Better Know Your Electricity History Series, Part Four: Technology and Utilities

By Vernon Trollinger, May 15, 2015, Careers/Jobs

Better Know Your Electricity History Series, Part Four: Technology and Utilities

Samuel Insull,
inventor of the powerpool grid and entrepreneur.
Image courtesy of

When Thomas Edison first lit streets with an incandescent light bulb in 1879, it took 50 years for electrical service to enter only a fraction of American homes. By 1920, only 35% of American homes had electricity. Yet, in the decade that followed, innovation and entrepreneurial genius created a system that expanded service across the country —only to be short-circuited by hubris, greed, and a lack of rules.

Samuel Insull and the Birth of the Electrical Grid

With the War of the Currents over, Alternating Current (AC) emerged in the 1890’s as the industry standard for transmitting and delivering electricity. Large cities frequently had six or seven investor-owned electric companies competing with one another but most areas only had one. While a few municipalities built their own local gas and electric power plants, most local governments signed service contracts with the one local electric company. These electric companies stuck to servicing local areas because the small electrical loads in the late 1890’s and early 1900’s could be managed by small generator systems. In order to expand, flourish, and evolve their business into an industry capable of serving an entire region and ultimately the nation, local electricity suppliers had to find a means to lower their generation and transmission costs.

One innovator in expanding the electrical industry was Samuel Insull. Born in London, Insull had entered the electricity industry as Thomas Edison’s secretary. He eventually settled in Chicago in 1892, after helping form General Electric. In the course of the current wars, Insull found that using powerful steam turbines to generate huge amounts of electricity drove down costs through economies of scale. By out-competing other local electric suppliers — and eventually buying them out — he expanded his business.

Insull established the use of central power stations interconnected with other generator substations forming a “power pool”. This system supplied Chicago, as well as north and central Illinois, while also improving reliability and further reduce costs. High-voltage transmission lines enabled him to spread electric service out into the suburbs and then into rural markets beyond.

In 1910, Insull set out to electrify northern Illinois’ rural Lake County. Colleagues held that bringing electricity to scattered farms and rural towns cost too much to ever become profitable. But Insull argued that production economies would eventually offset the cost of building of powerplants and power lines. By the time it was all running in 1913, Insull showed that in spite of the initial high infrastructure costs, lower fuel costs, higher usage rates, and increasing number of customers, pay back on the investment kept rates low.

To Insull, expanding his business just became a matter of pushing out into different towns, stringing transmission lines and selling kilowatt hours. Others entrepreneurs in other states and cities quickly followed his example.

Irregular Regulation

The first decade of the 1900’s saw state governments attempt regulation by mandating that local municipalities control electrical rates. Local governments set up service agreements with their local investor-owned utility companies by turning them into public utilities. While monopoly status guaranteed cities and towns electrical standardization (to a degree) and reliability, the electric utilities benefited from the long term financial commitments.  As electric utilities expanded and consolidated their operations into other municipalities through mergers or acquisitions, local governments lost their control. State-run public utilities commissions formed, however, they had no interstate jurisdiction over such things  as generation costs or transmission rates, or —most importantly— the holding companies in other states that owned the local utilities. And as for Federal oversight, there was nothing at all.

Public Utility Holding Companies

During this period of consolidation, utility owners formed holding companies in order to capitalize their operating utility companies to invest and expand operations. These holding companies bought the stocks and bonds of many operating companies (providing expansion funding to the operating companies). The holding companies then issued their own stocks and bonds to capitalize their business. One example was the was the Electric Bond and Share Company, which was created by the General Electric company in 1905, to sell the securities it acquired from selling equipment to utilities. When limited in size, the holding company entity was an effective method to fund business expansion.

But during the 1920s, public utility holding companies swiftly evolved into huge pyramid structures. At the bottom of the pyramid would be the operating utilities which were actually generating and distributing electricity. Five or six of these might be owned by a holding company. Then, five of six of these holding companies might be owned by another holding company and so on.

