Democracy In Power: A conversation with Sandeep Vaheesan, part I

The Hill Heat Book Club, with Jordan Haedtler.

In late January, I spoke with Open Markets legal director Sandeep Vaheesan about his book, Democracy in Power: A History of Electrification in the United States. Our conversation focused on the New Deal era, when new policies were enacted and new institutions were created to break up wealth concentration; electrify America; fight the economic depression; and defeat fascism. I’ve edited our interview for clarity. In this first excerpt from our interview, Vaheesan describes the moment in 1932 when presidential candidate Franklin Delano Roosevelt outlined his vision for public power.

HILL HEAT: I wanted to ask about that landmark 1932 FDR speech. He criticized public utility regulators, including those in his own state of New York, for not aggressively protecting the public from monopolistic rates and instead meekly serving as empires adjudicating disputes between customers and power companies. Do you think this critique is still relevant today?

SANDEEP VAHEESAN: Oh, absolutely. It’s still entirely valid. And I don’t know whether public service regulators have ever lived up to Roosevelt’s vision of them being kind of aggressive agents of the public. You know, you can point to episodes here and there where regulators did an especially good job. But on a sustained basis, it’s hard to think of public service commission that’s been consistently good, consistently acting as a trustee for the public.

But that doesn’t mean they shouldn’t try or we shouldn’t demand that they try. You know, at its best, I think the system operates as one in which the public kind of sets the goals and then the private utility figures out the means. You see some of this in states that have aggressive renewable portfolio standards that require utilities to generate or obtain an ever larger fraction of power from renewable or clean energy sources. So, California has been fairly successful in decarbonizing through the use of RPS where they tell utilities by 2030, you must obtain X percent of your power needs from renewable resources. And this shows that if legislatures and public service commissions are willing to strongly exercise public control, we can actually get these private institutions to act in a public-spirited way.

But too often, we’re talking about an unbalanced bargain. On one hand, you have shareholders who are represented by board managers, their compensations are all linked to the stock price. So you have actors who have a lot on the line to get higher rates to spend less. On the other hand, you have often under-resourced, understaffed public service commissions, you might have a handful of consumer advocates. So it’s very much a David versus Goliath fight.

And I think increasing the resources of these agencies can do real good. They can help these commissions serve more like the aggressive agents that agents of the public that Roosevelt wanted them to serve as rather than as meek umpires. So we shouldn’t write off this model. I think there is hope and potential, but we need to be willing as citizens to spend money to make it work. Allow these commissions to hire the best people. Force governors to appoint the best people. Too often, you know, these fights are obscure to people. And so, the governor ends up appointing a lobbyist for a private utility, someone who might have been an executive at a private utility. And even if they have good intentions, they’re bringing all this experience and, in my view, baggage with them when they transition into the public sector.

HH: So I want to talk about actually just something that we were just touching on, which is kind of this state capacity issue. Basically, FDR sort of took the position that public service commissions didn’t really have the mission or authority to effectively carry out regulation. So I’m wondering if you could kind of speak to that debate and where things ultimately landed.

VAHEESAN: In the 1930s—let’s pick 1932—you had two models in the American power industry. The dominant model was privately-owned monopolies subject to state regulation by agencies called either public utility commissions or public service commissions. And they generated most of the power, they served most of the customers, they owned the bulk of the infrastructure in the United States at the time. The minority model was direct public ownership where a government agency, typically a municipal or other local agency, would own and operate the infrastructure and directly serve customers.

And so in 1932, the city of Los Angeles, coincidentally, already had a municipally owned water and power company. Same with Seattle. Literally, there were thousands of these municipally owned utilities in existence, the majority of them serving relatively small towns and villages. So you had a large number of municipally owned utilities, actually more municipally owned utilities than private utilities, but most of them are rather small.

So the aggregate numbers don’t actually tell you the relative significance of private versus public. On the private side of things, on top of these regulated utilities, in many cases, you had something called a holding company. These were effectively financial institutions that owned the stocks and bonds of companies that actually provided electric service to customers, whether they’re residential, commercial, or industrial. And these holding companies were, in a sense, motivated principally by short-term financial considerations.

The executives and promoters were looking for easy profits. They were often in a very extractive relationship with the operating utilities. They’re trying to pull as much money as possible out in the form of dividends. Various service contracts that were often involved vastly inflated fees. So they provide engineering services or legal services for some arbitrarily large amount. So you have these holding companies on top of the utility companies in a generally extractive relationship.

So, in September of 1932, Franklin Delano Roosevelt travels to Portland, Oregon, and after significant pressure from progressive and populist allies, he gives a speech where he lays out his vision for the power sector. What is he going to do about power if he’s elected?

And there are a few facts I should highlight here. The short-term profit orientation of the holding companies was in clear tension, if not outright conflict, with the idea of universal affordable service. So the most damning fact was the United States, which was still a substantially rural nation at the time, largely did not have electric service in the countryside. Fewer than one in ten farmers had electricity in 1932.

And for critics of the private power industry, this was probably the single most damning fact. You can’t purport to care about public service as you’re regulated to be, when it seems like profit considerations are actually trumping the notion of universal affordable service for all.

And even in cities, there were problems. Rates for residential customers are pretty high. And most people still didn’t have what we might think of as electric modernization. They didn’t have the full suite of appliances we take for granted today. So a middle-class or working-class household might have a few lights, they might have a radio, but they wouldn’t necessarily have a refrigerator or a washing machine or a vacuum cleaner. So even in cities, there was discontent over the quality and level of electric service.

Roosevelt’s operating in this environment. And he says that something has to be done about this: “Electricity is no longer a luxury. It is a definite necessity.”

How do we provide universal affordable service?

One thing he makes clear in his speech in Portland is he believes in private ownership, even believes in public utility regulation. He says, “I think private ownership should remain the rule. And I think public regulation can be done right.”

He talks about the idea that public service commissions should operate not as arbitrators between the public and the utility, but rather as agents on behalf of the public. They should be vigorously protecting the public interest. And he said, they failed to do that so far, but I think we can still make them do that and redeem the promise of public regulation going forward.

That aspect of the speech is sort of conservative. The radical aspect of the speech is where he says, that he believes in the “yardstick” principle. He says we should set up a critical mass of publicly owned power systems that, through a combination of publicity and direct competition, make the private utilities do better. And he says, he wants the federal government to get into the power business in the four corners of the United States. He wants dams on the Columbia in the Pacific Northwest, the Colorado in the Southwest, the Tennessee River in the Southeast and the St. Lawrence in the Northeast.

The Colorado and Tennessee projects were already in development or completed. So some of the promises he made were already being fulfilled. So he says, if we have enough of these yardstick projects, whether it’s at the federal state or local level, we can actually force private utilities to focus on public service in pursuit of reasonable profits rather than exorbitant profits. And so this is his vision.

He’s elected in November, two months after this speech, and he and the new Congress quickly go about implementing the yardstick concept. For example, they create the Tennessee Valley Authority in the first hundred days of his presidency, starting in March 1933. They create this regional body to construct dams, to control floods, to aid navigation, and of course generate a lot of low cost hydroelectric power. And they replicate this in varying degrees across the country, across most of the country.

In the next part of the interview, Vaheesan discusses how the state creates power, both economic and electric.