The answer actually took two forms--municipal ownership and state regulation of companies. By purchasing firms providing essential services and commodities, cities could ensure that the benefits of natural monopoly would flow directly to the people or so it was hoped. In the electricity supply business, customers would enjoy lower rates as the city-owned utility exploited economies of scale and increased sales to greater numbers of people and businesses.
Since cities have no stockholders demanding dividend payments or returns on investment, they could pass on savings directly to their citizens. While municipalization of electric utilities enjoyed growing popularity, they did not win universal approval.
Progressive reformers, for example, had been strident opponents of corrupt city governments. Why should political officials all of the sudden gain enlightened management skills when operating power systems when they so blatantly stole from the public coffers in so many other situations? And in attempts to maintain low prices, for political reasons, managers might neglect maintenance, refrain from necessary investment in capital equipment, and offer low salaries that would discourage hiring of superior engineers and staff.
Moreover, several critics of municipal systems viewed them as attempts to socialize American industry at a time when private enterprise still carried much popularity in society--the existence of abusive monopolies notwithstanding. As an alternative, many progressives looked to state regulation. Though several states had created regulatory bodies to oversee the activities of railroad companies--with Massachusetts' railroad commission created in being one of the most notable--few had the power to enforce their recommendations nor could they establish rates and fares.
But the new type of regulation, promoted by progressive Republican governors in Wisconsin and New York in the first few years of the 20th century, was different. In , for example, Wisconsin's Governor Robert La Follette pushed through creation of a railroad commission that had full jurisdiction over a railroad's rates, schedules, service, and operations of the state's transportation companies. Two years later, in July , the Wisconsin legislature extended regulation to the state's electric companies.
The commission used its powers to compel utilities to develop standard accounting techniques, and it had the right to investigate companies' books as part of the process for determining rates based on the physical valuation of a company's properties. Just a month earlier, New York governor Charles Evan Hughes, signed into law a similar measure to create a regulatory body for the Empire State.
Though the Wisconsin statute proved more sweeping in several respects, both states deservedly take credit for initiating the idea of state regulation of electric utilities. Gaining support from politicians and civic reform groups, state regulation of utilities became commonplace, such that by , 43 more states followed the example of New York and Wisconsin by establishing government oversight of electric utilities.
Despite the move toward state regulation, the idea that city-owned utilities could better derive the benefits of natural monopolies for their citizens continued to hold some appeal. In fact, the number of municipal utilities peaked in , with more than 2, "munis" in existence. The overall purpose of regulation, as viewed by its founders, was to serve as a body that would enforce the responsibilities and rights of electric power companies and their customers.
For example, utility companies were required to serve all customers without discrimination who sought to buy power. To fulfil this "obligation to serve," they would need to raise capital and build plants to meet projected loads. Moreover, utilities could charge customers "reasonable" rates for service--rates based on the value of their investments in equipment plus a fair rate of return on the so-called "rate base"--and they must do their best to provide service with as few interruptions as possible.
But utility companies earned valuable rights as part of the political consensus that created regulation. Perhaps most importantly, regulatory bodies legitimated the utilities' status as natural monopolies within their service territories and protected them from interlopers.
Utilities also earned the right of eminent domain, formerly a power reserved by the state, so it could obtain property for their generating plants, transmission towers, and other equipment that was necessary for supplying an increasingly necessary commodity. Utility customers, on the other hand, undertook the responsibility, overseen by regulators, to pay rates that helped maintain the financial integrity of utility companies.
Unlike politicians in municipal systems that might reduce rates to curry favor among voters, regulators would insist in theory that rates be sufficiently high to keep utilities financially healthy. Sometimes, this obligation meant that customers had to pay higher rates than in previous periods. Astute utility managers such as Samuel Insull anticipated the benefits of regulation to power companies. As early as , he pointed out that regulation would legitimate the monopoly status of utility companies and would keep at bay those who harbored distrust and antipathy for non-competitive industries.
