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CP&L will be a leader in the electric utility industry measured in terms of the cost, reliability and quality of operations, service to customers and returns to our investors.
Carolina Power & Light Company (CP&L) supplies electricity to over a million customers in eastern and western North Carolina and central South Carolina, using an array of coal-fired steam, nuclear, and hydroelectric plants. Having planned in the 1970s to increase greatly the proportion of its nuclear generators, CP&L, like many other utilities, ran into severe regulatory and cost problems and abandoned many of its nuclear projects. CP&L continued to use nuclear and coal-fired plants for the bulk of its electricity in the 1990s. As of 1997, the company operated 16 power plants, with a total generating capacity of 9,613 megawatts.
Carolina Power & Light was one of the many utilities created and nurtured by General Electric (GE). The latter was formed in 1889 by a group of investors led by J.P. Morgan, with the purpose of amalgamating a number of the manufacturing facilities associated with Thomas Edison's early work in light and power transmission. GE supplied the nation's new power industry with much of its equipment and technical leadership, often receiving as payment shares of stock in the young, undercapitalized utilities.
Some of GE's client companies grew into thriving businesses, but many others--most of them small utilities in rural areas--had trouble attracting the vast amounts of capital needed to build a system of electrical distribution. In order to help these smaller utilities raise capital--and in turn become good customers for GE equipment as well as increase the value of GE's equity holdings--GE created in 1905 a wholly owned subsidiary called Electric Bond & Share Company (EBS). EBS was given GE's stock portfolio and told to arrange financing, provide technical aid, and advise the management of these struggling utilities, including a number of companies in England and France. EBS generally owned but a small percentage of stock in each of its client firms. It was not a holding company, but the recommendations of EBS were followed by its much-smaller partners.
Among the many U.S. cities in which EBS became active was Raleigh, North Carolina, where electric lights were first provided in 1886 by the Thomson-Houston Electric Light Company. In 1892 Thomson-Houston was merged with GE, which thereby acquired a position in a number of the small power plants then beginning to harness the hydroelectric potential of the Appalachian river systems. When GE had formed EBS in 1905, it transferred its interest in these local plants to EBS, which quickly arranged for a merger of three of them in 1908. In that year, Carolina Power & Light Company was established in Raleigh by the merger of Raleigh Electric Company, Central Carolina Power Company, and Consumer Light and Power Company. Unlike many of EBS's ventures, CP&L was controlled directly by EBS and its president, S.Z. Mitchell, who for many years was a leader of the electrical industry in the United States. As EBS was wholly owned by GE, Carolina Power was controlled indirectly by the company from which it bought all of its equipment, a situation that was common in the electrical industry and that later would prompt charges of conflict of interest leading to the dissolution of the great U.S. electrical holding companies.
The chief obstacle faced by Mitchell was the fragmentation of power generation in the Raleigh area, compounded by the difficulty of raising enough capital to consolidate and expand CP&L's system. The early electric power companies generally did not foresee the enormous growth in demand for electricity; they operated generators of limited capacity and charged customers a relatively high price for power. Mitchell and other early leaders of the electrical business believed that electricity was unlike any other commodity: it was destined to become universally and intensively utilized; it was a fungible product; and its generation and distribution required so much capital that competing firms could not survive in the same geographical area. It was thought that electric power was a natural monopoly, with a large central power station serving many square miles of customers. It was the chief goal of men like Mitchell to develop the electrical industry according to these principles: Mitchell encouraged mergers and expansion among EBS's many affiliates, and arranged the funding for same; he stressed the advantages of large central power stations; and he urged his colleagues to sell more electricity at a lower rate rather than less at a higher rate. That all of these rationalizations of the industry would benefit GE was, of course, understood from the beginning, but they were also to a large degree dictated by the nature of electric power.
CP&L accordingly set about expanding its facilities, which originally consisted of two hydroelectric plants and one steam plant generating a total of 3,900 kilowatts of power. In 1911 the company acquired the assets of two struggling power companies in nearby Henderson and Oxford, North Carolina, and the following year opened a western branch with the purchase of Asheville Power & Light Company. To help finance the construction of main transmission lines between CP&L's growing network of stations, EBS in 1911 created a second subsidiary to handle construction projects. North State Hydro Electric Company built and maintained power lines that it then leased to CP&L, obviating the need for CP&L to raise the cash needed for such large undertakings.
After battling the local gas company for several years, CP&L bought out its rival in 1911, becoming the sole supplier of both gas and electricity for the city of Raleigh. Its next milestone was a 1913 agreement to sell electricity wholesale to the city of Smithfield, North Carolina, which would handle its distribution to the customer. Such rapid expansion on the part of power companies raised the concerns of local legislators, who saw the threat of onerous rates by utilities given such monopolies. In 1913 North Carolina accordingly placed all power companies under the jurisdiction of its Corporation Commission, which would eventually be granted power to regulate all utility business, including rate schedules. A similar commission had already been formed in South Carolina, where another EBS subsidiary, Yadkin River Power Company, was operated by CP&L management. CP&L thus became a regulated monopoly, one of a great many around the country affiliated with EBS and ultimately with General Electric.
