The Source
Page 23
Soon after Edison introduced the light bulb to the world in 1879, he developed the first electricity grid, using a coal-fired steam engine to produce the electricity to light fifty-nine homes in Manhattan. Less than a month later, the world’s first hydroelectric plant, built on the Fox River in Wisconsin, generated the power to illuminate 250 light bulbs in Appleton, Wisconsin. Electricity production and use then quickly moved from novelty to standard expectation; houses were built already wired for electric lights, electricity-powered streetcars became the standard form of public transportation, and manufacturers redesigned their factories to make use of electric motors. This shift happened extraordinarily quickly: the electrification of Chicago’s factories grew from 4 percent to 78 percent in the thirty years between 1900 and 1930.2
Early electric companies performed all the duties involved in powering society, from generation to transmission, distribution, and marketing (i.e., selling) the power to its end users, both industries and individuals. Because electricity is interchangeable, a single company need not perform all these functions; but by doing so, it retains control over the product’s entire supply chain. And in the early nineteenth century, this meant having full control over the availability of a product that was becoming essential to society. Indeed, private electric companies were quite similar to the gristmills of the eighteenth and early nineteenth centuries—they provided an essential service to society and had a natural monopoly.
And, as with gristmills, the government stepped in to regulate electric companies. Three states established electric regulating agencies in 1907, and 33 of the 48 states had such agencies by 1916. The electric companies were given a franchise in an area (no other companies were allowed to enter the area) on the condition that they would provide service to anyone in that area who was willing to pay and that their rates would be set by a public utility commission to ensure a minimum level of service at a reasonable cost. Almost every rule or regulation that had been developed for gristmills of the early nineteenth century was being adapted and applied to electric companies of the early twentieth century.3
This type of regulation worked well for small power companies, but it was less effective when the power companies began consolidating physically and financially. In 1926 the private company Philadelphia Electric began developing the Conowingo hydroelectric project on the lower Susquehanna River, where the river crosses the Fall Line. But the potential power from this single hydropower source was so great that the electricity would dwarf Philadelphia Electric’s own needs. The only way to justify building a dam that could create this much power was to increase demand. So three electric companies—Philadelphia Electric, Pennsylvania Power and Light, and New Jersey’s Public Service Electric and Gas—set up a regional transmission network that allowed them to share the output of their various generating plants, including Philadelphia Electric’s Conowingo. The 1927 agreement created the first integrated, centrally dispatched power pool in the nation, a vast grid spanning the entire Mid-Atlantic region that became known as the PJN Interchange. By connecting their networks, the three companies dramatically increased the number and diversity of users, and they could take advantage of distant, enormous power sources—like large dammed rivers—that produced more power than a single electric company serving a single city or region could use.4
The Conowingo exemplified what was happening in the industry more broadly. First, these electric companies were vertically integrated businesses in that they provided every aspect of the electricity supply chain, from generation to transmission to distribution and marketing at the level of individual homes and businesses. Second, over the first three decades of the twentieth century, individual electricity utilities were being systematically rolled into power companies that owned many utilities. These different power companies, in turn, became part of broader holding companies. Holding companies are companies that own companies; Google, for instance, is now owned by Alphabet, Inc., a holding company that owns several technology companies.
As an example, in 1925 the national-scale company Electric Bond & Share bought Northwestern Electric Company, a small regional power company in Oregon that generated electricity from the Condit Dam on the White Sturgeon River. The firm also bought Montana Power and Washington Water Power Company, which each had thirteen hydropower dams. The financial ballast behind Electric Bond & Share’s purchases of these small Northwestern power companies was wealthy investor J. P. Morgan Jr. By the time Morgan’s holding company was done, it controlled 53 percent of the Pacific Northwest’s electricity demand—and it did not stop there; with control of 15 percent of the nation’s electricity, Morgan’s Electric Bond & Share was the nation’s largest electric utility holding company.
As this trend toward consolidation expanded throughout the industry, the growing electricity-using population found itself being serviced by fewer and fewer companies that were owned by only a handful of holding companies. In Wisconsin, for example, 25 percent of homes that had electricity in 1917 were serviced by 312 distinct electric utility companies. By 1930 over 90 percent of homes had electricity, all supplied by a mere nine companies—eight of them owned by the big three holding companies in the region. These holding companies created numerous problems for government regulators.5
To progressives of the early twentieth century, private electric companies were the most recent form of a trust—like the railroads of the late nineteenth century or oil of the early twentieth—that needed to be broken up or regulated. To government regulators, private industry had gained too much control over too many central functions of society; the entire backbone of modern America was under the control of Wall Street tycoons like J. P. Morgan Jr.