In other words, regulation gave the utility industry a special place in the American political economy and protected it from those who saw evil in the big oil and railroad trusts of the day. On a practical level, regulation allowed utility companies to raise money more easily, in the form of stock and bonds, than before the imposition of regulation.
Since investors knew that regulators oversaw the financial accounts of utilities--in an era before public disclosure of accounts was made obligatory--they could feel that their investments in utility company securities was not as speculative as those in unregulated companies. Hence, utility companies could pay lower interest rates than more risky investments. Meanwhile, regulators helped guaranty the financial integrity of companies, meaning that utility bonds paid interest at regular intervals, and that utility stocks paid healthy-enough dividends to attract investment in what became the most capital-intensive industry in the United States.
Without a doubt, utility stocks and bonds only became securities for the "widows and orphans" after regulation helped ensure their safe and secure status. During the two decades after regulation appeared, utility companies expanded to provide increasing amounts of electricity, at lower unit cost, to a greater number of customers.
The electrical output from utility companies exploded from 5. To help finance the great expansion, the utility industry exploited a financial innovation known as the "holding company. Thus, nascent utilities could therefore retain cash for their operations. After accepting the securities from several utilities known as "operating companies" , the holding company issued stock and bonds using the subsidiaries' securities as collateral.
Investors preferred the securities offered by the holding company, because they provided diversification and more secure returns than did offerings from individual companies. A favorite holding company investment among many was the Electric Bond and Share Company, created by the General Electric company in , to market the securities it acquired while selling equipment to utilities. Because the holding company now had a stake in the operating companies, they offered management and engineering services that the smaller firms could not have afforded themselves.
Moreover, the holding company often consolidated the equipment and management of smaller companies into larger ones, and it helped them interconnect transmission facilities to ensure higher levels of reliability. Overall, the holding company innovation appeared to facilitate expansion of the utility industry.
During the go-go years of the s, however, some of the beneficial principles of the holding company concept got lost in the desire to exploit its business structure.
Holding firms assessed high fees for arranging financing for their operating companies, and they provided engineering services at levels way beyond their cost. Meanwhile, the companies pyramided one sub-holding company on top of another, none of which did anything but to hold securities of the companies below it. The scheme allowed stockholders of the top company to control the assets of operating companies with very little investment.
By Insull's company established a monopoly, providing Chicago with all of its electricity. Selling securities to obtain financing, Insull built a system of central electric power stations, expanding his energy empire throughout most of Illinois and into adjacent Midwestern states by Traction companies-electric railroads and trolley lines-were among the chief commercial consumers of Insull's cheap electric power. Two years later, Insull became president of People's Gas Co.
Using principles he employed successfully in the electric utilities business, he transformed the floundering company. In the installation of the world's largest storage battery in the old Adams Street Station had helped meet the maximum demand on the system between and on dark December evenings. Yet this type of solution was expensive and could serve only as a stopgap. The steady growth in demand would soon exceed the limits of the generators at the company's main power plant.
In the practical limit of the reciprocating steam engine was reached at the Harrison Street Station. Since the plant opened a decade earlier, one piece of equipment after the next had been added until its original capacity of kw reached 10, kw. The power plant's eleven steam engines used up all the space set aside in the plans for future expansion.
To meet the pressing need for additional capacity, a huge addition had to be built to house a gargantuan machine of 5, HP and its companion, a 3,kw generator. The gigantic engine was four times as large as the original equipment and created pounding vibrations that put the structural strength of building materials and metal parts to the ultimate test.
Many visitors came to see the giant engine, including a rising architect named Frank Lloyd Wright. He seemed as awestruck as Henry Adams had been by the technology of electrical energy. Yet the cost of the steam engine and a foundation strong enough to hold it pushed this technology to the breaking point—one of practical economics. In most respects, engineers and inventors had anticipated the problems of designing larger and more efficient prime movers.