As the economies of North Carolina and South Carolina grew following World War I, an increasing number of manufacturing plants and residential customers alike switched to electricity for a growing number of applications. Most important among industrial users were the textile and tobacco manufacturers. Residential customers were encouraged to use electricity for a plethora of new gadgets and tools, often sold directly by CP&L's representatives. As with many technical evolutions, electrical customers often had to be shown the possibilities of electric power, and CP&L was eager to push the sale of GE appliances. It was the dawn of a new era for rural Carolinians, and electricity was soon in great demand.
However, as always, there remained a shortage of capital required to meet such demands. Through its wide experience in the industry, EBS had learned that the best method for smaller utilities such as CP&L to raise large amounts of capital was to form a holding company in charge of many such small firms. The holding company's larger asset base would attract investors more readily than could the individual utilities. One such holding company was National Power and Light, formed by EBS in 1921. Carolina Power & Light was made a part of National in 1927, and for the next 20 years would satisfy its capital requirements via its new parent company.
The Great Depression
On April 6, 1926, CP&L was itself reconstituted into a new and larger corporation. Along with the former CP&L, the new company included Yadkin River Power Company, Asheville Power and Light, Pigeon River Power Company, and Carolina Power Company. Together, the utilities served 130 communities throughout the central parts of North Carolina and South Carolina, providing up to 59,000 kilowatts of power to about 20,000 customers. It was not long before the Great Depression slowed CP&L's growth, however, as the region's big textile mills reduced operations and the economy generally crumbled. To replace the lost industrial revenue, new CP&L president Louis V. Sutton initiated a sales program designed once again to increase the amount of electricity used in the home. CP&L published an "electric cookbook" and encouraged the adoption of the latest home conveniences, cut its rates, and halted all new construction until the economy showed signs of reviving.
In the meantime, the electrical industry's highly concentrated organization continued to attract criticism. The power trust, as its opponents labeled the GE-based network of utilities, responded by pointing out that the cost of electricity per kilowatt hour had fallen steadily since the industry's beginning, but the persistent allegations of monopoly caused GE to distribute its EBS stock to GE's shareholders in 1924. Of equal concern, however, was the number of electrical holding companies across the country whose often-precarious financing was underscored in 1932 by the collapse of Samuel Insull's midwestern power conglomerate. In response, Congress passed the Public Utility Holding Company Act in 1935, setting restrictions on such organizations and placing them under the jurisdiction of the Securities and Exchange Commission (SEC).
Becoming a Public Company
As part of a general campaign, the SEC began dissolution proceedings against National Power and Light in 1940, and the holding company's stock was finally given over in 1946 to its parent, EBS. Two years later, EBS in turn sold most of its stock in CP&L to the public, at which time CP&L became a wholly independent, investor-owned utility with its stock traded on the New York Stock Exchange.
The robust postwar economy of the 1950s was accompanied by a huge increase in the demand for electricity among both residential and industrial consumers. To provide the needed power, CP&L began constructing a series of new plants of unprecedented size. Major plants were added at a rate of about one every two years during the 1950s, the majority of them using coal-fired steam generators in place of the earlier hydroelectric units. In 1956 CP&L began experimenting with the third great source of electric power, nuclear reaction. It formed the Carolinas-Virginia Nuclear Power Association with three other regional utilities to study the details of nuclear power generation. The group built a prototype reactor at Parr Shoals, South Carolina, where electricity was first obtained from nuclear fission in 1963. Encouraged by the results, CP&L applied for and received approval from the Atomic Energy Commission to build its own full-scale nuclear plant, upon which it began work at Hartsville, South Carolina, in 1966. When it came on-line several years later, the Robinson Number 2 Reactor was the first commercial nuclear reactor in the Carolinas, and, with energy sales tripling during the hectic 1960s, CP&L planned a second unit at Southport, North Carolina. Along with its growing confidence in nuclear power, CP&L increased its electrical capacity by joining a power pool formed by utilities in the Carolinas-Virginia area. This 1964 agreement, and its 1970 revision, provided for a flexible sale and purchase of power among the participating utilities as needed.
Problems in the 1970s
With the death of Sutton in 1970, CP&L entered a new era, in several ways. Shearon Harris became the company's chief executive, but more fundamental were the changes wrought by the 1973-74 oil crisis and subsequent, prolonged "stagflation." CP&L was hit by a double blow of rocketing fuel costs and a contracting economy, at a time when its ambitious construction projects were well under way and soaking up great amounts of cash. When Consolidated Edison of New York, the nation's largest public utility, failed to pay a dividend in the first quarter of 1974, Wall Street's faith in utilities was shaken, and CP&L found that it could not obtain financing at reasonable rates. Thus, although the company escaped immediate damage during the energy crunch by passing along to the customer its higher fuel costs, CP&L was forced in 1975 to postpone plans for two steam and three nuclear generators, the first in a series of delays and cancellations that would continue to trouble CP&L.
