Interconnection, Integration, and Holding Company: Three Institutional Approaches to Electric Power Network Coordination in the Early 20th Century

Abstract: Physical coordination has been a challenge in electric power networks since their invention in the late 19th century. Coordinating the generation and delivery of supply and demand in a system that requires real-time balance is essential, and both technological and institutional innovations emerged as approaches to grapple with network coordination. In this paper we employ institutional and organizational economics to examine three organizational approaches to coordination that emerged in the early 20th century: interconnection, integration, and holding companies. Interconnection of separately-owned distribution systems using high-voltage transmission lines provided reliability benefits when the systems faced uncorrelated demands, but posed organizational and incentive problems due to the asset specificity of the relevant capital assets (Williamson 1983). Integration (both horizontal and vertical) through acquisition and merger addressed some of these problems, and led to considerable industry consolidation through the 1920s. A third approach was holding companies that took ownership stakes in operating companies as a way of using financial structure to create larger networks. A holding company enabled one firm to gain operational control of multiple utilities (Hausman & Neufeld 2004). We analyze spatial/regional differences in the uses of these organizational approaches. Specifically, we exploit the exogeneity of hydroelectric power (due to geography) to test whether holding companies were more prevalent in regions where physical coordination was more challenging and costly. Hydroelectric power plants are spatially immobile (and thus exogenous) and their capital has asset specificity and is non-redeployable. We test the hypothesis that states with lower population density have a higher demand for interconnection, and thus experience earlier adoption of the holding company structure than other states, using data from the Census of Electrical Industries 1902-1937.