III. ELECTRIFYING CHICAGO

Samuel Insull, the British immigrant who had become Thomas Edison’s secretary and right-hand man, and who had also run the General Electric (GE) manufacturing businesses, assumed the presidency of what eventually became the Commonwealth Edison company of Chicago in 1892. He was thirty-two years old, small in stature, but compact and hardy, with boundless energy, a first-rate mind, and a direct, forceful, approach to every problem. While he was no glad-hander, he was still a superb salesman, taking pains to understand his customers’ needs, and lucidly setting out the case for his products. He had some exposure to quality education in England, though not at a university level, and he worked hard to overcome his thick regional accent. His family was respectable, but of precarious means, and he related easily to union leaders and Chicago politicians. When it came to producing and selling electricity and electrical equipment, he was as knowledgeable as anyone in the country. Insull took a big pay cut to make the move to Chicago, but Marshall Field, the retail magnate and a Commonwealth Edison director, sweetened the package with a $250,000 loan so Sam could purchase a sizeable stock position in the company.¹⁴

Urban energy companies were in their Cenozoic era, a free-wheeling stew of new life-forms scrabbling for position and profits. Natural gas was displacing coal gas in municipal lighting and cooking. DC central power stations were proliferating—each one had a service radius of only a half mile or so. Building engineers were pushing “self-contained” commercial and factory buildings with their own steam-generated power supplies. Urban transport was shifting from horse carts to trolley systems, run from dedicated DC power plants. High-end developers offered pre-wired houses fed from a neighborhood generating station. But the penetration of new solutions was still thin. Ordinary folks’ homes were still lit with kerosene lamps and heated with coal- or wood-burning stoves, domestic technologies on the level of the ubiquitous outdoor privy.

It took Insull almost twenty years to realize his vision—an integrated, metropolis-wide, all-purpose, highly affordable, almost infinitely expandable energy system, able to accommodate the deluge of labor- and money-saving products jostling to take advantage of the inexorable shift toward electrical power. His challenges were political, technical, strategic, and financial.

Chicago has always been famous for the rough-and-tumble of its politics and the blatant plundering of its politicians. For sheer rapacity, however, the Gilded Age politics of Insull’s day may win the prize. The city council granted the gas, electric, and streetcar utilities franchises subject to a maximum term of twenty years. That was long enough to pay off the debt of a DC power station, but much too short to finance the behemoth generating complexes Insull had in mind. In 1897, the state legislature authorized fifty-year franchises, but repealed the law the next year. Before the repeal took effect, a meat-eating pack of Chicago aldermen known as the “Gray Wolves,” took advantage of the window to create an unassigned fifty-year franchise, with the intention of selling it to Insull. When he peremptorily refused, they incorporated a new electrical utility under their own control and endowed it with the enviable fifty-year franchise. And then they discovered that every major electrical equipment maker had signed exclusive sales contracts with Insull. Good politicians are fatalists: the aldermen quickly negotiated a reasonable purchase price for the franchise. Insull reciprocated the respect. He never paid a bribe, but he gave generously to both political parties; his dealings with city and state officials were straightforward, and he always kept his word.¹⁵

Insull’s common touch served him well in dealing with unions. When a militant union leader, Mike Boyle, called a strike action, Insull, with his five-year-old son, strolled over to Boyle’s temporary quarters at the strike scene and suggested that they get together and settle things. Then he introduced his son to Boyle, stressing that Boyle was “a very important man.” Insull had no objections to unions, and was happy to work with Boyle, on the sole condition, which Boyle readily agreed to, that he would not organize the administrative and management employees, since they would provide vital electrical services during a strike.

The same directness was evident in his dealings with coal and coal miners. Francis Peabody was a talented politician with a modest coal business on the side. Insull agreed to finance Peabody’s expansion in return for first rights to all of his coal at a reasonable cost-plus price. Together with Peabody, Insull worked out a deal with the brilliant and tempestuous John L. Lewis, who was just then organizing the Midwest’s coal mines. The union was recognized in all of Peabody’s mines, and he and Insull agreed to encourage other mineowners in Illinois to do the same. They also agreed to support a progressive and enforceable mine safety law. In return, Insull asked only that all union contracts expire on April 30—so if coal was going to be short, it would not be during the winter months.¹⁶

The technical hurdle was serious but straightforward. The success at Niagara clinched the case for AC power. The missing piece of the puzzle was the power for the generating plant. The Niagara plant was powered by massive water turbines, which were well understood. But Chicago sat in prairieland, and its dynamos could be powered only by coal-generated steam. The biggest steam engines in the world were Corliss reciprocating engines—giant walking beams—a fifty-year-old design. One of them powered Insull’s central business district generating station, but the strains from its whirling hundred-ton flywheels were worrying, and its coal consumption was fearsome. Europeans had been testing modestly-sized steam turbines, but none had approached the scales that Insull needed. So he reached out to his friends at GE and convinced them to undertake the joint, shared-risk development and installation of twin 5,000 kilowatt (kW) steam turbines. They were up and running in 1903, after just about a year of development, and were repeatedly enlarged. Since turbines were only a fraction of the weight of a Corliss, they brought huge fuel savings. With AC generators powered by steam turbines, Insull could build out high-voltage long-distance AC transmission lines, marble the city with substation transformers and DC converters, and supply reliable power at the correct current to all classes of users.¹⁷

