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[NOTE: Unfortunately, Troesken does not appear to incorporate the
arguments of contemporary economists, but for those interested in the
intellectual history of public utility regulation and instutionalist
economics, this may provide useful background material. -- RBE]
H-NET BOOK REVIEW
Published by [log in to unmask] (June, 1997)
Werner Troesken. _Why Regulate Utilities? The New Institutional
Economics and the Chicago Gas Industry, 1849-1924_. Ann Arbor: The
University of Michigan Press, 1996. xv + 132 pp. Illustrations,
notes, references, and index. $37.50 (cloth), ISBN 0-472-10739-9.
Reviewed for H-Urban by Christopher J. Castaneda
<[log in to unmask]>, California State University, Sacramento
The City and the State
Conflicts between federal and state governments regarding
legislative jurisdiction and political power are a common theme in
U.S. history. A powerful federal government suggests weak state
governments, and _vice versa_. What factors cause the balance of
power and influence to shift? During today's era of New Deal
regulatory state dismemberment, it is timely to examine the
relationship of federal, state, and local regulatory authority and
policy.
In _Why Regulate Utilities?_, Werner Troesken (Asst. Prof. of
History and Economics at the University of Pittsburgh) takes a "case
study" approach to analyze issues related to the balance of
regulatory power between city and state governments. His focus is on
Chicago's gas utilities between the years 1849 and 1924. Gas
utilities provide a good subject for this study because they are
"natural monopolies," meaning that the high capital costs and
extensive pipeline distribution systems required for one system to
operate discourage the construction of a duplicate, competing
system. Troesken explains that "Economists have long believed that
utilities provided the quintessential example of market failure ...
If regulation failed to improve things in markets that were natural
monopolies, it would surely fail in situations where claims of
market failure were more tenuous" (p. 5). In his book, the author
suggests a new perspective for evaluating regulatory behavior by
examining a wider range of contract solutions available to utilities
and municipalities in conflict over utility service.
The book is divided into three parts: Part I discusses the
background to public utility regulation; Part II dissects in
separate chapters the regulatory history of Chicago's gas utilities
from 1849 through 1924; and Part III presents supporting appendices.
In Part I, Troesken explains the theoretical basis of his book. He
intends to test competing theories of regulatory behavior. On one
side is the "public interest" interpretation which suggests that
lawmakers created state utility commissions to protect consumers
against monopoly power and associated high utility rates. The
"Chicago School" posits the contrary view that state regulatory
policy benefited utilities and was essentially "captured" by
business interests. When state legislatures began establishing state
regulatory commissions, between 1907 and 1922 about thirty states
did so, it appeared that one of two things happened: states acted
decisively in favor of the public interest, or states acted
decisively in favor of business.
As Troesken argues, neither of these regulatory models
satisfactorily explains the change from municipal to state utility
regulation. Instead, Troesken builds upon the "relational
contracting" interpretation of regulatory behavior. This theory
suggests that state and municipal regulatory policy were markedly
similar. Thus, the transition from municipal regulation to state
regulation "represented more of a change in the way cities and
utilities contracted than a move from pure and unfettered
competition to widespread state intervention" (p. 5).
The evidence supporting the book's thesis is concisely presented in
Part II which is titled "History." The narrative moves through
successive eras characterized by--and with chapters
titled--competition (1849-97); antitrust (1888-97): monopoly
(1897-1905); municipal regulation (1905-13); and state regulation
(1914-24).
Troesken begins this section of the book by describing the
nineteenth century gas industry. Gas lighting was a luxury until
the 1870s, and even then, its availability was limited to larger
urban areas. By 1899, Chicago, New York, Philadelphia and St. Louis
burned about 50% of U.S. coal gas production; thus, Chicago emerges
as a relevant urban era to study regarding gas usage. The Chicago
Gas Light and Coke Company was the city's first gas utility, and
after the Peoples Gas Light and Coke Company began operating (1862),
these two gas firms dominated the city's gas service until 1880.
