place
Con Edison's track record of reliability in our operations is matched only by our financial performance. This reflects our focus on maximizing value for our shareholders. As a result of our strong financial performance, we have been able to increase our dividend each year for more than a quarter century. We remain committed to providing our shareholders a superior, low-risk, long-term total return. All the while, we continue to provide the most reliable electric service in the world.
Consolidated Edison, Inc. (Con Ed) is one of the largest publicly owned utility holding companies in the United States. The company boasted $16 billion in assets and more than $8 billion in revenues in 2000. Its largest business in 2001, the transmission and distribution of electricity, gas, and steam, was handled by two regulated subsidiaries: Consolidated Edison Company of New York, Inc., which served New York City and Westchester County, New York; and Orange and Rockland Utilities, Inc., which served an area covering parts of New York, New Jersey, and Pennsylvania. The company's unregulated subsidiaries included Consolidated Edison Solutions, Inc., a retail energy services company; Consolidated Edison Energy, Inc., a supplier of wholesale energy; Consolidated Edison Development, Inc., an energy infrastructure developer; and Consolidated Edison Communications, Inc., a telecommunications infrastructure company.
Lighting New York: 1823-80
Con Ed began as New York Gas Light Company, founded in 1823 to provide gas for New York's street lamps and homes. Gas illumination had been introduced only recently in the United States and, at first, met widespread resistance due to concerns about safety, but its economy and efficiency soon made gas the standard light source for much of the 19th century. By the last quarter of the century, New York Gas Light and five rival companies supplied gas to the great majority of New York's already vast population, much of which could not imagine a time when the city had been without gas light.
An alternative source of illumination was under intense scrutiny by the 1870s, however; this was electricity. After years of experimentation, the first electric arc lights began appearing in U.S. cities in that decade, and it was soon obvious that electricity would one day become the standard illuminant. The arc light was, nevertheless, a crude and dangerous innovation, suitable only for outdoor lighting of public space, and a host of inventors around the world continued searching for an acceptable alternative.
Among the men who became interested in the future of electric light was Thomas Alva Edison, already famous for his invention of the phonograph and a series of improvements in telegraphy. It was clear to Edison that electricity was destined to light the world, and in 1878 he focused his energies on solving the problems remaining in its development. To make electric light truly universal, two things were needed: a sturdy and economical form of incandescent illumination; and a power grid able to distribute safe, reliable electric current from its source of generation into distant apartments and homes, something that had not yet been attempted on a large scale. Incandescence was a well-known method of illumination, but no one had yet found a material able to withstand long hours of operation without burning up. The inventor shelved his other projects and devoted himself and his considerable staff to experiments in electric light.
The scope of Edison's ambition in these ventures can hardly be overestimated. In essence, he was proposing to design and build the system of electric power distribution upon which the entire world remains dependent. Literally everything had to be created--generators, transmission lines, switching equipment, and protective devices; and, within the home or office, internal wiring, outlets, lamps, meters, and even the light source, the bulb, itself. Such an immense project naturally would require capital, and in October 1878 Edison's group joined forces with Wall Street financiers in forming the Edison Electric Light Company. Edison's backers included J.P. Morgan and the Vanderbilt interests, both of whom saw the potential of the new system. With his financing in place, Edison redoubled his experiments, and by the end of 1879, working furiously to best the efforts of Joseph Swan in England, he had devised a workable incandescent light using a filament of high-heat-and-electric-resistant "thread" in an evacuated glass globe.
Edison simultaneously had solved most of the generation and transmission problems, and by 1880 was ready to apply to the city of New York for permission to build the nation's first commercial electric power station. At that point a legal technicality forced the creation of a subsidiary corporation, Edison Electric Illuminating Company, to act as an operating company on behalf of Edison Electric Light, which would remain only a holding company and in control of all patents. The newly formed Edison Electric Illuminating applied for and received its license--apparently with the help of liberal payments to New York's open-handed city government--and at 3 p.m. on September 4, 1881, current began to flow from the generators at 255-57 Pearl Street in lower Manhattan. London's Holborn Viaduct Station had gone on-line nine months earlier; it too was an Edison project. The Pearl Street Station, like all of Edison's later generating plants, could supply power only a mile or two in any direction from the plant before its direct-current electricity began to lose voltage, but for several years its design was unchallenged and imitations sprang up everywhere. By the spring of 1883 there were some 334 Edison plants in operation, most of them considerably smaller than the one at Pearl Street.
