The Reformers' Charge

For progressive reformers, there was no mystery in the failure of private utilities to bring electrical modernization to the majority of American homes in the 1920s. The utilities charged too much for electricity. Sen. George W. Norris of Nebraska, leader of the public power movement in Congress, put it simply: only when electricity was cheap "would the modern home contain all the appliances necessary to do most of the work and drudgery now done by hand." Reformers divided between two basic strategies to lower electric rates, regulation and public ownership. They trod both paths before 1914, but their efforts remained with municipal and state governments. In 1913, San Francisco's plan to dam the Hetch Hetchy Valley in Yosemite National Park ignited the issue of regulation versus ownership at the national level. Controversy flowed over national utility politics for the next two decades. And it was from this controversy that Franklin Roosevelt gained his political ideology regarding electrical modernization of the home.^[1]

Major issues of electric utility regulation that dominated the 1920s appeared earlier in the progressive struggle to reform railroads. In Wisconsin and California, reform legislation brought water, gas, telephone, and electric companies, as public utilities, within the same framework as the railroads. Reformers could easily redirect issues and analyses from one utility to another. As Robert M. La Follette fought railroad rates, so he fought electric rates. He argued that lowering electric rates increased the sale of electricity. Even with increased taxation due to a progressive income tax and fair valuation of property, greater sales re-

sulted in greater after-tax profits. "After two years of careful investigation, the Railroad Commission, after improving the quality of service, reduced the maximum price of electricity in the city of Madison [in 1910] from sixteen cents to fourteen cents/kwhr/mo, and adjusted the other rates on a lower basis. The result was that the sales of electricity increased 16 percent." California similarly reduced electric rates. Its commission lowered household rates from ten cents to eight cents in northern California and from ten cents to seven cents in southern California. In response, the utilities improved and expanded their service. The commission compelled companies to keep accurate books by a methodology it mandated, and it inspected their books. The new regulations took inflated values out of companies. They could lower rates and still make a fair profit, because they did not have to cover bloated capitalization.^[2]

Commissions regulated service as well as rates. What "service" ought to include depended on the reform camp with which a progressive identified. The individualist progressives said that service must be judged against the "interest of the public"—a narrowly legalistic interpretation of the contractual responsibilities of utility corporations as defined in their charters. At this simplest level, service only obligated a utility to deliver its commodity or technological service safely and at the mandated level. California progressives considered public safety the most important service consideration. A generation of train wrecks and of street railways without crossing guards made safety a highly charged local issue. New York's progressive Republican governor, Charles Evans Hughes, spoke of service in this sense in 1907 when he called for enforcement of "adequate service" from the state's public service corporations, "which they are bound by their charters to render." Closely related to this idea of service was the expectation of responsiveness by the company to consumer complaint. Since individual consumers could not force utilities to amend their service through the marketplace (there were no competing companies for the consumers to take their business to), the state had to ensure a minimum level of service to the customer.^[3]

Other reformers expanded the concept of service to include substantive contribution to the public good. In New York, William Randolph Hearst forcefully put this idea in front of voters by advocating the public ownership of utilities. The utility should deliver a social benefit—what a later generation might call "quality of life." As a congressman (representing a Tammany district in New York City), as a mayoralty candidate in New York City, and as the Democratic party opponent of Charles Evans Hughes for the governorship of New York in the 1906 election, Hearst broadcast this view to the New York voters in his own newspapers. Clearly opposed to this concept of utility service, Governor Hughes told the Republican Club of New York in 1908, "Our government is based upon the principles of individualism and not upon those of socialism.... It was founded to attain the aims of liberty, of liberty under law, but wherein each individual for the development and the exercise of his individual powers might have the freest [sic ] opportunity consistent with the equal rights of others."^[4]