Through a territorial agreement, they each served customers in
separate parts of the city. As gas production technology improved
and demand increased, new firms entered the market to challenge
existing firms and, more typically, to provide service in new areas.
Price competition commenced, and gas rates fell. To avoid the
disastrous effects of cut-throat price competition, gas firms merged
and stabilized prices. But prices rose and gas consumers, along with
famed attorney Clarence Darrow, attempted (largely unsuccessfully)
to lower gas rates and break-up the gas trust. Emerging from this
effort was the state legislated Enabling Act (1905) which empowered
the city of Chicago for the first time to regulate gas rates.
Attacks on the Enabling Act by utilities threatened Chicago's rate
making powers. Utility firms opposed any law giving local
politicians power over rates, fearing that these politicians would
trade lower gas rates for votes without regard for the gas firm's
cost of service. Instead, utilities supported the creation of a
state commission relatively insulated from local political
pressures. The Illinois legislature created a state utility
commission in 1913.
The final section of the book contains two appendices. The first is
a brief but very clear description of the production processes for
manufactured coal gas, standard coal gas, and water gas. These
descriptions are particularly useful for readers who are not aware
of the earlier gas industry which depended upon coal as the base
fuel for gas production rather than natural gas reserves. The second
appendix is an explication of the event study methodology and
regression analysis used to generate data for the author's tables
and observations.
This case study approach does succeed in presenting a convincing
argument that the imposition of state utility regulation is not
necessarily an indication of a one-sided victory of either corporate
policy or the public interest. Troesken's conceptualization rests
upon a mechanistic view of history. For example, he writes: "Think
of history as a puzzle. To complete the puzzle, we need all of the
pieces-we need to know all of the relevant facts. We also need to
know how all the pieces fit together--we need a theory to interpret
the facts" (p. 7). If one believes that historical truth is
discovered through scientific empiricism, the approach makes perfect
sense. Troesken's analysis of gas prices, income statements, and
stock price changes to gauge the affect of local and state
regulatory decisions, for example, is well done. To some extent,
however, historical context is underrepresented in the work. While
the author states that historical context is important for
establishing a framework for understanding the various pieces of the
"puzzle," discussion of the most appropriate historical context--the
progressive era--is largely absent from the study. It would also be
interesting to know whether the Illinois commission remained
relatively independent of utility company influence, and Samuel
Insull especially, during the 1920s.
The author's historical research is well grounded in regulatory
literature, relevant court cases, and contemporary newspaper
accounts. Along with gas industry trade journals, Troesken relies
upon Stotz and Jamison's _History of the Gas Industry_ (1938) as a
primary source on early gas industry development. Although that work
is dated, it does remain as the most commonly cited secondary source
on the nineteenth and early twentieth century gas industry.
The stated audience for this book is economists and historical
economists, particularly those who are interested in regulation and
institutional change. The author expresses the hope that
non-economists will also be interested in the book, and some urban
historians and historians of technology may well find the book to
contain useful information. The book will most likely find a secure
place within economic and regulatory scholarship, and scholars of
urban politics should find this work provocative as well.
_Why Regulate Utilities?_ is a carefully crafted, concise, and
insightful analysis of the shifting locus of regulatory authority
between local agency and the state commission. Using the Chicago
gas industry as the subject, Werner Troesken provides a concise
model of regulatory power shifts and in the process illuminates the
important point that imposition of state regulatory authority alone
is not a clear indication of state intervention explicitly for, or
against, the public interest. Rather, the independent state
commission may well provide relatively objective and fair
forum--like a court--for regulatory decision making. Interestingly,
the logical extension of this theory suggests that regulation by
federal commission might also be more accurately assessed in the
context of contract formation rather than governmental intrusion.
Copyright (c) 1997 by H-Net, all rights reserved. This
work may be copied for non-profit educational use if
proper credit is given to the author and the list. For
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