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Selling Power: Economics, Policy, and Electric Utilities before 1940

Author(s):Neufeld, John L.
Reviewer(s):Kiesling, Lynne

Published by EH.Net (July 2017)

John L. Neufeld, Selling Power: Economics, Policy, and Electric Utilities before 1940. Chicago: University of Chicago Press, 2016.  xiii + 328 pp. $60 (cloth), ISBN: 978-0-226-39963-8.

Reviewed for EH.Net by Lynne Kiesling, Department of Economics, Purdue University.

Electricity is the fundamental industry enabling modern life. That trite observation is a cliché precisely because of the nugget of truth at its core: few other industries have influenced the economic, social, cultural, and political developments of the past century as electricity has. John Neufeld’s recent book is an essential piece of historical scholarship for readers interested in any of those areas.

Selling Power focuses on the formative years of the electric power industry, from the 1880s through 1940, and tells a well-woven chronological story of the interplay of engineering, economics, politics, and accounting/finance in the evolution of the industry in this early period. The historical narrative and the depth and rigor of the analysis of primary sources are the real strengths of the work — Neufeld provides a springboard for other researchers by doing clear and careful history.

An overarching theme throughout the work is the tension between public and private ownership, and how choice of ownership was contested during this period. Neufeld tells the story of this process clearly and carefully, but his analysis reflects a strong public interest theory framing that limits what he can explain. Public interest theory, A. C. Pigou’s theory that regulation is supplied in response to demand for the correction of inefficiencies or inequities in markets, is the normative underpinning of welfare economics. It treats political actors, such as legislators and regulators, as neutral agents implementing regulation in the public interest without having their own objective functions separate from the public interest. Public interest theory also undergirds the legal precedents establishing utility regulation, such as Munn v. Illinois.

What public interest theory cannot explain in the history of electric utilities and their regulation is the political economy dynamic in which, for example, electric companies tailored their behavior and decisions to try to shape regulation, or to cultivate regulatory institutions in ways that raised their rivals’ costs. Different interest groups also had incentives to influence public policy to achieve their desired outcomes, whether public ownership or private ownership or more specific aspects of public policy, and public interest theory cannot speak to that political economy. By treating political actors as neutral implementers of the public interest, public interest theory is not equipped to help us understand the political economy of regulation that Neufeld wants to understand, and that he describes so clearly in his historical narrative.

To complete that analysis Neufeld must couple public interest theory with public choice theory. This broader political economy theoretical framework could encompass the simultaneous Progressive/public interest forces and private interests of utilities as both economic actors and political actors, as well as the interests of legislators and bureaucrats implementing public policy. For example, the analysis of the Tennessee Valley Authority (TVA) on pp. 186-188 and the analysis of Rural Electrification Administration on p. 239 do not ask deep enough questions about the political economy of these institutions and the incentives other than the public interest facing the involved parties. Neufeld does recognize throughout the work the imperfect incentives and performance of regulators, but stops short of a fuller, consistent analysis of the political economy of the evolving utilities and public policy. He also does not incorporate or exploit the existing public choice analyses of this period from Stigler and Friedland (1962) and Jarrell (1978); although they are dated they do contain valuable information and a useful framework for analyzing the political economy of this period.

Neufeld begins the book with an overview of the economics of electric utilities, emphasizing the extent to which electricity is a technological system. He states that the book’s focus is on “the structure of the industry’s economic institutions and the ways in which economics and public policy affected that structure” (p. 2). The utility business model and regulatory institutions were, and remain to this day, endogenous. His discussion of peak demand, capital costs, joint costs, economies of scale, and transaction-specific investments provides a good foundation for anyone interested in understanding the economic structure of utilities, public or private. He covers joint costs, but could have elaborated more on the importance of economies of scope (for example, in the discussion of the move from providing electric light to providing electric light and power during the day on pp. 36-37).

The economics primer Neufeld provides is excellent but incomplete, because while he lays out the endogeneity of utility business models and public policy, he does not incorporate public choice analysis into his economics. How he defines “institutions” is also unclear (pp. 3-4), and while he does refer to Williamson’s transaction cost economics work in discussing transaction-specific investments (fn. 4), his economics primer does not go into enough depth in transaction cost economics to enable him to draw on it in the chapters that follow (e.g., in the discussion of the Stone and Webster management contracts on p. 102).

Neufeld’s historical narrative starts with a brief technological history of electricity (Chapter 1). Writing such a history in eight pages is no mean feat, because electricity dates back to antiquity and the scientific working out of its properties from the seventeenth century onward gets quite technical pretty quickly. He moves quickly into electric lighting, and then into the development of businesses based on this first commercial application of electricity. Neufeld deftly and briefly discusses Edison’s pivotal role as inventor and entrepreneur, recognizing the extensive literature elsewhere on Edison, Tesla, the war of alternating vs. direct current, and so on. His topic is not “great man history,” but rather the interaction of engineering, economics, accounting and finance, and politics in the development of the primary organizations in the industry: utilities (private and public) and regulatory agencies.

