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In many ways, American Electric Power has been an industry powerhouse for decades. We pioneered many technologies and techniques that have become standard in the electric utility industry.
Thanks to the inventiveness, skill and drive of its people, AEP remains at the forefront of the restructured electric utility industry. Our achievements in 2000 provide a platform for even better performance in the years ahead.
Energy, information and people will be the primary ingredients for our future success. We are committed to being a powerhouse of energy and shareholder value.
American Electric Power Company, Inc. (AEP) is a public utility holding company that generates, purchases, transmits, and distributes electric power. Nearly five million people in Michigan, Indiana, Ohio, Kentucky, Virginia, West Virginia, Arkansas, Louisiana, Oklahoma, Texas, and Tennessee are serviced by AEP's interconnected power grid delivering electricity from coal-fired, nuclear, and hydroelectric generating facilities. AEP also has two service subsidiaries: American Electric Power Service Corporation, a nonprofit organization providing management and technological services to affiliated companies, and AEP Energy Services, Inc., which provides the same services to nonaffiliated companies for profit. The company also serves 2.4 million customers outside the United States with its power holdings in Mexico, Brazil, Australia, China, the Philippines, and the United Kingdom. AEP has always served a multistate area, emphasizing consolidation of its subsidiaries, integration of its system, and technological leadership. It has become one of the largest electric utilities in the United States, with 38,000 megawatts of generating capacity and 224,000 miles of transmission and distribution lines.
Formation of the Company: 1906
The company was incorporated as American Gas & Electric Company in 1906, when the structure of the electric utility industry in the United States was changing from small, individually owned generator plants to consolidated single systems serving a large area. This change was seen in other industries as well. As president of the United States from 1901 to 1907, Theodore Roosevelt denounced such business combinations. By 1906, however, Roosevelt had come to believe that, with proper government regulation, the consolidation of businesses could be beneficial to the public interest. Thus when Richard E. Breed, Harrison Williams, and Sidney Z. Mitchell met in 1906 to consider forming a holding company to buy the 23 small companies held by Electric Company of America, they were in the right place at the right time.
Electric Company of America was itself a holding company founded in 1899 that, because of its directors' failure to grasp the economics of the newly developed industry, was in financial difficulty. Breed, a glass manufacturer in Marion, Indiana, was a major stockholder. Williams, Breed's brother-in-law, was a prominent financial entrepreneur. Mitchell was president of the utilities holding company, Electric Bond & Share Company, a subsidiary of General Electric Company. After some negotiation, Electric Company of America agreed to sell its assets for $6.28 million to American Gas & Electric Company (AG&E). The sale was completed in January 1907, with Breed and Williams as board directors of AG&E, Mitchell as chairman, and Henry L. Doherty--later to begin his own chain of electric companies--as president until 1910, when Breed stepped in.
The acquired companies were a varied lot, including nine utilities in Pennsylvania; four in New Jersey; and two each in New York, West Virginia, Illinois, Indiana, and Ohio. They supplied services that included electricity, gas, water, steam, and ice. For the most part, the companies' service was poor, their rates high, and their equipment faulty. Customers desiring new service often had to invest in the company since the operating company lacked financing to extend its lines.
Sidney Z. Mitchell had the experience and financial expertise to remedy this situation. An 1883 graduate of the U.S. Naval Academy, Mitchell had installed the first incandescent electric lighting system on a U.S. naval vessel. After leaving the navy in 1885, Mitchell met Thomas Edison and started working for him in New York City. That same year he left for the Pacific Northwest, where he ran Edison's operations for the next 20 years. He returned to New York in 1905 to help organize Electric Bond & Share Company (EB&S), of which he was soon president and chairman, with the responsibility of making the small operating companies turn a profit.