But until the rapid growth of demand for electricity in Chicago forced Insull to find a solution, technological innovation had proceeded at the slow pace of cautious experimentation. In the case of the turbine engine, the exploitation of water-power sites had given impetus to its technical improvement and kept interest focused on its commercial promise.
But the steam turbine was different, and its development was restricted to small demonstration models. In Europe turbogenerators of — kw were being tested under commercial conditions. American efforts lagged behind in the laboratories of General Electric, Westinghouse, and other manufacturers.
In December Insull decided to purchase land for a new powerhouse that would mark a historic departure from the current standards of the industry. The utility executive had already received technical reports on the European experience with steam turbines from his chief engineer, Louis Ferguson, and his trusted consultant, Fred Sargent.
Insull also conferred with the president of GE, Charles A. Coffin, who suggested that the largest available model of 1, kw be given a commercial test in Chicago. Insull, however, was persuaded by Ferguson and Sargent to insist on something larger still.
He demanded a machine that would exceed the limits of existing technology, a machine of at least 5, kw. Coffin agreed to assume the risks of attempting to build such a generator while Insull took responsibility for making it commercially operational.
The experimental device was installed in the new Fisk Street Station, on the south branch of the Chicago River about two miles beyond the congestion of the CBD. Started on 2 October , the turbogenerator was so successful that it was eventually returned to the GE works in Schenectady, New York, where it stands today as a monument to engineering genius.
It would take another decade for the steam turbine to evolve into its present design, but its practical value was immediately evident. The introduction of large steam turbines into commercial use ushered in a halcyon era of rapid improvements in the size and the efficiency of central stations.
The replacement of the first generation of turbogenerators within four years was emblematic of this dynamic process of innovation. After only two years of commercial experience with the first four engines, the engineers had learned enough about the peculiar characteristics of the steam turbine to modify it and enlarge it to 9, kw.
The first two of these units were found to be so efficient that they were further modified a year later, in , to generate 12, kw. Though producing a percent boost in output, the second-generation turbine was the same size and cost as the first. The improved model cut investment costs even further because it required no additional boiler equipment.
Savings in capital were matched by similar economies in operation. Most important, it used about one-third less coal per unit of electricity. When added to several laborsaving innovations introduced at the Fisk Street Station, the result was a marked decline in the cost of energy. At the same time, the development of a distribution network of high-voltage transmission lines and substations paralleled the growth of the utility's generating facilities.
Only five years after the establishment of the first substation in , twenty-two of these distribution points dotted the city see map 3 , creating an integrated service grid that covered approximately two-thirds of the built-up sections of Chicago's square-mile territory.
By the number of these distribution points would climb to thirty-three. During this period, the elaboration of specialized substations would begin in response to the city's increasingly diverse needs for more light, heat, and power. The system Insull built represented a special kind of technological breakthrough.
The turbogenerator became more and more cost effective as it became larger and larger. The size limit of this technology has only recently been reached in machines exceeding 1 million kw. In effect, then, the introduction of the turbogenerator set in motion a process that led inexorably to the goal of cheap electricity. Perhaps the best way to illustrate the economic savings resulting from the turbogenerator is to reproduce some of the diagrams Insull used in preaching the gospel of consumption.
The simplest one see chart 3 superimposed the falling unit cost of electricity on the rising volume of output. In contrast to the reciprocating engines at the Harrison Street Station, the turbogenerators at the Fisk Street Station cut the amount of coal burned per kilowatt-hour in a steady, step-by-step progression.
The widening gap on the chart between energy output and coal consumption was reflected in increasing benefits from the conservation of fuel and the abatement of smoke pollution in the city.
This enviable record of corporate success was achieved in spite of rate cuts that reduced the income from each customer. The interaction of two factors largely explained the basis of Insull's theories. Falling rates allowed more and more consumers of energy to enjoy central station service. More customers, in turn, reduced each one's share of the utility's heavy burden of fixed costs for investment capital.
