Sunday, October 9, 2011

Electrifying America

I’ve actually had two different people show me exactly where they were on the road to their farm house when they first saw it had been electrified.  They knew exactly where they were and how it felt to see the light escaping through the windows.

 Imagine in our wired world what it would be like if you lived 30 miles from the big city and had no access to the Internet.  In 1930, 80% of homes in urban areas had electricity, but just 10% of farms had it.  That meant you milked the cows by hand, cooled the milk in 50 to 55 degree creek water, or, if not too far off the main road, in an ice box, much safer at 40 degrees. 

Most often, not having electricity meant that you had an outside toilet.  It meant your space heating and cooking heat would come from chopped wood or coal or dried manure.  All your tools were hand tools.  It meant, in short, a hell of a lot of work.
And there was something undemocratic about it -- this core technology of society available only to people in cities and suburbs.  It was a technology that most farmers and their families could see, touch and understand, but not at home. 
Thanks to Nikola Tesla's creation of alternating current, transmission over long distances became possible and the electricity business went from a highly local activity with a power plant in your neighborhood to one that was delivering energy over considerable distances.  As the poles and wires covered more ground, the corporate entities that organized and ran them got further away from the people they served. 

Samuel Insull
Chicago Now
Thomas Edison acolyte Samuel Insull was the leading electricity innovator in the industry’s early days.  He had worked at the master’s side and then moved on to Chicago where he bought an electric company and became the industry pathfinder.  Electricity in the early part of the century was very expensive, in 1911 a kilowatt hour in Seattle cost 20 cents.  So, to broaden his customer base, he started what we now call time of day pricing, selling the kilowatt hour more cheaply at times when there is less demand.  This led him to purchasing electric train systems to even out use and spread the cost around to more users.  He also employed new steam generation technologies that were bigger and more efficient than what was in place at the time and set about buying just about any electricity company he could.    Insull was the wizard of the wires, a regular on the cover of Time Magazine and people happily bought stocks in his great pyramid.  
Seattle Municipal Archives
 During the decade of the twenties, American electricity production doubled.  In 1922 electricity’s cost was down to about six cents/kWh, still very pricey compared to today, but it was also steadily declining, hitting four cents by 1930.  With a great opportunity still remaining in the urban market and with costs still high to string wire to the farm, utilities continued to ignore the farmer.

So, in 1929, the Washington State Grange took up the state’s new initiative to the legislature process and began collecting signatures that would allow the creation of public utility districts.  Initiative #1 contained 60,000 signatures, twice the number necessary, and brought the issue of rural electrification to the capitol.

The initiative to the legislature process automatically puts the measure on the ballot if the legislature fails to act.  Concerned about the growing economic disaster enveloping the country, the utilities convinced legislators that the farmers would have to wait for better economic times before they got electricity, so it was placed on the ballot.  Rural areas gave it strong support and the initiative passed with 54% of the vote.  It became effective on January 1, 1931.

 The law gave rural people the ability to form individual districts to provide electricity and water to the members of the district and recover the costs of the project through rates.  The first district, Mason County Number One, was formed in 1934 and now provides electricity, water and sewer services in the Hoodsport area.

Having the law was no guarantee of success.  Each attempt to form a district was a huge political battle with the private utilities and there was a parallel legal fight going on.  In 1936, the Washington State Supreme Court ruled the initiative legal and many districts formed, most of them countywide.  There is still life in Initiative #1.  Jefferson County's PUD was formed in 1939 but only provided water to parts of the county.  Voters approved electrifying the PUD in 2008 and service will start in 2013.

Bonneville Power Administration
At the end of the thirties, twenty three PUDs had been formed in Washington state and were in the process of energizing.  Rural electrification was in full swing everywhere.  The New Deal included the Rural Electrification Act which passed in 1936 and provided low interest loans for the formation of electrical cooperatives.   Today, there are over 3000 public agencies delivering electricity to customers in this country.
The Tennessee Valley Authority formed in 1933, a highly unique institution that Franklin Roosevelt described as a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise.”
Four years later came a somewhat different creature, the Bonneville Power Administration, to sell the output of the new Bonneville Dam and many others that would follow.  These agencies brought home two powerful concepts to aid the goal of rural electrification.
One is public agency preference, in which public agencies receive a priority for the output of federally produced electricity generation.  The second is an idea of transmission pricing called “the postage stamp rate.”  That means the transmission cost of electricity is shared by everyone, benefiting all equally, not just those close to the source of generation.  

Together, these and many other events were bringing electricity to nearly half of rural America by 1942 and, by 1947, to all of it, one of the great accomplishments of the last century.
Samuel Insull was not, at the core, a financial guy.  He was an innovator and builder -- an industry guy.  He cared about electricity, not money.  He is not, as is popularly thought, the inventor of the holding company.  In fact, he disliked the idea.  But the pace of electrification and its incredible returns brought in the money people.  J.P.  Morgan decided to get in big and by 1929, controlled 20% of the US electricity market through its holding company United Corporation.  The holding company formula was simple -- acquire companies, pay for them with bonds, and use the dividends from the companies in the shell to pay the bondholders. As long as everything was going up, it worked.
Insull also concluded that Cyrus Eaton, the Cleveland investor, was secretly buying shares in his operating companies and was seeking to acquire a controlling interest.  To head this off, he went to the holding company formula he didn't like.  He formed Insull Utility Investments and placed in it all his and his family’s holdings in the operating companies.  Such was the confidence in him and in the growing electricity market, that the shares of the new company literally exploded.  Originally priced at $12 they were offered on January 17, 1929.  They opened at $25 and closed  that day at $30.  In the spring, they were trading at $80.  That summer, a share of IUI went for $150.  

Holding Company Stock Certificate
It all unraveled over the next year.  The stock market collapse was complete.  For Insull, the deepest cut was that large numbers of people stopped using the electricity he had so abundantly and creatively supplied.  The economy was such that in 1932, eight percent of Commonwealth Edison’s 800,000 Chicago area customers no longer purchased his electricity.
Two years later he was in exile in France, trying to stave off extradition.  Ultimately arrested in Turkey, he stood trial in Chicago on a variety of federal fraud and mail charges from which he was exonerated in 1934.  His wife refused to live in the United States and so he returned to France.  His ultimate reward for leading the electrification of much of America was that he was not obliged to die in jail, but rather on a Paris Metro platform in 1937.

Lillian Spear's Story, How Tough it is to Form a PUD


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