Description
This paper seeks to contribute to a longstanding tradition in accounting research which attempts to understand
accounting within its social and historical context. The topic of this historical narrative is the creation and role of
accounting in the formation of the electricity industry in the US between 1882 until 1944. The paper is divided into
three parts. In the first part we examine how early electrical engineers struggled to understand the nature and behavior
of the costs of generating and distributing electricity at the turn of the 19th Century
The construction of US utility accounting: 1882–1944
Alistair M. Preston
a,
*
, Andrew M. Vesey
b
a
University of New Mexico, Department of Accounting, Albuquerque, NM 87131-1221, United States
b
AES Latin America, DR-CAFTA Region, Arlington, VA 22203, United States
Abstract
This paper seeks to contribute to a longstanding tradition in accounting research which attempts to understand
accounting within its social and historical context. The topic of this historical narrative is the creation and role of
accounting in the formation of the electricity industry in the US between 1882 until 1944. The paper is divided into
three parts. In the ?rst part we examine how early electrical engineers struggled to understand the nature and behavior
of the costs of generating and distributing electricity at the turn of the 19th Century. In doing so, these engineers estab-
lished a relationship between costs and the engineering concepts of load factor and diversity and developed pricing
structures which would recover both standing (?xed) and running (variable) costs. In the second phase, we examine
how this accounting knowledge was deployed by early ‘‘inventor entrepreneurs’’ and businessmen in their attempts
to dominate the early electric markets in the US and how investor owned regulated utilities emerged out of these strat-
egies as a uniquely North American institution. In the ?nal phase, we examine how accounting became the center of
intense con?ict between regulatory commissions and investor owned utilities in the US court system – including the
Supreme Court – as representatives of these entities vied with each other over the chart of accounts, allowable expenses,
the valuation of assets and depreciation. Here we contend that utility accounting did not simply grow to re?ect a reg-
ulatory process but rather worked to shape utility regulation in the US. In 1944 a legal ruling displaced the primacy of
accounting in the regulatory process and shifted its focus from asset valuation to rate of return determination. The
space once dominated by accountants was ceded to regulatory economists. After that, accounting became taken-
for-granted and matter-of-fact.
Ó 2007 Published by Elsevier Ltd.
Introduction
This paper seeks to contribute to a longstanding
tradition in accounting research which attempts
‘‘to describe and interpret the behavior of account-
ing and accountants in the context of the institu-
tions in which they are historically located
(Cooper & Sherer, 1984, p. 214). In particular,
the paper seeks to contribute to the continued
‘‘need for more historical studies of the develop-
ment of accounting’’ and to address the questions
of ‘‘just how has accounting come to function as
0361-3682/$ - see front matter Ó 2007 Published by Elsevier Ltd.
doi:10.1016/j.aos.2007.03.003
*
Corresponding author.
E-mail addresses: [email protected] (A.M. Preston),
[email protected] (A.M. Vesey).
www.elsevier.com/locate/aos
Available online at www.sciencedirect.com
Accounting, Organizations and Society 33 (2008) 415–435
we now know it? What social issues and agents
have been involved with its emergence and devel-
opment? How has it become intertwined with
other aspects of social life? And what conse-
quences might it be seen as having had? (Burchell,
Clubb, & Hopwood, 1980, p. 23).
Since these, and numerous other calls for histor-
ically situated and institutionally contextualized
studies of accounting development in the late
1970s and early 1980s a considerable number of
such studies, typically referred to as the new
accounting history, have emerged (see Napier,
2006, for a review). Although the new accounting
history ‘‘does not represent a unitary research pro-
gramme, with de?nite theoretical boundaries’’ but
rather represents a ‘‘loose assemblage of often
quite disparate research questions and issues’’
(Miller, Hopper, & Laughlin, 1987, p. 396), Napier
(2006) notes that a recurring theme is that
‘‘accounting is not just re?ective but constitutive:
it is not merely a passive e?ect of its environment
but works to shape this environment.’’ (p. 456).
It is this constitutive role of accounting that is
important to this paper. In short, the paper exam-
ines the constitutive role of accounting in the for-
mation of investor owned electric utilities and in
the development of electricity markets in the US
between 1882 and 1944.
Electric utility accounting has been largely over-
looked in the accounting literature. This is surpris-
ing given that this industry arguably provided the
source of energy to power the second phase of
industrialization of the western hemisphere. As
Hughes (1983) notes:
Of the great construction projects of the last
century, none has been more impressive in its
technical, economic, and scienti?c aspects,
none has been more in?uential in its social
e?ects, and none has engaged more thor-
oughly our constructive instincts and capa-
bilities than the electrical power system.
A great network of power lines which will
forever order the way in which we live is
now superimposed on the industrial world.
(Hughes, 1983, p. 1)
In fact, considerably more attention has been
paid to the development of accounting in manu-
facturing and (e.g. Hopwood, 1987; Loft, 1986;
Miller & O’Leary, 1987) than the industry that
made possible its rapid growth in the early years
of the 20th Century.
The electricity industry in the US got o? to a
turbulent start. Heated debates and legal chal-
lenges over technology – direct current (DC) ver-
sus alternating current (AC); ownership structure
– public versus private; and market structure-regu-
lated natural monopoly versus free market compe-
tition, took place in the newspapers, regulatory
commissions and the law courts. The early years
of electricity were characterized by predatory pric-
ing, mergers and acquisitions and bankruptcies.
However, by the mid 1940s some level of stability
had been achieved; central station alternating cur-
rent technology reigned supreme; regulated inves-
tor owned utilities with monopoly rights to serve
de?ned service territories, dominated the market;
and price and service were regulated by state and
federal commissions.
Traditional histories of electric utilities and the
electricity market in the US typically focus on
technology and competition (see Hirsch, 1989,
for example). Fligstein (2001) suggests that
traditional histories argue that new markets form
when:
Opportunistic entrepreneurs ?nd a new mar-
ket for some good or service. This newmarket
often results from a technological break-
through. Then, others see the opportunity
and enter the same market. This creates com-
petition that forces producers to make prod-
ucts more e?ciently and at lower cost. The
winners of this battle are those who ?gure
out how to deliver the best goods at the
cheapest cost. (Fligstein, 2001, p. 3)
In histories of electricity in the US, Thomas
Edison, George Westinghouse and Elihu Thomson
are the legendary entrepreneurs. The technology
breakthroughs include the electric light bulb, the
transformer, the meter, and the electric motor.
One notable entrant into the market is Samuel
Insull, onetime assistant to Edison, who trans-
formed the ?edgling private and municipal power
providers in Chicago into a vast monopolistic
investor owned utility, which became the model
416 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
for the rest of the nation. The problem with these,
admittedly very plausible, histories is that they are
partial at best. As (Fligstein, 2001) notes:
As soon as one observes the formation and
operation of real markets, it becomes obvious
that none of the dynamism is possible with-
out deep involvement by entrepreneurs, man-
agers, workers, ?rms and governments. The
people who run ?rms have to conceptualize
opportunities, ?gure out ways to exploit them
and motivate others to help attain those ends.
They have to obtain funding, secure raw
materials, and build an organization. They
have to ?gure out ways to stabilize their inter-
actions vis-a`-vis their principal competitors.
Finally, the con?ict between owners and
those who work for them is under constant
negotiation. (Fligstein, 2001, p. 3)
This paper seeks to bring agency back in.
Consistent with the position adopted by Oakes,
Miranti, and Louis (1996) we neither regard
individuals as completely constructed nor fully
autonomous but rather ‘‘social positions are con-
structed in such a way that the individuals who
occupy them have the possibility of agency’’ (p.
570). Social position and the possibility of
agency is not exclusively reserved for such ele-
vated personages as Edison, and Insull or for
the Supreme Court Justices such as John Mar-
shall Harlan and Louis Brandeis who ruled on
accounting disputes, but also includes the numer-
ous engineers, accountants, economists and law-
yers who constructed electricity costs, developed
accounting valuation rules, gave expert testimony
and defended the legal position of utilities or
commissions. These often unnamed people were
regarded as experts and they held an important
social position in this period of US history.
