The Insull Speech of 1898: Call for Public Utility Regulation of Electricity (The origins of EEI’s support for cap-and-trade in today’s energy/climate bill)

By Robert Bradley Jr. -- April 29, 2010

[Editor note: Bradley is currently working on the second volume of his political capitalism trilogy. Book 1, Capitalism at Work: Business, Government, and Energy, came out last year.  Edison to Enron: Energy Markets and Political Strategies (Scrivener Press/John Wiley & Sons) will examine the rise and fall of the father of the modern electricity industry, Samuel Insull. Publication of Book 2 is scheduled for year-end.]

“Several electric utilities, including nuclear power giant Exelon and PG&E, joined more than 170 businesses to punctuate the importance of placing a price on carbon through a complex bill that is facing a political impasse.”

 – Evan Lehmann, “Businesses Push Reid to Abandon Immigration for Climate,”E&E News, April 29, 2010

The Edison Electric Institute has controversially thrown its support behind cap-and-trade legislation sponsored by Sens. John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joseph Lieberman (I-Conn.), aka the KGL Bill.

The question may be asked: why would a major business lobby advocate legislation that increases costs and thus electric rates?

The answer is easy: the companies get to pass on the costs to their customers under public-utility regulation. So higher costs from CO2 rationing can be judged ‘reasonable’ by state authorities, and the new federal law can give the utilities a lot of sweeteners to make sure they profit, at least in the short term.

Jim Rogers of Duke Energy, who more than any other person in his industry has championed CO2 pricing, sees advantage. The Ken Lay protégé will go down in history as one of the major rent-seekers of our era–despite the troubled case for climate alarmism, the political problems of any global “solution,” and the negative effects on electricity users.

Where did the drive for automatic pass-through of  “reasonable” costs begin? For the electric industry, it began in Chicago in June 1898 in a then-controversial speech by Samuel Insull, the head of Chicago Edison Company and the president of the major trade association of the industry, the National Electric Light Association.

Insull did not want regulation for its own sake. He believed that franchise protection was worth giving authorities control over rates. Insull believed that this quid-pro-quo — exclusive franchises for cost-based rate maximums — would lower interest costs (a huge cost item for public utilities) and thus lower rates. Insull also saw statewide public utility regulation as a better alternative to local politics and to municipalization.

Insull’s political program was ahead of its time. Most of his fellow electric utility heads were opposed when Insull first gave his speech. But he would win them over in the next years, and state-after-state would implement formal cost-of-service regulation for electricity.

PUBLIC CONTROL AND PRIVATE OPERATION (Samuel Insull, Speech before the National Electric Light Association (now Edison Electric Institute), Chicago, Illinois, June 7, 1898

“A subject of growing importance to a number of our members is the question of the public ownership and operation of the undertakings now operated by electric-lighting companies.

The agitation in connection with this subject has called forth a great deal of discussion, partly by those interested in it simply with a view to extending the influence of political parties, and partly by serious disinterested thinkers who believe that the best interests of the greatest number are to be obtained by the creation of a municipal socialism, which, if carried to its logical conclusion, must ultimately result in municipalities performing, with others, such public-service work as we are engaged in, and also in producing the food we eat and the clothes we wear.

To those occupied in the management of electric-lighting properties it does not seem possible that the movement in favor of municipal operation of electric-lighting plants, based upon the assumption that a municipality can produce electricity cheaper than, or even as cheap as, a private corporation, is well founded We all realize, from the close attention we have to give to our own affairs, that self-interest and the necessity of getting a return on our investment are the first essentials to the economical administration of large enterprises.

While I do not pretend to assert that electric-lighting companies are beyond reproach, I wish to point out that many of the evils complained of as pertaining to corporate management are the direct results of the enforcement of unwise conditions through legislative action. Ill-advised efforts are made often by legislative bodies to secure advantages in the direction of control which cannot be obtained without giving an equivalent in protection to the industry. This causes the investor to feel that his property is being attacked, and compels him to resist such legislation.