AG&E, while not owned by EB&S, did benefit from its financial services and was influenced by EB&S, because Mitchell simultaneously held the top positions in both companies. Mitchell's corporate strategy was guided by a few basic principles. First, sales were to increase by 6 percent to 8 percent each year. Second, small generating stations were to be replaced by larger, more efficient plants strategically located to allow for future growth and interconnection. Third, small operating companies located close together in one state were to be consolidated into one company. Fourth, the sales of preferred and common stock would provide for increased capital investment. Mitchell understood that utilities had inherent qualities that would force out competition and favor large holding companies. The cost of equipment was quite high and could be recouped only by companies with large customer bases. Quoted by his son, S.A. Mitchell, in S.Z. Mitchell and the Electrical Industry, Mitchell stated, "The only way that I know to make money in the public-utility business today, is by following the large volume of business, low cost of operation, low cost of money, low rates to the customers, and small margin of profit idea." In following this idea, AG&E had increased the number of kilowatt hours it provided from 53 million in 1907 to 427 million in 1917.
To increase consumption, the operating companies of AG&E established 24-hour service, gave away electric irons to new customers, and presented free toasters to households using the most electricity. In addition, the company rented vacuum cleaners to customers and ran cooking schools using electric ranges. As new plants came on line, rates were lowered and put on a sliding-scale basis, decreasing as consumption increased.
Mitchell also applied his principle of consolidation to AG&E. By 1910 Mitchell had sold all of the gas properties included in the original acquisitions, a policy the company consistently followed in later years. He also sold some electric companies that could not be merged readily into a unified system. The largest of these isolated AG&E operations was in Rockford, Illinois. Retaining the companies in Marion and Muncie, Indiana; Bridgeport, Ohio; Atlantic City, New Jersey; and Scranton, Pennsylvania, Mitchell began acquiring smaller, adjoining companies, consolidating their operations and extending their lines into neighboring communities.
Having created several core markets in which to expand, AG&E began to construct long-range transmission lines to tie its properties together. An early step in consolidation was the construction of a 32-mile-long tie-line between Muncie and Marion. AG&E replaced existing equipment in this region with more powerful generators, and the Indiana properties became an interconnected system. This process was repeated in the area between Canton, Ohio, and Wheeling, West Virginia. George N. Tidd managed the ongoing consolidation and became president of AG&E in 1923 and chairman in 1924. By 1926 Mitchell had acquired additional properties in Virginia, West Virginia, and Kentucky.
The greatest cost of producing electricity was financing charges for new equipment. As cash flowed into AG&E from sales of unwanted properties, the company purchased more common stock in its partially owned subsidiaries. This in turn supported further issues of common stock and bonds to the public to raise more money for capital improvements.
The Golden Age of Growth: 1914-30
In 1914 the United States had opened to commercial shipping the Panama Canal, and World War I had begun in Europe. Following a period of strained neutrality, the United States entered the war in 1917, and the increased demands of wartime industries caused a 40 percent increase in the demand for electricity. At this time, Mitchell served on a committee of the War Industries Board overseeing electrical supply to defense plants. By interconnecting all generating plants, regardless of ownership, the committee achieved more balanced loads in order to meet war needs. This pooling system became popular in the postwar period. Implemented on a more limited basis than first conceived, it lowered production costs, created more reliable service, and contributed to company savings.
In the United States, the decade of the 1920s was characterized by a tremendous increase in industrial expansion and financial speculation. Mitchell was instrumental in establishing the principles upon which was based the first piece of federal legislation specifically aimed at regulating electric power, the Federal Power Act of 1920.
For power utilities, this was a golden age of growth, and AG&E flourished with the times. After reincorporating upon merging with Appalachian Securities Corporation, the company paid special stock dividends of 50 percent in 1925, 40 percent in 1927, and 50 percent in 1929. By 1926 AG&E had three primary electric power centers in place, one near Atlantic City, New Jersey; one in the Scranton area of Pennsylvania; and the third, known as the Central System, stretching from Virginia to Michigan. In building these systems, the company had constructed four "superplants," which went into operation from 1924 to 1930; each was built outside the areas it would serve but near to fuel sources. This large-scale technology decreased unit costs.
Weathering the Depression
During the Great Depression with its monopoly shielded by regulation, AG&E and other utilities fared comparatively well. In 1933 revenues fell by 11 percent, the decline in industrial use being offset by residential customers, whose rate of use actually increased 20 percent between 1929 and 1933. U.S. President Herbert Hoover requested that electric utilities begin construction of facilities to meet future need to ease unemployment. Mitchell responded by directing companies controlled by Electric Bond & Share Company to spend $97 million on construction in 1930. Associated holding companies advanced more than $330 million to help the operating companies between 1930 and 1934. Mitchell retired in 1933, however. One of the last of the giants of the early era of electrical utilities, his greatest contribution was the financial management that had supported rapid growth.