A typical example was Pennsylvania Power & Light Company (PP&L). In 1900, 64 electric utility companies served 88 communities in central and eastern Pennsylvania. By 1920, these companies had merged into just eight public utility companies. At that point, they formed Pennsylvania Power & Light Company (PP&L) holding company. PP&L’s securities were eventually controlled by another holding company called the Lehigh Power Securities Corporation. Lehigh Power Securities also came to hold control over Lancaster County Railway & Light Co., Lehigh Valley Transit Co., Mauch Chunk Transit Co., and Wrightsville Water Supply Co. In 1926, Lehigh Power Securities came under the control of National Power & Light Company—which was controlled by Electric Bond and Share Co. owned by General Electric.

The complexity of the number of holding company levels above the utility operating companies and how money moved was so mind boggling that even their owners couldn’t understand it. Small profits by operating companies at the bottom produced exponential profits at the top. Numerous banks were also deeply invested, many up to their shareholders’ necks. There was no transparency, no disclosure, and in some cases, holding companies owned nothing more than paper securities and debt. Pyramidal piles of paper created financial empires that changed the US electricity industry over night:

  • In 1924, 74.6 percent of all electricity generated in the United States was produced by operating companies onwed by holding companies.
  • In 1926 alone, there were more than a thousand utility mergers.
  • By 1930, 90 percent of all operating companies were controlled by 19 holding companies.
  • By 1932, only eight holding companies controlled almost 75% of investor-owned utility business.

Three of these companies, Insull’s utility empire, J.P. Morgan’s United Corporation and the Electric Bond and Share Company, were responsible for 45% of the electricity generated in the United States. And because individuals served on the boards of more than one  holding companies, the personal financial interests of only a few individuals affected the lives of 42 million people.

Better Know Your Electricity History Series, Part Four: Technology and Utilities

Detail New York Times front page,
Oct. 29, 1929 —Black Tuesday
courtesy of

They All Fall Down

Just as small increased profits from operating utilities created wealth at the top tier of a holding company, small decreases could spell ruin.

Samuel Insull’s Middle West Utility Company had made he and his family stinking rich. With only a $27 million investment, he controlled company assets of at least $500 million. At its peak in 1926, Insull’s empire had combined assets totaling approximately $3 billion. In 1929, Middle West Utility Company had operating subsidiaries in 30 states, supplied 5,300 communities, and included Commonwealth Edison in Chicago, several railroads, and radio stations. In 1929, his newly formed Insull Utility Investments company (IUI) sold its first shares at $27 in January. The stock value climbed, as did others, because investors believed the stock market would continue to rise indefinitely. IUI’s share price peaked at $147/share by October —just in time for the stock market crash.

Insull’s empire didn’t sink immediately. Even after the crash from 1930 to 1931, Insull at one point had 13 salaries paid to him through his Middle West Utility Company. All the same, the weakening economy closed businesses and nipped at profits. Share values hemorrhaged red ink, worsening all the way up the pyramid. For thirty months, debt piled up to nearly $100 million as Insull combed his social and political connections to gather investors and capital. Doomed, amid charges of insider trading and corruption, Insull’s empire declared bankruptcy. At the end in 1932, IUI’s shares sank to 20 cents and over 600,000 shareholders had their “sure-thing” investments wiped out. The bankruptcy proceedings lasted 14 years, ending in 1946.

Insull’s empire wasn’t the only case. Throughout the country from 1929 to 1935, 53 public utility holding companies valued at $1.7 billion sank into bankruptcy.

Meanwhile, because of their status as protected, regulated monopolies, the electric utility companies remained somewhat shielded from financial ruin. Turbines turned and the generator utilities continued delivering electricity to their customers. As industries closed, many utility companies shifted focus to expanding residential service.

But in order to build infrastructure and expand electrical service further, there had to be way to raise money without bankrupting the whole country.

It was time for Federal intervention with a new set of rules.

Stay Tuned for Better Know Your Electricity History Series, Part Five: Rules and Regulations.

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A native of Wyomissing Hills, PA, Vernon Trollinger studied writing and film at the University of Iowa, later earning his MA in writing there as well. Following a decade of digging in CRM archaeology, he now writes about green energy technology, home energy efficiency, DIY projects, the natural gas industry, and the electrical grid.

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Comments (1)


  1. Pat Lavallee says:

    It is interesting to note that Mr. Insull died penniless living on the graces of close friend Nicolas Telsa.
    The Roosevelt administration’s break up of the electric railway industry on behalf of GM, contributed greatly to the down fall.