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Post World War II "Golden Years"
After the SEC had finished its work of divesting holding companies,
generally between 1938 and 1955, the utility industry enjoyed a period
often described as "the Golden Years." Regulatory intervention
from states and the federal government was minimal, and utility companies
generally satisfied their investors and customers. The happy period would
last until around 1970, when storm winds suggested that the energy world
was about to change and that old assumptions and business practices could
no longer remain unaltered.
Growth
The pent-up demand for electricity and electrical appliances after World
War II sent utility companies scurrying for capacity. Usage jumped 14%
between 1946 and 1947, but power firms could not get enough equipment to
meet demand as labor troubles at manufacturers and reconversion to a peace-time
economy stalled deliveries. But as the immediate post-war constraints alleviated
themselves, the growth rate slowed to about 8% per year nationally from
between 1947 and 1973. At this rate, utilities doubled the amount of electricity
sold every nine-to-ten years.
Technological advances
Increased scale
Happily for electric utilities, technological advances
in generating and transmission technologies allowed them to produce more
power at lower marginal costs. One form of technological advance came
from increasing the scale of steam turbine-generators--the technology
that used fossil fuels to covert raw energy into electricity. As Samuel
Insull realized early in the 20th century, the hearty steam turbines could
be expanded in size to deliver more power but at lower unit costs. Throughout
the decades, the major manufacturers, which included General Electric,
Westinghouse, and Allis Chalmers in the United States, built steam turbine-generators
of increasingly large capacities. Insull's
5 MW and 12 MW units were followed in the industry by units as large as
110 MW in 1928. The Depression of the 1930 stalled rapid growth of electricity
demand, but after World War II, manufacturers built bigger units again.
In 1953, the first 220 MW unit appeared, to be followed in 1960 by a 575-MW
unit. The 1,000 MW threshold was broken in 1965, when the Consolidated
Edison Company of New York installed its "Big Allis" unit. By
1972, the honors for the largest unit went to a 1,300 MW behemoth. Until
these latter units were installed, utility companies generally found that
the unit cost of power declined as the scale increased.
Better Thermal Efficiency
On another front, technological advance provided real benefits too.
When Thomas Edison burned coal to power his Pearl Street plant, only about
2.5% of the raw energy could be converted to electricity. But as electric
power production became a more prominent activity, manufacturers of boilers
and turbines found ways to improve that thermal efficiency rate. By heating
water to higher temperatures and pressures and by improving the metallurgy
of the turbines--so they could withstand the more oppressive conditions
of the steam--they could raise thermal efficiency dramatically, thus getting
more kilowatt-hours out of a ton of coal or barrel of oil. By 1920, the
best power plant obtained just under 20% thermal efficiency, while in the
1960s, some plants obtained about 40%. On average, power plants in the
1960s converted about one-third of the fuel energy into electricity.
Transmission
Voltages Grow
Transmission systems also witnessed stepwise improvement throughout the history
of electric power, and technological improvements in this area also helped
reduce costs and prices. As understood by the 1890s, alternating-current
power could be transformed to high voltages and sent over transmission
lines with little energy loss, compared to transmission at low voltages
with direct current. After demonstrating the success of the Niagara Falls
transmission line at 11,000 volts, manufacturers increased voltages to
60,000 volts in 1900, 150,000 volts in 1912, and 240,000 volts in 1930.
Higher voltages reduced energy losses--a major advantage--but they also
enabled more power to be transmitted through the same wire, in the same
way that more water can be forced through a pipe at high pressure than
at low pressure. Thus, high-voltage lines could carry more power and to
greater distances. The advances allowed utility companies to connect their
power systems together, which enabled them to back each other up during
emergencies (when one company's power plant unexpectedly failed, for example),
thus raising reliability of power supply. Interconnections also allowed
utility companies to sell excess power to neighboring utilities when the
economics benefited both customers. In such cases, the transactions also
benefited customers, who saw lower prices, and stockholders, who saw their
companies reduce their costs and earn extra income. Overall, advances
in high-voltage transmission and interconnections complemented technological
progress being made simultaneously in steam turbine-generating units.
Price declines
Overall, the technological advances in generating and transmitting electricity
allowed the utility industry to show productivity gains that dwarfed the
American economy overall. From 1899 to 1953, for example, the utility industry
demonstrated a productivity growth rate of 5.5% per year, which compared
to 1.7% annually for the entire private domestic economy. Utilities continued
to swamp the rest of the economy in productivity growth rates into the
late 1960s.
While impressive to economists, these productivity gains had a more
substantive effect on customers, who watched the price of electricity decline.
Adjusted to 1992 terms, a residential customer in 1892 paid more than 4
dollars for each kilowatt-hour, a price that explains why electricity was
viewed as a luxury item at the time. But by 1907, the price had dropped
by more than half, to $1.56 per kWh. As utilities pursued incremental technological
advances, prices fell to 55 cents in 1927 and 19 cents in 1947. Progress
continued in the post World-War II period, such that the price of electricity
dropped to 13 cents per kWh in 1913 and 9 cents in 1967.
Grow and Build Strategy
The combination of technological progress and cost
(and price) declines became codified in a business approach sometimes
known as the "grow-and-build" strategy. Following Insull's pioneering
example, utilities promoted the use of electricity usage so they would
have reason to build new and more productive power plants. The plants
produced power at lower marginal cost, which meant that expenses per unit
of electricity declined. Part of that lower cost would be passed on to
customers as lower rates. When prices fall, customers usually buy more
of the product, and the same occurred in the electric power realm. Lower
prices stimulated growth in usage, which meant utilities needed to build
new power plants to meet demand, but those plants could further exploit
technological advances and attain still lower costs.
The strategy helps explain why utility companies, especially in the
post-World-War II period, heavily promoted the use of electricity through
the use of "Live Better Electrically" and "All-Electric
Home" advertising campaigns. After all, growth in electricity usage
appeared to be universally beneficial, helping utility companies, their
customers, manufacturers of equipment, sellers of electrical appliances,
and stockholders. The approach even satisfied regulators, who sat back
with little to do as everyone seemed to profit from a well-operating electric
utility system.
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