An Ohio utility turns 17,000 customers into shareholders

Many electric utility customers figure the companies that supply their power also gouge them, push stubbornly ahead with expensive and unnecessary facilities , and are insensitive to the environment.

This is one reason executives of the Cleveland Electric Illuminating Company were a little surprised when they gave customers a chance to buy some CEI common stock. The offering began in June and in just two months, 17,000 customers bought 729,000 shares, raising $13.7 million for the company.

It was not the first utility to try selling stock to customers. Two of the pioneers were Montana Power Company and Virginia Electric & Power Company. Ten others have also gone this route, but CEI is by far the most successful.

''The response really astounded us,'' says the Cleveland Electric chairman, Robert Ginn. ''It was not really a money-raising effort. We really approached it from the point of view that people who owned company stock would be more receptive to the company's message on nuclear power construction, rates, or whatever.''

An opinion poll showed that customers receiving dividend checks as well as electric bills would be less critical. Because the company is still deep in a massive building program, with heavy emphasis on nuclear power, disgruntled ratepayers could be a problem.

As president Richard Miller puts it: ''The idea was to make customers part of the family so we could communicate with them.''

Merrill Lynch utilities analyst Doris A. Kelley calls this a ''very smart move.'' Told of the customer response, she describes it as nothing short of ''amazing.''

''If you can dilute potential opposition by making your customers members of your team, you have done very well,'' she says.

Of 600,000 customers who received letters about the offering, 80,000 wrote back asking for more information and received prospectuses. The average investment for the 17,000 who signed up was $800. Customers are allowed to invest from $10 to $40,000 a year at an average of high and low prices for the stock on the investment date. Even before the offer, CEI had 30,000 customers who were also shareholders, many of them employees. The company also had a successful dividend reinvestment program.

Officials and outside analysts attribute the high interest in the stock not so much to customer goodwill as to the healthy dividend the stock is paying.

Since the advent of money-market accounts, many fixed-income investors - in Cleveland as elsewhere - have become quite aware of the earning power of interest rates, observes Edward H. Maugans, CEI's vice-president of finance. But money-market rates have dropped to single digits in the past year. CEI stock , however, has a yield of 12 percent.

Also, there is the tax break. Stockholders can reinvest utility dividends and receive a federal tax deferral of up to $750 a year for individuals. Shares bought with reinvested dividends can qualify for long-term capital gains.

Will the high number of customers buying stock help the company with its finances? CEI secretary E. Lyle Pepin believes it will either reduce or postpone new financing needs. But he, too, sees its primary value as a customer-relations tool.

The stock purchase idea grew out of the directors' experience at annual stockholder meetings. Although Cleveland Electric has not been the center of controversy like many other US utilities, company officials say there had been disruptions at shareholders' meetings from antinuclear protesters and people complaining about their bills.

To counter this, the directors decided that besides the annual shareholders meeting, which attracts 300 to 400 people, they would conduct suburban meetings. These attracted 2,500 to 3,000 stockholders, virtually all customers of the utility.

''That led us to realize that stockholders are interested, positive, and essentially in our corner,'' says Ginn. ''They'd ask questions about nuclear waste or about generating capacity and costs. But at the end of the meetings management usually got a hand.''

Because CEI has major construction costs ahead of it, its standing in the community is very important. Three nuclear plants are still being financed and built. The company reckons it will spend $500 million on construction in 1983, $ 550 million next year, and $500 million in 1985. Eventually, one-third of its electricity will be generated by nuclear power, higher than the national average.

Merrill Lynch's Ms. Kelley says CEI is a utility with a long-term favorable profile, despite its location in the troubled steel-producing region. She notes, however, that the three nuclear power units necessitated a rate increase last spring. Once they are on line, she adds, the nuclear plants may add further

to CEI's excess generating capacity.

Chairman Ginn counters that ''we maintain 35 percent reserve capacity, but half of that is out for maintenance.'' During the summer, he notes, reserves dropped to 10 percent.