Utilities responded to reformers with three claims. Domestic electric rates

fell steadily after the turn of the century, and utilities lowered rates as much as costs would permit, continually passing efficiencies to the consumer. Rates also had to cover the total cost of providing electrical service, including attracting new private investment capital. They denied that state franchises obligated utilities to provide a social service. Regarding the first thesis, the utilities were correct: rates generally fell. National average prices of residential electricity fell from 10.9 cents/kwh in 1907 to 5.8 cents/kwh in 1937.^[5]

Analysis of the decline in electric rates shows how the utilities could claim to have lowered rates, and how reformers could find the extent of lowered rates inadequate. An operating utility builds its generating capacity to serve all its customers at once, that is, to supply electricity to all connected electrical devices at peak demand. In normal circumstances, consumers (residential, industrial, commercial, and transportation) do not use all devices at once, so the average demand for electricity is less than the peak-load capacity. In 1938, for instance, average load was only 35 percent of peak capacity. Utilities tied the capitalization and finance of building generating capacity to the normal load. The normal load paid the bill. The utility need not make major additional capital expenditures to meet load added to the normal load, as long as additional load did not rise above the peak load. Meeting additional load could simply be a matter of fuel costs—firing up another generator at the steam plant. Marginal demand (i.e., demand above normal load) did not cost the utility as much to meet as normal demand, because normal demand paid for all the generating capability; hence added load brought greater profit. Utilities had a built-in incentive, therefore, to encourage consumers to use additional electricity by lowering the cost of that electricity when their demand rose above the average.^[6]

From early days in the industry, the utilities had a graduated-scale pricing system. They priced electricity in blocks or steps of consumption, with higher blocks of usage carrying lower rates. All domestic customers paid a flat rate for the lowest block, and most consumers did not use enough electricity to jump to a higher block. Consumers who used enough electricity to obtain the lower rate for higher blocks would lower their overall average rate. Average rates could also reduce the mean consumption of a group of customers. In a group of ten homes, for instance, two households might increase their consumption to higher steps with lower rates. Their lower average rates would lower the rate of all ten consumers averaged as a group. Not until we break out the distribution of consumption do we see that eight of the ten homes were still paying the high base rate and had not increased their consumption at all. The utilities could say, accurately, that the average cost of electricity for all consumers had declined. The reformers could claim, accurately, that the cost for most consumers had not declined.^[7]

For reformers, the cost structure of residential electricity raised a serious conundrum. Graduated schedules provided declining prices for electricity, apparently a good thing for everybody, but they carried a built-in bias against households consuming the least electricity. Such households may not necessarily have been low-income households. In the early years of electrification, before elect-

trical appliances were widely available, all households, no matter how well-off, would be consuming little electricity. After 1919, however, when appliances made modernization possible, the industry's pricing schedules worked against the electrical modernization of lower-income households and households in technologically inadequate dwellings. Even setting aside the cost of the appliances and of rewiring a dwelling, the initial block of electricity was expensive. A household had to consume a lot of electricity to get into the sliding-scale range. The pricing structure of electricity before 1933 worked against electrical modernization for the mass of American households. From the reformers' point of view, the households who would benefit most by modernization were least able to jump out of the high base block. To the extent that the pricing structure of electricity reflected the technology and corporate organization of the central station electrical utility, the progressive reformer could say that the very structure of the private electrical utility made electrification possible but worked against electrical modernization.

The simplest regulative reform turned out to be impossible. Why not reduce the rates for upper blocks of consumption less and reduce the base rate more? Reformers did not expect this strategy to work. Utilities would not lower general domestic rates, because domestic rates subsidized industrial rates. Utilities charged industries far less (per kilowatt-hour) than domestic consumers. They did so because industrial plants and other large consumers, such as hotels and department stores, could threaten to withdraw from central station service and install a small generating plant for their own, in-house power. They could reverse the process of central station electrification that brought the utilities easy money.

For progressives, a rate structure that assigned the highest rates to ordinary households prevented a social revolution in the American standard of living. Here is H. S. Rauschenbush and Harry W. Laidler's indictment, published by the New Republic in 1928:

The power industry has for some years had a startling differential rate structure, favoring the power consumers over the domestic light consumers.

