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.
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.
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 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.
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.