The result is a feverish agitation, crimination and recrimination between the would-be improvers of municipal government and the owners of corporate properties without reaching a conclusion satisfactory to either.

The fallacy of the so-called reformer’s theory results from looking only at what he calls the injurious effects of corporate management without taking into account its indisputable benefits. He does not seek for the cause of the trouble. If reformers will take accurate account of all the points in the problem, they will discover that the evils complained of result from errors in legislation designed to determine the relations between municipal bodies and electric-lighting companies.

It seems to me that the claim that municipal operation is the universal cure for all diseases for which electric-lighting companies are supposed to be responsible merely proposes the substitution of political in the place of industrial management. This raises the question, Is the administration of municipal affairs in the various cities throughout this country so economical, as compared with the management of private industries, and the class of service rendered so efficient, as to justify the increasing of the burdens already imposed upon municipal government?

It appears to me that a correct division of power and responsibility requires political government merely to control private industrial management. Where political government and industrial management are merged into one interest, the power of control is seriously impaired, since a political administration cannot be reformed without overturning the party in power.

I cannot bring myself to the belief that the citizens of this country are in fact opposed to large aggregations of capital in corporate form, as such aggregations are absolutely necessary to the operation of all great undertakings by private enterprise. It is as impossible to operate such vast affairs with individual capital, as a personally owned business, as it is for us to live without municipal, state and national governments.

The misunderstandings that from time to time occur between communities and the managers of electric-lighting companies will, to my mind, disappear entirely if the relations between the two are correctly founded on the basis of public control, with corresponding protection to the corporations operating this industry.

It would seem to me to be a very proper function for this association to address itself to educating the public to a definite legislative policy that will be fair to the municipalities, securing to the public the best service at the lowest possible price, and protecting corporations by giving them franchises which, while conserving municipal control, will insure to the investor the permanency of the undertaking.

COMPETITION IS NOT THE TRUE REGULATIVE FORCE

It is supposed by many who discuss municipal affairs that the granting of competitive franchises for public-service work is the true means of obtaining for users the lowest possible price for the service rendered, where, as a matter of fact, the exact opposite is the ultimate result.

This is proved by results in all large cities where the most severe competition has taken place. Acute competition necessarily frightens the investor, and compels corporations to pay a very high price for capital. The competing companies invariably come together, and the interest cost on their product (which is by far the most important part of their cost) is rendered abnormally high, owing partly to duplication of investment and partly to the high price paid for money borrowed during the period of competition.

The selling price of a service should be based on its cost, and in any business such as public work, where the investment is large and the annual turnover is comparatively small, if the item of interest be necessarily augmented, it must be reflected in the price paid by public and private users.

While it is not supposed to be popular to speak of exclusive franchises, it should be recognized that the best service at the lowest possible price can only be obtained, certainly in connection with the industry with which we are identified, by exclusive control of a given territory being placed in the hands of one undertaking.

In most European countries public-service operations enjoy exclusive franchises, under proper control, and are able to obtain capital for their undertakings at the lowest commercial rates, thus materially affecting the cost of their product, of which interest, as I have already stated, is necessarily so great a part. In order to protect the public, exclusive franchises should be coupled with the conditions of public control, requiring all charges for services fixed by public bodies to be based on cost plus a reasonable profit. It will be found that this cost will be reduced in direct proportion to the protection afforded the industry.

The more certain this protection is made, the lower the rate of interest and the lower the total cost of operation will be, and, consequently, the lower the price of the service to public and private users. If the conditions of our particular branch of public service are studied in places where there is a definite control, whether by com- mission or otherwise, it will be found that the industry is in an extremely healthy condition, and that users and taxpayers are correspondingly well served.”

Source: Insull, Samuel. “Standardization, Cost System of Rates, and Public Control” (1898). Reprinted in S. Insull, Central-Station Electric Service, 34–47. Chicago: Privately Printed, 1915.