The success of Edison's power system was an event of the first order; the advent of electricity changed every aspect of modern life. Locally, Edison found himself quickly enmeshed in the struggles and strategies generated by any such leap in technology. The inventor and his associates incorporated many subsidiary manufacturing companies in order to build power stations wherever they were wanted, and by 1884, greatly assisted by a young financial wizard, Samuel Insull, Edison had even gained control of Edison Light as well as Edison Illuminating. As an innovator in electricity, however, Edison's day was past; in the great debate that shortly arose as to the relative merits of alternating current (AC) and direct current (DC), Edison stuck with his original conception of DC generators long after the rest of the industry had recognized AC as the wave of the future. By the late 1880s George Westinghouse had won the battle of the currents, and Edison had long since dropped active participation in his electrical holdings.
Consolidation of the Gas and Electric Companies: 1880-1900
Given this situation, Edison was more than happy to listen when a group of German financiers led by Henry Villard proposed the formation of a new electrical combination, to include all of Edison's manufacturing companies and the valuable stock of Edison Electric Light, the holding company. Although the latter had come under the managing direction of Edison's group in an 1884 proxy fight, its largest block was controlled by the interests of J.P. Morgan. In the complex negotiations leading to the creation of Villard's new company--later to be known as General Electric--Morgan used his stock position and financial muscle to demand and win 40 percent of General Electric's stock, while Edison settled for 10 percent and enough cash to make his fortune. Meanwhile, the creation of General Electric led to Edison Illuminating being spun off on its own in a utility market increasingly crowded with efficient AC competitors and the newly roused gas companies.
New York's gas companies were hardly pleased by the success of electric lighting. Edison's earliest announcements on the subject had sent gas stocks reeling, and in 1884 the city's six largest gas concerns joined forces in a new utility giant called Consolidated Gas Company of New York. This merger initiated a long process whereby the scores of small electricity, gas, and steam companies operating in the greater New York area would be melded into the single and far more efficient entity known since 1936 as Consolidated Edison Company of New York. At first, the electric and gas concerns faced each other as rivals, each side augmenting its forces by annexation or combination with neighboring firms.
The gas companies, including New York Gas Light Company, united in Consolidated Gas, while the bulk of Manhattan's electricity supply was collected in 1898 under the umbrella of The New York Gas & Electric Light, Heat & Power Company (NYG&ELH&P). NYG&ELH&P also gained a controlling share of Edison Electric Illuminating. Consolidated Gas bought NYG&ELH&P in 1899, when Consolidated Gas decided to use its superior financial might to overcome a growing technological gap by buying up as many electricity companies as it could. In 1901 Consolidated Gas merged the electric companies it controlled, including Edison Electric Illuminating, NYG&ELH&P, and others into a single subsidiary known as The New York Edison Company. Thus the gas companies themselves became providers of electricity, and by 1910 controlled, under the name of New York Edison, most of the electricity generated in Manhattan and the western portion of the Bronx.
By that time, of course, electricity had become the standard source of power not only for illumination but for a widening variety of household gadgets and industrial tools. Alternating current had won the day, allowing the construction of very large central generators capable of serving vast numbers of customers at long distances. New York Edison gradually replaced its last few small DC-generating stations, and the city's power network began to assume its modern structure. In particular, as it became apparent that large-scale power distribution was by nature a type of monopoly, utility companies came under the regulatory control of the state legislature in Albany, New York. The power of the legislature to fix rates of return for utilities was tested in a landmark court case arising out of its 1906 attempt to limit Consolidated Gas's price for its gas to 80 cents per 1,000 cubic feet. The United States Supreme Court eventually ruled that while governmental bodies had a clear right to oversee the operation of utilities, they could not set rates so low as to prevent the utilities from earning a reasonable rate of return on investment; in the case of Consolidated Gas, however, the rate of 80 cents was not found to be excessively low. In the course of its analysis, the Court estimated Consolidated Gas's asset value at $56 million.
