Why Regulate Utilities?: The New Institutional Economics and the Chicago Gas Industry, 1849-1924, and: Gas Pipelines and the Emergence of America's Regulatory State: A History of Panhandle Eastern Corporation, 1928-1993 (review)

Although neither of these two books takes technology as its theme, both trace the impact of technology on a segment of the gas industry. In Werner Troesken’s Why Regulate Utilities? the technology is the water gas process for manufacturing gas. In comparison with the older coal gas process, the new method required a smaller investment and yielded a superior product. In many cities, its commercialization in the 1870s led to the entry of new firms into the manufactured gas market. Troesken attributes their entry into the Chicago market to the lower fixed costs of the new process; elsewhere, the incumbent firms’ reluctance to abandon their investment in the older process appears also to have played a role. In Chicago, the result was a price war that bankrupted one company and nearly bankrupted another. The survivors turned first to a holding company and then to a voting trust. Although the state successfully challenged both devices in court, in 1897 the companies prevailed in the Illinois legislature: the Gas Act permitted them to merge or combine, and the Street Frontage Act protected them from new competitors by making it impossible to obtain right-of-way for mains.

With competition at an end, attention shifted to rate regulation. Over the companies’ strong opposition, the state legislature in 1905 empowered the Chicago City Council to regulate gas and electric rates. The results confirmed the companies’ fears. A promise to reduce gas rates helped to elect one mayor, and rates were set after either a cursory analysis or no analysis at all. In 1914, a state public utilities commission replaced municipal regulation.

Troesken uses these developments to test an institutional theory of utility regulation, which seeks to explain regulation by looking to formal institutions, including legislation and judicial decrees as well as contracts. He employs several analytical tools, including a comparison of Chicago gas prices before and after institutional changes and an analysis of the effect of those changes on gas company stock prices. His findings generally support and quantify what common sense would suggest. The 1897 legislation halted the decline in real gas prices; the 1905 legislation reduced the price of gas company shares.

His findings also are consistent with the institutional theory but do not, however, prove that theory, even for Chicago and Illinois. The problem lies partly in the inescapable ambiguity of some of the events. For example, the relative increase in gas prices between municipal and state regulation may be consistent with either the institutional theory or a theory that regulators are captured by the regulated companies; it depends on whether the increase was needed to provide the necessary assurances to companies considering a commitment of capital to the industry.

The problem also lies partly in the nature of the institutional theory, which potentially points to several different institutional factors to explain the development of regulation. Its conceptual complexity may well be a necessary accommodation to the reality of regulation, but the result is a theory not easily proved or disproved.

The development of the natural gas pipeline industry described by Christopher Castaneda and Clarance Smith depended on the use of electric arc welding to construct pipelines capable of transporting natural gas hundreds of miles without unacceptable leakage. This technique became practically available in the 1920s, and Panhandle Eastern Corporation was one of the first pipelines to exploit it to link producing state natural gas reserves with urban markets in the East and Midwest. By 1931 Panhandle was serving customers in...