Southwestern Electric Power Co. History

Company Perspectives:

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Company History:

Southwestern Electric Power Co. (SWEPCO) provides electrical power and energy-related services to over 408,000 customers in a 25,000 square-mile area of west Arkansas, east Texas, and northwest Louisiana. SWEPCO is a wholly owned subsidiary of Central and South West Corp. (CSW), an electric utility holding company with its central office in Dallas, Texas. Along with CSW's three other electric companies in the United States (Central Power and Light Co., Public Service Company of Oklahoma, and West Texas Utilities Co.) SWEPCO covers the second largest geographic area served by a single electric utility system in the country. In 1996, these four electric utilities generated 63 percent of CSW's total revenues and 57 percent of its earnings. With headquarters in Shreveport, Louisiana, SWEPCO has been organized into four operating divisions: Shreveport, Louisiana; Fayetteville, Arkansas; Texarkana; and Longview, Texas. In tandem, these divisions service an area that is an important hub for oil, gas, and chemical production, oil refining, agriculture, food processing, mining, and pulp and paper manufacturing.

Incorporation and Early Expansion

SWEPCO was founded on June 29, 1912, when it was incorporated in Delaware as the Southwestern Gas and Electric Co. from the consolidation of three utility companies owned by three brothers: Rufus, Henry, and Charles Dawes. The three companies, gas and electric providers, were Shreveport Gas, Electric Light and Power Co.; Caddo Gas and Oil Co.; and Texarkana Gas and Electric Co.

The Dawes brothers owned Southwestern until 1925, when they sold it to Middle West Utilities. By that time it had acquired additional properties: In 1923 the company bought gas plants and distribution facilities in Beaumont, Texas, and in Pass Christian, Biloxi, and Gulfport, all on the Mississippi Gulf Coast, and in 1924 the company acquired the Shreveport Natural Gas Co. Even so, Southwestern's net worth at the time was only about $15 million, a small portion of Middle West's total assets. A large utility provider, Middle West was the holding company of Central and South West Utilities Co. (CSWUC), itself incorporated by energy moguls Samuel and Martin Insull in 1925 as a holding company designed to absorb Southwestern and four other subsidiaries then servicing the "Cactus Patch" areas of Texas, Kansas, Arkansas, Oklahoma, and Kansas. CSWUC would eventually be reorganized as the Central and South West Corporation, or CSW, the current holding company of SWEPCO.

During the boom years before the Great Depression, Southwestern expanded and realigned its structure through additional acquisition and some divestment. Between 1926 and 1928, partly as a practical gerrymandering of operational control, it procured properties in southwest Arkansas from Central Power and Light Co., in northeast Texas from subsidiaries of American Public Service Co., and in northwest Arkansas from Southwest Power Co. Thereafter, in 1928, it sold all its oil and gas properties in Arkansas, Texas, and Louisiana. In 1930, it also sold off electricity-producing properties in Bartlesville, Oklahoma, acquired two years earlier.

Although Southwestern held gas-processing plants in Mississippi until 1943, when it sold them to United Gas Corporation, by 1928 the company had virtually ended business as a natural gas provider in its primary tri-state area of operations in Texas, Arkansas, and Louisiana, concentrating instead on electricity as an energy supplier. This focus was partly prompted by Samuel Insull's belief that electrical appliances would play a major part in the growth of the utility companies under his control. Among other things, he authorized the sale of such appliances through Middle West's subsidiaries and established training and information services to teach women the benefits of electrification and to demonstrate appliance use.

Southwestern did maintain other operations, however, and into the 1940s continued to provide water and ice and maintain and repair electric streetcars. Before the widening use of refrigeration and rural electrification, the company's sale of ice ranked second only to electricity. However, the demand for ice, primarily used in ice boxes, was declining; hence, when federal regulations finally forced the company to divest itself of ice sales as a nonutility service, the company simply rid itself of an increasingly expendable enterprise.

Surviving the Great Depression and Federal Regulations

Although the Great Depression hit most investor-owned utility companies very hard, Southwestern managed not just to survive but even to prosper some, primarily because large oil deposits were discovered near Henderson, Texas, within its geographic area. Southwestern had the monumental but lucrative task of constructing new pipelines to service the burgeoning oil and gas industries. Nevertheless, like the other CSWUC companies, Southwestern was reluctant to risk expansion in the lean and uncertain depression years. Instead of increasing its own generating capacity, it purchased power from neighboring companies to service the booming oil fields in east Texas.

