On May 16 the New York State Legislature voted, with unusual haste, to buy two partially completed power plants from the Consolidated Edison Company for $500‐million. The move rescued the utility —the largest privately held firm in the nation's biggest industry—from its immediate financial troubles. But Charles F. Luce, Con Edison's board chairman, hinted that his firm may yet have to sell its entire system to New York State. This prospect may soon confront other private electric systems, also squeezed by escalating fuel and capital costs. Which raises again the issue of the century‐long Electric‐War: the competing merits of the two dominant forms of electric power, investor‐owned utilities and publicly controlled utilities.
In September, 1879, the California Electric Company of San Francisco established the first privately owned electric system. Because of high costs, serviced only commercial establishments and factories, leading one editorial writer to dismiss the potential of this new technology. (“The great mass of the people will never be able to use this costly illuminator to banish darkness from their humble dwellings.”) In 1882 Thomas Edison set up his famous Pearl Street Station in Manhattan, serving 59 customers within a one‐mile radius.
The prevailing laissez‐faire ethic of the era gave private power a distinct advantage over public power. But communities became worried over the growth of monopoly control, and the idea of state regulation was developed. According to his biographer, Forest McDonald, even Samuel Insull, industry magnate and father of the concept the holding company, recommended state regulation as a device to ward off public ownership yet retain private control. In 1907 New York and Wisconsin became the first states to create public utility commissions to regulate electric rates. Today 48 states have such authorities.
The 1920's were the years of rapid growth for privately owned utilities. Under Insull's dynamic leadership, they aggressively bought out many of the smaller and financially weaker public systems. “A relentless campaign was conducted against the Bolshevik heresey of public ownership,” wrote Arthur Schlesinger Jr. “Rarely in American history has business organized so powerful a propaganda campaign.” The campaign seemed to be working: By 1929 three giant holding companies controlled more than 45 per cent of all electric power.
But the trend changed in the 1930's. A nine‐year study by the Federal Trade Commission exposed stock manipulations, financial speculation, overcapitalization and the use of holding company techniques that could allow a handful of powerful men with a small investment to control scores of operating companies. Public and political sentiment shifted against the privately owned utilities. Insult went abroad to avoid indictment. And in 1935 the Public Utility Holding Company Act broke up these industrial octopuses into “single integrated public utility systems.”Continue reading the main story
Since that debacle, private utilities have focused their energies on the state regulatory authorities. The record of regulation has gotten mixed reviews. Edwin Vennard, former managing director of the Edison Electric Institute; the utilities’ trade association, looked favorably on state regulation as “a system under which businessmen run the business and men in government act as the regulator to maintain honesty and fair play.” But Charles R. Ross, a former commissioner at the Federal Power Commission and the Vermont Public Service Commission, sees state regulation as “plagued with a lack of funds, lack of staff, too many political appointments, and too few independent, knowledgeable commissioners.” The resuit, say critics, is excessively high rates of return for an industry insulated against failure; private utilities earn 11 per cent annually on the average. A scholarly economic study in 1962, in fact, found that rate regulation had no measurable effect on utility rates, discriminatory pricing or the value of utility stocks.
Like their competitors, publicly controlled utilities first developed in the 1880's. A U.S. Census report indicates that four municipal electric systems were in operation in 1882. Public utilities proved popular in smaller communities and rural areas, which were often forced into self‐sufficiency since private electric companies shunned them as unprofitable. By 1892 there were 235 municipal electric systems in the United States; by 1922, there were 2,581. Then in the late 1920's, many of these were taken over by holding companies.
But the strains of the 1930's led to a popular resurgence for public power. “It was not hard to convince local voters,” utility economists Martin Ferris and Roy Sampson have written, “to take over the distribution system of a local power company if it had been involved in the holding company fiasco.”
There was also a need for new power sources. In the early 1930's, fully one‐third of the population and 90 per cent of the nation's farms had no electricity. By the end of the decade, the Federal government had created the great Federal power projects, like the Tennessee Valley Authority and the Bonneville Power Administration, and had developed the Rural Electrification Administration, whose 2 per cent loans induced rural electric cooperatives into sparsely settled areas.
Today some 17‐million customers are served by 2,920 local, publicly owned systems (including municipals, state and Federal facilities, and cooperatives), ranging in size from the Los Angeles Department of Water and Power with 1.1‐million customers to the Cotesfield, Neb., system serving 50 consumers. Most of the systems are relatively small, however; three‐fourths of them are in communities of 10,000 residents or less.
About 275 privately owned utilities serve 58million customers. They are much larger than the public companies and usually are fully integrated—generating, transmitting and distributing electricity. According to F.P.C. statistics, private utilities generate 77.3 per cent and public utilities 22.7 per cent of the nation's annual 1.5‐trillion kilowatt hours. This ratio of 4:1 has held constant for the past three decades, despite aggressive rivalry.
When public and private systems do struggle for control of a community's electric power supply or distribution, there are a number of points of contention:
Price. The most recent F.P.C. data, for 1971, indicate that public power systems sell electricity 33 per cent less cost to residential users and 16 per cent less to commercial and industrial users than do private power systems. An article in Fortune magazine included the assessment that “Federal power projects, such as the TVA, have had the healthy effect of lowering the prices, improving the efficiency and even raising the earnings of neighboring private utilities.”
Profits. Who should receive the profits of an electric utility? Privately owned utilities distribute them as dividends to shareholders. Public utilities distribute them to their local customers either in the form of lower rates or as payments to local government in lieu of taxes.
Taxes. The privately held companies complain that the public systems are cheaper only because they are tax exempt and obtain preferred treatment in the raising of capital. Private utilities paid 11 per cent of their revenues as local and state taxes 1971. But public utilities point out that they themselves paid 10.1 per cent in 1971 to their local communities in lieu of taxes. And they note that while investor‐owned utilities paid 16.5 per cent in Federal taxes in 1953, the amount had dropped to 4.3 per cent by 1971.
Cost of capital. Privately owned ‘utilities argue that municipals can issue bonds with the credit the Government behind them; that the interest on municipal bonds is tax exempt, and that 2 per cent Rural Electrification Administration loans involve an indirect Government subsidy. The Edison Electric Institute estimates that privately owned utilities must pay 1.5 to 2.6 per cent more in interest to raise capital. One economist projected that for every 2 per cent increase in the cost of raising capital this very capital‐intensive industry, prices would increase by 10 per cent.
Efficiency and Service. Public utilities say they charge less because they are more efficient. According to F.P.C. data, municipals spend 6 per cent less on operating expenses than do private utilities. But some economists say that to the extent municipals do cut costs, they also cut back on service. Privately owned utilities claim to provide more sophisticated management and better back‐up facilities in case of overload. Public ownership, they say, equals political ownership, which means cronyism, misconduct and waste. Public utilities reply that precisely because they are controlled by their customers, they are compelled to provide better service.
Neither New York State nor Con Edison, by their recent actions, has conclusively settled whether the giant utility will remain privately held or will be publicly taken over. The potential costs and benefits of Con Edison as a governmental enterprise have not yet been closely examined. But public power advocates are hardly eager to call Con Edison one of their own.
Critics fear that a rush to public ownership may bring a form of “lemon socialism"—where the government, as in England, takes over failing companies, but not healthy ones. “Con Ed as a local municipal?” Larry Hobart of the American Public Power Association asked theoretically last week. “It could give us a black eye.”Continue reading the main story