The Public Utility Holding Company Act of 1935, which established the Securities and Exchange Commission to enforce its provisions, was designed to demolish pyramid holding companies such as AG&E, which had been built on a mountain of debt. The value of large interconnected systems serving a single area was widely accepted by this time, however, and while AG&E was forced to dispose of two noncontiguous companies--Atlantic City Electric and Scranton Electric--the Central System was left intact.
In 1939 the start of World War II in Europe led to increased production of war supplies, which lessened the effects of the Depression. When the United States entered the war in 1941, there was a rise in power demand by wartime industries, which the utilities were able to meet. In addition, as construction priorities shifted to defense materiel, new generating equipment could not be built. After the war, demand dropped and industrial production returned to normal. While consumers rushed to buy the new appliances then available, the utility industry had to wait for the delivery of new equipment before it could resume growth.
Postwar Technological Advances
By 1949, Philip Sporn, a one-time assistant to Tidd who had become AG&E's president in 1947, announced that the worst of the power shortage was over. With comfortable margins of reserve, AG&E picked up 82,000 customers in 1948, representing 250,000 kilowatts of demand. Load expansion was bolstered by AG&E's sale of 45,000 electric ranges and 30,000 water heaters. To Sporn, the most significant problems of the decade ahead would be developing technology that could handle an expected doubling of demand and raising capital for new facilities costing an anticipated $500 million.
With Sporn in charge, AG&E increased the number of kilowatt hours provided to 23.3 billion in 1959, achieving growth through acquisitions, technological breakthroughs, and sales promotions. In 1948 the company bought Indiana Service Corporation in Fort Wayne and consolidated it with an AG&E subsidiary, Indiana & Michigan Electric Company. This was only one of six acquisitions during the years between 1945 and 1956.
Sporn had been an engineer with AG&E since 1920, and he was interested in the technical aspects of the power industry. As president of the company until 1961, Sporn's approach was to take risks with new, untested equipment in order to surpass competition. In the 1950s Sporn worked with General Electric Company on the design of a new 225-megawatt generator. After achieving favorable results with a prototype, he ordered another six units. AG&E became widely known for its technological leadership.
Sporn did not neglect the sales side of the business, however, and he structured it to mesh with the growth of the system. Sales of room air conditioners went up from 43,000 in 1947 to 1.67 million in 1958 and while this meant consumption, it also created a new problem: summer peaking of load demand. In 1955 Sporn began promoting heat pumps and home electrical heating as a way to achieve balanced seasonal loads. By creating demand, Sporn hoped to project future generating needs more accurately.
The development of nuclear power was also a major concern of the utility industry in the 1950s. To raise the enormous capital required for such development, Sporn urged that the Public Utility Holding Company Act be revised to allow private companies to develop facilities jointly. In 1954 U.S. President Dwight D. Eisenhower signed the Atomic Energy Act, making possible the private development of nuclear energy in the United States.
In 1958 AG&E changed its name to American Electric Power Company. During the 1960s the electric utility industry was a success story in which new equipment and business techniques encouraged growth and profits. This success was reflected in rising stock prices, with averages doubling between 1958 and 1965, and while the growth rate of demand advanced at an annual pace of 7 percent on average between 1920 and 1973, rates continued to drop.
The power failure in the northeast United States that prompted a power blackout in New York City in 1965 led to threats of federal intervention to guarantee reliability. Donald C. Cook, who had succeeded Sporn as president of AEP in 1961, argued that a proposed national power grid system was unworkable and that such federal intervention was not needed. As proof he pointed to the role of private industries in alleviating the blackout crisis by sending power to New York through their transmission lines. Nevertheless, regional power pool arrangements were worked out through the North American Electrical Reliability Council, a new industrial body.