For many years Consolidated Gas and its subsidiary New York Edison grew quietly. The long process of unifying New York's various power companies continued, and by 1932 Consolidated Gas was the largest company in the world providing electrical service. The final step occurred in 1936 when Consolidated Gas became Consolidated Edison Company of New York. Under the direction of Hudson R. Searing, the previously cool relations between Edison's gas and electric divisions were quietly improved, and the gigantic combine took on its present configuration as New York City's sole power company.
Con Ed Monopoly Developing a Bad Reputation: Mid-20th Century
As the single purveyor of light and electricity to New York's millions of inhabitants and workers, Con Ed attracted the suspicions and criticism that accompany a monopoly. When Mayor Fiorello La Guardia threatened to create a municipal power utility to compete with Con Ed during the Great Depression, company executives worked to develop closer relationships with other members of the city's government. Con Ed was the city's largest employer of construction workers and paid more taxes than any other single organization in the city, and, in large part through the efforts of Charles Eble--later Con Ed's chief executive--was able to stave off La Guardia's threat. The interests of New York City and Con Ed meshed from the mid-1930s on.
In 1955 Con Ed was among the first utilities to apply for permission from the Atomic Energy Commission to build and operate a private atomic power plant. Permission granted, Con Ed built its reactor at Indian Point, New York, some miles up the Hudson River from New York City, inaugurating what it hoped would be a new era of clean, cheap power for New York. Con Ed's path-breaking project took far longer and much more money to build than anyone had expected. When it was completed in the early 1960s, Indian Point's cost per kilowatt of capacity was 2.5 times that of a conventional generator, adding to a general growing perception among New Yorkers that Con Ed was an inefficient utility. The origins of this reputation seem to be split between the unavoidable difficulties of supplying power in so complex an environment as New York City and Con Ed's failure to meet that challenge.
The burdens of a New York City utility are severe. Since the 19th century, most utility lines and pipes have been required by law to be laid underground, vastly increasing Con Ed's expense for upkeep and expansion of its system. Con Ed has more miles of underground wire than the rest of the nation's utilities combined. New York's extremely dense population creates additional problems, and the high percentage of residential users necessitates the metering, billing, and servicing of thousands of relatively small accounts, in contrast to a utility with a higher proportion of industrial customers. The preponderance of office workers in Manhattan means that Con Ed must be prepared to supply a midday peak of electricity far greater than its 24-hour average, forcing the construction and maintenance of a generating capacity larger than would otherwise be needed. Such underutilized capacity is highly inefficient for power companies, whose single greatest burden is the cost of construction and upkeep. Con Ed also pays extremely high taxes, which it passes on to customers through its rates. Thus Con Ed, in effect, collects taxes on behalf of the various city, state, and federal agencies, taxes that have helped make Con Ed the nation's most expensive utility for many years. Finally, space restrictions in New York made it much easier for Con Ed to repair old power stations than to build new ones, which meant that by the 1950s much of its physical plant was antiquated and inefficient. Despite that handicap, Con Ed was the subject of some of the earliest restrictions on air pollution adopted in the United States, further increasing its already excessive costs.