This is a form of social control which the industry has the power to exert. When a rate structure is built on high domestic rates, when the benefits of the industry go mainly to the large power consumers, something is being done to determine the standard of living of the people. Reversibly, when a rate structure is built on low domestic rates, when the greater electrification of various forms of domestic toil are encouraged, something else and different is being done to the living standards and culture of a people. This is especially true of the farms. When light and power reach them, they are different places, for work, for men and women to live in, than when light and power are absent or may be obtained at a rate they do not feel they can afford.

For those interested in the development of a homogeneous civilization in this country, in a natural and easy growth rather than in a development proceeding by a series of explosions caused by a head-on collision of different racial and cul-

tural heritages, the development of power on a large scale and its long distance transmission have been of immense importance. These reformers expect the re-birth of small towns, not located as before, of necessity, on a watercourse or at a waterfalls, but wherever the soil, timber and other mineral resources are best, drawing their power by wire, able at last to exist economically independent of the great industrial centers which have, in the main, put the small towns and the economic independence and cultural unity they were developing, out of competition.^[8]

The first reason, then, for the peculiar price schedule of the electric utilities: their social vision of America differed fundamentally from the progressives' vision. The progressive vision as represented by Rauschenbush and Laidler, of socially modernized American homes, with electricity lifting the standard of living of small towns and farms, of the dispersion of industry out of the industrial centers, of social harmony for a heterogeneous population, found a responsive audience in the newly elected governor of New York, Franklin Roosevelt, who made it his own.

The second reason reformers found for utility resistance to subsidizing modernization of the lower block of domestic consumption related to holding companies, which created a vast debt in their consolidation of the industry. Their debt to capitalization ratio (including bonds and stock in the debt) exceeded that of American industries generally. In 1927, the utilities held $51 of debt in bonds for every $100 of investor shares and funded debt. Manufacturing corporations averaged only $13.4 per $100 of capitalization. Corporations had to pay this debt. Court decisions regarding rates required that return on investment be paid to investors at the next quarter of the corporate year. Utilities could not forgo profit now for greater profit a few years later. This restriction prevented utilities from using profits to lower rates to consumers. Utility reformers asserted, however, that holding companies created much of their debt fraudulently to fatten banks and a few directors' purses. Consumers should not pay false debt. Fighting for public electric power at Muscle Shoals, George Norris charged in 1925 that electric rates were high, because rates paid not only for electric current but also for "premiums on watered stock, profits on fictitious values." Holding companies also extracted huge fees for management services from the operating utilities, thereby raising the operating costs of the industry. Reformers thought the service fees far exceeded the value of the management advice rendered. The fees virtually constituted extortion. They bloated operating expenses of the utilities, expenses that utilities met with higher domestic rates.^[9]

The rise of the holding company in the electrical industry in the 1920s effectively neutralized the power of the state regulatory commissions. Operating electrical companies (the companies that built and managed the electrical generating plant and the distribution lines) before World War I were local and regional, given corporate charters by their host states for operations inside state boundaries. Consequently, state commissions could effectively regulate operating utilities (given sufficient political will). Holding companies, by contrast,

were often interstate. Frequently, the holding company was headquartered outside the state where it conducted most of its operations. For example, the holding company that owned Southern Sierras Power Company, a private utility operating out of Riverside, California, was headquartered in Denver, Colorado. Since a regulatory commission of one state could not open the books of a holding company in another state, the holding company could effectively hide the financial details of the operations of its group of utilities and thereby deny the commission the information needed to determine whether local rates were fair. Clearly, only national-level regulation could reach the holding company.^[10]

At every turn, private utilities thwarted the progressive reformers' efforts to obtain social benefits through regulation. In addition, the conservative side of the progressive ideology, stressing individualism and competition, made it difficult to stretch the justification of reform enough to include the social welfare of the household. Some influential progressives believed the time had come to have publicly owned power and avoid the problem of regulation altogether.