Baltimore Gas and Electric Company - Company Profile, Information, Business Description, History, Background Information on Baltimore Gas and Electric Company

39 West Lexington Street
Baltimore, Maryland 21201

Company Perspectives:

BGE Vision: To perform as a world-class energy company. BGE Mission: To achieve complete customer satisfaction by providing superior energy products and services.

History of Baltimore Gas and Electric Company

Baltimore Gas and Electric Company (BGE) is an investor-owned utility with diversified operations in energy and environmental projects, real estate, and investments. BGE's principal business as of the late 1990s was the purchase, production, and sale of electricity and gas to business and residential customers in Baltimore and ten central Maryland counties. At that time, the company provided electrical service to over one million customers and gas service to over half a million customers.

Company Origins

Baltimore Gas and Electric Company dates back to 1816, when Rembrandt Peale, William Gwynn, and three other partners formed the Gas Light Company of Baltimore. Peale was the son of the painter Charles Willson Peale, and was himself a well-known painter of portraits and historical scenes. Gwynn was a local businessman. Another of the partners was a wealthy merchant, William Lorman. Within a week of a successful demonstration of gas lighting in what is now the Peale Museum, the new company secured a franchise to light the streets and homes of Baltimore, Maryland, with gas. The Gas Light Company was the first gas utility in the United States. Lorman was the company's first president, serving from 1816 to 1832. The Gas Light Company set to work laying pipes throughout Baltimore, bringing the new method of lighting to more neighborhoods. The company's first seven years were hard, producing no profit. The new company faced several problems of a technical nature. The method of gas manufacturing it had adopted proved inadequate for large-scale production, and there were no means of measuring the quality of the gas produced. And gas meters, although they existed in England, were not available in the United States. Since there was no method for measurement of gas used, the company had to charge a flat annual rate.

The Gas Light Company continued to lose money, and by 1818 the company had exhausted its capital. To raise the money necessary to continue operating, the company made an initial public stock offering in 1818. The capital raised by the offering was to be used to buy equipment to expand the number of customers Gas Light Company served. By increasing its customer base, the company could sell more gas and thus increase profit. Between 1818 and 1821, Baltimore, in common with other U.S. cities, was rocked by financial panic. The company's new influx of capital saw it through this period. In 1822, using a process already established in England, the company began manufacturing gas from coal. Previously tar was the raw material used. Coke, the by-product of this process, was a salable commodity. The company paid its first dividends in 1826.

In 1832 Columbus O'Donnell became president of the company and served until 1871. By 1830 the company was again running low on capital and was unable to continue to grow as quickly as the city of Baltimore. Much of the capital raised in 1818 had been spent on experimentation and on pipes and equipment of unsatisfactory quality. In 1833 the company issued new stock to raise capital.

The use of gas meters was underway in some homes by 1834, despite widespread opposition by members of the public, who did not trust the accuracy of gas meters. In fact, the meters lowered rates for most consumers.

Meanwhile, the city was still inadequately lit due to the cost of laying pipes, and by 1850 critics of the company, including Baltimore's mayor, voiced complaints. In 1860 Gas Light's first local competitor, Peoples' Gas Light Company, was formed. The organizers of Peoples' capitalized on Gas Light Company's unpopularity in persuading members of the Maryland state legislature to charter their company. Peoples' did not begin to operate until 1871, however, due first to internal disagreements among its founders, then to the Civil War.

Post-Civil War Competition

In 1861 the Civil War broke out, imposing difficulties and setbacks, especially in railroad traffic. The war ended in 1865, but the higher cost of living, and thus of doing business, that it produced continued. Peoples' Gas Light Company began to operate in 1871, after reaching an agreement with Gas Light Company to divide the city. Also in 1871, William Sinclair assumed the presidency of Gas Light Company, serving until 1880. In 1876 another contender in the increasingly profitable industry was formed--Consumers Mutual Gas Light Company of Baltimore. Fierce price wars between the three gas companies were waged until 1880 when the companies merged to become Consolidated Gas Company of Baltimore City. John W. Hall served as president for the next 20 years.