The upshot of these unique drawbacks was to make Con Ed an expensive and erratic provider of gas, electricity, and steam; but some of its problems lay with management as well. By the 1960s, Chairman Charles Eble and his team of top advisors had all been with the company for a number of years, and many felt that they had developed an aloof, isolated mentality that angered New Yorkers, irate over poor service, high bills, and a series of famous blackouts beginning in 1959. Typical of the company's poor handling of public relations was its 1962 effort to build a second atomic power plant in the middle of the borough of Queens; such judgment helped make Con Ed notorious. Equally damaging was Con Ed's poor financial performance. While 1965 revenues of $840 million made Con Ed the nation's largest utility, its revenue growth was very slow, net earnings were low, and earnings per share were moving up at only 4 percent per year, or half the pace of a typical competitor such as Commonwealth Edison in Chicago.
Luce Turnaround: 1967-82
The man chosen to lead Con Ed out of this trough was Charles F. Luce. Appointed chairman in mid-1967, Luce was formerly an under-secretary with the Department of the Interior. He was chosen both for his abilities and because he was an outsider to New York power politics. The new chief executive took a number of decisive steps toward the renewal of Con Ed: a virtual makeover of top management; division of the company into six operating divisions, one for each city borough plus one for suburban Westchester County; the addition of several new plants; plans to replace aging equipment; and a new emphasis on customer service.
Con Ed's stock price continued to drop, however, and the company soon found itself in the worst crisis of its history. After agreeing in 1972 to halt the use of coal for environmental reasons, Con Ed was dependent on oil for 85 percent of its generating capacity when the OPEC oil embargo doubled the price of crude in the fall of 1973. As fuel price increases could not be passed along to customers for about four months, and Con Ed was in the midst of yet more construction projects to increase capacity, the company was suddenly faced with a critical shortage of cash. Luce took the unprecedented step of withholding dividends in the first quarter of 1974, unleashing an avalanche of criticism from stockholders, Wall Street, and other utilities, who watched their own stocks follow Con Ed on a sharp decline.
Luce had a second, far more important strategy. Knowing that the state government had no interest in seeing New York's power supply disrupted by financial collapse, Luce persuaded it to buy two of Con Ed's generating plants that were still under construction. At one stroke, Con Ed received $612 million in cash and was relieved of the heavy cost burden associated with new plant construction. What additional power Con Ed required was bought back from the state; but 1973 and 1974 also marked the beginning of a long decline in the expansion rate of New York's energy usage, partially in response to the high price of oil and partially as a result of vigorous conservation campaigns promoted by Con Ed, which realized that nothing could be better from a financial perspective than an end to the cycle of borrowing required for new generating equipment and plants.
Stable Operations in the 1980s and 1990s
By 1978 Con Ed was regarded as one of the most efficient and profitable utilities in the country, and Chairman Luce was credited with a remarkable turnaround of the once-hated institution. Customer complaints dropped off dramatically, earnings per share and the stock price rose, and Con Ed gradually eased itself back into a more balanced pattern of fuel usage, much of it natural gas and nuclear. In the 1980s Con Ed operated smoothly and quietly. The generally conservative pattern of energy usage in New York allowed Con Ed to avoid the costly construction projects that once threatened to sink it, keeping earnings high. During the late 1980s, Con Ed even began posting the lowest rates of customer interruption for any utility in the country, which, in light of its long tradition of sub-par performance, may be its most impressive achievement. Charles Luce's decision to sell off two of the company's plants in 1974 made possible a renaissance at Con Ed.
Luce retired in September 1982 and was succeeded by Arthur Haupsburg. By this time Con Ed had begun an era of stability in its electric rates. A rate increase requested in April 1982 and granted the following year was its last for a decade; in April 1990 the utility extended its current electric rates until 1992. Haupsburg retired in September 1990 without having had to request a single electric rate increase. During his tenure, electric sales rose, fuel prices generally declined, and dividends were increased annually. Con Ed had ample capacity to meet the demand generated by the healthy local economy.
Eugene R. McGrath became chairman, president, and chief executive officer upon Haupsburg's retirement. He faced a somewhat different situation than did his predecessor. Con Ed remained financially strong, but the New York City area's economy had weakened. Con Ed launched a major energy conservation program in 1990, with the goal of reducing customers' electric energy usage by 15 percent by 2008, as compared to expected consumption without the program. Con Ed planned to spend about $4.2 billion on the program during that period. To maintain its power supply, Con Ed continued modernizing its existing plants and signed contracts with several prospective independent power producers.