The growth in demand stimulated by lower rates also helped achieve significant economies of scale and additional savings from [Map 3] Distribution system of the Chicago Edison Company and Commonwealth Electric Company, Madison W. Madison St. Division W. Division St.
Clark St. Kinzie-Kingsbury 9 Lydia St. Lake St. Harrison St. Fisk St. Grove 22 S. Chicago S. Chicago Ave. Thus the income collected from an increasing number of customers more than made up for any decline in the profits from each one. Insull did not have to distort the statistics to make his gospel of consumption appear to be an iron law of economics. During the first fifty years of central station service, a peculiar configuration of conditions produced a cycle of falling rates and increasing output that no longer prevails.
Unique to Insull's time was a historic buildup of demand in the city for better sources of light and power that sought a supply at a reasonable price. This reservoir of demand was large enough to absorb all the available supply as the technological revolution in the electrical industry permitted a steady reduction in price.
A glut of low-priced coal was another major factor helping to make Insull's equation work. But eventually the pool of demand would exhaust itself, and the revolutionary pace of improvement in basic components such as generators, motors, and light bulbs would slow down. The price of fuel could also be expected to rise as demand increased, natural resources were depleted, labor unions won wage concessions, and other market conditions changed.
In fact, a national coal strike in first raised the specter of a fuel shortage. Insull reacted by forming a partnership with the Peabody Coal Company to acquire huge reserves in central Illinois and Indiana. Although it took some time to accumulate statistical data on the turbogenerator after the opening of the Fisk Street Station in October , immediate indications of a technological triumph strongly bolstered Insull's belief in theories of mass-consumption economics.
The new generators spun ten times faster while weighing only one-tenth as much as the old reciprocating engines, for instance. The example of the elevator pointed him toward power consumers as the logical way to counterbalance a heavy demand during the evening with a sizable load during the day. Insull did not have to look far to find such a prospective group of customers, whose use of electricity already far surpassed all others'. By the street and elevated railways in Chicago already used more than three times as much energy as the combined total of Edison's light and power customers.
In the near future the potential of the transit business would be even greater, since its conversion from horse and cable to motor traction was not yet complete. Of the nearly 1, cars entering the Loop during the rush hour, were drawn by cables, 97 were electric cars attached to cable trains, and were powered by electricity. In the neighborhoods of the North and West sides, the horsecar remained an all-too-familiar sight.
The completion of transit modernization by the city's fifteen franchise holders would boost their demand for electrical energy to truly enormous proportions. For Insull, however, the problem was that the companies were all generating their own power—all except one, the Lake Street Elevated Company.
While the Fisk Street Station was under construction in , this company approached Insull to make a deal. The elevated el line to suburban Oak Park had been purchasing the excess capacity of other transit companies until these sources dried up.
For Insull the timing could not have been better. With an expensive new central station coming on, a large power load during the daylight hours would help keep otherwise idle equipment working.
Eager to gain a foothold in this market, Insull proposed a contract with rates so low that the railway company could hardly afford to reject his offer. This important precedent used the demand model of a two-tier structure of rates in a modified form, called the Hopkinson system. The primary rate, corresponding to the utility company's fixed costs, was still based on the consumer's maximum demand as measured by a meter, but the elevated company made a flat rate payment annually for each kilowatt of maximum demand.
In contrast, the Wright system of rates charged a variable amount determined by hourly use each month. The secondary rate, corresponding to the utility's operating costs, remained pegged to actual kilowatt-hour consumption.
For the utility, the advantage of this rate structure was a key provision added by Insull that guaranteed a minimum amount of consumption equivalent to a load factor of 35 percent. In other words, the traction company promised to keep the machinery it used running at least 35 percent of the time on the average or to pay for an equivalent amount of energy. Over the next five years, additional contracts with the transit companies fueled an unprecedented expansion of central station service in Chicago.
In the energy consumption of these Edison customers would surpass the combined total of all the rest of the utility's light and power users see chart 6. Why did more and more of the transit companies turn to the utility operator rather than building large-scale generating stations of their own?
