The Galveston County Daily News

Across the country — and especially in Texas — people are questioning whether electricity deregulation has been such a good idea.

When they sold it to ratepayers five years ago, boosters claimed that competition would bring down power prices. Instead, prices shot up and allegations of market abuse and corporate plunder rolled in. Now, many experts are worried that instead of creating competition, the “deregulation” sold by Enron’s Kenneth Lay has been just the opposite: an unregulated monopoly, a sure way to generate big profits.

It’s not the first time that public outrage over electric utilities drove lawmakers to try to rein in the industry.

In fact, many of the regulations rolled back over the past decade in 17 states have their roots in an earlier scandal.

Many were imposed 70 years ago, after the Enron-like collapse of another electricity magnate, Samuel Insull.

Once a hero, by 1932 Insull came to be even more demonized than Enron’s Lay. Somewhat unfairly, Insull was considered the ultimate corporate predator — wielding a vast electricity monopoly to abuse powerless consumers and small investors.

He was so hated that when Parker Brothers released its 1936 version of the game Monopoly, the mustachioed Rich Uncle Pennybags was rumored to have been patterned after Insull.

The man’s real legacy is far more complex than the cartoon he became. And if it hadn’t been so completely forgotten by the 1990s, millions of electricity consumers likely wouldn’t be having the problems they are today.

A NATURAL MONOPOLY

Samuel Insull left England for New York in 1880 to work for one of the most famous men on the planet: Thomas Edison, who by that time had already invented the stock ticker, the mimeograph, the phonograph and the transmitter that made the telephone practical.

Starting as Edison’s personal secretary, Insull’s intelligence and drive soon made him indispensable to the great inventor.

Insull’s value to Edison lay not in his technological insights. Rather, he was a great businessman. He understood far better than the brilliant Edison how best to organize and finance a commercial enterprise.

Early on, Insull realized that electricity was special for a number of reasons.

In this age of television, the Internet, cell phones and air conditioners, try to imagine a time when electricity was considered a luxury. In 1892, when Insull struck out on his own in Chicago, many power suppliers viewed their product as just that.

They built small generators to run power to the homes and businesses of those who could afford it. To them, high prices were the path to high profits.

Insull considered electricity to be a natural monopoly, but for a different reason. He knew that larger generating plants with more customers would mean more power more cheaply for everybody.

He called it “massing production,” an expression that later would be shortened to “mass production” and used to describe the burgeoning auto industry.

He understood that cheap power would entice homeowners and businesses to try electric lights, fans, irons, stoves and other appliances. That would expand his customer base, allowing him to build even bigger generators that would produce power that was cheaper still.

When Insull took over the company that would become Commonwealth Edison, it was one of a slew of electric companies doing business in Chicago. But within just a few years, Insull was able to buy out or otherwise dispose of every other power company in the city.

As he did, he went on a construction binge, building generator after generator, each with a capacity that was unheard of up to that time.

A NATION TRANSFORMED

As he built the central-station power industry, Insull confronted another problem that was unique to electricity. It can’t economically be stored, so power has to be consumed at the instant it’s generated.

To balance out demand for power through the day, Insull bought up urban “traction” lines and interurban train systems.

The result — an electrified metropolis connected by electric trains — helped make the Chicago region the economic powerhouse that it is today.

And as Insull’s generating plants and power lines went up, prices came down, leading a national trend toward central-station power.

In 1914, household power still was relatively rare in the United States, with only 16 percent of homes having it. But by 1930, lights were burning and refrigerators humming in 80 percent of American dwellings.

Electricity was a luxury no longer, thanks in large part to Samuel Insull.

CHEAPEST POWER?

Insull revolutionized the electricity industry, and in doing so, the country.

He assisted in the birth of the megacorporation and he was hailed as an enlightened employer. In a time when such things were almost unheard of, he initiated a 40-hour workweek, pension plans, profit-sharing, medical benefits and even education benefits for his growing army of employees.

But as his empire of electricity monopolies grew, some important critics questioned whether the prices charged by the Insull companies were as low as they could be.

Fearing extortion by corrupt city councils, Insull lobbied for a system of state regulation of electricity monopolies. Between 1907 and 1916, a majority of the states would go to such a system.

But there were those who argued that power companies could bamboozle regulators into allowing hefty, sure profits. Better, they said, to allow public ownership of the monopoly and remove the incentive to extract any profit from ratepayers.

Certainly today, publicly owned utilities in Kerrville, New Braunfels and Austin charge far less for electricity than do private companies serving the part of Texas where there is wholesale and retail “competition.”

That also was the case in the Chicago region of the 1920s, according to Paul Douglas, an economist at the University of Chicago who would go on to be a U.S. senator. In some cases, Douglas reported, private utilities in the region were charging more than eight times as much as public ones.

Douglas said Insull had made power generation more efficient. But he accused the magnate of putting more of the savings in his pockets than he passed along to his customers.

