REVIEWS
“Neufeld’s account of the development of electricity markets in the United States clearly outlines the problems stemming from the industry’s character as a natural monopoly. Chronicling the responses of public officials over time, he explains why each response occurred within the context of political struggle and carefully explains how some policy responses, while solving a current problem, created future problems as the industry evolved and technology changed. Neufeld is a leading authority on the economics of the early electric industry, and this book will be of interest to economic historians, energy economists, scholars of both historic and modern industrial organization, historians of the progressive era, and political scientists interested in better understanding the rise of government in industries.”
— Carl Kitchens, Florida State University
“Neufeld has written extensively and incisively on the history of the US electric utility industry, making him well positioned to undertake a comprehensive examination of the history of this unique industry. Blending solid economic theory with the historian’s attention to detail, this book likely will be his magnum opus.”
— William J. Hausman, College of William and Mary
“Selling Power is a thoughtful and well-written history . . . . Its detailed and rigorous treatment of primary sources will make it a valuable resource for scholars who want to incorporate electricity into their work on this period, for economic historians who want to grapple with some of these same questions applying different theoretical frameworks, and for scholars and policy makers analyzing the twenty-first-century challenges of the technological dynamism and political economy who want to understand the historical foundations of this industry.”
— EH.Net
"Presents a history of the electric-power industry, concentrating on the structure of its economic institutions and the ways in which economics and public policy have been affected by that structure."
— Journal of Economic Literature
"[T]his work is a valuable window into the way that electricity has shaped American political and economic institutions and an interesting case study of the modernizing American economy of the pre–World War II era....Selling Power is an interesting and valuable addition to the history of electricity, industrial growth and development, the intersection of private and public policy during the Progressive and New Deal eras, and the modernization of the U.S. in the early twentieth century."
— American Historical Review
"...Neufeld’s command of economics and his deep reading of the primary sources produce a work notable for its willingness to render judgements...Selling Power is a welcome addition to the growing scholarship on the history of electrification."
— Robert Lifset, Technology and Culture
TABLE OF CONTENTS
Introduction. The Economics of Electric Utilities - John L. Neufeld
DOI: 10.7208/chicago/9780226399775.003.0001
[incentive alignment;capital costs;price discrimination;peak load;networks;transaction specific;transmission;hydroelectricity;sunk costs]
The development of the electric utility industry has been strongly affected by specific technological and economic characteristics of the generation and distribution of electricity. Characteristics that have repeatedly affected the industry’s development and responses to different policy environments are described here and referred to in later chapters. These include the issues of the alignment of individual incentives with the interests of customers and society, government versus private ownership of firms, the major role of capital investment in firms’ total costs, and the dependence of capital costs of a firm’s peak load rather than on the total electrical energy produced and sold. The non-storability and non-transferability of electricity among customers made price discrimination possible, and the importance of joint costs made it inevitable and, perhaps, desirable. Most of the capital investment of an electric utility is transaction-specific; its costs are sunk and cannot be recovered if the equipment cannot be used as intended. The peak-load issue and the characteristics of hydroelectricity make large fully integrated networks an important source of economies. The transaction-specific nature of capital investment inhibited the achievement of those benefits. The technological characteristics of transmission make unified control of a network essential and make joint ownership problematic. (pages 1 - 11)
This chapter is available at:
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Chapter 1. Early Commercialization - John L. Neufeld
DOI: 10.7208/chicago/9780226399775.003.0002
[Thomas Edison;arc lighting;incandescent lighting;parallel circuits;alternating current;Ohm's law;transformers;Paul Jablochkoff;Joseph Swan;General Electric]
The discoveries and inventions that preceded and accompanied the early commercialization of electricity are discussed, including the development of batteries and generators and both arc and incandescent lighting. Arc lighting was commercialized before incandescent. The requirements of a system providing electricity for incandescent lighting are very different than that required for arc lighting, requiring parallel rather than series circuits and the application of Ohm’s law. Thomas Edison understood the implications of the difference and the consequent requirement for new generators, meters, fuses, wiring technique and the resistance of an incandescent bulb, all of which he did. His competitors and successors in the industry all embraced his system, which remains in use today. Edison’s claim to have invented the incandescent light is debatable; his role as the inventor of the modern electric utility industry is not. (pages 12 - 20)
This chapter is available at:
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Chapter 2. The First Electric Utilities
DOI: 10.7208/chicago/9780226399775.003.0003
[Battle of the Systems;alternating current;isolated plants;price discrimination;networks;competition;direct current;Charles Brush;Elihu Thompson;Westinghouse]
The enormous capital investment needed to create the infrastructure before any revenue could be realized inhibited the creation of the first electric utilities. Obtaining the financing for what seemed a risky investment was a major problem; the manufacturers of the equipment required by utilities adopted methods to share in those risks, but customers other than privately owned firms were seen as desirable. Many municipalities provided their citizens with utility service by establishing government-owned utilities. Large users of electricity, such as factories or hotels, invested in their own generating equipment, termed “isolated plants.” Isolated plants were serious competition to electric utilities; in 1929, 35 percent of the electricity used to power motors in manufacturing was generated outside utilities. Electric utilities employed price discrimination to deal with this competitive threat by implementing rate structures (demand charges) that based the price of electricity to a factory not on the cost to the utility of providing the current but on what it would have cost the factory to use an isolated plant. Edison’s system used direct current. The switch to alternating current in the “Battle of the Systems” made large integrated supply networks desirable but difficult under existing industry structure.
