Samuel Insull and Rural Electrification (it did not start with FDR’s New Deal )

“I am not claiming any great originality for the Lake County Experiment [on rural electrification in 1910]. If I had not hit upon it somebody else would have, but it is rather an interesting sidelight that even the opponents of private ownership, such as the Tennessee Valley Authority, by their work have put the stamp of approval on such matters….”

– Samuel Insull, The Memoirs of Samuel Insull (1934), p. 97.

[Ed. note: This post is taken from the author’s Edison to Enron (2011), chapter 3, pp. 105–108]

“The way Insull’s utility managed Chicago’s power load,” noted one technological historian, “is comparable to the historic managerial contributions made by railway men in the nineteenth century and is as interesting as the widely publicized managerial concepts and policies of John D. Rockefeller and Henry Ford.” But beyond the city and the suburbs lay another frontier for the synergistic generation/distribution, adding yet more heft to Insull’s “principle of concentration” and the virtuous cycle of more sales and lower rates. Insull could only revel in “a business which affords so many remarkable surprises.”

As described in chapter 2, North Shore Electric Company (North Shore), a Commonwealth Edison affiliate, conquered Chicago’s suburbs. This left the small farming communities, which had, at best, electric lights on their main streets run from a small coal-fired dynamo.

This sprawling market, covering most of America, was not in anyone’s sights for electrification, much less from a network perspective. Still, farmers wanted energy, affordable energy, badly, just as city and suburban dwellers did; with the energy option, perhaps the advantage of lower land costs could spur rural industry.

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In 1907, Insull purchased a farm near Libertyville, a country town where a small rickety generator lit the main street. He thought about installing his own generator to electrify his farm, but this was hardly consonant with the scale that he championed everywhere else. So Insull schemed. What about transmission to reach a properly scaled generator, which meant North Shore, six miles away? But the economics were daunting without a wider market to serve.

With Gladys and his infant son abroad on vacation in the summer of 1908, Insull bought a car and toured the countryside with more than pleasure in mind. Might there be a network of users in the hinterland? Insull commissioned a survey and talked up the idea of rural electrification. His colleagues were skeptical about profitably serving dispersed, poor farmers, but Insull envisioned production economies great enough to offset the transmission costs. A load-factor diversity gain could turn losses into systemwide benefits, and this market would only grow once the wires were in.

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In 1910, North Shore wired 22 towns and 125 farms, serving 1,422 customers out of a total population of 23,000 For Insull, this pocket of northern Illinois was the “poorest territory” he had ever attempted to electrify. Ten isolated plants were purchased (most towns had no electricity), nine of which were scrapped. (“The junk pile is our most valuable asset,” Insull would say.) One plant serving several farms was upgraded as the central station from which substations were added. Transmission lines with improved reach (as much as 50–60 miles) completed the so-called Lake County Experiment.

At the same time, Insull created the Committee on Electricity in Rural Districts within the National Electric Light Association (NELA, the predecessor to the Edison Electric Institute) to spur other experiments. There was derision within the ranks, however, with one prominent NELA utility executive calling rural marketing “a joke.” Even farm groups were not inspired.

But good results began to emerge with each passing month; by 1912, the results were in: Lake County panned out spectacularly. The infrastructure makeover doubled the fixed cost per kWh, but amortization, lower fuel costs, growing usage, and improved load diversity kept rates down—and falling.

As Insull explained in a historic 1913 lecture to the Franklin Institute in Philadelphia, fuel costs fell 70 percent, and the load factor doubled to 29 percent (not too far behind that of a small city). Usage, meanwhile, jumped two-and-a-half-fold, with customer growth of 150 percent joining doubled usage per customer.

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What was behind this success in a less-than-ideal market? Part of it was applying the knowledge and buying power of Commonwealth Edison to the experiment. Insull knew how to set rates and sell, sell, sell. But part of the success was a pleasant surprise, as E. J. Fowler documented: rural life’s summer peak complementing the suburbs’ winter peak, improving load diversity for North Shore as a whole. With electricity on tap, the farms used power to drain water and irrigate. Rural mining and manufacturing operations sprang up from affordable power too.

With the new investment amortized over many years and the economics of buying and selling exceeding expectations, sales growth brought revenue to the bottom line. With the load factor doubling in the first two years, partly from rate cuts that more than paid for themselves, the experiment was a resounding success.

The “new conception” of electricity service, as Insull called it, “exploded upon the industry.” What his doubters missed, despite Insull’s tireless education, was the importance of diversity, which flipped the economics. It was complicated and subtle, giving credence to those crediting Insull with accelerating the development of electricity industry by a decade or two–or even a generation.

“From being just a little shoestring business which no one would care to give any particular attention to,” Insull explained to his brethren, rural electrification “grows to formidable proportions, is easily financed, and is put on a basis that is a credit alike to the owners and the users, and a great benefit to the territory that is served.”

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The industry got busy. “By 1914 lines had begun to emanate from cities all over the Middle West to electrify villages and hamlets in the surrounding countryside.” The “systematization movement” was under way, one that “would dominate, and then carry, the American economy for better than a decade.” Insull described the benefits of enhanced rural life in terms of providing a better living and working environment:

[The working man] will be able to establish himself under conditions where he can get healthful environment for his family. Instead of living in overheated, ill-ventilated, small tenements of the big city he will have the opportunity to establish himself practically amid the desirable conditions that those living in the country ordinarily enjoy.

Electrification’s “socioeconomic revolution” had reached its third market after the city and the suburbs. As with the other two, Insull was at the frontier.