These experts had a profound role to play in
the construction of utility accounting and how
it was deployed in the formation and regulation
of electric utilities in the US.
One notable history of electricity which recog-
nizes agency is a work entitled ‘‘Networks of
Power’’ by Hughes (1983). In this study, Hughes
explores not only the emergence and growth of
the technology underpinning of the ‘‘networks of
power’’ lines and generation stations, but also
the social ‘‘networks of power’’ that Edison and
other early inventor entrepreneurs developed to
?nance and operate their businesses. He writes:
The half-century from 1880 to 1930 consti-
tuted the formative years of the history of
electric supply systems, and from the study
of these years one can perceive the ordering,
integrating, coordinating and systematizing
nature of modern human societies. Electric
power systems demanded of their designers,
operators, and managers a feel for the pow-
erful manipulation of things, intellect for
the rational analysis of their nature and
dynamics and an ability to deal with the
messy economic, political and social vitality
of the production systems that embodied
the complex objectives of modern men and
women. (Hughes, 1983, p. 1)
Not surprisingly, even Hughes’ history, has lit-
tle mention of utility accounting and the constitu-
tive role it played during the formative years of the
industry. Where you do ?nd mention of account-
ing is in economic histories of regulation (see Phil-
lips, 1965). Such histories capture some of the
color of courtroom battles over ‘‘allowable
expenses’’ and ‘‘original versus reproduction cost’’
and the nefarious use of accounting numbers by
utility owners. However, the development of utility
accounting is generally represented in terms of an
inevitable progress toward becoming a faithful
mirror of economic reality – it was simply a matter
of getting accounting right.
In studying the constitutive role of accounting
in the emergence of investor owned utilities and
the creation of electricity markets in the US, one
is struck by the fact that the institutional form
and market structure that emerged was unique to
the US. In almost all other countries some form
of nationalization of privately owned and muni-
cipal power companies took place. The creation
of investor owned regulated utilities may be
explained by the relatively weak structure of fed-
eral and state government; however it may also
be seen to re?ect a number of themes that were
prevalent during the Progressive era. Oakes et al.
(1996) list these as follows:
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 417
(1) the rise of expertise as a ‘‘neutral’’ solu-
tion to the crisis of order; (2) a general wor-
rying about perceived threats to democracy
by the concentration of economic power;
(3) the ambiguity and contested nature of
government regulation that focused increas-
ingly on accounting measures of cost and
pro?ts; and (4) the movement to ‘‘expose’’
the truth, especially the prominence of the
‘‘muckraking’’ press. (Oakes et al., 1996,
p. 370)
These threads were interwoven through this per-
iod and following Oakes and Miranti, we argue that
they were instrumental in the ‘‘the development of
regulation which increasingly required the skills of
accountants, lawyers and other experts’’. Investor
owned regulated utilities were created in the
attempt to preserve the ideals of private ownership
yet at the same time regulate against the excesses
possible under a monopoly structure.
This paper has some contemporary relevance in
that the nationalized or state owned electricity
markets in most parts of the world including Eur-
ope, Eastern Europe, South America, Australia
and Africa have been or are being privatized.
What is signi?cant is that the model for regulation
and the calculation of rates based on reasonable
cost are derived from those established in the US
in the ?rst 44 years of the 20th Century. Thus,
the institutional structure of regulatory commis-
sions and some form of private ownership, along
with variations on the reasonable rate calculation,
which were laboriously and even painfully con-
structed within the turbulent era of US industrial-
ization, are being transplanted into very di?erent
social, institutional and cultural domains – includ-
ing Ukraine, Cameroon, Victoria, Australia, and
El Salvador in Central America. The resulting
impact of these transplantations and their subse-
quent mutations, including those of accounting,
though beyond the scope of this paper, are never-
theless worthy of study.
This historical narrative is divided into three
phases. In the ?rst phase entitled ‘‘Constructing
Costs’’, we examine articles written in the 1890s
by UK and US engineers on the nature and behav-
ior of costs in ?edgling electricity companies.
The authors of these texts re?ected upon the pecu-
liar nature of electricity as a product and how costs
behaved under di?erent scenarios. These early and
very sophisticated accounting constructions are
reminiscent of Josiah Wedgwood’s correspondence
on the cost of producing pottery (Hopwood, 1987).
Here we can see how costs were ‘‘laboriously cre-
ated’’ through observation of and re?ection upon
the inner workings of early generation plants and
distribution systems. The relevance of this section
is that these cost constructions enabled subsequent
businessmen such as Samuel Insull to conceptualize
opportunities in the electricity industry and ?gure
out ways to exploit them (Fligstein, 2001, p. 3).
The second section entitled ‘‘Constructing Elec-
tricity Markets’’, examines how prominent ?gures
such as Thomas Edison, George Westinghouse
and Samuel Insull used these early cost constructs
to combine technology with business practices
that radically restructured the electric industry.
Through these practices, small privately owned
and municipal power companies were transformed
into large horizontally and vertically integrated
monopolies before ?nally being regulated by state
and federal commissions. It is here that we exam-
ine how individual businessmen negotiated the
ambiguities of Progressive era concerns to ?rst
grow their businesses through predatory pricing,
and acquisitions and mergers and then sought a
regulatory structure that would allow their busi-
nesses to operate as a monopoly and yet retain
their investor owned status. The resulting institu-
tional structure provides the context necessary to
understand the role of the judiciary in the con-
struction of utility accounting which is the subject
of the ?nal section.
In the ?nal section entitled ‘‘Constructing Util-
ity Accounting’’, we examine how a new domain
was opened up for accounting and legal experts,
how a new practice of accounting was constructed
and how accounting contributed to shaping the
regulatory arena in the US. In this period, the
focus of accounting shifted away from manage-
ment concerns about the nature and behavior of
costs, towards issues of ?nancial disclosure,
income measurement and asset valuation. The ?eld
or arena also changed from boardrooms to court-
rooms. Accounting became the focus of, and was
418 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
itself transformed by, a series of highly contested
Supreme Court cases between utility owners and
regulatory commissions. It is here we can see
how accounting played a constitutive role in shap-
ing the regulated utility environment in the US.
Constructing costs
Thomas Edison established a power company
in New York City in 1882 to sell electricity to
owners of his new incandescent light bulbs.
Though typically acknowledged as the inventor
of the light bulbs and a host of other electricity
related technology, Edison was also an accom-
plished entrepreneur. Hughes (1983) describes
him as an ‘‘inventor–entrepreneur.’’ Edison not
only invented things, but also established busi-
nesses and business practices to pro?t from his
inventions. The Edison Electric Light Firm in
New York was the ?rst successful system for pro-
ducing and distributing electric power. Edison’s
Pearl Street power station consisted of coal-?red
boilers that produced steam for reciprocating
engines that turned generators (magnets housed
within coils of wire) to produce direct-current
(DC) electricity. Electricity was distributed to cus-
tomers within an area of one square mile in the
Wall Street district of New York City via under-
ground wires.
