Public utilities - History of Business in the U.S.
Definition: Organizations that provide basic services, such as water, gas, and electricity, needed by all members of communities
Signficance: Without the basic services provided by public utilities, industrialization would not have been possible. The urbanization that accompanied the industrialization of the developed world required that basic services needed by residents be supplied collectively to all residences, and public utilities emerged to provide these services.
The most basic of public utilities is water. When most Americans lived in rural areas, they obtained the water they needed through the digging of wells and disposed of their wastes through the construction of cesspools on their property. Difficulties arose when industrialization brought large numbers of people together in a relatively small area, placing them in multiple dwelling units located in the immediate vicinity of the industrial activity. Although people initially used communal pumps, drawing water from a single, shallow well, as the number of users grew, people began to need more water than could be provided by a single well. Reliable water service was also needed to fight the numerous urban fires that occurred at that time.Wastes were often simply dumped on any unused ground and often migrated to the nearest streams.
Nineteenth Century Beginnings
During the early nineteenth century, as American cities grew into communities with first tens of thousands of people and then hundreds of thousands of people living near one another, the old way of providing water to these residents ceased to be practical. At first, as in Boston at the beginning of the nineteenth century, entrepreneurs created networks of pipes, often made of wood, and buried them in the streets to deliver water to a single neighborhood. Service, however, was unreliable because the wooden pipes, especially those that were near the surface of the ground, froze during the winter.
The first serious attempt to solve the water problem occurred in Philadelphia, then the largest city in the United States. Benjamin Henry Latrobe and other civic-minded citizens put together a plan to draw water from the adjacent Schuylkill River and pump it, using water wheels as a source of power, up to a high point, from which gravity would secure its distribution through a series of pipes laid under the streets. After intense public discussion, this water system was built as a municipal system, and it served as a model for other cities that followed Philadelphia’s example.
The far more grandiose system that supplied NewYork City with water (and still does) was the one that created the Croton Reservoir well north of the city and brought that water through an aqueduct to the city. The great difficulty lay in how to cross the rivers that surrounded Manhattan Island, and in the end, the problem was solved by the aqueduct that crossed the Harlem River and then made its way to storage reservoirs in the north part of the island. It also depended on buried pipes, but by this time the iron industry had developed the capacity to produce cast-iron pipes that could survive for years under the streets. The initial development of the Croton Reservoir occurred during the 1840’s, again following intense public debate, and it also was municipally owned.
Boston immediately followed New York City’s example. After considering various private proposals, city officials chose to adopt municipal ownership. After the country’s three largest cities all chose the public ownership path, the pattern was set for the rest of the country. Although water was provided by private companies in some smaller towns, the rapid growth of urban centers dictated public ownership because only the government could generate the huge capital sums needed, through the sale of bonds. All systems depended on pipes laid under the streets, with individual dwellings tapping into the pipes.
Gas was the next service provided by public utilities, after some important technological developments. When the iron industry switched from wood to coal to provide the energy it needed, it was found that the coking process produced gas, called “manufactured” gas. Early in the nineteenth century, it was found in Europe (and not much later in the United States) that this gas could be collected and used to provide illumination “by gaslight,” chiefly in the streets of the great cities that were growing so quickly.
In contrast to water, however, gas was provided overwhelmingly by private companies. The early pipes were sometimes made of wood (though they often leaked) or of discarded gun barrels. The first gas company organized in the United States was established in Baltimore in 1816. One emerged in 1825 in New York City, in Boston in 1829, in Louisville in 1832, and in New Orleans in 1835. Gas companies spread rapidly throughout the United States after the early companies demonstrated the feasibility of manufactured gas. Two communities created municipally owned gas systems: Philadelphia in 1836 and Fredonia in upstate New York in 1858, making use not of manufactured gas but of natural gas gathered fromone of the many seeps in the area.
Not long after Edwin Drake struck oil and natural gas in Titusville, Pennsylvania, in 1859, natural gas became a rapidly growing resource often found in conjunction with crude oil. It had about twice the British thermal units (BTUs) of manufactured gas and was therefore useful for many more purposes. There were numerous sources of natural gas in the Appalachian region. Companies selling natural gas hastened to secure municipal franchises, and many cities had a multiplicity of gas companies. The city of Pittsburgh had six gas companies by the late 1880’s. The entrepreneurs had only to sink a well into a gasbearing fracture in the ground and then to build a network of pipes to residents ready to pay for the gas. Wherever people were congregated, the companies relatively quickly acquired a group of customers. Moreover, the distribution pipes, unlike those needed for water, were small, and by that time, the metal industry had learned to produce long lengths of pipe at moderate cost.
Once natural gas became readily available, it began to be used for purposes other than lighting. The earliest known case of industrial usage was that of the Great Western Iron Company in Pittsburgh in 1870-1871. Industrial use spread rapidly throughout Appalachia. In some of these areas, it began to be used for space heating and for cooking. Throughout the middle of the country, there were easily tapped local deposits of gas, as there also proved to be in California. In those parts of the country where there were no gas deposits, manufactured gas continued to be sold.