To cope with the company's difficult conditions, CP&L shook up its management. Harris remained chairman but handed the presidency to Sherwood H. Smith, Jr., who remained the company's chief executive in 1991. Under Smith, CP&L abandoned uncontrolled growth for a more conservative strategy. With the financial, construction, and fuel costs of new plants rising faster than consumers would agree to higher rates, most utilities began to advocate energy conservation in the 1970s to relieve themselves of the need to raise ever more capital. In the aftermath of the Three Mile Island, Pennsylvania, nuclear accident of 1979, nuclear construction came to a virtual standstill for the next decade. CP&L canceled the nuclear units it had postponed in 1975, and, during the 1980s, slowly gave up hope of completing more than one of the four nuclear units originally planned for its Shearon Harris Plant in New Hill, North Carolina. In the atmosphere of tighter inspections following Three Mile Island, CP&L had not won for itself a particularly distinguished reputation. The Nuclear Regulatory Commission levied a number of fines against the company for poor performance, including a 1983 levy of $600,000 that was then the largest civil penalty ever assessed for nuclear mismanagement.
CP&L planned no new coal or nuclear construction projects through the end of the century. With electrical demand slowing and the company's problems with nuclear plants still fresh in the minds of management, CP&L decided to supply its next 2,000 megawatts of capacity by means of smaller, combustion turbine generators. These provided, in the words of CP&L chairman and president Smith, "reasonably short construction schedules, relatively low cost, and quick start-up when needed"--three qualities lacking in the average coal- or nuclear-fired steam plant. The company also planned to continue purchasing significant amounts of electricity from its sister utilities in the region, and had even resorted to selling four of its units to a state agency and then buying back electricity as needed.
Transition to Deregulation in the 1990s
The company was forced to rethink its long-term plans, however, when Congress passed the Federal Energy Policy Act of 1992. Although many utilities welcomed the coming deregulation, the transition from monopoly to competitive marketplace would be challenging. CP&L in particular was threatened by the prospect of competition. Having relied on set rates to recover the costs of its nuclear power plants, CP&L would have a difficult time if low-cost utilities forced electric prices down. The depreciation on such an expensive capital investment would create a large burden for CP&L in a competitive market.
CP&L approached the coming deregulation by cutting costs and attempting to make its nuclear plants more efficient. The company hired new managers for its nuclear plants in 1993, and the Brunswick nuclear plant, which had been plagued with problems, began to show improvement. Two years later, the company announced plans to lower the operating costs of its nuclear plants by $80 million by the end of the century.
An expanding economy in 1995 increased demand for electricity and helped raise CP&L's systemwide sales by almost ten percent. The company's bulk-power sales more than tripled that year, and the company responded by raising its shareholder's dividends. The following year Sherwood Smith retired as chief executive officer, although he continued on as chair of the company's board. William Cavanaugh, who took over as CEO, oversaw further cost cutting and sales expansion. Systemwide sales were up 2.9 percent, and bulk-power sales were up approximately 50 percent. In 1996 operating costs were reduced by $8 million, and the company lowered its fuel costs by renegotiating a coal-supply contract. According to CP&L, this new contract and another renegotiated the previous year would save the company more than $275 million.
The realization of the company's ambitious cost-cutting goals was postponed by the extensive damage caused by Hurricane Fran, which swept through in September 1996 and left 70 percent of CP&L's customers without electricity. The Federal Emergency Management Agency calculated that the power outage caused by Fran was the largest caused by any hurricane in U.S. history. Still, CP&L managed to restore power to almost all customers within ten days. The cost, however, totaled $95 million, $40 million of which was attributed to operations and maintenance and would be amortized over a 40-month period.
In 1997 cost cutting at the company's nuclear plants continued, with CP&L planning to eliminate 150 positions at the Brunswick plant by the end of the year. CP&L also announced plans to make a major acquisition as part of the company's goal to double its annual revenues and net income by 2001. Industry analysts speculated that a natural gas distribution company was the most likely target. CP&L would face fewer regulatory constraints with the acquisition of a natural gas company, although the purchase of one or more electric utilities in territories not adjoining CP&L's current territory remained a possibility.
Although CP&L was preparing for its inevitable entrance into a more competitive arena, the company urged regulators to move slowly in changing the existing system. Pointing to a booming local economy and the Carolinas' relatively low electric rates, CP&L advocated a wait-and-see approach, claiming this strategy would let them learn from other states' mistakes. With deregulation imminent, Cavanaugh remarked in the company's 1996 annual report, "The urgency I feel is for preparing this company to grow and succeed no matter what the rules of the game are. I'm confident we will not only be a successful competitor, we will be a leader. As for the issue of restructuring the industry, it's more important to do it right than do it fast."
Principal Subsidiaries: CaroNet, LLC; CaroHome, LLC; CaroCapital, Inc.; Nuclear Power Associates, Inc.
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