: t n e m t s e v n I l a t i p a C
Depreciation
Power Plant Buildings $ 8,500 2% $ 170
Boilers and auxiliary equipment 30,180 10% 3,018
Steam engines and dynamos 48,000 3% 1,440
Auxiliary electrical equipment 2,000 2% 40
0 4 1 , 1 % 2 0 0 0 , 7 5 s r o t c u d n o C
0 5 2 % 5 0 0 0 , 5 s r e t e M
8 5 0 , 6 $ 0 8 6 , 0 5 1 $ l a t o T
Operating and Other Expenses
: ) y l i a D ( r o b a L
0 0 . 5 $ r e e n i g n e f e i h C
0 0 . 3 r e e n i g n e t n a t s i s s A
0 5 . 1 r e p i W
5 2 . 2 n a m e r i f l a p i c n i r P
5 7 . 1 n a m e r i f t n a t s i s s A
Chief voltage regulator 2.25
Assistant voltage regulator 1.75
0 0 . 3 s r e r o b a l o w T
0 5 . 0 2 $ l a t o T
2 8 4 , 7 $ ) l a u n n A ( r o b a L
: r e h t O
Executive wages (annual) 4,000
Rent, insurance and taxes 7,000
8 5 0 , 6 n o i t a i c e r p e D
Coal (annual)
($2.8/ton; 3#/h.p. hour: 5hours
Daily: 1,200 h.p.)
8,212
Oil, waste and water 2,737
Lamps (30,000 at 35c each) 10,500
9 8 9 , 5 4 $ l a t o T
Estimated Minimum Income from 10,000 Installed Lamps $136,875
Expenses - 45,989
6 8 8 , 0 9 $
Fig. 1. Edison’s estimate for a 10,000-lamp central station. From Menlo Park Notebook no. 1 (1880). (Reproduced from Hughes, 1983
p. 39.)
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 419
From the outset, Edison was acutely concerned
with both the capital and operating costs of his
system. His overriding concern was that electricity
‘‘could produce light at a price lower than that of
gas’’ (Passer, 1953, p. 23). Passer further states
that ‘‘from the economist’s viewpoint, the most
signi?cant aspect of Edison’s activities in electric
lighting was his concern at every step of the way
with economic factors’’ (p. 83). By 1880 Edison
had developed the following budget for a 10,000
– lamp central station representing his ?nancial
vision for his Pearl Street Stati (Fig. 1).
This budget reveals both Edison’s grasp of busi-
ness and represents the clear economic concerns of
his enterprise. However such accountings were not
su?cient to run the business pro?tably.
Electricity is a very strange product. It is shape-
less, invisible, and most importantly it cannot be
inexpensively stored. The Edison Electric Light
Firm, which made losses in its ?rst two years of
operations, and other emerging electric light ?rms
in the US and Europe, faced a curious business
anomaly; as additional customers were connected,
earnings declined. As one English manager, remi-
niscing on the early days of electricity, wrote in
1896: ‘‘To ?nd that too much business was under-
mining the stability of the company and jeopardiz-
ing its success was startling’’ (Greene, 1896, p. 24).
This curious anomaly inspired a number of electri-
cal engineers and business owners to turn their
attention to the nature and behavior of costs and
how to bill customers for this unique product.
The root of the anomaly resided in the fact that
because electricity could not be inexpensively
stored, and because response to demand had to
be instantaneous, output had to be maintained
whether the electricity was being used (and hence
billed) or not. This is as true today as it was in
the 1880s. In 1892, an Englishman named Hopkin-
son explained this phenomenon in terms of the
concept of the ‘‘load factor’’ (the ratio of average
daily or yearly use of electricity to the maximum
load sustained during the same period) of a sys-
tem.
1
The load factor essentially explained that if
it were incumbent on the electric companies to
supply electricity at a moment’s notice, then it
would cost practically the same to produce and
distribute electricity to a customer base that used
the energy, for say, 1 h a day as it would for a cus-
tomer base that used electricity, for say, 16 h/day.
In the former case, the company could only charge
the customer for 1 h of energy, while in the latter
case it could charge for 16 h. Recognition of this
phenomenon rested, in part, on a surprisingly
sophisticated discourse on the nature and behavior
of costs.
John Hopkinson began a detailed analysis of
the cost of producing and supplying electricity that
was published in 1892. Hopkinson began his anal-
ysis by distinguishing between ‘‘standing’’ and
‘‘running’’ costs. He described them in the follow-
ing manner:
You are familiar with the fact that the
expenses of an undertaking may be broadly
divided into two classes. On the one hand
there are expenses which are quite indepen-
dent of the extent to which the undertaking
is used (standing costs), and on the other,
expenses which are absent unless the under-
taking is used and which increase in propor-
tion to the use. (Hopkinson, 1892, p. 8)
Having established the cost structure
2
of the
electricity industry he attempted to explain the
dilemma:
Electrical engineers now realize that they
have to provide the same plant and no more
to give a steady supply day and night as to
give a supply for one hour out of twenty
four. They also now realize that if they are
to be ready to give a supply at any moment,
they must burn much coal and pay much
1
According to Hopkinson (1892) the concept of the load
factor was developed by a Mr. Crompton who was on of the
pioneers of the electri?cation of the UK.
2
It is clear from Hopkinson’s opening phrase that the notion
of standing costs (which he subsequently referred to as ‘‘?xed’’)
and running costs were familiar terms of use and were most
likely derived from the railroad industry. This speculation is
reinforced later in Hopkinson’s paper where he used an
example from the railroads to elaborate upon his de?nition of
theses cost categories and to illustrate the dilemma of decreas-
ing earnings with increased sales.
420 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
wages for however short a time the supply is
actually taken. (Hopkinson, 1892, p. 9)
To illustrate his point, Hopkinson created a
hypothetical example. First, he presented the ‘‘cap-
ital outlay required’’ for an electricity company as
follows (Fig. 2).
Hopkinson then developed annual charges for
each item of capital under two scenarios and this
is where his accounting di?ered from the one
developed by Edison (see above). Both scenarios
had the capability of supplying 40,000 ‘‘sixteen-
candle lamps’’ at one time. In one scenario, the
lamps were hardly ever used while in the other,
the lamps were used continuously. The ?rst sce-
nario was referred to as running light, and has a
load factor of ‘‘nil’’ while the second scenario
was referred to as fully loaded and has a load fac-
tor of 100%. Hopkinson then developed the
annual charges for the company. For example,
the charges for land and buildings were estimated
at 4% while annual repairs for these items were
estimated at 10%. He then notes that:
The boilers, engines and dynamos will have a
charge for interest, and a charge for writing
o?, or amortization as the French call it, that
is, for writing o? the value of the plant before
the time at which it becomes antiquated.
(Hopkinson, 1892, p. 11)
Hopkinson argued that for each of these items,
the charge for running light or fully loaded would
be the same. However in the case of engines and
dynamos there would be an added charge for a
fully loaded operation because running the equip-
ment at full capacity would create additional wear
and tear and thus a higher maintenance expense.
His analysis of annual operating and maintenance
costs was as follows (Fig. 3).
Finally, Hopkinson added coal and other con-
sumables that vary between running light and fully
loaded and came up with this ?nal analysis
(Fig. 4).
In summary Hopkinson notes:
The cost of merely being ready to supply
2500 units per hour at any moment through-
out the year will be £28,010, and the cost of
actually supplying 2500 units per hour for
every minute of the year will be £59,250.
(Hopkinson, 1892, p. 13)
While a fully loaded system costs nearly twice
as much as running light, under the running light
scenario little revenue would be generated, while
under the fully loaded scenario revenue would be
generated continuously.
Based on this analysis, Hopkinson argued for a
two-step rate structure; namely one that applies ‘‘a
?xed charge per quarter proportioned to the great-
Land………………………………… 25,000
Buildings……………………………. 15,000
Boilers and Pipes……………………. 14,000
Engines……………………………… 24,000
Dynamos……………………………. 15,000
Switchboard and Instruments………. 2,000
Feeders and Mains………………… 50,000
145,000
Fig. 2. Estimated capital outlay for a maximum of 40,000-lamp
station. (Reproduced from Hopkinson, 1892, p. 10.)
Running Light Fully Loaded
Land………………………………… 1,000 1,000
Buildings……………………………. 1,500 1,500
Rates………………………………… 500 500
Boilers……………………………… 2,100 2,100
Switchboard and Conductors………. 7,800 7,800
Engines……………………………… 2,160 3,600
Dynamos……………………………. 1,350 2,250
16,410 18,750
Fig. 3. Fixed charges for a 40,000-lamp station ‘‘running light’’ vs. ‘‘fully loaded’’. (Reproduced Hopkinson, 1892, p. 11.)
