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| About Western Products Organizational chart Strategic planning History 30 years 25 years Utility industry develops Financial information Power projects 2006 Annual Report Frequently asked questions | 1927 to 1936: Electricity holding companies in control |
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by Jeff Hein (Note: This is the third of a series about the history of the U.S. electric utility industry. Hein developed this material as part of his master's thesis research.) During the 1900s, Commonwealth Edison and other utilities began to form an operational structure known as a holding company. Holding companies acquired various utilities (electric and railway). These were known as operating companies. Organized into a pyramid scheme covering many states, holding companies acquired sub-holding companies and the corresponding operating companies. The holding companies would interconnect their operating companies' systems to improved operating efficiencies. By 1927, three holding companies controlled 45 percent of the entire U.S. electric utility industry. The holding company structure offered many benefits. Operating companies used the holding company's centralized engineering, management and purchasing services. In addition, holding companies increased reliability by interconnecting their operating companies. The electricity system grew quickly. By 1928, holding companies were abusing this structure. The holding companies were essentially monopolies and began charging exorbitant service fees and overvaluing purchases, which were then added to the service rate. The interstate operating structure allowed holding companies to evade state-based regulatory commissions because these issues were under the jurisdiction of the Federal government, and there were no Federal authorities providing industry oversight. Public distrust of these holding companies came to a head when the stock market crashed in 1929. Many investors lost their investments in holding companies because their weak organizational architecture was susceptible to complete collapse.
Franklin Roosevelt, campaigning for the presidency in 1932, promised to reform the corrupt electric utility industry and create government agencies to provide electricity to rural areas, long ignored by the electric utilities. Federal intervention Roosevelt was true to his campaign promises. First, with the approval of Congress, he created the Tennessee Valley Authority in 1933 and the Rural Electrification Administration and the Bonneville Power Administration in 1935. These government agencies proved that electricity could be generated and delivered cost effectively to remote, rural areas. As a result, the standard of living in these remote areas rose tremendously. These rural loads proved to be the largest customer base in the country at the time. Secondly, to prevent future abuses similar to the 1920s, Congress passed the Public Utility Holding Company Act of 1935. PUHCA created effective state and Federal regulations for regulating the holding companies. Federal Power Act Enacted by Congress in 1935, the Federal Power Act increased the Federal Power Commission's responsibilities to oversee and "regulate the transmission and sale of electric energy in interstate commerce." Originally, the FPC was established to oversee/regulate power projects on navigable waterways under the Federal Water Power Act. Vertically integrated operations The post-Federal intervention era created the foundation for vertically integrated electric utility companies. Operating as natural monopolies primarily in or near urban areas, they were vertically integrated, which means they were responsible for providing generation, transmission and electricity distribution to customers. To control the balance of energy supplied and used, each utility created a control area. Control areas ensured system operation by matching electrical generation to load requirements and use. Regulatory oversight was the responsibility of state public utility commissions for investor-owned utilities and the role of municipal leaders for municipal power agencies. To ensure customer abuses did not occur, service rates were under constant scrutiny through the Uniform System of Accounts. Operating in a regulated, cost-based environment, utilities planned and built infrastructure to meet the needs of the customers they were obligated to serve. The utility recovered its operating costs plus a regulated profit (approximately 10 percent) through approved service rates. Electric utilities were under state PUC oversight for intrastate activities, in practice, due to their vertical integration structure and bundled services operation. Federal regulations created in 1935 governed interstate activities and PUCs reviewed every aspect of utility operation, from siting to service requirements, through final rate development. Throughout the '20s and '30s the utility industry continued to grow and grow quickly. Utilities constructed generation near their customers in urban areas to reduce system losses. As the demand for electricity grew, utilities could add to their system infrastructure with a guaranteed return on investment. Utilities added facilities and got paid for this investment from service rates paid by their customers. (Note: Hein was a substation engineer in Western's Design group at CSO.) |