After 1900, the multiplicity of small gas distributors with municipal franchises began to be consolidated into larger companies, in many respects following the pattern in the oil industry set by John D. Rockefeller. This helped to create local monopolies that in turn evoked popular opposition and then a demand for regulation. Massachusetts was one of the first states to create a regulatory agency for the gas industry, the Board of Gas and Electric Commissioners, in 1885-1886, which in 1913 became the Public Service Commission.Manyother states followed.
Although initially this and other regulatory bodies set up in other states had no power to regulate prices, this authority was in time acquired, as one of the reasons for their creation was to respond to consumer protests over gas prices. Creating this authority was at first made difficult by the lack of federal power to control rates. After the 1911 decision of the Supreme Court that broke up the Standard Oil Company, however, it was recognized that these firms had, in effect, a natural monopoly and that if the firms were not confined to a single state, it was essential for the federal government to provide regulation.
During the 1920’s, the steel industry developed the ability to create large-diameter pipes, enabling long-distance pipelines to be laid to transport natural gas across many miles. The first long-distance gas pipeline was a 217-mile line laid between northern Louisiana and central Texas in 1925. The first 1,000-mile pipeline was laid in 1931 from Texas to Chicago. Subsequently, the country was covered by pipelines, which led to the division of the industry in terms of ownership into three parts: producers, who ran the gas wells; transporters, who ran the pipelines; and distributors, who handled the piping of gas to individual users, whether companies or households. Regulation was then divided between the federal government, which through the Federal Power Commission had the authority under the Natural Gas Act of 1938 to regulate pipeline rates, and the states, which through their public utility commissions regulated the local distributors. In 1977, the role of the Federal Power Commission was taken over by the Federal Energy Regulatory Commission (FERC), within the Department of Energy.
The supremacy of gaslight as the preferred form of illumination was challenged and rapidly overtaken with the invention of the incandescent electric light bulb by Thomas Alva Edison in 1879. Initially supplied with a carbon filament in a glass enclosure from which all air had been evacuated, the incandescent bulb became what it remained for a century with the introduction of the longer-lasting tungsten filament. Edison recognized that the electric light bulb needed a power system to support it, and he incorporated the Edison Electric Illuminating Company in 1880 to build that power station in downtown New York City, on Pearl Street. He acquired a municipal franchise from the city, along with permission to bury the lines under the streets. Clearly, Edison saw the gaslight industry as his major competitor, and he was determined to go ahead with electric light only if he could provide electrical illumination at a lower cost than that charged for gaslight.
Because Edison used direct current in his first generating station, he was limited in the scope of its operation—the maximum distance direct-current electricity can be transmitted at a reasonable price is about one mile. Other inventors, notably William Stanley, believed that a system of transformers in the generating facility and the use of alternating current instead of direct current could overcome the distance limitations.With the financial encouragement of George Westinghouse, who built alternating-current generators at his manufacturing plants for railroad equipment in Pittsburgh, alternating-current generators and transformers made it possible to create central generating stations serving much larger geographic areas.
Westinghouse and the corporate inheritor of Edison’s inventions, General Electric, took advantage of the new technology by creating many devices making use of electricity. In particular, they created electric motors that could easily replace steam engines, then the prevailing motive force in factories, and these motors spread with great rapidity throughout industry because of their adaptability. In 1900, 5 percent of the power used in industry was electrical, but by 1950, 80 percent of industrial power was supplied by electric motors.
Electric motors were essential to another major factor in the spread of electricity: trolleys. Although trolleys had existed before Edison’s work, the cars were hauled by horses, and as the cities expanded, horses were not up to the required distances. However, electricity provided by overhead lines enabled trolleys to extend from the urban center to its outskirts and beyond. Trolley entrepreneurs saw that trolleys—because they moved a large number of users from the central city to the outskirts—were potentially a very profitable enterprise, made more so by the construction (often by the trolley companies) of amusement parks at the end of the line. Trolley companies found they could easily sell some of the electricity that ran on their lines to people living in the houses that sprang up along the lines.
Additional technological improvements were made to the central generating station courtesy of Samuel Insull, who started in the industry as Edison’s assistant but soon moved on to Chicago, where he managed generating stations that he was later to build into a business empire. Insull introduced steam turbines to replace the old coal-fired steam generators, which proved spectacularly successful, reducing both the noise level and the cost of producing electricity. Others pioneered the use of waterpower to drive the turbines, and by the midtwentieth century, really large electrification schemes depended on waterpower as their source of energy.Oneof the earliest generating stations to use waterpower was located at Niagara Falls.
From Edison’s Pearl Street Station supplying direct-current electricity to businesses and a few homes in its immediate vicinity, the electric industry grew greatly, especially during the 1890’s and the early twentieth century. It repeated the pattern of the gas industry, starting from a single generating station in one city and growing largely by consolidation, as single-city generating stations joined with others in their area. Because electricity, even more so than gas, involves heavy capital expenses at the outset but very little capital investment once the generators are in place and the lines to individual users have been built, there was a strong tendency for the central stations to be merged into ever-larger companies.