Like all investor-owned utility companies, Southwestern also faced growing competition from public power producers and providers. Public companies, aided and abetted by the New Deal programs of President Franklin Roosevelt, received federal help from such agencies as the Tennessee Valley Authority and the Public Works Administration. Many cities took advantage of low interest government loans to purchase diesel or gasoline engines, generating enough power for their citizens while reaping the benefits of untaxed profits used to finance other municipal functions. So, too, the Rural Electrification Administration, created in 1935, fostered the creation of small utility cooperatives, which in some states, notably Texas, competed with the large, investor-owned companies for rural customers, giving them what investors saw as a distinctly unfair advantage. Because the competition and abundant fuel continued to force kilowatt-hour rates down, electricity was becoming an increasingly practical and popular energy source in both the workplace and the home. The ever-growing load demands helped the investor-owned companies survive against bad odds--the stacked deck that they argued the federal government had foisted on them.

During the Depression, antitrust legislation also ensnared Southwestern in legal problems, contributing to the company's caution. Its future under its holding company umbrella was at risk. CSWUC, and its parent holding company, Middle West, were facing the prospect of federally mandated divestitures in compliance with the Public Utility Holding Company Act of 1935 and its infamous "Death Sentence," a section stipulating that utility holding companies could provide only one type of energy and had to do so within a straightforward and simple structure free of intermediate holding-company levels. The act, quickly challenged by private utility companies, gave the Securities and Exchange Commission considerable power to regulate and restructure interstate utility holding companies. Although court appeals and the Second World War slowed enforcement of the law, by 1944 the SEC ordered Middle West to sell off many of its holdings, in effect compelling the holding company's dissolution and forcing it into receivership.

CSWUC itself survived the "Death Sentence" as a holding company, but each of its subsidiaries was required to divest itself of some properties and services. Southwestern Gas and Electric, the future SWEPCO, had to sell all its ice and water properties as well as its own subsidiary, the Southwest Arkansas Utilities Corporation, which has been transferred to the company in the intricate reorganization plan devised by the Insulls in 1925. Ultimately, compliance with the regulations may have done Southwestern more good than harm, thanks to the increasing demands for electrical power in the economic boom beginning at the end of World War II. A very sharp rise in private and commercial use of electrical energy occurred as refrigerators, freezers, televisions, air conditioners, and other modern conveniences found their way from the marketplace into the homes of working-class Americans.

Expansion and a Move to Coal in the Postwar Era

The building boom of postwar decades and the tremendous growth of the oil and gas industry in Texas and Oklahoma helped CSW, SWEPCO's parent company, reach almost $200 million in annual sales by 1958. At that time, some 14 years after its federally mandated divestitures, Southwestern Gas and Electric changed its name to Southwestern Electric Power Co., reflecting the actual business of the company. Over the next decade, partly as a result of CSW's purchase of Transok Pipe Line, the sales of CSW more than doubled, reaching $425 million by 1970. All its subsidiaries were expanding and profiting.

The chief fuel for producing electricity during this expansion was natural gas, which was both abundant and available from area wells. In 1964, SWEPCO completed its Wilkes Power Plant, which increased the company's capacity to generate electricity from natural gas. However, company officials had by then foreseen the likelihood of a diminishing supply of the cheap natural gas and were considering possible alternatives. In the early 1970s, when a gas shortage in fact materialized, SWEPCO elected to rely on coal in its future expansion. Coal was both inexpensive and plentiful in the United States. The decision was also prompted by the fact that the Fuel Use and Power Plant Act of 1978 limited options to either coal or nuclear fuel.