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 421
est rate of supply the customer will ever take, and a
charge by meter for the actual consumption.’’
(p. 13) For the example given:
The undertaker, therefore who incurs the lia-
bility to supply, ought to receive £11 per
annum per unit per hour from those on
whose behalf he incurs the liability, and if
he receives the £11, he need not charge more
than 1/3d. per unit for what he actually sup-
plies to cover his expenses. (Hopkinson,
1892, p. 13)
Given that Hopkinson was an engineer, the
undercurrent of technological determinism in his
writing is not unexpected. However, the classi?ca-
tion of costs into standing and running was not
inevitable. As Hopwood (1987) notes of Wedg-
wood’s e?orts to develop cost statements for his
potteries, the costs of electricity had to be labori-
ously created rather than revealed. The di?erence
being is that unlike Wedgwood, Hopkinson and
his colleagues had some procedures for observing
the inner workings of electricity companies estab-
lished in the railroad companies. Nevertheless
other cost constructions could and indeed did
emerge. For example, Greene (1896) an engineer
from the US, instead of two cost categories,
o?ered four:
First. Expenses a?ected by equipment, from
real estate to meters, and expressed by the
relation of the maximum number of lights
burned at one time during the year to the
investment.
Second. Expenses a?ected by the number of
consumers.
Third. Expenses a?ected by the amount of
work done by engines, boilers, dynamos,
etc., and shown by the output of watt-hours.
Fourth. Expenses practically unvarying, and
practically independent of the size of the
plant, the number of consumers or the
amount of current supplied. (Greene, 1896,
p. 24).
The multiplicity of cost structures proposed
during this era reinforces the position that they
were constructed and not revealed.
Arthur Wright (1896) from Brighton in the UK
provided a con?rmation of Hopkinson’s cost
model. Wright presented his results in the follow-
ing graph (Fig. 5):
Sales were represented by the solid line,
monthly costs by the upper dotted line and the
maximum annual load as the lower dotted line.
As can be clearly seen, ‘‘there is no obvious con-
nection’’ between the sales and cost curve.
However,
a very obvious tendency becomes apparent
after the ?rst or second year for the monthly
total expenditure to follow this line joining
the points representing the annual maximum
loads and the slight deviation from this line
will be found to be roughly proportional to
the monthly sales of electricity. (Wright,
1896, p. 39)
In conclusion he notes that:
The chief governing factor in determining the
monthly expenditure of any Central Station
will probably be found to be the maximum
annual load which the station has to be pre-
pared to meet. (Wright, 1896, p. 39)
Wright was also quick to note that the cost of
supplying electricity fell rapidly as ‘‘the average
time of use increases.’’ This phenomenon made
some customers more desirable than others. Indeed,
Running Light Fully Loaded
Fixed Charges..…………………… 16,410 18,750
Coal ……………………………. 6,000 30,000
Stores……………………………... 600 3,000
Wages……………………………… 5,000 7,500
28,010 59,250
Fig. 4. Total expenses for a 40,000-lamp station ‘‘running light’’ vs. ‘‘fully loaded’’. (Reproduced Hopkinson, 1892, p. 12.)
422 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
Hopkinson, Wright and Greene all noted that those
customers who used electricity when demand was
low, or who used electricity for long continuous
periods of time were particularly desirable and
argued that discounted rates should be used to
attract them. Thus, di?erent classes of customers
were created. This was referred to as ‘‘load diver-
sity.’’ In this respect, discourses on costs not only
constructed costs but also the customer.
As can be seen from the above texts, the focus
of the discussion was primarily concerned with
developing appropriate methodologies to capture
revenue that re?ected the pattern of cost incur-
rence. Each author argued for a two-step method.
One would recover the ?xed costs of the enterprise;
the other would recover the variable costs. How-
ever this two step method was not universally
applied. In fact, Doherty (1910) noted that there
were at least seven methods of charging for elec-
tricity in the US at the turn of the century:
First – Flat rates
Second – Uniform rates
Third – Meter rates di?ering on quantity of
consumption
Fourth – Meter rates with minimum guarantee
Fifth – Meter rates di?erent on amount of time
maximum capacity of installation is used
Example: New York System
Sixth – Meter rates varied by the amount of
time maximum demand is used
Example: Wright demand system
Fig. 5. ‘‘Curves showing relation between Monthly Expenditure, Output in Units and Annual Maximum Load (Reprinted from
Wright, 1896, p. 29.)
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 423
Seventh – Meter rates varying according to time
of day at which current is used
Example: ‘‘General Electric Company two-rate
meter.’’ (Doherty, 1910, p. 58)
The variety of methods proposed for classify-
ing costs and methods used for charging for
electricity re?ect the unsettled structure of the
electricity industry at the turn of the century.
Electricity was a small and fragmented indus-
try. Electric companies were almost exclusively
located in large metropolitan centers in the East
and Midwest. The sector largely comprised muni-
cipal power companies, who focused on street
lighting, and waterworks and electric trolley com-
panies, who generated their own electricity to
power their enterprises. There were only a limited
number of small private companies seeking to
expand the market by supplying residential and
retail establishments with electric light. Competi-
tion was relatively benign, there was no formula-
tion of the concept of a natural monopoly and
there were no giant investor owned utilities to
dominate the market. However, early cost con-
structs, which recognized the need to spread high
?xed costs over large numbers of customers and
to diversify load by attracting particular kinds
of customers, set the stage for intense competi-
tion, predatory pricing, bankruptcies and market
instability.
Constructing electricity markets
In this section we examine the role of account-
ing in the creation of investor owned regulated
monopolies which is the institutional form that
came to dominate electric utilities in the US. In
traditional economic texts, natural monopoly is
expressed in technologically deterministic terms.
For example:
A natural monopoly is meant to indicate that
this type of business, by virtue of its inherent
technical characteristics rather than by virtue
of any legal restrictions or ?nancial power
cannot be operated with e?ciency and econ-
omy unless it enjoys a monopoly of its mar-
ket. (Bonbright, 1961, p. 10)
However, assigning monopoly status to the
electricity industry was a highly charged and labo-
rious enterprise. Consistent with Fligstein’s (2001)
position, in order to understand the formation of
markets, one must move beyond traditional expla-
nations of technology and competition and con-
sider how ‘‘the dynamism of technology and
competition is situated in, de?ned by and struc-
tured through the production of ?rms, their social
relations with each other and their relations to
government’’ (p. 4), and thus we should in part
focus our study on entrepreneurs, managers,
workers, ?rms and government agencies.
3
Initially, the electricity industry comprised a
number of independent small power companies,
municipalities, street railways, and public and pri-
vate water companies which constructed and oper-
ated their own generating stations. The growth of
the power companies and their subsequent
monopoly status only came after heated debates,
extensive lobbying, developments in technology
and a ?nancial panic that destroyed investors’
faith in municipal bonds (Hirsch, 1989). The com-
bination of accounting and engineering knowl-
edge, which was rapidly accumulated during the
early years of the electricity industry in the US,
also played a critical role in this process. It was
the application of the newly acquired understand-
ing of the nature and behavior of costs in electric-
ity generation and distribution that the ‘‘secret’’ to
pro?ts through growth was constructed.
One of the earliest exponents of this business
strategy was Samuel Insull who was Thomas
Edison’s secretary until 1892 when he became
president of the small Chicago Edison Company.
It is in Insull’s business strategy that we see the
3
Some historians have recognized the ‘‘social’’ in the forma-
tion of markets. For example Hughes (1983) notes that in the
construction of the Pearl Street station, Edison was challenged
by ‘‘economic, legal, and legislative factors as well as technical
and scienti?c ones’’ (p. 29). According to Hughes, Edison hired
Grosvenor Lowery to guide him ‘‘in matters involving Wall
Street, New York City politics, . . . patent applications . . . and
gaslight interests and lamplighters who might be thrown out of
work by the new incandescent light.’’ (pp. 29 and 30).