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Chapter 3. The Adoption of State Commission Rate Regulation - John L. Neufeld
DOI: 10.7208/chicago/9780226399775.003.0004
[municipal franchise;corruption;Progressives;transaction specific;extortion;National Civic Federation;Smyth v Ames;state commissions;railroads;Samuel Insull]
Electric utilities (as other municipal utilities) were originally subject to the policies of the city government where they were located because of their need to obtain a franchise to use the public rights-of-way for their distribution systems. The transaction-specific nature of utility capital equipment made them subject to extortion by corrupt city officials, and many American cities had corruption problems stemming from utility franchises. Progressives, such as those in the National Civic Federation saw two paths for reform: government ownership or regulation by impartial state commissions. The chapter discusses the history of state regulatory commissions. Legal requirements for state control of prices had been earlier defined by the Supreme Court in economically flawed decisions involving railroads, notably Smyth v Ames. The methodology adopted to regulate utility rates ostensibly sought to prevent utilities from earning monopoly profits by setting total revenue equal to total cost. The new system was an improvement over corrupt municipal franchising, but it created undesirable incentives that brought significant new flaws to the industry’s structure. Despite its flaws, the new structure proved workable, enabling the industry to grow and providing the nation with enormous benefits. (pages 46 - 72)
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Chapter 4. Growth and Growing Pains - John L. Neufeld
DOI: 10.7208/chicago/9780226399775.003.0005
[shafts and belts;capital intensive;manufacturing productivity;appliances;large integrated networks;state regulation;transaction specific;Superpower;Giant Power]
In the 1910s and 1920s, electricity production sales grew and prices fell. Eighty-five percent of urban residences had electric service by 1930, and new electric appliances became available. Electricity fundamentally changed the organization of factories and may have been responsible for the acceleration in the growth of manufacturing productivity in the 1920s by eliminating shafts and belts as the means of power transmission. Growth required increasing investment in capital equipment, and the electric utilities became the nation’s most capital-intensive industry. World War I brought an appreciation of the unrealized benefits that could have been provided by much larger fully integrated electricity supply networks. This led to two failed proposals in the 1920s: Superpower and Giant Power. The failure of Superpower was caused by the barriers to consolidation that state regulation created. The transaction-specific nature of utility investment made joint participation by separately owned utilities in a common network too risky to accept and no agreement was reached on the necessary new institutional structures. Giant Power proposed a radical restructuring of the industry separating generation, transmission, and distribution. Private ownership of firms would have continued, but government would have gained power over policy issues such as rural electrification. (pages 73 - 95)
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Chapter 5. Public Utility Holding Companies: Opportunity and Crisis - John L. Neufeld
DOI: 10.7208/chicago/9780226399775.003.0006
[holding companies;Samuel Insull;Electric Bond and Share;Stone and Webster;United Corporation;state regulation;public relations;propaganda;Great Bull Market;1920s;pyramiding]
Public utility holding companies existed early in the industry’s history. By 1929, they controlled over 80 percent of the nation’s electricity generation, and that control was becoming concentrated in fewer companies. Concern over their economic and political power, their enormous public relations (or propaganda) operations, and the opaqueness of their organization raised political concerns over their role. They facilitated the early industry’s access to financial markets and they brought utilities managerial and technical expertise. They were able to overcome the barriers created by state regulation to the creation of large fully-integrated networks. Four companies with very different origins are discussed: Electric Bond & Share, Stone & Webster, United Corporation, and the group of companies associated with Samuel Insull. Holding Companies were enormously profitable to investors, providing returns among the highest of any industry during the 1920s. Concern over their political and economic power and uncertainty over the extent to which the entire industry was becoming monopolized resulted in multiple federal investigation culminating in 1928-1935 with an FTC investigation, the largest ever undertaken of an American industry. Some fell into serious financial difficulties during the Great Depression, and the collapse of Samuel Insull’s system was the nation’s largest business failure. (pages 96 - 118)
This chapter is available at:
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Chapter 6. Public Utility Holding Companies: Indictment and “Death Sentence” - John L. Neufeld
DOI: 10.7208/chicago/9780226399775.003.0007
[Federal Trade Commission;FTC;exploitation;investment;public relations;propaganda;state regulation;securities regulation;Public Utility Holding Company Act;PUHCA;writeups]