Cook continued to address the problem of the national power supply when, in 1967, he told a National Power Conference in Washington, D.C., that most of the electrical systems in the United States were outmoded and inefficient. Cook called for their replacement. Within 25 years, he speculated, the country would be served by approximately 15 electric mega-systems. Indeed, in the late 1960s an industrywide trend toward corporate consolidation did emerge. As part of this, AEP absorbed Michigan Gas & Electric Company and proposed taking over Southern Ohio Electric.
Another trend in the late 1960s was a growth in the annual rate for electrical consumption to an unforeseen level. The need to increase capacity set off a race among utilities to buy new equipment, causing high prices and delays in delivery. To avoid these problems, AEP bought 2,200 megawatts of power equipment overseas in 1967, an unusual procedure for a U.S. utility.
Industry Decline and Recovery: 1970s-80s
The climate of expansion ended abruptly in the 1970s, in large part because of three factors: a general market decline set off by the OPEC oil embargo; rising costs that could not be offset; and a technological standstill, in which existing technologies could no longer provide higher levels of efficiency at lower costs. In 1973, the year the oil embargo began, 17 percent of power generation nationwide depended on oil. In the Northeast, the figure was 60 percent. As oil prices rose eightfold, the price of electricity shot up almost 50 percent. In 1974 power demand went down for the first time since 1970, in part due to exports to Japan; Cook suggested export restrictions.
Another problem for utilities in the 1970s was a series of federal regulatory acts spurred on by an increase in public awareness of the environmental movement. Jimmy Carter became U.S. president in 1977, and the National Energy Act of 1978 soon followed. For AEP, which used coal produced by subsidiary-controlled mines, the regulatory environment had become stifling. W.S. (Pete) White, who had become chairman of the board of AEP in 1976, predicted in 1979 that projected construction costs would be 40 percent higher for the company because of Clean Air Act amendments.
In the midst of declining demand and increased regulatory restrictions, AEP had opened its 2.13 million-kilowatt Cook nuclear plant in Michigan. For a time, the company was sheltered by its sales to other utilities, which could purchase electricity from AEP at a cost lower than they could produce it themselves. In 1980 AEP acquired Columbus and Southern Ohio Electric Company, located in the middle of its operating system, and moved its headquarters to Columbus, then the largest city it served. By 1982, however, a recession severely affecting industry in AEP's territories caused a drop in industrial sales of 18 percent. Sales to other utilities declined by 20 percent. In response, White cut salaries, froze wages, and laid off workers.
Recovery, however, came as early as 1984. In that year, increased auto sales led to the recovery of the aluminum and steel industries, which were AEP's largest industrial customers. As industrial sales rose 22 percent in the year's first quarter over the year before, sales to other utilities meeting the increased demand rose 40 percent. Residential and commercial demand rose 10 percent and 8 percent, respectively. For AEP, which had been granted a rate increase of $260 million in 1983, the corner had been turned. Although revenues would decline in both 1985 and 1990, AEP's financial situation generally improved from its 1983 low. In 1986 a project 19 years in duration, a 2,022-mile-long, 765,000-volt transmission network stretching from Virginia to Michigan, began operation. At a cost of $800 million, AEP established an electrical grid expected to serve into the 21st century.
AEP still faced three major problems in the late 1980s and early 1990s: completion of the Zimmer nuclear plant in Ohio, amendments to the Clean Air Act, and proposed deregulation of the utility industry. Begun in 1971 as a joint project of AEP and two other utilities, Zimmer was planned as an 810-megawatt nuclear facility, but the national controversy over the development of such plants, especially after the nuclear accident that occurred in 1979 at the Three Mile Island plant in Pennsylvania, helped to bring a halt to Zimmer in 1982. With the facility almost completed with an investment of $1.7 billion, the project was stalled. Then in 1984, despite industry skepticism, the company decided to convert Zimmer to a coal-fired plant. AEP's subsidiary, AEP Service Corporation, using modular construction methods, completed the conversion three months ahead of schedule and below budget by almost $300 million.