During the mid-1880s Consolidated Gas faced competition in some areas from the Chesapeake Company, another provider of gas for lighting. In areas where both companies provided service, they slashed prices. In 1886 the Maryland legislature restricted competition among gas companies by making it more difficult to establish a new company. In 1881 two electric light companies, Brush Electric Light Company and the United States Electric Light and Power Company, appeared in the city. Consolidated Gas was not yet involved in electric light, which was still fairly experimental at this time. When Thomas Edison's incandescent light bulb came into common use during the late 19th century, however, electric light became the standard. Electricity became the new competitor to gas.

In 1904 the city was devastated by the Great Baltimore Fire. Company employees labored to protect exposed mains from exploding. Despite the loss of property and the disruption of commerce, the company emerged prosperous and on solid ground and began to attract New York financiers.

By 1906 it had become clear to the leaders of Consolidated Gas that most homes and businesses favored electricity over gas for lighting. It was also clear that both gas and electric companies could operate more cheaply and efficiently if they did not duplicate services. In 1906, therefore, Consolidated Gas Company of Baltimore City merged with Consolidated Gas Electric Light and Power Company to form Consolidated Gas Electric Light and Power Company of Baltimore. The new company provided fully integrated gas and electric service in Baltimore. Chairman S. Davies Warfield made good use of New York investors' capital and thus launched the direct predecessor of BGE. General Ferdinand C. Latrobe became president, serving until 1910. Its capital shortages behind it, Consolidated grew at a healthy pace. During the financial panic and depression of 1907-1908, the new company managed a small increase in sales.

The Public Service Commission of Maryland was created in 1910 to regulate utilities. Also during this time, natural gas was becoming a popular substitute for manufactured gas. Warfield wanted to bring natural gas to Baltimore but did not succeed in doing so. Between 1906 and 1910, gross income increased by 31 percent, and in 1910 Warfield resigned and was succeeded by J.E. Aldred as chairman. Aldred embarked upon vigorous expansion. Much of the company's electricity was supplied by hydroelectric plants on the Susquehanna River, and Consolidated owned several gas generating plants. With production in place, the company could offer more competitive rates.

The domestic economy, especially manufacturing, was boosted when World War I started in Europe. After the United States entered the war in 1917, demand for fuel rose. Soon a coal shortage developed, coincident with a severe cold wave. This period of strain and high prices did not end after the war. Two rate increases were granted and cost-cutting measures enforced to make up for the increased cost of labor and of coal, oil, and gas manufacture. In 1921 a contract was formed between Consolidated, United Railways & Electric Company and Pennsylvania Water & Power Company, under which all of Baltimore's electric power was organized under one management. It was another year of depressed earnings, but Consolidated began to recover in 1922 and 1923.

Due to several years of low water levels in the Susquehanna, the company began relying more heavily on its Baltimore steam plants in 1923, and Consolidated ordered two large turbine generators. By 1924 electric refrigerators and other appliances had become increasingly popular. The company was expanding to the north for power supplies. It entered an entirely new field in 1925 with the establishment of WBAL, a radio station that was sold to the American Radio News Corporation in 1935. In 1926, the use of gas was still growing. The company's Gould Street generating station began service in 1927, and was the first of the city's power plants to burn pulverized coal. In 1928 the company further diversified with the purchase of the Terminal Freezing & Heating Company. Steam heating was related to Consolidated's gas and electric interests, but the purchased system still had to be overhauled.

Lean Years During the Depression

In 1928, to simplify its corporate structure, a number of companies held by Consolidated were dissolved and absorbed. The company contracted to buy two-thirds of the energy generated by the Safe Harbor Water Power Company in 1931. Safe Harbor produced hydroelectricity at a plant on the Susquehanna River. In the early 1930s there was a boom in air conditioning, and population and industry increased in Baltimore as well. But these factors did not entirely offset the effects of the Depression.