In 1992 Con Ed requested, and received, a rate hike, the first in almost ten years. Despite the long-term rate stability, Con Ed still had extremely high rates; its 12-cents-a-kilowatt-hour charge doubled the national average. With its aging plants and the city's stringent environmental controls, Con Ed could only generate power at 7 cents a kilowatt hour, compared to independent power producers, who could manage at 5 cents a kilowatt hour. In addition, taxes accounted for 25 percent of Con Ed's revenues in 1993, by far the highest in the country.
Cost-cutting and more efficient operations were high priorities for Chairman McGrath in the 1990s, as the company prepared for the deregulation of the electric generating market. Between 1990 and 1993 the company laid off 3,000 workers, and by 2000 it had reduced its workforce by another 3,000.
McGrath's plans called for Con Ed to minimize its power generation and maximize its power distribution after deregulation. The company's greatest assets in the mid-1990s were its transmission and distribution systems, whereas the generating plants accounted for only 20 percent of company assets. McGrath refused to upgrade or build new plants in anticipation of selling them off and buying power from independent producers after deregulation.
Deregulation in the Late 1990s
In 1997 the first phase of a five-year process of deregulation began, allowing some commercial and residential customers to choose their power supplier. Although only 10,000 commercial customers and 50,000 residential customers in New York could purchase electricity on the open market by 1998, by 2002 all of Con Ed's three million customers would have that freedom. Con Ed, however, continued to distribute the power, regardless of who generated it.
Deregulation required Con Ed to develop a plan with government agencies and consumer groups for its organization and operation. As part of that plan, Con Ed reorganized under a new holding company, Consolidated Edison, Inc., in 1998, with different subsidiaries handling its regulated and nonregulated businesses, including a new power marketing group. The same year, Con Ed announced plans to buy Orange and Rockland Utilities, Inc., which operated in New York state, New Jersey, and Pennsylvania. The $790 million deal was completed in 1999 and helped protect Con Ed from acquisition by a large national power company.
McGrath's long-held plan to sell off the company's generating plants came to fruition in 1999, when Northern States Power, KeySpan, and Orion Power paid a total of $1.65 billion for the facilities. Con Ed used the money to finance its Orange and Rockland acquisition, to buy back some of its stock, and to entice other possible merger partners.
The company found such a partner quickly, arranging to purchase Northeast Utilities for $3.5 billion in cash and stock and the assumption of $3.9 billion of Northeast's debt. After numerous talks with regulators and consumer groups on how to divide the savings generated by the merger, the deal fell through in 2001.
Enthusiasm for deregulation waned in 2000 when a summer power shortage caused blackouts in New York City. Although Con Ed received the brunt of consumers' criticism, it had little actual power to control the situation, having in large part exited the power generation business. In addition, Con Ed had been required by deregulation to reduce its long-term contracts with energy suppliers, forcing the company to pay high spot prices during peak demand.
The September 11, 2001, terrorist attack on the World Trade Center severely damaged Con Ed's infrastructure in lower Manhattan. Two substations adjacent to the twin Trade Center towers were destroyed, and major transmission cables were significantly damaged, leaving 12,000 customers without electricity. The company moved quickly to bring generators, new cables, and around 2,000 repair workers into the area to restore service. Insurance was expected to cover the replacement of the substations, and federal aid was expected to cover the $400 million in Con Ed expenses related to the attack.
Principal Subsidiaries: Consolidated Edison Communications, Inc.; Consolidated Edison Company of New York, Inc.; Consolidated Edison Development, Inc.; Consolidated Edison Energy, Inc.; Consolidated Edison Solutions, Inc.; Orange and Rockland Utilities, Inc.
Principal Competitors: American Electric Power Company, Inc.; Energy East Corporation; Keyspan Corporation; Niagara Mohawk Holdings, Inc.