Accounting numbers played a central role in the social and
political dimension of the formation and expansion of Edison’s
business.
424 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
application of the cost constructs developed by
Hopkinson and others. Insull’s aim was not to
manage costs directly, but rather to manage load
factor and diversity. As Hirsch (1989) notes:
Companies could improve their return on
investment by attracting customers who
boosted the load factor, managers learned
that they could lower their own costs, expand
service to new users, and o?er lower rates to
everyone. (Hirsch, 1989, p. 19)
Insull was acutely aware of the relationship
between load factor and diversity and the cost of
electricity. Insull wanted customers; not just any
customers, but those that would increase load fac-
tor and diversity. As it turned out the customers
Insull sought to attract were also his competitors.
To attract desirable customers, he aggressively dis-
counted rates to capture the big daytime users:
If you bring down your price to a point
where you can compel a manufacturer to
shut down his private plant because he will
save money by doing so; if you can compel
the street railway to shut down its generating
plant; if you can compel the city waterworks,
whether privately or publicly owned, to shut
down its power plant because of the prices
you quote – then you will begin to realize
the possibilities of this business, and these
possibilities may exceed your wildest dreams.
(Insull, 1915, pp. 116–117)
Insull’s wildest dreams were not just to make
pro?ts for the business, but also to transform his
small company into the region’s single provider
of electricity. Cost and customer constructs that
were developed to bill customers for their con-
sumption of energy, became those that informed
Insull’s obsession to become the dominant pro-
vider of energy in the Chicago area.
Before Insull could transform his small com-
pany, he had to enroll two emerging technologies
as his allies; namely, alternating current and the
steam turbine engine. In what has been termed
the ‘‘war of the currents’’ or the ‘‘battle of the sys-
tems’’, George Westinghouse and Elihu Thomson
championed AC technology as an alternative to
Edison’s DC system. The advantages of AC for
long distance transmission eventually made it the
winner; and Insull’s choice. Edison, despite a spir-
ited defense of his DC system, including claims
that AC current was far too dangerous – citing
that it was used in the electric chair – was ?nally
forced to merge with the Thomas-Houston ?rm
forming the General Electric Company.
At about the same time as the development of
AC systems, steam turbines were invented. These
turbines produced more energy more e?ciently
than the older reciprocating engines, allowing for
larger and larger generating stations to be built.
While the new technologies were instrumental in
the development of the monopolistic structure that
came to dominate the US electrical scene, it was
only in combination with the business strategy of
managing load factor and diversity that the
technology came to life and shaped the electricity
market. As observed by Fligstein (2001): ‘‘Techno-
logical change certainly can have independent
e?ects on social structures. But technological
change can have these e?ects only where the social
organization exists that makes technology rele-
vant’’ (p. 4). Insull described the combination of
technology and business strategy thus:
The perfection of the alternating-current sys-
tem, followed by the marvelous development
of the steam turbine, gave us great possibility
of low cost of production of electricity if we
could ?nd the customers to take it o? our
hands. (Insull, 1915, p. 130)
It was around these technologies that he articu-
lated his strategies of ‘‘getting into a larger way of
business’’ namely to quote low prices overall and
charge even lower prices for customers that
increased load factor and diversity. Insull’s entre-
preneurial approach and his adoption of AC and
steam turbine technology rendered existing busi-
ness practices and technologies obsolete. In his
quest to dominate the Chicago electricity market,
Insull ?rst targeted the street and elevated railway
businesses, as these companies would have the
greatest impact on the load factor of his company.
In so doing, Insull was able to rapidly expand his
business. The reduction in the cost of electricity led
to the ‘‘abandonment of small generating stations
and the massing of production on a very large
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 425
scale’’ (Insull, 1915, p. 148). In e?ect, Insull took
over or bankrupted the competition. The account-
ing constructs created in the early days of the
industry and deployed by Insull therefore did not
merely re?ect but rather helped shape the market
structure of electric companies in the Chicago area
in the early part of the 20th Century.
Insull’s thirst for growth through acquisition
also re?ected a broader trend in corporate Amer-
ica at this time. Electric utilities emerged at a time
when the US was undergoing profound changes in
its economic system. Perrow (2004) notes that in
1890 there were only a few large privately held cor-
porations in textiles, railroad and the oil steel and
locomotive industries and these hardly dominated
society, but:
At the turn of the century they made their
move, and in about ?ve years mergers had
produced most of the two hundred biggest
businesses of the time. Most of these still rule
their industries. (Perrow, 2004, p. 29)
This era included the rise of such industrial
giants as Borden, American Tobacco, Standard
Oil, Singer Sewing Machine, H.G. Heinz, Swift
and Company, and American Telegraph and Tele-
phone (Oakes et al., 1996, p. 575). Thus, Insull’s
arguments of getting into a larger way on business
echoed those within the Progressive era who cham-
pioned big business and as noted by Oakes et al.
(1996) couched their arguments inter alia in terms
of reducing costs to customers.
Recognizing the increasing size and market
share of his enterprise would soon attract the
attention of the state legislator, Insull began to
encourage government supervision in return for
monopoly status as early as 1889:
The business in which we are engaged can be
most successfully operated as a monopoly
business. If the communities which we serve
are to get electrical energy at the lowest pos-
sible cost, they can only expect to achieve
this by preventing duplication of investment
and by concentrating production under one
organization. The fact that low prices cannot
be permanently obtained by the old method
of encouraging competition is being very
generally recognized today; and as this
becomes more recognized, the regulation of
our business, our methods of conducting it,
our methods of ?nancing, will be subject
more and more to governmental supervision
in some form or another. (Insull, 1915, p.
155)
Insull’s proposal to accept government supervi-
sion in return for monopoly status was not popu-
lar with all owners of private electric companies.
However, (Oakes et al., 1996) note that in the Pro-
gressive era there was considerable opposition (as
well as support) for big business. The opposition
viewed the concentration of economic power as a
threat to democracy. Those who opposed the
growth of big business ‘‘were dismayed by the dis-
placement of small business by large competitive
?rms [and] the declining quality of life as the US
became more urban, more industrialized and more
centralized.’’ (Oakes et al., 1996, pp. 574–575)
As such, the growth of the electricity companies
was not altogether popular during an era when
‘‘big business’’ was increasingly distrusted. As
Hirsch (1989) notes, reformers, trust-busting poli-
ticians and so-called ‘‘muckraking journalists’’
were supporting public power movements. Indeed,
to counter the growth of private electricity compa-
nies, municipalities created their own power sta-
tions. By 1902 there were 815 municipal electric
systems in the US.
In 1907, after the collapse of the municipal
bond market, which prompted investors to favor
private rather than public enterprises, New York,
Massachusetts, and Wisconsin established regula-
tory commissions to grant monopoly status and
supervise the electricity companies in these states:
other states were soon to follow. The principle
aim of these commissions was:
To assure the public that it would receive a
socially and economically signi?cant com-
modity – electricity – at reasonable rates
and with reliable service; and to enable utility
companies to earn a ‘‘reasonable’’ return on
investments so they could produce electricity,
construct new facilities, and, in general,
maintain their ?nancial integrity. (Hirsch,
1989, p. 22)
426 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
As noted in the ‘‘Introduction’’ section, the
market structure of investor owned utilities was a
uniquely US phenomenon. In Europe, and subse-
quently in most other parts of the world, public
services including electricity were nationalized.