By 1936 the company's lean years were abating. That year it signed a long-term contract for electricity supply with Bethlehem Steel Company. Between 1929 and 1936 the company's operating revenue increased by more than 18 percent. In 1939 Consolidated benefited from a number of newly established large industrial plants in Baltimore. And within two years, World War II began to have an impact on the U.S. economy. War and the defense industry stimulated production, and Consolidated was called upon to meet higher demands. Charles M. Cohn became president of Consolidated in 1942, serving four years. During the war, the company had to use lower quality fuels to meet the demands of increased production. Electric and gas sales soared.

In 1946, the year after the war's end, William Schmidt, Jr., was elected president and chairman. At this time, gas use was still in steady decline nationwide, while the cost of manufacturing gas had risen nearly 300 percent in two decades. Consolidated was still expanding its capacity to provide service to new customers. In 1948 its third 60,000-kilowatt generating unit was completed and a fourth was ordered. Another, larger plant was under way at the company's Westport, Maryland site. The company set a record for new property expenditures in 1948--more than $21 million.

With revenues and energy demands on the rise, net earnings declined. The company had been working to discontinue the production and sale of manufactured gas and to convert to natural gas, and the conversion was completed in 1950. It was an enormous undertaking that involved changes in equipment from pipelines to appliances; the total cost of the conversion to the company was $9 million. The benefits were many: natural gas is less expensive, more efficient, and cleaner burning than manufactured gas. The lower cost of natural gas led to increased consumption. Also in 1950, Charles P. Crane became president, with Schmidt continuing as chairman. In 1951 the 20-year effort to convert Baltimore's electric system from direct current (DC) to alternating current (AC) was completed.

In 1955 the company's name was changed to Baltimore Gas and Electric Company. The following year, BGE formed one of the world's largest fully integrated power pools when it signed a contract with seven other electricity distributors to inaugurate the Pennsylvania-New Jersey-Maryland Interconnection.

1960s-1980s: Steady Growth

The 1960s saw more steady growth, marked by construction of a new BGE headquarters in 1964 and the announcement in 1967 that BGE would build Maryland's first nuclear-powered generating plant. The two-unit facility was built at Calvert Cliffs, about 60 miles south of Baltimore, and represented an enormous investment. The first of these units was in operation by 1975. In its first year, it produced more than a third of the company's generation and reduced customer fuel rate adjustment charges by more than $50 million. The second unit began operation in 1977.

Demand had continued to grow, and in 1981 the Safe Harbor Hydroelectric Project started a four-year expansion project. In an effort to improve profitability, BGE trimmed its operating budget in 1982 and 1983 and sought diversification into other businesses. In 1983 however, the Maryland Public Service Commission turned down BGE's application to form a holding company, stating that Maryland law forbids such a structure for utilities. The holding company reorganization would have enabled BGE to diversify freely.

The Brandon Shores Unit Number 1--a coal-burning electricity-generating plant--opened in 1984, helping to eliminate the company's dependence on foreign oil. A second Brandon Shores unit started up in 1991. In 1983 about 60 percent of the company's operating revenue was in electric power sales, and around the same time gas sales began to slump. In 1986 BGE formed Constellation Holdings, Inc., a subsidiary through which it planned to expand its nonutility interests, despite being denied the right to form a holding company.

By the mid-1980s, problems with the Calvert Cliffs nuclear power plant began to emerge. The Nuclear Regulatory Commission (NRC) fined the company for procedural and equipment violations at the plant in 1985. The NRC proposed further fines for alleged violations at the Calvert Cliffs plant in 1988. By year's end, the NRC placed Calvert Cliffs on its watch list of plants "warranting close agency monitoring" because of "declining performance." In 1988 these units were providing 40 percent of BGE's fuel mix and were the company's lowest-cost producers of power.

Calvert Cliffs' second unit was shut down in 1989, after stress and erosion cracks were discovered. The NRC identified a number of equipment and managerial problems at the plant, and the first unit was also closed for inspection.

