It is a debate that rages to this day: whether rate-based regulation (government) or electric competition (marketplace) is a more effective model for the utilities industry and world economies....
Mending Our Broken Capacity Markets
The ability to provide reliable capacity is becoming both riskier and more costly to society and investors alike.
The year was 1902 and Samuel Insull, nominally the father of the electric utility industry, faced a dilemma. The largest generators at his flagship utility, then called Chicago Edison, used 4,000-kW engines. His engineers, led by Fred Sargent (who later founded Sargent & Lundy), thoughtfully explained to Insull that if the reciprocating engines were made any larger, the stress caused by the push-pull action of the recips quickly would destroy the machinery.
Insull suggested they build a new plant with huge steam-electric rotating turbines. Sargent claimed that using a turbine for large steam applications was impossible. Undeterred, Insull went to Charles Coffin, president of General Electric (GE), asking him to build and guarantee a 5,000-kW steam turbine. After several refusals, GE finally agreed to attempt the unthinkable—build the world’s largest steam generating plant without conventional reciprocating technology, but with untried turbine technology. GE made Insull’s utility accept a huge part of the cost and performance risk of the turbine.
Seventeen months later, in September of 1903, the Fisk Street Station, employing this huge new piece of experimental technology, was ready for dedication. At the initial firing ceremony, the engines were started and began to shake violently. Visiting officials were led off to a safe distance and the engines were turned off by Fred Sargent. The trouble was quickly identified, but as Sargent prepared to restart the engines, he noticed that Sam Insull was still on the turbine deck by his side.
“This is a dangerous business. You need to leave,” pleaded Sargent.
“Then why don’t you leave?” asked Insull.
“Look, Mr. Insull, it’s my job to stay here. I have to. But you don’t. Don’t you understand this damned thing might blow up?”
Insull turned toward the new turbine. “Well, if it blows up, I blow up with it anyway. I’ll stay.”
At least on that day, Sam Insull did not blow up. This historical vignette takes place in an era before utilities were assigned the responsibility to provide reliable service to designated geographies by regulating agencies and, in return, were granted monopoly rights to provide central-station service in their assigned jurisdictional territories. Insull’s decision engendered huge risk to himself and his investors—not simply technological risk, but much more substantively, financial risk. The Chicago Edison Co. sold to customers who readily could be picked off by any of a handful of competing central station and wires owners in upstate Illinois.
The struggling utility also was in head-to-head competition with GE and other manufacturers of power stations who were targeting Insull’s core industrial markets for sales of on-site alternating and direct-current machinery. In this environment of commercial uncertainty, Insull’s financing choices were limited and expensive, resulting in a very high cost of capital and the demand by investors for a very accelerated repayment of the initial, high cost of project construction.
Insull’s gamble paid off in this instance, but