Douglas accused Insull of hiding his true profits from regulators in a thicket of financial statements that were all but impossible to understand. Untangling that thicket became a primary goal of later reforms.

A BIG FIGHT

By the late 1920s, Insull had an even more powerful enemy. Franklin D. Roosevelt, the governor of New York, commissioned a study showing that publicly owned hydroelectric power in Ontario was far cheaper than private electricity generated in the United States by what Roosevelt called the “power trust.”

“We have permitted private corporations to monopolize the electrical industry and sell electricity at the highest rates they could obtain,” he said in 1930.

Insull and the industry group he started, the National Electric Light Association, fought back.

They did so partly on patriotic grounds, calling public ownership of power companies “the Bolshevik idea.”

To reinforce the point, Insull encouraged widespread ownership of stocks and bonds in his companies.

Starting with employee stock clubs, Insull soon had those in even the lowliest jobs hawking Insull stocks to their families, friends and neighbors.

It created an army of small owners in his companies — and a lot of votes for politicians who said the government should stay out of the electricity business.

By 1926, that army was large indeed. Half a million people held bonds in Insull companies. Even more, 600,000, owned stock.

Such widespread ownership at first provided Insull with important political support – and with capital to keep expanding his electricity empire. But it would later aid in his downfall.

A THREAT

Edgar Lee Masters, the great author, observed that Insull and his fellow Chicagoan, Al Capone, were alike in a crucial respect: Both men demanded absolute control of every endeavor they undertook.

Each had good reasons.

For Capone, control could mean the difference between life and death. For Insull, it meant power, literally and figuratively.

By 1926, he controlled $3 billion worth of utilities, which produced an eighth of the electricity and natural gas consumed in the United States. And when it came to politics, he was very much a kingmaker. That same year, he gave so much to one candidate that the U.S. Senate refused to seat him even though he won the election.

But, powerful as Insull was, he wasn’t invulnerable.

In 1928, Insull learned that Cleveland financier Cyrus Eaton had been quietly snapping up voting stock in his companies. For all Insull knew, Eaton was an agent of the House of Morgan: the New York-based owner of General Electric and the same force that drove Insull to Chicago in the first place.

In an increasingly desperate bid to keep control, Insull turned to the holding company: an entity whose sole purpose was to own other companies. He set them up, offered stock in them on sweetheart terms to himself and his family and borrowed money to buy it.

The more Eaton pressed, the more Insull had to borrow.

At the same time, stock prices were rising wildly, with many investors buying “on margin,” or with borrowed money.

The more Insull borrowed to stave off Eaton, the more he needed the market to keep booming to cover his debt.

The CRASH

But the market didn’t keep booming.

Starting in September 1929, it went on a long, steep slide that didn’t really end until the summer of 1932.

As the market crashed, small investors were wiped out when they were forced to repay the money they borrowed to buy their now-worthless stocks. For Insull, it was worse. He borrowed money to try to buy stocks in his companies in a desperate bid to stop their fall.

But prices plummeted anyway.

By 1932, Insull was wiped out. On June 6, it took him nearly three hours to resign from all the companies he directed or on whose boards he sat. Roosevelt had long accused Insull of gouging ratepayers.

By the time Insull threw in the towel, Roosevelt was running for president. The fact that more than a million investors were hurt in the debacle made it a powerful factor in Roosevelt’s victory.

And it didn’t help Insull that his brother, Martin, was caught using company funds to cover his debts as his own stock holdings collapsed.

Insull and his lieutenants were indicted on charges of fraud and other crimes. But eventually they were acquitted, largely because the crash wiped them out just as it had their investors.

LEGACY

Historians and economists disagree whether Insull’s disgrace was entirely deserved. To some, he was a great visionary ensnared in an era when President Coolidge proclaimed “The business of America is business.”

To others, he was a predator who used his power and sophistication to amass great wealth at the expense of the common good. His greed, they said, proved to be his – and his investors – downfall.

There is truth in both arguments.

Certainly, Insull’s collapse left an undeniable legacy.

State regulators passed strict accounting rules to better monitor the profits monopoly utilities were extracting from their customers. The result was the “cost plus” rate system that reigned everywhere until the advent of electricity “deregulation” in the past decade.

Within three years, Congress also passed the Public Utilities Holding Company Act, which barred a holding company from owning electric utilities that weren’t interconnected. In a boost to public power, Congress created the Tennessee Valley Authority, which provides power and flood control through a vast swath of the Old South.

It also promoted public power in the countryside by creating the Rural Electrification Administration. It provides low-interest loans for rural cooperatives, which thrive to this day.

Perhaps most significantly, Congress passed the Securities Exchange Act to regulate financial markets and those who participate in them.

Six decades later, during another go-go period for American business, many of those reforms would be rolled back or simply ignored. A new wave of scandal would ensue.