This chapter analyzes the FTC’s findings. The FTC investigation included whether holding companies were victimizing outside investors or utility customers, the structure and extent of control of holding company systems, the industry’s public relations/propaganda activities and the effectiveness of state regulation. A strong case was made that holding companies were able to neutralize much of the power of state regulators to restrain utility profits. The accounting practices used by holding companies concealed important information from outside investors and would be illegal today. They were, however, not illegal then, when there was no federal regulation of securities markets. Holding companies were precocious in developing sophisticated and expensive techniques to influence opinion. These seemed outrageous then but would not so seem today, when expensive efforts of corporations to influence political outcomes has become common. The Roosevelt administration proposed a new policy that radically restructured the electric utility industry by dissolving nearly all existing holding companies and subjecting others to very strict regulation. The administration’s proposal empowered the FPC to form large integrated networks. Stringent opposition from state regulators led to the dropping of that provision from what became the Public Utility Holding Company Act of 1935 (PURPA). (pages 119 - 154)
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Chapter 7. Hydroelectricity and the Federal Government - John L. Neufeld
DOI: 10.7208/chicago/9780226399775.003.0008
[Federal Power Commission;Boulder Canyon Dam;Hoover Dam;Tennessee Valley Authority;TVA;Bonneville Power Administration;BPA;Franklin Roosevelt;FDR;Ontario Hydro;Herbert Hoover]
Hydroelectricity provided a compelling justification for federal government in the electric utility industry. The Constitution gave the federal government authority over all navigable waterways and their tributaries and this responsibility led to the creation of the Federal Power Commission. Many hydroelectric sites were on federally owned land. Irrigation and flood control both came to be seen as federal responsibilities. National defense also drew the federal government into hydroelectricity. Two major federal hydroelectric projects preceded the Great Depression, Boulder Canyon (Hoover) dam and Wilson Dam. With the major political shift accompanying FDR’s election, Wilson Dam became the nucleus of a new and unprecedented federal agency, the Tennessee Valley Authority. The TVA was given a mandate to develop the hydroelectric potential of the entire Tennessee River and provide electricity at the lowest possible price with preference to residential and rural users as well as promoting agriculture and regional development. TVA’s rates were lower than neighboring privately owned utilities, who justifiably saw it as an existential threat. The TVA represented the height of direct federal involvement in the electric utility industry. Later major federal hydroelectric developments, including the Bonneville Power Administration, gave the federal government a somewhat more modest role. (pages 155 - 202)
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Chapter 8. Rural Electrification - John L. Neufeld
DOI: 10.7208/chicago/9780226399775.003.0009
[Rural Electrification Administration;REA;Giant Power;rural electrification;indoor plumbing;New Deal;Morris Cooke;Edison Electric Institute;rural cooperatives;subsidy]
In 1930, 85% of urban dwellings, but only 10% of farms, had electric service. Without electricity, indoor plumbing and food storage were more difficult. The issue was emotional and personal to farmers and their supporters, who felt the industry’s failure showed the refusal of privately owned utilities to serve the public good. The industry argued that rural electrification’s cost could not be justified, and it supported that position with numerous studies. Privately owned utilities typically required rural customers to bear upfront the cost of their distribution lines and to pay rates higher than charged in the city. Rural electrification was a major part of the Giant Power report, which concluded that it was economically justified. In 1935, the Rural Electrification Administration was established to provide low-interest loans for rural electrification, primarily to farmer-owned cooperatives and provided considerable technical and managerial support. This support was a subsidy, but one much smaller than the amounts utilities had demanded to provide service. The work of the REA sparked a dramatic change in the behavior of privately owned utilities who began their own rural electrification efforts at an unprecedented scale. State regulation had protected utilities from the type of competition cooperatives now posed. (pages 203 - 243)
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Conclusion and a Look Forward from 1940 - John L. Neufeld
DOI: 10.7208/chicago/9780226399775.003.0010
[Restructuring;ISO;RTO;California;Giant Power;networks;regulation;competition;incentive alignment]
In the 1970s, both privately and government-owned utilities undertook a massive and ill-fated investment in nuclear power, resulting in huge increases in electricity prices and a financial crisis for the industry. Unlike the case of unregulated competition, under state regulation the consequences of investments were not fully realized by the firms making the decisions, discouraging adequate investment planning, a problem not previously noticed. Based partly on experiences in other countries, a proposal arose to restructure the industry separating generation, transmission and distribution, much as had been proposed by Giant Power. In this structure, generation (only) was to be done by unregulated competing firms selling to a transmission authority (ISO or RTO). The new structure was on the way to becoming accepted in all states until a crisis in California in 2000-2001 froze further adoptions and left the industry operating under two very different structures in different states. The new structure proved workable, but unforeseen complications and flaws became evident, and it is unclear which system is better. Transmission authorities have been able to bring larger areas under unified control, realizing a portion of the benefits of larger fully integrated networks. (pages 244 - 260)
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