A good franchise, peace with unions and politicians, and a state-of-the-art generating and distribution plant was still not enough to succeed. Insull understood from the start that without a well thought-out strategy, the enormous cost of the plant could sink him. Large-area AC electric power supply was a high-volume/low-unit-price business, with enormous startup costs. The good news was that once a plant was at breakeven, marginal profits rose almost without limit. So an obvious strategy was to go in big and ramp up sales very fast. But it couldn’t be just any sales, as Insull quickly learned. In the early days, he had focused on the trolley companies, the city’s biggest power consumers, and quickly won about 30 percent of the business. But that created a usage spike during the evening rush hour when trolley demand overlapped with lights being turned on all across the city. The kind of large-scale electricity provider that Insull envisioned could not survive with such skewed volume. In 1902, for example, he had to supply a peak demand of up to 4,500 kW, against a daily average usage of only 1,200 kW. So nearly three-quarters of his generating capacity was standing idle most of the time, even as his debt service meter ticked like a bass drum in the background.¹⁸

The challenge was to fill the empty hours, primarily in the daylight and late at night. Insull had a highly analytic mind, which he eventually embodied in a full-blown statistics department. Chicago was a pioneer in tall commercial buildings, which necessitated elevators. Steam elevators were noisy monsters, so electric elevators became the first choice of architects and builders. But they used a lot of power very intermittently, so both traditional DC central station vendors and building owners with on-site generators hated them. With Commonwealth Edison’s wide AC service area, intermittent elevator usage in a large swath of buildings averaged out to a steady daytime load factor. Since Insull was selling idle capacity, it was almost pure profit.

Dozens of focused sales strategies followed that pattern. Apartment house hall lighting provided at very low rates to create income through the wee hours, with landlords paid commissions for signing up tenants for electrical service. Snapping up vacant stores in promising areas, and installing dazzling electrical displays to rope in the surrounding merchants. Deals with developers to include full wiring in all their new homes. Electrical appliances at near-wholesale prices paid off by small interest-free installments added to the electrical bill.

A critical technical fillip was a new meter, originally developed in England, that allowed Insull to measure usage volumes and split the charge between a connection fee and volume-based charges. Data from the metering also allowed the statistics department to conduct natural experiments on the effects of different charging plans. Industrial power took the longest to convert, because so many factories had only recently invested in their own DC power plants. But as Insull steadily pushed down prices and exploited his advantage in coal purchasing, the economics of switching to a regional power supplier became compelling.¹⁹

Between 1905 and 1912, Insull’s power sales leaped from 100,000 kilowatt hours (kWh) to more than 700,000 kWh, but that was only the palest portent of the explosive growth to come. The middle-class residential market did not begin a broad adoption of electricity usage until after the war. Even in the early 1920s, middle-class customers still viewed electricity as just a lighting solution, although the electric iron was beginning to gain a decent market share. A typical Insull sales strategy was a political-campaign-style sound truck passing out electric irons for a free six-month trial. Later, he sponsored essay contests in schools in which the students wrote about the electrical products they would most like to have in their homes. Bruce Barton made advertising history with a heavy-handed full-page newspaper ad, “How Long Should a Wife Live?” extolling the benefits of labor-saving electrical appliances.²⁰

The final challenge was a financing strategy to cover the crushing startup costs. The generation and transmission infrastructure was very expensive, as was the cost of connecting each individual customer. Residential customers needed time to grow their usage beyond lighting, while the electric appliance industry was still learning the nuances of developing and marketing new classes of appliance. Since Insull had unlimited faith that electricity markets would only expand, he built his generators with huge capacity margins, effectively ensuring a long period of underutilization. Financing with very long-term bonds, with maturities of forty-five years or so, was essential to keep his debt service affordable while utilization was building to profitable levels. The prewar US economy was very bumpy, and financiers told him that the London market had no appetite for American bonds. Characteristically, Insull went to London by himself, sans financiers, with only the most tenuous of connections in London finance, and quickly placed a $6 million equipment mortgage. Sam Insull, as Chicago already knew, was a salesman to the bone.

By the 1920s, Insull’s silky-smooth financing machine was supplying hundreds of millions of highly attractive, very long-term, 8 percent mortgage bonds to an eager market. All of them were placed by a Chicago banker, Harold Stuart, of Halsey, Stuart. Midwestern investment banks were used to living off the slender financial pickings ignored by the great New York banking houses, and Stuart had specialized in placing the modest bond issues for Insull’s acquisitions of rural and suburban utilities. During the money drought that followed the wartime inflation, Insull tried out Stuart on a $27 million issue; when he placed it in short order, he became Insull’s banker, handling all of his issues from then on.²¹

As the 1920s drew to a close, Sam Insull sat on top of one of the nation’s greatest business combines, providing about an eighth of all electric power in the country. He was a hero in Chicago, both for his business achievements and his philanthropy, the most powerful voice in nation’s utility industries, and the darling of investors.