The institutional form of investor owned utilities
may in part be explained by the precedent of the
railroads which had adopted a similar institutional
form. Indeed, the National Association of Rail-
road and Utility Commissions (NARUC) was
soon formed to represent both railroad and other
utility commissions including electricity at the
state and national level. However, the Progressive
era concerns, discussed above, and we argue the
structure of the US state at the turn of the century,
in which the ‘‘federal state was kept weak, small
and divided’’ (Perrow, 2004, p. 31) led business-
men and state governments to adopt a structure
in which both the ideals of private ownership were
preserved but where business was conducted under
the scrutiny of a regulatory authority.
In stronger statist countries like the UK,
nationalization of public service companies was
the norm. From the earliest days of electricity in
the UK, the British Parliament created legislation
for the electri?cation of the country. As Hughes
(1983) cryptically notes:
In the United States authorization [for build-
ing power stations] came from the local gov-
ernment or authority, but in Britain the
problem moved quickly to the national level,
where Parliament and the Board of Trade
sought a general solution in legislation. Tho-
mas Edison had wined and dined New York
City alderman prior to the erection of the
Pearl Street station; but in Britain Joseph
Swan, J.E.H. Gordon and R.E.B. Cromp-
ton, all pioneer entrepreneurs in electric
lighting, gave a dinner for the Speaker of
the House of Commons and other leading
M.P.’s in a bid to win passage of the Electric
Light Act in 1882. (p. 58)
After passage of the 1882 Act, the electrical sys-
tem in the UK grew as a collection of private and
municipal companies which supplied electricity to
localized markets. In fact, by the end of the First
World War there were 600 electrical companies
in the UK, often with di?erent voltages which
made inter-connection di?cult (Surrey, 1996).
However, instead of evolving into investor owned
and regulated utilities, the UK electrical system
was nationalized, re?ecting very di?erent sets of
social concerns and a very di?erent government
structure. The process of state ownership began
in 1926 when the Conservative Government estab-
lished the Central Electricity Board which devel-
oped, owned and operated the transmission
system (The National Grid). In 1948 the electrical
system was fully nationalized and the British Elec-
tricity Authority was created to own and operate
generation stations and transmit power to 12
newly formed semi-autonomous Regional Distri-
bution Boards. This structure persisted until priv-
atization in 1990–1991. (Surrey, 1996, p. 21)
Although the creation of investor owned utili-
ties alleviated some of the ambiguities and tensions
between private ownership and regulation of pub-
lic services in the US, another set of ambiguities
and tensions emerged between the newly created
utilities and regulatory commissions. The resolu-
tion of these tensions as indicated by Oakes et al.
(1996) called upon legal and accounting experts
to develop a method of establishing electricity
prices through the regulation of cost and pro?ts.
This regulatory emphasis relied centrally on
accounting measurement which became the center
of a new and highly contested domain.
Constructing utility accounting
With the advent of regulation, the focus of
accounting in electric utilities shifted, as did the
arena in which the construction of accounting
took place. The new arena was that of the law
courts. Within this highly stylized and formal
arena, utilities and commissions argued their cases
and judges ruled in favor of the plainti? or the
defendant – in so doing, accounting was con-
structed through the rule of law. With this change
of location, the actors also changed. Historic per-
sonages like Edison, Westinghouse, Thomas and
Insull were eclipsed by more bureaucratic ?gures
– accountants, economists and lawyers – in short
the experts of the Progressive era.
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 427
The court rulings often involved other utilities
including gas, water and the railroads. However,
each ruling applied to all public utilities. The Judi-
ciary became involved in utility accounting as
early as 1890. In the Chicago, Milwaukee and St.
Paul Railway vs. Minnesota Case (1890), the
Supreme Court ruled that the reasonableness of
rates was subject to judicial review.
4
This marked
the beginning of the ‘‘judicial phase’’ of utility reg-
ulation, which was to last over ?ve decades (Phil-
lips, 1965, p. 135).
5
As a result of the numerous court rulings, a new
form of accounting was constructed in the US
between 1907 and 1944. This came to be called
public utility accounting. It was unique to the
US; in part because of the institutional structure
that was created to operate and regulate public
utilities. This is not to suggest that utility account-
ing was a byproduct of the creation of regulated
utilities, but rather was constitutive of that regime.
As we shall see below, for over 40 years utility reg-
ulation was shaped by accounting rules and dis-
putes. While public regulation of utilities was
deemed necessary, the degree and form of regula-
tion to be imposed was not initially clear. In this
respect, a regulatory regime had to be constructed
and accounting was inextricably involved in that
process of construction.
From the very outset regulation of prices was
integral to the principles of regulation in the US.
In Munn vs. Illinois (1877), a case concerning
grain storage plants in Chicago, the de?nition
and criteria for public utilities was laid out and
the imperative to regulate prices was expressed.
Chief Justice Waite commented:
Every bushel of grain for its passage pays a
toll which is a common charge and therefore
every such warehouseman ought to be under
public regulation, viz.: that he should take
but a reasonable toll. (Munn vs. Illinois,
1877, pp. 131–132)
Although the primary focus was on regulating
price, regulation also grew to cover quality and
quantity of service, safety of operation and e?-
ciency of management (Phillips, 1965, p. 123).
The centrality of accounting to the process of reg-
ulation was expressed by Oxtoby (1910).
The chief elements in determining a reason-
able rate for any particular public service
are (a) the fair value of the property used
in serving the public, (b) the reasonable value
of the service to the public, (c) the proper
deductions to be made for expenses, includ-
ing depreciation and obsolescence, and (d)
the reasonable rate of pro?t or return to be
allowed on the value of the property used.
(Oxtoby, 1910, p. 130)
Clearly operating costs or expenses, property
valuation and depreciation, all critical to the calcu-
lation, fell within the domain of accounting.
During this period, the focus of accounting
shifted away from understanding the nature and
behavior of costs towards issues of disclosure,
income measurement and asset valuation. The
newmeasurement, recording and reporting orienta-
tion of accounting took form within the tense rela-
tionship that existed between rate commissions and
utilities. There was not a great deal of trust between
the utilities and commissions in the early days and
rate of return regulation set the stage for a tumultu-
ous relationship between the two parties.
A gamesmanship was soon to emerge in which
utilities sought to manipulate the rate calculation
by in?ating the value of their property and maxi-
mizing the value of deductible expenses. Commis-
sions were justi?ably concerned that the property
valuations and accounts prepared by utilities were
biased or even fraudulent given that ‘‘many irreg-
4
The 1890 railway ruling was applied to the electric utilities
when the regulatory commission structure was put in place
beginning in 1907.
5
It is interesting to compare this judicial approach to
resolving accounting disputes with the approach adopted in
the UK. In England the issue of railroad regulation, as with
electricity regulation, took place in Parliament. In fact, William
Gladstone was the champion of both the bill to regulate the
railroads in 1844 when he was President of the Board of Trade
and the bill to regulate electricity in 1882 when he was Prime
Minister. In the UK accounting disputes were solved by
Parliamentary Committees rather than courts of law. For
example, the dispute over railroad depreciation was handled by
a House of Lords Select Committee – the Monteagle Commit-
tee – which was formed in 1849 (see Bryer, 1991, pp. 454–455)
While in the US, the nature and method of calculating
depreciation (see below) was contested in the Supreme Court.