When no longer able to arrange long-term contracts with gas suppliers, SWEPCO started building coal-fueled electrical power plants. Two went into service in the late 1970s, at Welsh in east Texas and Flint Creek in northwest Arkansas. At first, SWEPCO relied on low-sulfur coal purchased from Wyoming mines. Then, in the 1980s, the firm began building lignite-powered plants, using the low-grade brown coal found in abundant deposits in northern Texas and Louisiana, within the company's own service area. It completed a mine-mouth, lignite-fired plant, the Pirkey Power Plant, near Hallsville in east Texas in 1985, and the next year, in a joint venture with Central Louisiana Electric Co. (CLECO), opened another lignite facility, the Dolet Hills Power Plant, nears Mansfield in northwest Louisiana. SWEPCO thus initiated a new mining industry in Louisiana and Texas, providing new jobs and holding down energy costs during the recession of the late 1980s and early 1990s.

Continued Growth and Future Plans

Even in the leanest years in the decade between 1985 and 1995, SWEPCO continued its steady growth in annual sales and the number of customers serviced. In 1987, when the Louisiana economy was at a nadir, the company managed to reach a new annual high in operating income through careful management, reduced fuel costs, and benefits from the Tax Reform Act of 1986. By 1995, it had added over 44,000 customers and increased its total annual revenue from about $779.6 million in 1985 to $836.7 million. According to the projections of CSW, kilowatt-hour sales by its electric utility subsidiaries were expected to continue to grow at a rate of about 2.2 percent per annum. Its growth was also reflected in its construction expenditures, which totaled $153 million in 1994, $115 million in 1995, and $95 million in 1996.

In the late 1990s, under the leadership of its president Michael D. Smith, SWEPCO remained responsive to the needs of both its private and commercial consumers. Over its history, the company had worked hard to keep its good neighbor image. It continued its involvement in public information and education programs, begun 50 years earlier. It also tried to improve its customer service. For example, in 1997, the company began providing around-the-clock, seven-day-a-week access to its service representatives, facilitating not just outage and emergency reporting but all other kinds of service formerly limited to "regular" business hours. It also played an active role in helping the geographical area it served prosper through economic development. Its economic development department provided assistance in arranging loans for businesses from a coalition of funding agencies. The department also purchased and developed industrial sites for lease to new or relocating companies in its geographic area. In addition, it set up revolving loan funds for some industries. As a result, over a five-year period beginning in 1992, it had an important part in bringing 110 new companies and 16,000 jobs to the company area. SWEPCO also passed reduced fuel cost savings on to its customers, achieving a 10 percent reduction in average costs between 1993 and 1994 and an additional 8 percent between 1994 and 1995. It remained one of the cheapest providers of electric power in its geographic area. Moreover, the company also reflected the interests of CSW in developing new technologies. For example, it participated in planning for the use of electric vehicles, both as an infrastructure provider of hookups for recharging their batteries and their use as company vehicles.

SWEPCO, with a continuing construction program, tried to maintain a growth cycle that kept in step with the economic and demographic developments in its area. Its plans for the late 1990s were to expand and improve its distribution facilities, largely with funds generated internally. The company's growth was expected to accelerate if it was successful in some of its contingency measures, chiefly its efforts to purchase the non-nuclear power-generating assets of Cajun Electric Power Cooperative, Inc., which, starting in 1994, had to continue operations under Chapter 11 bankruptcy provisions. If successful in its bid, SWEPCO would also gain the contractual right to serve Cajun's 12 cooperative members, providing power to about a million additional customers in Louisiana. SWEPCO faced competitive bids and court delays, however, and no resolution had been reached by the summer of 1997.

Further Reading:

• Easterbrook, Gregg, "The Failure of Electric Power," Atlantic, July 1993, pp. 42--46.
• Finn, Edward A., Jr., "Mr. Malec Versus the Bureaucrats," Forbes, December 28, 1987, p. 44.
• Kilby, Jane, et al., The Cactus Patch and How It Grew: A History of the Central and South West System, Dallas: Central and South West Corporation, 1989.
• Rennhoff, Harley A., "Louisiana's Energy Industry: Power Source for Progress," Louisiana Life, November/December 1988, pp. 51 ff.
• Rudolph, Richard, and Scott Ridley, Power Struggle: The Hundred-Year War Over Electricity, New York: Harper & Row Publishers, 1986.
• "SWEPCO's Success Story," Louisiana Life, November/December 1988, p. 64.

Source: International Directory of Company Histories, Vol. 21. St. James Press, 1998.

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