The answer to that question requires an analysis of utility finances and reform politics, which were reaching a crisis during the tumultuous [Chart 6. Since electric, gas, and other utilities also came under the intense scrutiny of urban progressives during this period, the entire subject of government-business relations is best dealt with in a separate section below. Adding the power load of the city's transportation companies built the load of Chicago's central station system to the point where it finally realized significant economies of scale.
Although the trolley and elevated companies continued to supply some of their own fast-growing needs for power, an even larger proportion of this increment was met by Insull's electric companies see table [12]. Supplying only 1. The guarantee agreements with the transit companies attracted the investment capital to underwrite the utility's expansion program; their energy bills paid for most of it.
With the lifting of the utility's heavy burden of finance costs, Insull was free to offer much lower rates to off-peak customers. Station with a second generation of turbogenerators, but also to build a second modern power plant.
It was directly across the Chicago River at Quarry Street and contained even larger and more efficient 14,kw units than its companion. The energy demands of urban transportation also provided Insull with the first significant solution to the problem of spreading the load over the entire day see chart 7. Early-morning commuters and midday shoppers riding the transit system helped counterbalance the peak demand for light, power, and traction during the evening rush hour. Although the point of maximum demand climbed incessantly from to , new demands for power during the daytime improved the utility's overall load factor from 30 to 40 percent.
Again the result was a steady decline in the cost of electricity, which permitted additional flexibility in setting rates. In the decade following Insull's gospel of consumption speech [Chart 7] Central station load curves, — The importance of his theories cannot be overstressed, because they established a solid economic foundation for the growth of central station service in the city.
The equation he drew between falling rates and rising consumption gave him key insights on how to put technology to best use to reach a goal: cheap electricity.
Pursuing his vision with relentless determination, he was able to take advantage of the revolutionary pace of technical progress by following engineering trends in the United States and Europe and working closely with the equipment manufacturers. It was during this period that he became highly regarded as a system builder and financial wizard. During the first decade of the twentieth century, the battle for municipal reform in Chicago reached a showdown.
The traction baron Charles Yerkes left the legacy of an embittered and aroused community that demanded rapid improvement in service and an end to major corruption at city hall. From to , public frustration reached the point where a majority of voters favored a public takeover of the city's transportation system.
The clamor for municipal ownership rose in a deafening crescendo as the politicians fought among themselves for leadership of this popular crusade. With their franchises expiring in , the transit companies were in deep trouble politically and financially. Investors shunned these high-risk ventures.
The gas monopoly's dubious record of corporate arrogance and rate gouging also contributed to an atmosphere of hostility toward all the city's privately owned utilities. Threatened by demands for municipal ownership, the utility companies could not expect to escape a tightening net of regulation. Even conservative reformers believed the city government should set service standards and maximum rates for gas and electric lighting. In many respects the path of reform in the metropolis of the Midwest was typical of the progressive movement in American cities.
But Chicago's acute ideological and ethnic conflicts gave its politics an intensity unknown elsewhere. On one hand, a tradition of violent labor clashes had branded the city's immigrants and working classes with a reputation for radicalism and anarchy. On the other, a strident posture of moral righteousness among mid-western Protestants had turned several policy questions into gut-wrenching tests of ethnic self-respect and religious fidelity.
Among the issues most passionately fought over were the saloon, the regulation of the liquor trade, and the teaching of foreign languages in the schools. In the early years of the twentieth century, a reform mandate to write a new municipal charter had the unintended effect of compounding all the various ideological, economic, and ethnocultural conflicts into an explosive mixture. Dominated by a business elite, the charter reform movement raised basic questions about the meaning of good government and about who should rule.
