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Using the career of Samuel Insull as a template, this chapter describes the origins and development of the electric power business in the United States from the 1890’s to the early 1930’s. During that span, Insull (once Thomas Edison’s right-hand man) created the basic features of the utility industry that continue to this day. To defeat venal municipal politicians, he advocated state regulation of electric and gas utilities, regarded as natural monopolies. To serve an ever-widening customer base, he adopted Edison’s central station concept, wedded it to long, alternating current transmission lines, and became a shrewd salesman for an essential service. He was an unceasing proponent of low-cost power, driven by mass production based on efficient gas turbines. In a regulatory vacuum he built a holding company empire that eventually commanded ten percent of the entire U.S. power market but collapsed in the early 1930’s under the weight of political opposition and too much debt. An anathema to New Deal enforcers, Insull was brought to trial in federal court for fraudulent sale of securities but, remarkably, was acquitted. New Deal legislation dismantled the holding company structures he and others had created and closed the regulatory gap that permitted them to flourish. To many he remains a pariah. He was nonetheless seen for decades as a business genius and is, unquestionably, a principal architect of the private electric utility industry in the United States.

Electric utilities (as other municipal utilities) were originally subject to the policies of the city government where they were located because of their need to obtain a franchise to use the public rights-of-way for their distribution systems. The transaction-specific nature of utility capital equipment made them subject to extortion by corrupt city officials, and many American cities had corruption problems stemming from utility franchises. Progressives, such as those in the National Civic Federation saw two paths for reform: government ownership or regulation by impartial state commissions. The chapter discusses the history of state regulatory commissions. Legal requirements for state control of prices had been earlier defined by the Supreme Court in economically flawed decisions involving railroads, notably Smyth v Ames. The methodology adopted to regulate utility rates ostensibly sought to prevent utilities from earning monopoly profits by setting total revenue equal to total cost. The new system was an improvement over corrupt municipal franchising, but it created undesirable incentives that brought significant new flaws to the industry’s structure. Despite its flaws, the new structure proved workable, enabling the industry to grow and providing the nation with enormous benefits.

Public utility holding companies existed early in the industry’s history. By 1929, they controlled over 80 percent of the nation’s electricity generation, and that control was becoming concentrated in fewer companies. Concern over their economic and political power, their enormous public relations (or propaganda) operations, and the opaqueness of their organization raised political concerns over their role.They facilitated the early industry’s access to financial markets and they brought utilities managerial and technical expertise. They were able to overcome the barriers created by state regulation to the creation of large fully-integrated networks. Four companies with very different origins are discussed: Electric Bond & Share, Stone & Webster, United Corporation, and the group of companies associated with Samuel Insull. Holding Companies were enormously profitable to investors, providing returns among the highest of any industry during the 1920s. Concern over their political and economic power and uncertainty over the extent to which the entire industry was becoming monopolized resulted in multiple federal investigation culminating in 1928-1935 with an FTC investigation, the largest ever undertaken of an American industry. Some fell into serious financial difficulties during the Great Depression, and the collapse of Samuel Insull’s system was the nation’s largest business failure.