franchise made capital raising difficult; yet this industry had an enormous appetite for investment capital in order to expand and achieve the greater efficiencies and lower costs that came from larger scale.13
Faced with such a treacherous business environment, Insull promoted yet another innovation—this, not technical, but political: it was the regulatory bargain. Because of the large investment required by the business, the economics of this industry dictated, in his view, that it be a monopoly. But he argued it was a particular kind of monopoly—a “natural monopoly.” It was very wasteful to have two companies laying wires down the same alley and building capacity and competing head to head to supply the same customer. Costs to the customer would end up higher, not lower. By contrast, because of the efficiency of its investment, a natural monopoly would deliver lower prices to the consumer.
This was where the bargain came in. Insull recognized the political reality: If “the business was a natural monopoly,” he said, “it must of necessity be regulated by some form of governmental authority”—specifically a state public utility commission, which would determine the “fairness” of its rates. For, he said, “competition is an unsound economic regulator” in the electricity business. This call for government regulation hardly endeared him to many of his fellow electricity entrepreneurs, but it became the way the business worked. In due course, this regulatory bargain was ingrained into public policy: as a natural monopoly, the electric power business had to be treated as a regulated industry with its rates and its profits determined by a public utility commission. What was required of the regulators in turn was, as Supreme Court Justice Oliver Wendell Holmes Jr. wrote in 1912, “fair interpretation of a bargain.” 14
Wisconsin and New York established the first such commissions in 1907. By the 1920s, about half the states had done so, and eventually all of them did. This new regulatory bargain imposed a fundamental responsibility on the natural monopolist—the utility had the obligation to “serve”—to deliver electricity to virtually everyone in its territory and provide acceptable, reliable service at reasonable cost. Otherwise, it would lose its license to operate.
ELEKTROPOLIS: TECHNOLOGY TRANSFER ACROSS THE SEAS
Chicago, lit up by Insull, became the world’s showcase for electricity. It had only one rival: Berlin, which became known around the world as Elektropolis.
The inventor Werner von Siemens and an engineer named Emil Rathenau would be decisive figures in Berlin’s—and Germany’s—electrical preeminence. Rathenau acquired the German rights to Edison’s electrical inventions. His company achieved recognition in 1884 when it succeeded in lighting up the popular Café Bauer, on the Unter den Linden, the most prominent boulevard in Berlin. Rathenau built up what eventually became AEG—Allgemeine Elektrizitäts Gesellschaft—German for the “General Electric Company.”
By 1912 Berlin would be described as “electrically, the most important city” in Europe. Siemens and AEG became formidable companies, competing head-on for contracts to electrify cities and towns throughout Germany.
Electricity was the hallmark of progress in the late nineteenth and early twentieth centuries. Illuminating that progress, Berlin, with three million people, and Chicago, with two million, easily outshone London, which, with seven million people, was the largest—and most important—city in the Western world.
Whereas Chicago and Berlin both had centralized systems, London was highly fragmented, with 70 generating stations, about 70 different methods of charging and pricing, and 65 separate utilities, including such variegated firms as the Westminster Electric Supply Corporation, the Charing Cross Electric Supply Company, and the St James and Pall Mall Company, and many more. “Londoners who could afford electricity toasted bread in the morning with one kind, lit their offices with another, visited associates in a nearby office building using still another, and walked home along streets that were illuminated by yet another kind.”
London lagged because of the lack of a regulatory framework that would have promoted a more rational unified system. A prominent engineer complained in 1913 that London used “an absurdly small amount of electricity” for a city its size. “There is a very great danger of our not only being last, but of our remaining last.” London continued to lag for years after.15
“AIM FOR THE TOP”
In the United States by the 1920s, Samuel Insull had implemented his formidable business model—taking advantage of the economies of scale derived from centralized, mass production to provide an inexpensive product to a diverse customer base—on a grand scale. His great electric power empire stretched across the Middle West and into the East. Chicago itself showed the scale of what had been achieved. When Insull