As a special charter convention began its deliberations in November , articulate Chicagoans and their special-interest groups split into two antagonistic camps at war over the future of the city. The polarizing of politics made the city council's formation of public policy on urban utility services difficult and likely to result in uncertainty or deadlock. On transportation policy, for example, the goals of the democratic idealists who advocated municipal ownership were so fundamentally different from those of the business pragmatists who favored regulation that a dialogue between the two sides was impossible.
On the one side, a clear majority of Chicagoans wanted a public takeover of the transit system as the most immediate solution to their personal needs. On the other side, their political leaders were working toward private ownership under municipal regulation.
Close public scrutiny and elections every other year forestalled any resolution of the issue. Instead, an ambiguous collection of reports, resolutions, and enabling acts kept piling up until Mayor Edward Dunne was elected in on a municipal ownership platform. During his two-year administration, the city council had an opportunity to make several momentous policy decisions. The new administration was asked to settle the municipal ownership of the transit system, how far the government should regulate its franchise holders, the definition of utility rate structures, and the maximum rates for gas and electric lighting.
The outcome of each of these policy issues would have a major effect on the quality of daily life in the city. These decisions were also of vital concern to Insull and his electric companies. Assuming the posture of a progressive reformer, Insull was able to steer a smooth course through the troubled waters of Chicago politics, bringing him greater legal and financial strength than ever before. The contrast between his liberal approach toward government-business relations and the robber-baron style of Yerkes or the Gas Trust could not have been more complete.
At the meeting of the NELA, for example, Insull bravely called for public regulation and profit limitations in front of his fellow utility managers.
Two years later he joined Chicagoan Ralph M. Easley in forming the National Civic Federation to help channel the currents of reform between the shoals of radical socialism and laissez-faire capitalism. In the case of urban transportation policy, for example, he took the middle ground of acting as a neutral expert in search of the most efficient and economical supply of electrical energy for the city's trolleys and els. By keeping a low profile in this contest, he did not look like a self-serving lobbyist.
Yet Insull ended up with contracts to supply almost all of the transit system's needs for more power. At the same time the utility operator began delivering the first central station power to the Lake Street El in , the reformers were laying the legal foundations in the state capital for a municipal decision on transportation policy. The enabling legislation, known as the Mueller law, was a typical by-product of Chicago's divisive politics. On the one hand, it permitted the city to take over the transit companies; but on the other, it made such a policy nearly impossible to implement.
What was the real purpose of this Janus-faced act? With the election of Dunne on a wave of municipal ownership sentiment, the companies were finally forced to work out an agreement with the pragmatists on the city council.
Insull was able to take advantage of his utility's strong political and economic position to influence the outcome of the transit settlement in ways highly favorable to his interests. Although his promise of cheap electricity was important, a much more powerful form of leverage was his offer to finance the construction of the power facilities for the transit system.
Every proposed agreement called for vast expenditures to pay for a rapid conversion of the trolley cars to electric traction, a complete rehabilitation of the lines, and more or less ambitious expansion programs.
The cost of bringing Chicago's obsolete system up to modern standards would be staggering. Without franchises, their futures were thrown into a legal limbo that made the cost of borrowing money prohibitive. For Insull, on the contrary, contracts to supply electricity to the transit system represented an asset that gave easy access to the money markets.
The fifty-year franchise of the Commonwealth Electric Company and a virtual monopoly of central station service in Chicago also contributed to a solid standing in the financial world. For the next decade, transit contracts would largely underwrite the rapid expansion of Insull's electric companies. As we have seen, the growth of demand for light and power after had justified investing huge sums of capital to construct the Fisk Street Station.
After , however, the transit contracts, with their provisions for a guaranteed amount of power consumption, ensured that Insull could borrow money at reasonable interest rates. In effect, middle-class commuters financed the growth of central station service in the metropolitan area.
During the Dunne administration, the utility executive quietly negotiated to sign up the biggest transit companies. In many respects, they had few other options for meeting the skyrocketing demands of their trolley and el lines for electricity. After the final settlement of , he used public platforms to argue that the contracts promoted the public interest by augmenting the modernization program and by helping to reduce the electric rates of the entire community.
