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The Utility of Utilities

Climate activists are no fans of electric utilities. But the alternatives that they often prefer will not deliver infrastructural change at the scale we need.

Public Utility as Growth Engine

In the early twentieth century, electricity service providers competed with one another for customers, installing their own wire networks across cities to reach them. Apart from costly duplicated networks, this posed a problem for financing growth. Just like today, the electric power sector was then one of the most capital-intensive industries.

To solve the problem—and to ward off the threat of public takeover by socialists, a far stronger threat than today—electric power titan Samuel Insull steered the nascent industry toward a model of state-regulated monopoly service, not unlike natural gas and railroads. With that institutional arrangement came a long-term captive customer base and easier appeals to banks for the capital needed to reach economies of scale. The fetters on growth were removed.

Electricity service thus became a public utility nationwide. According to law professor William Boyd, the concept was established by early twentieth-century Progressive lawyers and technocrats—essentially, wonks—as an institutional protection of “a common, collective enterprise… too important to be left exclusively to market forces.” In exchange for their monopolies and guaranteed returns on investment, electric service providers would have to allow state regulators to crack open their books and approve revenues and expenses to ensure fair prices for consumers.

The electric utilities—henceforth simply “utilities”—grew into behemoths in wave after wave of consolidation, most famously by Insull, as nationwide holding companies. Three-quarters of all power resources were owned by nine holding companies, including one controlled by J. P. Morgan. Eventually, thanks to their immense wealth, political influence, sprawling propaganda machine, and complicated organization that evaded (or bought out) regulators, holding companies became the capitalist villains par excellence during the Great Depression. In 1928 the Federal Trade Commission launched a seven-year investigation into holding companies’ control of the utilities industry, culminating in the Public Utilities Holding Company Act. And in 1932 Franklin D. Roosevelt campaigned for President railing against this Power Trust, “the Ishmaels and the Insulls, whose hand is against everyman's.”

For all its faults in the presence of weak regulation, though, the utility model worked: the growth of electricity infrastructure was explosive, if uneven. Profits were leashed not to sales per se but to capital investments, so new customers were sought, and new demand was developed in order to justify those investments to regulators. Unceasing orders for new power plants helped to finance manufacturer improvements in the ever-larger generators.