The shutdown of Calvert Cliffs forced BGE to purchase more expensive electricity from other utilities. The cost incurred by the idled plant ran to $300,000 a day, and BGE sought numerous rate increases that were held up by debate. In addition, the NRC fined BGE for safety-related violations, one of which involved a worker's death. Startup of Calvert Cliffs' first unit eased somewhat the expense of purchased--rather than produced--electricity, but the facility's second unit was closed until May 1991.

BGE's credit ratings were lowered in 1990, the result of financial deterioration brought on by the extended Calvert Cliffs outage, cost of energy replacements, and uncertainty about approval of rate increases. In December 1990 Maryland regulators approved base rate increases totaling $201 million annually and authorized BGE to apply for surcharges to recover a portion of its purchased power costs.

With the startup of Calvert Cliffs' second unit in 1991, BGE's prospects improved. A second coal-fired unit at Brandon Shores also went into operation early in 1991. Debate was ongoing among regulatory officials regarding how much of the costs of the Calvert Cliffs failure could be passed on to customers. The company estimated total replacement power costs ran to $415 million.

Deregulation in the 1990s

In 1992 the company faced a dramatic shift in the way it did business when Congress passed the Federal Energy Policy Act. The act permitted competition in the wholesale power market and, by allowing retail competition, signaled the end of regulated, regional monopolies. Although its relatively small size and regional coverage would work against it in a competitive market, analysts felt BGE's customer mix could be a benefit. Because it had few industrial customers, BGE would not be so much at the mercy of large manufacturers who would set one supplier against another in a bidding war. However, BGE apparently felt the disadvantage of its size and responded to the act's passage by looking for a partner that would help cut costs through economies of scale.

In the mid-1990s, the electricity market was growing at a rate of only two percent a year. BGE focused on expanding its gas customer base and managed to increase that division's profits 25 percent in 1995. However, the company's real estate investments were performing poorly, which pulled down overall company earnings that year.

BGE forged an agreement to merge with Washington, D.C.-based Potomac Electric Power Co. (PEPCO) in 1995. The two companies anticipated making substantial staff cuts to reduce overlapping jobs; those cuts and savings from eliminating related redundancies were expected to save $1.3 billion over 10 years. Stockholders approved the deal in 1996, and the Federal Energy Regulatory Commission gave its okay in 1997. Maryland followed suit with conditional approval, but the process was held up by conditions placed on the merger by the District of Columbia. BGE and PEPCO had proposed splitting the expected savings from the merger evenly between customers and shareholders. D.C. regulators, however, wanted customers to get a larger share, and made that a condition of the merger. BGE and PEPCO would not agree to that condition, and the two companies called off the merger in December 1997. The companies had invested more than two years and $100 million in arranging the merger. Analysts considered both companies as likely candidates for other merger or takeover deals in the coming years.

In 1998 BGE began a major organizational restructuring that split the company into three discrete units: utility operations, power generation, and unregulated subsidiaries. "All the rules under which we operate are being rewritten," Christian H. Poindexter, BGE's chairman and CEO, said to Baltimore Sun correspondent Kevin McQuaid. "That's what's driving this." Part of the reorganization entailed the creation of Constellation Enterprises Inc., a holding company for the utility's unregulated subsidiaries. The company expected to continue to make management and organizational changes in 1998 as part of its preparation for competition, which Maryland had slated to begin in 2002.

Principal Subsidiaries: Constellation Enterprises Inc.; BGE Energy Projects & Services, Inc.; BGE Home Products and Services, Inc.; BGE Commercial Building Systems; Constellation Energy Source.

Additional Details

Further Reference

Hamilton, Martha M., "PEPCO, Baltimore Gas Cancel Two-Year-Old Plan to Merge," Washington Post, December 23, 1997, p. 1.King, Thomson, Consolidated of Baltimore: 1816-1950, Baltimore, Md.: Consolidated Gas Electric Light and Power Company of Baltimore.McQuaid, Kevin L., "BGE to Split Itself into Three Parts," Baltimore Sun, March 7, 1998, p. 16C.Sparks, Debra, "Baltimore Gas & Electric: Time to Unplug," Financial World, August 1, 1995, pp. 20-21.

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