He promised to improve the delivery of essential services to the public. In the case of government regulation of utility rates for gas and electric lighting, he attempted to project a similar image, that of a responsible civic leader. In the Dunne administration was presented with the city's first opportunity to formulate a public policy of utility rate structures and to set their maximum levels.
Like the Mueller law, an enabling act of the legislature gave the cities of Illinois new authority to regulate their franchise holders, including gas, electric, and telephone companies. The reform measure was a response to the continuing battle between Chicago and the gas monopoly.
The company had shifted the controversy to the courts, which had enjoined the enforcement of the ordinance. The gas company contended that the city had no power under the general Municipal Corporation Act of to regulate utility rates.
The remedy was the Reform Act of May , which Chicago voters approved in a referendum during the November elections. The process of setting the gas rates warrants examination because it epitomized the self-defeating nature of a politics of confrontation in government-business relations.
In the years ahead, the complete contrast between this approach and Insull's would bring major benefits to the electric company. Driven into insolvency by its obstinacy, the gas utility would have fewer and fewer resources to use in competing against the electric company for a share of the energy market.
Yet more important for the future of gas service in the city was the closely related issue of the standards for measuring the quality of the fuel.
At the time of the council investigation, the franchises of the gas company held it to a standard of 22 candlepower cp. This type of measurement made sense before the electrical revolution of the s, when gas was used almost exclusively for illumination.
But this standard became increasingly obsolete and costly to both the company and consumers with the inexorable retreat of gas from the lighting market, the advent of the incandescent gas mantle, and the growth in demand for the energy fuel for cooking and heating.
In creating a regulatory framework for gas services, the council adhered to the tenets of urban progressivism by relying heavily on the opinions of experts. The balanced panel of experts consisted of a past president of the gas association, E. Humphreys, in the middle. Although the experts disagreed about rates, they spoke with one voice in recommending a change in the standard from the old lighting qualities to a more useful measure of heating values.
Yet there was no discord over the need to revise the standard to reflect the transformation of gas from an illuminate to an energy fuel. I think an 18 c. It is just as good for heating and the proportion of gas used in the open burner is growing less, continuously all over the world. But the stubborn refusal of the gas monopoly to bargain in good faith doomed the chance of further reform, including a change in the standards.
The aldermen accepted several of these but balked at the demand that the city drop all pending litigation against the company. In effect, the utility was asking the city to leave unsettled the very question of the constitutional foundation of the city's authority to set rates for its franchise holders.
The CGOE was not fooled by this plan to overturn its policies in a future court challenge, and it reasserted city hall's determination to continue the litigation to a final ruling. Over the coming years the gas monopoly would pay a mounting price for its intransigence. Its confrontational stance foreclosed the possibility of reforming the standards from light qualities to heat values. A change to a heat standard BTUs would have produced an immediate benefit by cutting the cost of the energy fuel.
Reducing its light-bearing qualities would eliminate the need to add petroleum products to the coal gas and would open the way not only to more efficient methods of manufacture but also to the use of cheap natural gas. The new standard would also encourage the conversion of gaslight fixtures in working-class homes from crude open-flame burners to soft, glowing incandescent mantles. Looking to the future, the reform would protect consumers of all classes as they used gas less for lighting and more for cooking and heating.
Instead of a settlement, however, the gas monopoly continued to battle the city in the courts, while the rising cost of petroleum eroded its profit margin to the point of economic ruin.
When World War I created a national fuel shortage, Samuel Insull would have to be called in to rehabilitate the ailing utility. Insull extracted far more concessions from the city council for his electric companies by couching his objectives in the conciliatory tones of cooperation. Equally important, perhaps, the utility executive realized the value of public relations in creating a favorable political climate.
To be sure, a fifty-year franchise and the recent attainment of economies of scale in generating electricity gave him strong leverage in demanding concessions from the council. Yet Insull's posture of being a public servant and his ready acceptance of city hall's rate-making authority helped shield his interests from an aroused community. Consumer-oriented reformers directed public attention to other causes, such as telephone and water rates, charter reform, and transit modernization.
