Everyday we turn on the light switch and expect the lights to turn on and part of the reason is the Grid of electricity that has been developed. It has increased our expectations and most of us would have no clue what to do if the grid did not operate. However, things are not as perfect as our expectations believe they are. In a book called The Grid – The fraying wires between Americans and our energy future by Gretchen Bakke, published by Bloomsbury Publishing, NY, 2016, the author examines the history of the Grid and is it the best solution for the future?

There are actually 3 distinct grids, one for the west, one for the east and Texas. More than 70% of the grid’s transmission lines and transformers are 25 years old and the average power plant is 34 years old. The design of the system was to produce large quantities of electricity in a big, centralized power plants. Both wind and solar power, which are useful to have, change the system because solar is decentralized power, and wind power is harnessed in relatively remote areas where there are few people. Once the design of the system was competed and operational, the companies which supply the centralized power plants – the oil, gas, or coal, interests, the railway companies which transport coal, the mining and oil and gas companies all have vested interests in keeping the system as it is.

Electricity is a force, it cannot be boxed or stored or shipped, it is always used the same instant it is made and the speed it happens is milliseconds.

From the start of the grid, it was designed to make money (which is one of the reasons to buy utility stocks).

In the early days of electrification there were many micro grids, and it was made and marketed to those that could afford it. The idea of electricity to all consumers was hinged on how to grow the system – encourage consumers to use more power by selling they stuff that needed to be plugged in. For example GE selling the refrigerator and then the electricity to run the electricity.

In the early years of electricity, in 1902 there were 815 city-owned and -governed municipal power companies in the US and it was growing by a hundred a year until 1907 which attributed to 30% of the power supply. The other 70% was made by private companies – most traction companies to run their streetcars, trains, industrial manufactories and commercial buildings.

Within 20 years, the 8 largest holding companies in the US controlled 75% of the electricity market. Much of this change is linked to Samuel Insull who spent his first 20 years working as Thomas Edison’s personal secretary.

Understanding electricity cannot be stockpiled, it cannot be stored, it is difficult to count and accurately bill. It requires a highly trained workforce to manage and to serve people the company needs to bear the cost of building and maintaining its infrastructure.

Unlike other monopolies, the secret to making a fortune off electricity was to lots of different kinds of customers in order to provide sufficient demand to run a large, centralized station 24/7.

Mr. Insull moved to run the Chicago Edison. The competition was 18 other companies central station electricity providers in Chicago’s downtown Loop along with 500 private plants. The problem was Chicago Edison’s 3,200 kilowatt plant produce power for 5,000 customers in the downtown, but demand fell drastically during the evenings or the electricity was in use 5.5% of the time.

How did he increase the customer base? First step lowered the price of electricity from 20 cents a kilowatt in 1897 to 10 cents in 1898 and lowered one cent a year till it reached 2.5 cents a kilowatt in 1909. This increased the customer base to 200,000 by 1913 or 10% of the population of the city.

To land the manufacturing companies which produced their own electricity, he lowered the price to 0.5 cents a kilowatt for off-peak power. At that price, given the maintenance, upkeep and necessary costs to maintain a private system, companies moved over.

The process made money, because the plant had to operate no matter the demand or the most serious problem of central station management and by far the greatest item of cost is interest on investment. Thus, selling more kilowatts the interest cost per unit fell because the cost was spread across a larger number of units.

This strategy to grow the absolute number of people served and amount of electricity consumed was to last into the 1960’s.

Mr. Insull’s other idea was to build more, bigger and more efficient power plants. He used government regulation to protect his interests from competition and to insure long-term low interest construction loans.

The big power companies Southern California Edison, Detroit Edison, United Corporation followed the same business models and consolidation was seen in the Investor owned utilities.

5 years after Insull arrived in Chicago, Chicago Edison owned every electrical company in the Loop. He also owned their generating stations and they were all shut down and replaced by a largest power plant in the world at Harrison Street. Efficiencies improved from 2.5% to 20%.

Linking to dividend paying stocks, buying investor owned utilities has been and continues to be in many dividend producing portfolios. While very inexpensive electricity maybe a thing of the past, it is hard to imagine not being hooked up to the grid and paying a monthly bill. As long as the regulators give yearly raises to electricity companies, they will be a good investment.

There are more questions than answers, till the next time – to raising questions.