The early utilities were entrepreneurial, developing electric light companies in dense urban areas and then expanding as generation and transmission-distribution technologies evolved and amplified the economies of scale and scope that were the hallmark of the industry. The institutional framework began as city franchises, frequently granted to multiple utilities with overlapping jurisdictions to enable competition, but also often resulting from corruption and cronyism. Progressive Era reformers believed that a more systematic approach to utility regulation, with state regulatory agencies replacing city franchises and spatially contiguous monopolies with legal entry barriers replacing competing utilities, would serve the public interest by exploiting economies of scale and scope to provide a uniform, homogeneous product (electric lighting) at least cost.

This regulatory approach, pioneered in Wisconsin and New York in 1907 and adopted in most states by the early 1920s, created an environment of financial stability in which regulated utilities could invest. Neufeld’s analysis shines throughout the book in his discussion of the accounting and financial aspects of utility operation and regulation, first in the stand-alone investor-owned utilities and then in the consolidation of utilities into the pyramid holding company structure that was one of the organizational and financial innovations of the late nineteenth and early twentieth centuries. Financing the construction and early operation of such massive capital-intensive technological systems was an enormous challenge (p. 22), and the combination of state regulation and holding company innovation brought investment to the industry by providing higher and more stable financial returns for investors.

Public utility holding companies generated capital for utilities and promised high rates of return to investors, but the novelty of the organizational form and the lack of standardized accounting practices meant that in reality, investors may not have realized or been informed about the risks associated with the investments they were making. Neufeld also digs deeply into a set of Federal Trade Commission reports on holding companies (1927-1938), motivated initially by concerns about how utilities could use them to exert market power in restraint of trade by consolidating ownership of utilities into a holding company structure (although I remain skeptical about this assertion, given that consolidating regulated monopolies is leveraging government regulation to aggregate monopolies into larger monopolies, so the restraint of trade arises from regulation). His careful analysis reveals how holding company consolidation became such a politically-charged national issue, resulting in legislative action under the New Deal abolishing public utility holding companies.

One of the original and valuable components of Neufeld’s analysis is his nuanced treatment of state regulation and private holding companies with respect to the development of large integrated systems. Beginning in the Introduction he describes the physical and economic benefits of large integrated systems — higher capacity utilization and higher reliability combine to provide the most “bang for the buck” from the capital investments — as well as the challenges of coordinating across independent distribution systems and utilities to achieve integrated systems. Neufeld’s analysis makes clear the tradeoffs related to integrated systems involved in state regulation and in abolishing holding companies, with both regulation and holding companies having both benefits and costs. State regulation enforced low retail rates and created a stable investment environment, but also undermined incentives to interconnect distribution systems and to re-architect them into integrated systems in the 1920s (despite attempts such as Giant Power and Superpower) (pp. 70-72). Holding companies enabled some semblance of large integrated systems to form when holding companies owned contiguous regulated utilities, but they had other financial motives that led to riskier and less transparent decisions that drew the ire of the Federal Trade Commission and New Deal policy makers.

The other substantive developments of the early twentieth century were investments in hydroelectric power and the federal government’s role in it, and the controversies surrounding rural electrification. In both instances the tension between public and private ownership and the endogeneity of public policy and utility business models are the dominant themes of Neufeld’s analysis.

Selling Power is a thoughtful and well-written history with primarily a technological and accounting/finance focus for analyzing utility business models and public policy. It leaves unanswered questions and opportunities to analyze this history by applying other theoretical lenses to the political economy of utility business models and public policy. Its detailed and rigorous treatment of primary sources will make it a valuable resource for scholars who want to incorporate electricity into their work on this period, for economic historians who want to grapple with some of these same questions applying different theoretical frameworks, and for scholars and policy makers analyzing the twenty-first-century challenges of technological dynamism and political economy who want to understand the historical foundations of this industry.


Jarrell, Gregg. 1978. “The Demand for State Regulation of the Electric Utility Industry,” Journal of Law and Economics 21(2): 269-295.

Stigler, George, and Claire Friedland. “What Can Regulators Regulate? The Case of Electricity.” Journal of Law and Economics 5: 1-16.

Lynne Kiesling is a Visiting Associate Professor of Economics at Purdue University and the Associate Director of the Purdue University Research Center in Economics. She is the author of Deregulation, Innovation, and Market Liberalization: Electricity Regulation in a Continually Evolving Environment (Routledge, 2008) and “Implications of Smart Grid Innovation for Organizational Models in Electricity Distribution” (in the Smart Grid Handbook, Wiley, 2016), among other works in political economy and regulatory policy.

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Subject(s):Transport and Distribution, Energy, and Other Services
Geographic Area(s):North America
Time Period(s):19th Century
20th Century: Pre WWII