Most important, perhaps, Insull made well-publicized announcements of rate relief at the beginning and end of the council's investigation of his utilities. After the passage of the enabling legislation in May , for example, he ordered a rate cut. In fact the aldermen admitted that their constituents were voicing few complaints about Edison central station service.
Nonetheless, Insull appeared to bend over backward to accommodate the aldermen and the reformers who found fault with the proposed settlement. In the formation of a public policy for electrical service, Insull and his lieutenants dominated the debate in the council about the structure and maximum levels of rates.
In spite of the aldermen's reliance on professional consultants, the company's highly talented lawyers and engineers overawed these experts with carefully prepared legal briefs and technical reports.
By conceding the city's authority to regulate the price of utility services, the company hoped to gain official recognition of its differential rate structure. However, the company's practice of discriminating among its customers by the quantity of energy consumed and the type of use raised troubling questions of constitutional law and public policy. If the council put a stamp of legitimacy on a differential rate structure, then the levels set for each class of consumer would have major effects not only on the company's fortunes, but on the energy-use patterns of the city as well.
The real question for the aldermen to decide was who ultimately paid for Chicago's electrical energy among the community's various groups of householders, shopkeepers, manufacturers, and commuters.
The Dunne administration did not shirk its duty in conducting a full and open investigation of these weighty issues. The council appointed the city electrician and its top traction adviser, Bion J. Arnold, to study the utility's operations. Arnold and other engineers helped the CGOE calculate a fair level of rates. To review the law, the aldermen turned to the corporation counsel.
They also heard testimony from a long parade of reformers, including legal experts, public officials, and articulate spokesmen of civic watchdog groups such as the City Club and the Hamilton Club. Behind the facade of this public forum, however, Insull was largely able to set the agenda of the debate and to dictate its outcome.
In this case, the decision-making process exposed many of the inherent difficulties facing the government in its attempt to regulate utility enterprises in the public interest. The consulting engineers were the first to admit that they were ill equipped to act as accountants.
In this highly technical field of utility finance, only a specially trained economist could arrive at an independent judgment of the maximum rates the city ought to impose on the company.
After a three-month study, the engineers confessed they had to accept Insull's figures and statistics because of the sheer complexity of such an intricate technological system.
To make a true accounting of the company, they reported, would require a major commitment of time, money, and personnel beyond the resources of the city government. The utility's top lawyer and lobbyist, William Beale, reinforced this imagery of insurmountable obstacles in the path of an effective regulatory apparatus.
By confining public policy in this manner, the council essentially gave Insull a free hand to apportion the cost of electrical services among the various groups constituting Chicago's community of energy consumers. The corporation counsel, James Hamilton Lewis, could not refute Beale's contention that the law permitted utility enterprises to discriminate between customers based on consumption.
Some courts had even upheld the notion that competition in some markets and not in others justified rate differentials. As the experts pointed out, retail merchants did not charge big spenders less for an item than customers with more modest needs. Even accepting a two-tier system, the council still retained a broad range of policy choices in setting different ratios between the primary and the secondary rates see table [13].
To persuade the council to adopt a rate schedule favorable to the utility's interests, Insull proposed to make some enticing concessions to the city. This maneuver helped him maintain the initiative by creating a new situation in which both parties would have the right to a fair bargain. His offer required the council to transform public policy from a general ordinance into a specific contract. Insull held out two pecuniary incentives that were guaranteed to win the support of most politicians and business-oriented, pragmatic reformers.
A second incentive promised an even richer reward, but Insull shrewdly linked this prize to the city's making an important concession. Since Insull had been operating under the separate franchises of the Chicago Edison Company and the Commonwealth Electric Company.
Insull wanted to consolidate the two firms under the longer fifty-year grant of the Commonwealth company.
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