Monday, December 05, 2016

How Public Utilities Became Public Utilities

The idea of a "public utility" is firmly entrenched in the minds of most people who live in industrialized countries today.  Things like the water supply, electric power, and more recent developments such as Internet service are all considered well-nigh essential to modern life.  Most people would probably agree that because of this, governments have the right to regulate public utilities in a way that would be regarded as heavy-handed or illegal if the firm involved was making dental floss, for example, instead of providing a necessity like clean water or electric power.  But I, for one, never stopped to wonder where the phrase came from until I read a historical article by Adam Plaiss called "From Natural Monopoly to Public Utility."

Plaiss traces the origin of the phrase all the way back to philosopher John Stuart Mill, who used it in a different sense, as a modifier rather than a noun.  Mill referred to canals and bazaars as works useful to the general public—that is, works of "public utility."  But the concept that a system of waterworks or communications could be called a public utility dates back only to the late 1800s, when the related concept of a natural monopoly began to influence thinkers during what came to be called the Progressive Era.

Progressives enthused about applying relatively new social sciences such as economics to pressing public problems such as the exploitation of the working classes by private monopolistic companies.  One of the first professionally-trained economists in the U. S. was Richard T. Ely, who obtained his doctorate from Germany and came back to join the effort to apply scientific approaches to economics as a way of "bring[ing] about a better world."  And during a period in the U. S. when utility companies selling gas, water, electricity, and telephone service were rapidly expanding, Ely examined the question of a natural monopoly.  Was there such a thing, and if so, what were its characteristics?

Around 1888, Ely came up with a set of criteria that made an entity a natural monopoly.  The thing it supplied had to be a necessity, like water.  The area it served had to be geographically distinct.  And there could be no wasteful duplication of service within the area.  A classic example of what Ely called a natural monopoly was a water-supply company.  The heavy expense of laying pipes and distribution networks made it virtually impossible for there to be meaningful competition between two rival water-supply companies for the same customers.  So if a service met Ely's criteria for being a natural monopoly, Ely believed it was the public's right to regulate that service closely. 

Perceptive and thoughtful as Ely was, Plaiss points out that he had a blind spot when it came to the root cause of a natural monopoly.  Ely attributed the cause to the nature of the hardware infrastructure itself.  But the idea that only private capital could afford to build utility services was so universally accepted at the time, that Ely failed to see the contribution of the economic background, so to speak, of late 1800s America, to the existence of natural monopolies.  It is only a slight exaggeration to say that Ely believed technology caused natural monopolies, not people. 

And because Ely saw the creation of natural monopolies as "technologically determined," as historians put it, he felt it was necessary for all owners of such monopolies to be subject to government regulation.  Otherwise, horrors such as Plaiss cites in his paper might come about, and did in fact happen in the 1880s and 1890s.  For example, privately-owned water companies in cities such as Houston and Seattle refused to extend their networks to newer parts of the cities, hampering fire departments which had no water hydrants to connect to in case of fire.  And a typhoid-fever outbreak in Superior, Wisconsin was caused by impure water provided by a private water company.  Thus, Ely believed that effective governmental control, if not outright ownership, of natural monopolies was necessary to prevent the exploitation of the masses that would result from unregulated private ownership.

After Ely published his thoughts along these lines, a Progressive journalist named Henry Call first used the phrase "public utility" as a noun in 1895, meaning by it any organization that enjoys what Ely would call a natural monopoly in the delivering of what was considered a modern necessity.  Call widened this category to include "banks, railroads, telegraphs," and municipal services such as water and gas.  In the coming years, as cities and states established regulatory commissions and agencies for such utilities, the public got used to the idea that certain types of business could be categorized as a public utility, and therefore subjected to regulation.  Many states passed regulatory laws for public utilities in the twenty years or so after 1900, which saw the height of the Progressive Era.  And although the free-market trends of the 1920s put a damper on further attempts at regulation, the distress of the Great Depression renewed public enthusiasm for government controls on all sorts of businesses that looked like public utilities.  The establishment of the Federal Communications Commission in 1933 was square in the tradition of regulating public utilities such as the air waves, for example. 

Since the Progressive Era, the scales of regulation have swung back and forth.  As late as the 1970s, airlines, the telephone system, and electric utilities in the U. S. were all closely-regulated and rather dull businesses, guaranteed an annual profit by their regulatory agencies, but not encouraged to do anything rash or speculative.  By and large, this situation produced stability and profitability, but discouraged technological innovation.  The spate of deregulation that began in the 1980s and continues largely to this day contributed to an explosion of new communications technologies—cable TV, mobile phones, and the Internet, to mention only a few—but has arguably had its downsides, as many smaller cities lost air service altogether and the deregulated electric-power market was gamed by near-criminal enterprises such as Enron. 

With at least the hope of some fresh winds blowing through Washington these days, we may see a swing of the regulatory pendulum back toward tighter controls in some services, or looser ones, depending on whether the interests of the supposedly downtrodden public or of the wealthy owners of public utilities win out. 

But whatever happens, we will do well to remember that the idea of a public utility is only about 130 years old, and its definition has twisted and turned with the political winds of the times in which it was used.

Sources: "From natural monopoly to public utility: technological determinism and the political economy of infrastructure in progressive-era America," by Adam Plaiss, appeared in the Society for the History of Technology journal Technology and Culture (Oct. 2016, vol. 57, no. 4, pp. 806-830).

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