428 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
ular accounting procedures and ?nancial abuses
were an integral part of American Indus-
try. . . from the turn of the century until the early
1930s.’’ (Phillips, 1965, p. 144)
Inaccurate or fraudulent records, capitalizing
expenses or expensing capital expenditures, in?at-
ing the value of property and equipment and com-
mingling regulated utility business with non
regulated non-utility business were all areas over
which regulators had concerns. Troxel (1947)
explains one such irregular practice:
Sometimes a plant was exchanged several
times, or was included in several successive
consolidations. And as each exchange or
consolidation was e?ected, the plant was
recorded at higher and higher book val-
ues . . . Other companies wrote up book val-
ues to the reproduction costs of their
properties; or they wrote up property
accounts to whatever ?gures suits their ?nan-
cial purposes. (Troxel, 1947, pp. 123–124)
In response to these concerns, state regulators
called for the right to prescribe accounting prac-
tices and disclosure requirements. Phillips (1965)
summarizes the various arguments put forward
for a uniform set of accounts:
In the ?rst place, rate-of return regulation
requires accurate records of operating costs,
depreciation expenses, and investment in
plant and equipment . . . In the second place,
accounting regulation is needed so as to dis-
tinguish between expenditures that should be
charged to capital and those that should be
charged to income. In the third place, as reg-
ulated companies are entitled to a fair rate-
of-return on the fair value of their property,
an accurate statement of a company’s prop-
erty account is one of the most important
objectives of accounting regulation and uni-
form systems of accounts. In the fourth
place, carrier and utility business must be
separated from non-carrier and non-utility
business. (pp. 145–146)
In 1912 commissions were given the right to
prescribe a ‘‘system of accounting’’ by the US
Supreme Court:
If the Commission is to successfully perform
its duties in respect to reasonable rates, with-
out undue discrimination, and favoritisms, it
must be informed as to the business of the
carriers of a system of accounting which will
not permit the possible concealment of for-
bidden practice. (Interstate Commerce
Comm. vs. Goodrich Transit Co., 1910)
With this ruling by the Supreme Court, individ-
ual state commissions developed speci?c charts of
accounts for utilities and determined reporting
requirements. These requirements typically dif-
fered between jurisdictions and were therefore of
limited value to federal regulators most impor-
tantly the Federal Power Commission (FPC)
6
.
After much lobbying, a uniform set of accounts
was adopted in 1935 by the Federal Power Act
of that year. The chart of accounts governs electric
utility accounting to this day. One year later,
NARUC adopted the uniform set of accounts pro-
posed by the FPC. Baum (1942) (in a somewhat
overstated fashion) summarizes the importance
of accounting to the regulatory process and the
magnitude of the FPC’s achievement in securing
agreement for uniformity in accounting practices:
No work of the Federal Power Commission
is more signi?cant than its control of
accounting. A basic tool for e?ective regula-
tion, accounting is the key to determination
of the actual legitimate original cost of all
licensed projects and therefore the ‘‘net
investment’’ which forms the basis for gov-
ernment acquisition of any project at the
expiration of the license period. It is the
source of accurate information to determine
the rate base (and therefore the reason-
ableness) of interstate wholesale rates, the
desirability of security issues, disposition of
property, such as write-ups in the value
of property and improper charges to capital
or operating expenses, and thereby the elim-
ination of such amounts from the costs that
are passed along to the consumer. Account-
ing is the basis for comprehensive ?nancial
6
The Federal Power Commission was charged with regulat-
ing rates for interstate wholesale transactions.
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 429
statistics of the industry, which in turn make
possible the arrival at useful tests and statis-
tical ratios, of value not only to the commis-
sion itself, but also to other state and Federal
agencies as well as the industry. Moreover it
makes possible a vast storehouse of informa-
tion regarding individual companies and
groups of companies. The importance of
measuring expenses and property valuations,
in rate-of-return regulation, prompted the
call for a uniform set of accounts for utilities.
In the case of electric utilities these debates
and court rulings continued from the turn
of the century until 1935 which is available
to the public at large and the state commis-
sions in particular. (Baum, 1942, p. 135)
The chart of accounts provided a framework
which established meaning and limited interpreta-
tion of accounting numbers. The subsequent uni-
formity permitted comparison of one utility
against another and these comparisons played a
prominent role in rate cases as both utilities and
commissions attempted to justify their claims for
and against a particular rate of return. In this
respect, the uniform chart of accounts signi?cantly
impacted the regulatory process. However the uni-
form chart of accounts only prescribed what
accounts were to be maintained and reported; it
did not resolve disputes over alternative methods
of measurement and valuation.
Because of the large asset base in electric utili-
ties, depreciation was a highly contested issue. A
President of NARUC when giving a retrospective
on depreciation accounting stated:
More confusion has arisen with respect to, or
has been injected into, regulatory thinking
with regard to depreciation in rate-making
than seems possible. In ratemaking, the
deduction has run the gamut from:
(1) no deduction at all, to
(2) deduction of an engineering determination,
to
(3) deduction of the accumulated accounting
reserve for depreciation, and
(4) to the deduction of a computed amount
which is alleged the accountants should have
accumulated if they had known what they
were doing.
The pendulum has indeed swung far, and the
process hasn’t been free from political in?u-
ences. (Quoted in Phillips, 1965, p. 245)
Thus, even the very principle of depreciation
itself was challenged. In 1909, the Supreme Court
stated the right of a regulated company to a depre-
ciation expense:
Before coming to the question of pro?t at all
the company is entitled to earn a su?cient
sum annually to provide not only for current
repairs but for making good the depreciation
and replacing the parts of the property when
they come to the end of their life. The com-
pany is not bound to see its property gradu-
ally waste, without making provision for its
replacement. (Wilcox vs. Consolidated Gas
Company, 1909)
Even by 1934 the courts were still only just
resolving the meaning of depreciation. The Court
de?ned depreciation thus:
Broadly speaking, depreciation is the loss, not
restored by current maintenance, which is due
to all the factors causing the ultimate require-
ment of the property. These factors embrace
wear and tear, decay, inadequacy, and obso-
lescence. Annual depreciation is the loss
which takes place in the year. In determining
reasonable rates for supplying public service,
it is proper to include in operating expenses,
that is, in the cost of producing the service
an allowance for consumption of capital in
order to maintain the integrity of the invest-
ment in the service rendered. Lindheimer vs.
Illinois Bell Telephone Company (1934)
In the intervening time, con?ict emerged
around depreciation methods. ‘‘One group [the
regulators] favored depreciation accounting or
the ‘‘periodic charge’’ method whereby reserves
were built up by charges during the estimated use-
ful life of the property. The other group, composed
largely of representatives of the gas and electric
industry, favored the ‘‘retirement accounting
430 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
method’’ (Baum, 1942, p. 42). Under this method,
replacements were not charged to operating costs
until they were actually made. (Riggs, 1932)
The reasonableness of other expenses was also
challenged in the law courts. The concern was to
limit the ‘‘abuse of discretion’’ by utility owners
and managers in what they claimed to be reason-
able costs. For example, in 1936 Justice Roberts’
rejected certain marketing costs and stated:
The contention is that the amount to be
expended for these purposes is purely a ques-
tion of managerial judgment. But this over-
looks the consideration that the charge is
for a public service, and regulation cannot
be frustrated by a requirement that the rate
be made to compensate extravagant or
unnecessary cost for these or any other pur-
poses. (Acker vs. United States, 1936)
Another major area of contention was the valu-
ation of assets and this controversy spilled over
into the depreciation accounting issue. The valua-
tion of assets was essential to determine the rate
base of the utility, or the asset base upon which
to calculate a return. The issue of valuation was
brought sharply into focus by a Supreme Court
ruling in one of the early landmark cases. In Smyth
vs. Ames in 1898, Justice Roberts stated:
The basis of all calculations as to the reason-
ableness of rates to be charged by a corpora-
tion . . . must be the fair value of the property
being used by it for the convenience of the
public. And in order to ascertain that value,
the original cost of construction, the amount
expended in permanent improvements, the
amount and market value of its bonds and
stock, the present as compared with the origi-
nal cost of construction, the probable earning
capacity of the property under particular
rates prescribed by statute, and the sum
required to meet operating expenses, are all
matters for consideration, and are to be given
such weight as may be just and right in each
case (Smyth vs. Ames, 1898, pp. 546–547).
While this ruling was most notable for its artic-
ulation of what factors commissions should con-
sider in determining the value of a company’s
property, it did not o?er any advice on how each
factor should be weighed. Over the following
years, many of the factors outlined in Smyth vs.
Ames were rejected in subsequent lawsuits on the
grounds that they were theoretically unsound.
