Why Commonwealth Edison Is Feeling The Heat

When river water began flooding basements across downtown Chicago in April, Commonwealth Edison Co. flew into action. The giant utility immediately cut power to a 20-block area, and senior executives threw together a war room to coordinate the company's response. Over the next three days, Edison worked around the clock to restore electricity. Crews even jury-rigged transmission lines so buildings could reopen. As the city rebounded, civic leaders heaped praise on the sure-handed effort. Says Chairman James J. O'Connor: "It was our finest hour."

You know things have gotten bad when a disaster is your high point. But then, O'Connor hasn't had much else to boast about. For three years, Edison has struggled without success to convince state regulators that it deserves a rate increase to pay for the $7.1 billion it sunk into its last three nuclear power generators, which came online in the late 1980s. Now it looks as if Edison will get an increase--but not enough to cover its costs. Worse, state regulators say the company paid too much for coal during the past decade, and they may order Edison to refund $281 million to its customers.

SQUEAKING BY. Edison's nuke spending has been devastating to its bottom line. After the Illinois Supreme Court last year refused to allow the company to pass $734 million in construction costs for the nuclear plants along to ratepayers, kicking the issue back to the Illinois Commerce Commission, Edison's net income plunged 63%, to $16.6 million. Hope for a banner year in 1992 grew dim in late June, when regulators' preliminary ruling said Edison wouldn't be allowed to pass along its costs. The reason: Under the arcane rules that govern the heavily regulated utility, the plants weren't judged "used and useful." A final decision is expected in January, when Edison should get some smaller portion of what it wants. But investors are less than enthusiastic: Edison's stock has slid 38% since late 1991 (chart).

Figuring the company won't get good news in January, O'Connor has moved to cut costs. On July 22, he announced Edison would ax 1,250 managers, or 10% of the company's total, and slice $385 million from its construction budget. The company's $3-a-share dividend is also "under pressure," says O'Connor. Smith Barney, Harris Upham & Co. industry analyst Edward J. Tirello predicts the company will cut the dividend in half, possibly by September.

But it may take a lot more than that to lift Edison's fortunes. Some outsiders believe an additional 1,200 or so management employees might be cut. Edison is talking about slashing services, such as its 24-hour consumer hot line, and putting off maintenance at old generating plants. If O'Connor hacks away enough costs, figures Tirello, net income could rebound this year to $402 million. But that's still less than half of Edison's 1987 profits. And such cuts probably won't stave off a credit downgrade: All four rating agencies currently have Edison on their watch lists.

Edison is not alone. Utilities, once energized by fat rate increases, face lean times. Worried about ratepayer rebellion and recession, flinty regulators are denying or scaling back rate hikes, forcing utilities to cut. On July 22, after failing to get a $204 million rate increase, Cincinnati Gas & Electric Co. announced it would eliminate up to 800 jobs and slash $400 million from its $1.4 billion four-year construction budget. In April, trying to get a handle on costs, Houston Lighting & Power Co. cut staff positions by 17%.

COAL COMFORT? The irony is that Edison's nuclear plants are up and running, providing power to northern Illinois consumers. "They're the best plants we have," says O'Connor. But under the formula state regulators will use, part of the electricity generated by one unit and most of the power thrown off by the others isn't necessary right now. Consumer groups say Edison has up to 10% more generating capacity than it needs. Charges Susan Stewart, head of the watchdog group Citizens Utility Board: "They won't need it until after the year 2000."

When the company started building the plants in the mid-1970s, both Edison and regulators thought the power would be needed by now. Then in the late 1980s the surplus appeared, and regulators started backpedaling. Edison originally asked for a $1.2 billion rate increase. About all O'Connor will probably get is a 9% rate increase, or $482 million. That won't help him forget his coal woes, either. Thanks to long-term contracts signed in the 1970s, Edison pays three times the national average for coal. O'Connor says he's seeking to restructure the coal deals.

One day, O'Connor may finally recoup the cost of building Edison's nukes. The company is next eligible to apply for a rate increase in 1993. But O'Connor isn't betting on it. "There's no compass," he says, about the regulators. Actually, there is. It's just not pointing in the direction O'Connor expected.

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