You may remember the extremely cold winter of 2021. In Texas, the system of electricity collapsed; 4.5 million homes lost power—for days. More than 200 people died, half of them of hypothermia (cold). This wasn’t supposed to happen, of course. Texas’s electric utilities are regulated, and the regulation had been modernized beginning in 1999.

Image: Creative Commons under Unsplash

Why wasn’t the public interest served?

The issue is so complicated that I can’t answer that question. But the ongoing debate over the Texas tragedy has plunged me into a new project: trying to understand why electric utilities are regulated in the first place. Why do state commissions control the activities of companies like Duke and PNG that produce and send electricity to our homes?

That effort sends us back to colonial days in America. [1]

The First Public Utilities

Colonists didn’t have electric power, but they had gristmills. “Gristmills were, in essence, the first public utilities,” writes David M. Gold.[2] These mills used water power to grind corn and wheat into flour.

Gristmills were so important that they were considered public services (a term familiar in colonial days). Farmers depended on them to transform their crops into food they could eat or sell. With muddy roads and trails limiting transportation, they needed mills nearby.

Water mills were built on waterways that had a substantial slope. A dam was built at the top, restraining the river or stream water. Pressure built up to the point where the water fell down a narrow millrace over a waterwheel that turned grindstones inside the mill.

Nearly all the colonies had Mill Acts. As early as 1669, Maryland enacted a law to make it easier to build mills. In the law’s preamble, the reason for the law was explained: Most suitable locations had been taken. They

“are already in the hands of persons under age or unable to be at the Charge of building a watermill or else of such as are wilfully obstinate in for bidding and hindring such persons as would purchase the said places fitt for building watermills . . . much to the Publick damage of the Province.”[3]

A typical Mill Act allowed a person who wanted to build a mill the right to damage or control other persons’ property.

· If a person didn’t own the land on the other side of the waterway, he could take that land. (The dam had to hold back the entire river or stream.) Virginia authorized a taking of an acre for this purpose; Maryland, up to 10 acres.

· If water backed up onto a neighbor’s property, that, too, was allowed.

· Furthermore, someone who had a good mill site but didn’t use it could be required to do so (or lease or sell the land to someone who would).

· And the colony regulated the prices (“tolls”) for grinding grain.

The owner of the submerged or taken land was compensated for the taking, but the price was determined by the courts—usually by a jury. Compensating for “market value” does not seem to have been a goal. [4]

What in the World?

Now, all of this may sound strange to you. It did to me.

I thought we had electric utility regulation because electricity is a “natural monopoly.” I used to think that means it’s impossible or difficult for two electricity lines to go, say, to my home. Two lines couldn’t reasonably be dug (or strung) in the same area.

However, the actual definition is this: If a producer requires substantial capital spending, and has large economies of scale, only one producer will be able to last and will become a natural monopoly. So, if there were two producers or transmitters of electricity, the one that could build the largest network would inevitably force the other out through lower prices. To use Milton Friedman’s phrasing, it would be the “natural outcome of competitive market forces.”[5]

Yet the concept of “natural monopoly” is not so persuasive now. It was challenged by economist Harold Demsetz in 1968. [6] He argued that as long as the so-

called monopolist faces different bidders or rivals or the potential for them, he or she will charge competitive prices. (Some good economists disagree.)

But natural monopoly is a weak reed.

Second, evidence is strong that regulation doesn’t achieve all that much in public benefits:

· Prices and profits are about the same whether a utility is regulated or not. [7]

· It wasn’t the public, but electric utilities themselves, that sought regulation. [8] In the early twentieth century, Samuel Insull, president of Consolidated Edison, found Chicago’s municipal control troublesome (he had to get permission to dig up streets to put in his lines), and he feared a possible takeover by municipalities. He preferred state regulation.

· According to another study, utilities wanted regulation because it improved their ability to raise capital (a key part of their business).[9]

Hmm. Utility regulation may not be all it’s cracked up to be.

Conclusion

We don’t have regulation of gristmills anymore, although there may still be some acts on the books. Why?

The importance of water-powered mills declined, of course. Readily replaced by steam-driven mills, they became less of a public service. “Now that wheat was successful and more capital was available, entrepreneurs could be expected to build mills where

most needed, without an artificial stimulus,” wrote John F. Hart. [9] The Maryland Mill Act was repealed as early as 1766.

Other repeals took longer. In fact, judges, more than legislatures, undermined the laws protecting “antiquated public utilities.” Citing cases in 1869 and 1871, Gold writes, “Some judges, although upholding the statutes, repeated the familiar refrain that if the question were new, the acts would fall.” [10] At about the same time, judges in Georgia and Vermont struck down their laws as unconstitutional.

So now, why exactly do we still have electric utility regulation?

This piece originally appeared at Janetakesonhistory.org.

Notes

[1] Thanks to Roger Donway for this suggestion.

[2] David M. Gold. “Eminent Domain and Economic Development: The Mill Acts and the Origins of Laissez-Faire Constitutionalism,” Journal of Libertarian Studies, https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=37457d81ea36881b1007c196da24d3462dac2c84.

[3] John F. Hart. “Colonial Land Use Law and Its Significance for Modern Takings Doctrine.” Harvard Law Review 109, no. 6 (1996): 1252–1300, at 1267, https://doi.org/10.2307/1342215.

[4] John F. Hart. “The Maryland Mill Act, 1669–1766: Economic Policy and the Confiscatory Redistribution of Private Property,” American Journal of Legal History 39, no. 1 (January 1995): 1–24, 5.

[5] Quoted in Harold Demsetz, “Why Regulate Utilities?” Journal of Law and Economics 11, no. 1, (Apr. 1968): 55-65, at 57, http://www.jstor.org/stable/72497056.

[6] Ibid.

[7] George Stigler and Claire Friedland. “What Can Regulators Regulate? The Case of Electricity.” Journal of Law & Economics 5 (1962): 1–16, http://www.jstor.org/stable/725003.

[8] Gregg A. Jarrell, “The Demand for State Regulation of the Electric Utility Industry,” Journal of Law & Economics 21, no. 2 (Oct. 1978): 269–295.

[9] W. Hausman and J. Neufeld, “The Market for Capital and the Origins of State Regulation of Electric Utilities in the United States.” Journal of Economic History 62, no.4 (2002): 1050-1073. doi:10.1017/S002205070200164X.

[10] Gold, 118, 117.