Progressives like Theodore Roosevelt bristled at the fact that a handful of power companies were monopolizing rivers in addition to electricity markets. Because they were developing and growing far more quickly than public power companies such as cooperatives, private companies were able to snatch up most of the ideal dam sites, further tightening their stranglehold on the industry. Adding insult to injury, because regulated private electric utilities were required to provide service to all in their region, the private companies avoided rural regions, where potential profits were lower due to users being widely dispersed and largely residential. Cities contained high-use industries as well as densely populated residences, which minimized costs of transmission and distribution and thus maximized revenue. Therefore the growth of private electricity in the United States through the 1920s was private, hydropower-driven, and focused on powering cities to the exclusion of rural regions.6
The progressives sought a way to simultaneously break up these electric trusts, electrify rural areas, and reassert public use and development of the remaining prime dam sites. The solution developed by Franklin Delano Roosevelt was for the government itself to start an electric company that operated in direct competition with private industry. Thus the Tennessee Valley Authority—or TVA, as it would become known—was founded to supply the power that it generated at its own dams to a rural poverty-ridden area: the Tennessee Valley, in the Deep South.
The TVA is unusual, its status resting somewhere between a federal river management agency and a private power company. It has been this way since its inauspicious beginnings with the half-finished dam begun by the War Department at Muscle Shoals, Alabama, in 1918. The dam was intended to generate the electricity needed to produce nitrate, a key ingredient in the explosives used in World War I. The war ended not long after construction began, and the federal government was left with an unfinished dam with no official purpose.
The dam at Muscle Shoals would eventually be named Wilson Dam. Its fate was tied up in the question of what role the federal government should have in the business of producing power. If the federal government produced electricity, it would be competing directly with private industry—something the government had been careful to avoid as recently as 1928, when the bill authorizing the Bureau of Reclamation to build the Hoover Dam
had contained provisions to allow power production. Instead of operating the dam itself, the Bureau of Reclamation leased the power potential of Hoover Dam to nonfederal power companies: the bureau provided the stored water volume and the hydraulic pressure to the power companies, which handled the transmission, distribution, and marketing themselves. This arrangement kept the federal government from any semblance of competing with private or local power. The half-built dam at Muscle Shoals provided a similar opportunity to repurpose a federal dam for private power, and among the various ideas regarding what to do with the dam was an offer from Henry Ford to buy it for a proposed new automobile-manufacturing hub in Alabama.
Instead, the dam, which took the Corps of Engineers six more years to complete, remained under federal control and followed a path similar to that of the Hoover Dam: power produced from the dam by the Corps would be sold under a ten-year contract to a regional private electric utility, Alabama Power and Light. This created a public-private partnership in which power generated using a federal dam was distributed through private transmission lines. But the long-term future was uncertain. Alabama Power’s contract would be up for renewal in 1935, and there was a growing desire by many in the federal government and anti-industry groups to use this dam and many others to compete with Alabama Power.7
These were the starting points of a years-long battle between Wendell Willkie and David Lilienthal. Willkie’s push for continued growth in the private power sector clashed with Lilienthal’s vision of government regulation—or even replacement—of the private sector. Willkie was the face of private power in his capacity as first an attorney for and then the president of Commonwealth & Southern Company, the holding company that owned Alabama Power & Light. With a full frame and a full head of dark, somewhat unruly hair, Willkie was eloquent and charming but also was described as arrogant, cocksure, and impetuous.8 His nemesis, attorney David Lilienthal, had come to the Tennessee Valley to do battle with Commonwealth & Southern and everything it represented. Though temperamentally similar, Lilienthal was physically the opposite of Willkie: bald, trim, and elegantly dressed.
Southern utilities executive Wendell Willkie, ca. 1940—the year he was the Republican nominee for president.
Tennessee Valley Authority Director David Lilienthal, ca. 1938.
While Willkie made his mark in private practice, Lilienthal’s career was driven by his tireless efforts to use government regulation to rein in private power. During his brief years in private practice immediately after graduating from Harvard Law School, Lilienthal authored a string of law review articles that delved into the weeds of regulation, along with articles for liberal and progressive magazines such as the New Republic. Two articles in the Columbia Law Review, in particular, showed Lilienthal’s deep legal scholarship. He addressed the issues that states faced when trying to control the practices of holding companies that crossed their borders: states were relying on regulations designed for individual plants when what they needed were regulations designed for entire systems. Lilienthal’s writings quickly drew the attention of progressives interested in limiting the growing influence of holding companies in the power industry, which typically were referred to as the power trusts.9
Lilienthal took his first step into government regulation when the governor of Wisconsin hired him to head the Public Services Commission. In that position, Lilienthal could implement his vision of regulating the system of industries rather than individual companies. He quickly earned a reputation as an aggressive pit bull, but one with extraordinary understanding of the intricacies of industry, regulations, and how regulated industries set their rates. This last aspect was critical: because regulated industries like water and sewer service or electricity have natural monopolies, the rates they charge are set by negotiating with regulatory commissions, which thus need expertise in rate setting along with a willingness to take on industries that constantly try to raise rates.