Financing of expansion was easier when an existing company provided the start-up costs, and the industry soon, through amalgamations (including with natural gas distributors), had facilities all across the country. The building of high-voltage transmission lines encouraged consolidation. Some of the companies were part of trusts, and when trusts were found illegal by the Supreme Court, the industry turned to the holding company. Insull built his original holdings at Chicago Edison into Middle West Utilities and then into even larger corporate “pyramids,” using the holding-company structure, in which a business could be purchased by owning just a small percentage of its stock. Before he was challenged in the courts, Insull controlled electric and gas companies with more than 4 million customers, selling them around one-eighth of all the gas and electricity sold in the United States.
Utilities in the United States, 2002
Source: Data from U.S. Census Bureau, 2002 Economic Census (Washington, D.C.: Author, 2005)
Note: An establishment is a physical location where business is conducted and is not necessarily equivalent to a company or enterprise.
Because these companies had no local competition, they were effectively natural monopolies. This enabled them to use monopoly pricing, which initially enriched them but led to political protest, seeking governmental control of their rates. The populist movement, which opposed the power of the trusts and holding companies to charge what they liked for the public service they rendered, got its first great boost from the progressive orator and politician Robert M. La Follette, who established a public service commission in Wisconsin with the power to regulate the rates charged consumers in the state. In the New Deal era, this kind of regulation was picked up by the Federal Power Commission, which set wholesale rates for utilities.
The Rural Customer
Although the New Deal broke up many of the private holding companies supplying electricity and gas to Americans, there were large parts of the population that did not receive electricity. These areas began to be served by the creation of monster hydro-electric systems powered by dams on the country’s numerous rivers. The prototype was the Tennessee Valley Authority, one of Franklin D. Roosevelt’s major objectives, legislated in the earliest months of his administration. On the West Coast, the Bonneville Power Authority and the Hoover Dam were created to supply most of the power generated in that part of the country.
Besides the big dams, the country needed a method of supplying electricity to rural customers, who lived too far apart to be profitable for a private business to reach. The Roosevelt administration filled this gap by creating rural electric cooperatives, which covered most of the parts of the country not served by the urban utilities. Their rates were heavily subsidized by the federal government, which supplied them with electricity from federally funded dams.
Nuclear Energy and Beyond
After World War II, another technological development boosted the creation of big systems: the development of nuclear power as a generating force. The large capital outlays that had characterized the industry from its beginnings became even greater when nuclear-generated electric power came on the scene during the 1960’s and 1970’s, for the capital needed to construct a nuclear plant was enormous. It became possible only when the government promised to provide liability coverage, and even this proved insufficient with the outbreak of the nuclear accident that occurred in 1979 at the Three Mile Island plant in Pennsylvania. As a result, private construction of nuclear plants in the United States came to a rapid halt, although overseas, construction continued (nuclear power generates most of France’s electricity).
In the latter part of the twentieth century, the growth of companies to ever-larger sizes resumed, and globalization, the hallmark of the developedworld economy during the 1990’s and into the twenty-first century, saw many national companies becoming part of international firms, often in effect holding companies on a global scale. Many of these were created in the wake of the antiregulatory policies that had become established in many governments.
Nancy M. Gordon
- Castaneda, Christopher J. Invisible Fuel: Manufactured and Natural Gas in America, 1800-2000. New York: Twayne Publishers, 1999. Traces the development of the gas industry, from the start with manufactured gas through the extension of natural gas pipelines throughout the United States.
- Edwards, Brian K. The Economics of Hydroelectric Power. Cheltenham, England: Edward Elgar, 2003. Looks at hydroelectric development from an environmental point of view.
- Hausman, William J., Peter Hertner, and Mira Wilkins. Global Electrification: Multinational Enterprise and International Finance in the History of Light and Power, 1878-2007. New York: Cambridge University Press, 2008. Three specialists in the field of international business look particularly at the evolution of electrical utilities throughout the world, with special attention to international developments.
- Lesser, Jonathan A., and Leonardo R. Giacchino. Fundamentals of Energy Regulation. Vienna, Va.: Public Utilities Reports, 2007. An extensive look at the regulation of energy, particularly gas and electricity, with attention to aspects such as cost measurement and allocation, market power, environmental regulations. Examines regulation as an economic concept.
- Nye, David E. Electrifying America: Social Meanings of a New Technology, 1880-1940. Cambridge, Mass.: MITPress, 1990.Agood analysis of the process by which the United States became fully connected electrically. The author has a particular interest in technological history.
- Peebles, MalcolmW. H. Evolution of the Gas Industry. New York: New York University Press, 1980. Covers the evolution of the gas industry in both the United States and western Europe.
- Wasik, John F. The Merchant of Power: Samuel Insull, Thomas Edison, and the Creation of the Modern Metropolis. New York: Palgrave Macmillan, 2006. This story of Insull’s climb to power covers the development of the power grid and the excesses of corporate power.
See also: Colorado River water; Dams and aqueducts; U.S. Department of Energy; Energy crisis of 1979; Enron bankruptcy; government spending; nuclear power industry; telecommunications industry; Three Mile Island accident; water resources.