Broken Trust: Understanding the Private Distribution of Electricity in Philadelphia

This blog is a part of a larger research project that explores the history of Philadelphia’s energy transitions. It was written under the supervision of Prof. Jared Farmer.

Philadelphia Electric Company (PECO) is the sole distributor of electricity in its namesake city. Pennsylvania’s largest metropolis is hardly unique in this regard: most cities rely on a single company for power. Economists generally agree that the high fixed costs inherent to utilities favor natural monopolies. There are two basic categories of electric distributors. Consumer-owned power companies, run by municipalities, service nearly one quarter of Americans. Investor-owned firms such PECO and its parent company, Exelon, are privately operated, and service the majority of Americans.

Proponents of consumer-owned distributors cite two key advantages. True public utilities are normally regulated by elected city commissioners and therefore are, in principle, accountable to local citizens. Moreover, customers of public utilities pay significantly less on average on their monthly bills. Why then have so many cities settled on private electrical distribution? Philadelphia provides a historical case example, and a warning to the city as it plans its transition to renewable energy sources.

Municipal leaders of the Gilded Age did not initially understand the importance of the energy transition to electricity. When electric lighting was emerging haphazardly in Philadelphia, the city council refused to establish a municipal supplier. Politicians considered the nascent technology unnecessary and expensive. They abdicated electrification to wealthy industrialists. Private interests consolidated power by forming a powerful trust. Philadelphia’s consumers, though distrustful of monopoly, soon had no choice but to rely on Philadelphia Electric. Thus, government inaction largely explains PECO’s dominance.

The utility traces its origin to the Brush Electric Light Company, founded by Thomas Dolan in 1880. Brush initially sought $5,000 in municipal funding to light Chestnut Street, but the council refused to issue a charter unless Dolan agreed to finance the operation himself. Consequently, in 1881, Brush, backed by ten of America’s wealthiest men, provided the first electric street lighting in Philadelphia. As demand for electricity skyrocketed, private capital and leadership drove the construction of vital electrical infrastructure. The municipality had ceded its authority.

Soon, dozens of firms leaped into the industry. During this frenzy of the 1880s, the city council performed no regulation beyond authorizing charters. It did not manage rates nor inspect for quality of service. Profit-minded charter-seekers brazenly bribed councilmen with company stock. Political bosses frequently sat on boards of electric companies they ostensibly regulated. Public reformers tried to calculate the cost of corruption passed on to ratepayers.

Various electric companies decided to collude instead of compete: they formed the “Electric Trust” in 1886. This cartel, led by Dolan, quickly dominated the market, and eliminated most of the remaining competition. Philadelphia’s electrical infrastructure was growing too big for the city to execute municipal takeover. More to the point, city and state politicians with industry connections killed such proposals before their viability could be properly assessed. Corrupt municipal leaders turned a blind eye to anti-competitive practices, praising the trust’s temporary and artificially low rates.

Emboldened by lack of oversight, businessman Martin Maloney further consolidated the market, absorbing all rivals and incorporating the Philadelphia Electric Company in 1902. The city responded to incorporation with an ordinance chartering this single firm to maintain the grid throughout the city. Henceforth, an investor-owned monopoly would officially distribute Philadelphia’s electrical power. Today’s PECO benefitted from past public submission to a private company.

In two ways, Philadelphia’s electric utility is the historic result of a broken trust. First, the Electric Trust breached anti-monopoly principles. Second, city leaders prioritized their own short-term interests over their constituent’s interests in the long term. Today, as the city prepares to confront the challenges posed by anthropogenic climate change, its government cannot afford a repeat of myopia, inaction, and corruption in regard to the utility it does own: Philadelphia Gas Works. The municipality must make future-minded and consumer-minded decisions when investing in renewable energies.

Manoj Simha

Wharton School

Manoj Simha graduated from the University of Pennsylvania’s Wharton School in spring 2022 with concentrations in finance and legal studies. Presently he is Director of Finance at Cosmic Writers.