Innovation, Interconnection, and Institutions: Evolving Electric Power Systems in the Early 20th Century

Lynne Kiesling (Northwestern University)
Karen Clay (Carnegie Mellon University)

Abstract: This paper examines the evolution of electric power systems from their earliest days in the 1880s through World War II and the barriers to achieving a large-scale integrated system. In the very earliest days of electricity, there were no gains to interconnection into large-scale integrated systems. Beginning some time around World War I, large-scale integrated systems would have offered lower cost and higher reliability. Coordination costs and the transactions costs created by the adoption of state public utility commissions acted as barriers to achieving this. World War I generated electricity demand far outstripping supply in some locations such as Buffalo and Pittsburgh. The problems associated with excess demand led the military to intervene. Military engineers worked with electricity companies to rationalize generation, interconnect transmission networks, and plan new investment so that war-related production could be maximized. Military intervention temporarily lowered the coordination costs and transaction costs associated with state public utility commissions and allowed regional interconnection in selected areas. Although some further interconnection did occur in the 1920s and 1930s, often through regional holding companies, state regulation and the financial excesses of the holding companies proved to be a barrier to large-scale regional integration. Transactions costs fell again in the lead up to World War II, when mounting war-related demand for electricity and a southern drought led to creation of a seventeen state power pool. The tension between regulation-induced transaction costs and coordination costs and the benefits of interconnection persists to this day.