Growing Network Effects

A second generation of networks5 emerged in the 1890s as the market became mature for “morganization.” Financiers, including Morgan of course, promoted mergers to concentrate Edison’s company with other smaller firms and finally also with Thomson-Houston, creating General Electric in 1893.6 General Electric concentrated two-thirds of the US market, with the rest under the control of Westinghouse. They both favored AC over Edison’s preferred DC. Edison lost the “battle of the currents,” but was awarded $3.5 million for his patents and his shares.

Local utilities, licensed by General Electric and Westinghouse, built universal systems providing electricity to residential users for lighting and small motors (for electric sewers and the like), but also to large industrial settings and to urban transport companies. Alternative current was transformed to the standardized voltages required by these different customers. Electrification was on its way, transforming industry and leisure. The parallelisms between electrification and digitalization have already been underlined.7

Having a diversified pool of users made the networks more efficient, as the load factor could be increased. Residential customers had their peak usage at night when they turned on their lightbulbs, while industrial customers had their peak usage during the day when the factories were active. Distributing the load during the day (and the different seasons in the year) increased the efficiency in the use of the fixed assets necessary to generate and distribute the electricity. Costs were reduced, increasing the competitiveness of the utilities’ networks against the isolated systems used by factories and transportation systems. Over time, such isolated systems became the exception, and utilities’ networks became the norm.

A key factor for the success of the utilities’ networks was the creation of the “load dispatcher,” the department in the utility that would coordinate the system by analyzing demand and ensuring the supply of electricity by the different generators in the system. Utilities would coordinate different generators, including ever-larger turbines and smaller back-up generators. The load dispatcher had to coordinate the operation of the electricity generation as to make sure that the dynamic demands of the heterogeneous customers would always be met. The load dispatcher was in charge of identifying the complementarities that would spark the network effects. The networks run by different utilities gradually became interconnected, which allowed them to exchange electricity and improve their load factors.

Large utility companies, managing increasingly large territories, became the center of the system. They benefited from economies of scale as they could build the largest generating plants, such as large hydroelectric plants. They also benefited from economies of scope, as the electricity was sold to more and more customers as electrification grew across industry and transportation. They also benefited from network effects; the more that users grew in number and diversity, the better the load factor could be distributed and the larger the complementarity, reducing the price of the service for all users. The power of network effects was also demonstrated in the electricity industry.

From a regulatory perspective, the control of larger utilities moved from local authorities, though installation permits, to state public utility commissions. Such commissions, well versed in the regulation of infrastructure networks due to their experience with water, railways, telecommunications, etc., applied the same logic to electricity networks.

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