Expansion in the 1990s
With the completion of its Zimmer facility, AEP, for the first time since World War II, was not constructing any more generating capacity, but was planning carefully during a time when the very structure of the industry might change. Environmental concerns were affecting not only the choice of fuels, but also the structure of energy plants. To comply with the Clean Air Act, the company installed scrubbers designed to mitigate pollution on its coal-fired plants in 1992. In addition to modifying their plants, AEP began looking into the development of alternative energy sources. Later in the 1990s, this research led to the company's development of the Trent Mesa Project, a wind-power generation facility in Texas.
In the mid-1990s deregulation in several countries and industries affected AEP's business plan. Discussion in several states about opening up retail energy sales to competition encouraged AEP to begin advertising, both to protect its existing customer base and to introduce its name to potential customers in new areas. The telecommunications industry opened to new players with the passage of the Telecommunications Act of 1996; AEP jumped in with AEP Communications. Around the same time, the United Kingdom deregulated its electric market. In 1997 AEP formed AEP Resources to handle nonregulated corporate development and capital investment operations, and the new subsidiary went looking for British opportunities. Along with New Century Energies (later Xcel Energy), the company purchased Yorkshire Energies for $2.8 billion.
Several factors led to a drop in AEP's net income in 1997: The U.K. government decided the value of Yorkshire Energies had been misassessed and hit AEP with a windfall tax of $109 million. The Cook nuclear plant was shut down when the Nuclear Regulatory Commission expressed safety concerns. In addition, AEP faced increasing wholesale competition. Despite these setbacks, AEP announced a major expansion plan in December 1997--to buy the electric utility Central and South West Corp. in a stock swap valued at more than $6 billion. The deal immediately became mired in the regulatory approval process, which would end up lasting two and a half years.
Meanwhile, AEP Resources continued investing in foreign utilities. In 1998 it purchased 20 percent of the Australian power company Pacific Hydro; in 1999 the Pushan Power Plant, of which AEP owned 70 percent, came on line in China. AEP moved into natural gas in 1998 with the purchase of the natural gas midstream operations of Equitable Resources in Louisiana. The deal included natural gas storage and processing facilities and nearly 2,000 miles of intrastate pipelines. AEP expanded its reach in this industry when it bought the Houston Pipe Line Company from the ill-fated Enron Corporation in 2001. The $727 million purchase added 4,400 miles of natural gas pipelines to AEP's system and a 30-year prepaid lease on the operation of the Bammel Storage Facility. One of the largest natural gas storage facilities in North America, Bammel had a capacity of 118 billion cubic feet. In 2000, AEP returned its Cook Nuclear Plant to service.
Finally, in mid-2000, AEP completed its acquisition of Central and South West, yielding combined 1999 revenues of $12.5 billion and sales of nearly 200 million megawatt hours. Along with the addition of 1.8 million customers, AEP also gained another U.K. utility, SEEBOARD. Although the company considered combining SEEBOARD with Yorkshire Energies, it abandoned that plan later in the year. As a result of the acquisition, the company also anticipated $2 billion in savings over the next ten years from efficiencies resulting from the combination of the two companies' operations.
Later that year AEP announced a reorganization that would create two wholly owned corporations. One would handle AEP's nonregulated subsidiaries, both utility and non-utility. The other would hold AEP's regulated utility subsidiaries and its foreign utility subsidiaries that were subject to rates or tariff regulations. The plan would require Securities and Exchange Commission approval before it could be implemented.
AEP continued to expand on a smaller scale in 2001, with the takeover of the Quaker Coal Co. Quaker was in bankruptcy proceedings in Kentucky when the court approved AEP's plan to assume the company's assets and pay off its creditors.
Principal Subsidiaries: AEP Communications, Inc.; AEP Credit, Inc.; AEP Energy Services, Inc.; AEP Generating Company; AEP Pro Serv, Inc.; AEP Pushan Power LDC; AEP Resources, Inc.; Central and South West Corporation; Central Power and Light Company; CSW Energy, Inc.; Indiana Michigan Power Company; Kentucky Power Company; Ohio Power Company; Public Service Company of Oklahoma; Southwestern Electric Power Company; West Texas Utilities Company; Wheeling Power Company.
Principal Competitors: Cinergy Corp.; Entergy Corporation; Xcel Energy Inc.; UtiliCorp United Inc.
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