In one of his first and most contentious rate cases, in which he battled with Wisconsin Telephone Company, Lilienthal uncovered irregularities in the company’s relationship with its holding company—AT&T. He showed that the company continued to generate profits while the public was in the midst of the Great Depression, thus posing the question of whether rates should reflect the profit needs of private industry or acknowledge the realities of the customers’ ability to pay. In previous cases placing government regulators against private industry, the private sector often relied on deep expertise in their subject that the public sector typically lacked. But in this case, Lilienthal brought in a series of economists; he invited professors from the University of Wisconsin, the University of Chicago, and Princeton—one of whom was past president of the American Economic Association—to testify against the fiscal rationale adopted by Wisconsin Telephone. As in almost every aspect of his management during his time at the Public Services Commission, Lilienthal set out to challenge the status quo by questioning the basic economic foundation of the private sector’s arguments and by uncovering how the private sector continued to flourish while the public sat in fiscal depression.10
Lilienthal’s purview ranged from the telephone industry to the railroad and electricity industries. He was also unafraid of drawing in his colleagues in the legislature, a tactic that enabled him to send shocks through the private utility companies when lawmakers simultaneously strengthened the regulatory commission and introduced a constitutional amendment allowing local governments to finance their own power projects. This was a brilliant political move; the private power companies could not fight the increased regulatory authority for fear that local governments would respond by beginning their own public power projects, which would cut into private power’s potential profits and ability to expand.
After convincing private power to drop its opposition to increased regulatory authority, Lilienthal dramatically increased the size of the Public Services Commission. He allowed it to hire experts to conduct in-depth investigations into private utility practices and prices. In less than a year, the commission could take credit for up to $3 million in reduced rates for a number of utilities that affected over 560,000 customers. Still not satisfied, Lilienthal relentlessly went after corporations, threatening at times to reduce allowable rates to the point where regulated companies began to worry over their financial stability. He gained a national reputation, garnering praise from influential sources ranging from Supreme Court Justice Louis Brandeis to the editorial page of the New York Times. In all, he was viewed as a national rising star for his method of “regulation with a vengeance” when taking on the power trusts.
After only two years in Wisconsin, in 1933 Lilienthal was tapped as one of the directors of the just-created TVA. This move put him in direct conflict with Willkie. One cause of their ongoing conflict was how aggressively Lilienthal came to define the TVA’s originally nebulous mission. In the midst of FDR’s blitz of his first hundred days in 1933, he had asked Congress to “create a Tennessee Valley Authority—a corporation clothed with the power of government, but possessed of the flexibility and initiative of private enterprise.”11 This directive was initially interpreted as envisioning a government agency intended, variously, to improve navigation, provide flood control, produce fertilizer, generate power, and provide for regional economic development.
But as Lilienthal took control, the TVA gained the greatest traction as an unusual mechanism for regulating the private power companies. At the time, utility commissions typically had no idea whether the rates that private industry lobbied for were realistic. There was little the government could do short of grinding through, case by case, state by state, as Lilienthal had done in Wisconsin. It remained difficult to know whether the rates charged for any of the different services of private power were fairly priced. As Lilienthal realized, only if the government did the same work as a private power company from start to finish could it, in FDR’s words, “discover the true cost” of power. Both Roosevelt and Lilienthal took to describing the TVA as a
“yardstick” for comparing private costs and rates. When Alabama Power & Light’s contract for the Wilson Dam was close to running out, Lilienthal sequestered himself for weeks with the books and estimates of how much power would be consumed. And in September 1933, he announced that the TVA would charge 3 to 4 cents per kilowatt hour, compared to the 5 to 6 cents that was the going rate of private power companies.12
The price Lilienthal set fulfilled the two purposes that he had developed for the TVA. Because it was low compared to the average rate of utilities in the South—and nationally—it put private companies and the public on notice that the government’s rates for power would be low, even artificially so; utility stocks and bonds fell in response to the announcement. The second reason Lilienthal set the rate so low was that the TVA was already producing too much power. Lilienthal hoped low rates would give the public incentive to use electricity. If use increased and the same amount of power was still generated, the cost per unit of power would decrease even more, providing an even greater contrast to private power.