History and economics of the electricity industry

The history of the electricity industry reveals how technological innovation and institutional design shaped one of the most critical infrastructures of the modern economy. In its early years, the development of electricity was driven by inventors like Thomas Edison and Nikola Tesla, whose conflicting visions—direct current versus alternating current—structured the architecture of power systems. Patent rights played a central role, enabling inventors and firms to control technologies and drive market dominance. Tesla's collaboration with George Westinghouse allowed alternating current systems to scale rapidly, culminating in milestone projects like the 1893 World’s Columbian Exposition and the long-distance transmission from Niagara Falls. These systems exploited significant economies of scale, reducing average costs and transforming electricity into a mass service. However, competition in urban markets quickly proved unsustainable due to high fixed costs and the scale advantages of large plants. As firms failed or merged, local monopolies emerged. These monopolies then deepened their advantage by leveraging economies of scope, such as selling power for streetcars during the day and lighting at night using the same infrastructure. The rise of monopolies sparked political concerns about excessive pricing and lack of oversight. In response, regulation shifted from municipal to state-level institutions, justified by a public interest rationale but also aligned with the strategic interests of dominant firms. Regulation offered stable financing conditions and protection from new entrants, making it a rational choice for incumbents. The electricity industry thus illustrates how technological trajectories, cost structures, and institutional incentives co-evolved to produce the regulated monopolies that defined 20th-century energy provision.

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