For example, earnings capacity and the market
value of bonds were rejected on the grounds that
they involved circular reasoning; they depended
on the company’s earnings which, in turn,
depended on the rates charged (Knoxville vs.
Knoxville Water Company, 1908). The amount
of bonds and stock was rejected on the grounds
that using these amounts for rate-making purposes
would encourage stock watering and overcapitali-
zation. Finally, it was decided that operating
expenses had nothing to do with the determination
of the rate-base. As a result of these rejections,
arguments centered on the remaining factor of
original cost or reproduction cost of the asset
base. And ‘‘so started the valuation contro-
versy. . . which was to occupy much of the commis-
sions’ and companies’ time for many years.’’
(Phillips, 1965)
Initially, the commissions and the courts
favored reproduction cost largely on the grounds
that inconsistent and sometimes fraudulent
accounting practices made the determination of
original cost problematic. These issues led one
court to suggest: ‘‘the property may have cost
more than it ought to have cost’’ (San Diego Land
& Town vs. National City, 1899). Utilities on the
other hand favored original costs. Despite this,
reproduction cost was ?rmly established by the
rule of law when the Supreme Court in 1909 ruled
that:
There must be a fair return upon the reason-
able value of the property at the time it is
being used for the public. . . And we concur
with the court below in holding that the
value of the property is to be determined as
of the time when the inquiry is made regard-
ing the rates. If the property, which legally
enters into the consideration of the question
of rates, has increased in value since it was
acquired, the company is entitled to the ben-
e?t of such increase. (Wilcox vs. Consoli-
dated Gas Company, 1909)
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 431
Although in these and other rulings, the courts
emphasized that reproduction cost must be given
due consideration in rate cases, they never deter-
mined that reproduction cost furnished an exclu-
sive test, nor how reproduction cost should be
calculated. Rather the courts declared that:
The exercise of a reasonable judgment as to
the present ‘‘fair value’’ required some con-
sideration of reproduction cost as well as of
original cost, but that ‘‘present fair value’’
is not synonymous with ‘‘present replace-
ment cost’’. (Georgia Railroad and Power
Company vs. Railroad Commission (1923),
pp. 629–630)
The ambiguity contained in such rulings left the
determination of ‘‘fair value’’ wide open to inter-
pretation. Rate setting became a matter of legal
disputes over the appropriate method to account
for the fair value of assets. A number of Justices
became increasingly dissatis?ed with the fair value
approach. Indeed, a minority of the Supreme
Court repeatedly rejected the emphasis given to
reproduction cost. Justice Brandeis consistently
argued for the original costs of ‘‘prudent invest-
ment’’ – total assets minus any fraudulent, unwise,
or extravagant expenditure. The aim of Justice
Brandeis was to achieve a measure of value that
would be ‘‘certain and stable’’ and that would
‘‘not be determined as a matter of opinion.’’ Phil-
lips 1965 noted ‘‘instead of ?uctuating rate base
valuations, Justice Brandeis was perfectly willing
to adjust the rate-of-return as conditions varied.’’
(Phillips, 1965, p. 225) Likewise Justice Stone
argued:
In assuming the task of determining judicially
the present fair replacement value of the vast
properties of public utilities, courts have been
projected into the most speculative undertak-
ing imposed upon them in the entire history
of English jurisprudence. . . . When we arrive
at a theoretical value based upon such uncer-
tain and fugitive data we gain at best only an
illusory certainty West vs. Chesapeake and
Potomac Telephone Company (1935).
It was not until the mid 1930s that the courts
began to approve asset values based on original
cost. Phillips (1965) identi?es this period as consti-
tuting a ‘‘judicial shift’’ beginning with the Los
Angeles Gas and Electric vs. Railroad Commis-
sion of California in 1933 and culminating in the
Federal Power Commission vs. Hope Natural Gas
Company in 1944. For example, in 1942, the
Supreme Court ruled that:
We think this is an appropriate occasion to
lay the ghost of Smyth vs. Ames . . . which
has haunted utility regulation since
1898. . . . As we read the opinion of the
Court, the Commission is now freed from
the compulsion of admitting evidence on
reproduction cost or of giving any weight
to that element of ‘‘fair value.’’ The commis-
sion may now adopt, if it chooses, prudent
investment as a rate base – the base long
advocated by Mr. Justice Brandeis. (concur-
ring opinion, Federal Power Commission vs.
Natural Gas Pipeline, 1942)
The use of original cost was formally sanc-
tioned in The Federal Power Commission vs. The
Hope Natural Gas Company of 1944.
The Federal Power Commission vs. The Hope
Natural Gas Company is noted for much more
than establishing original cost; it created a twofold
shift in the regulatory process – a shift which
diminished accounting’s role in rate setting. First,
the case shifted attention from the rate base to
the rate of return. Second it largely withdrew the
courts from direct involvement in the rate setting
process. Welch (1961) explained the implications
of the 1944 ruling.
The departure of the old fair rate of return –
fair value doctrine, in e?ect, frees the regula-
tory commission from the federal court dom-
ination and close supervision which
prevailed in former years. This does not
mean that the regulatory problem of ?xing
reasonable rates is all settled. To the con-
trary, reasonable rates will probably be a
troublesome question as long as there is leg-
islation. This does however, place greater
responsibility on commissions, since reason-
able rates now become more a matter of
expert commission judgment and less a mat-
432 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
ter of rules and formulas. (Welch, 1961, p.
311)
In short, if the end result was reasonable,
regardless of the accounting rules and formulae
used to determine the fair value of assets, the
courts would not intervene. With this, regulatory
arguments shifted from justifying operating costs,
depreciation and particularly asset values to justi-
fying the rate of return and in particular the return
on equity a ?rm should earn.
The return to the equity owner should be
commensurate with returns on investments
in other enterprises having corresponding
risks. The return moreover, should be su?-
cient to assure con?dence in the ?nancial
integrity of the enterprise, so as to maintain
its credit and to attract capital. (Federal
Power Commission vs. Hope Natural Gas
Company, 1944)
The signi?cance of this shift may be illustrated
by examining the rate determination formula
namely R = O + (V À D)r. The variables ‘‘O’’
(operating costs), ‘‘V’’ (value of tangible assets)
and ‘‘D’’ (depreciation) which in the past were
contentious accounting issues were metaphorically
‘‘taken out of the equation’’, which left ‘‘r’’ the
rate of return that would ultimately determine
‘‘R’’ (the revenue requirements necessary to cover
operating costs and earn the appropriate return
on investment). In short, it was the rate of return
that would become the point around which future
disputes would take place. What is important is
that rate of return disputes were led by economists
not accountants. Instead of the ‘‘periodic charge
method’’ versus the ‘‘accounting accumulation
method’’ and ‘‘original’’ versus ‘‘reproduction
cost’’, debates raged over ‘‘comparable earnings’’
versus ‘‘capital attraction’’.
7
It is important to be clear that the reduced role
of accounting and accountants in the rate setting
process was neither because the ‘‘right’’ formula
for asset valuation was determined, nor was it
because accounting disputes between the utilities
and regulators were resolved. There was at least
the implicit recognition that the accounting for
asset valuation issue was irresolvable. In order
to dispense with interminable debates, it was
decided to focus on the end result of the rate of
return calculation, rather than the accounting
inputs. The method of asset valuation became
moot as regulators and utilities vied with each
other over the rate of return that would produce
a fair result regardless of the asset valuation
method applied. Accounting controversies were
quite literally side stepped. At this point the
courts not only sanctioned original cost valuation
they ceded power to the regulatory commission
who were free to establish valuation rules (almost
all adopted original cost) and thus e?ectively
eliminating accounting disputes from the utility
arena.
Conclusion
We began this paper by suggesting that
accounting played a constitutive role in the crea-
tion of electric utilities in the US. It was noted that
accounting concerns emerged when electricity
companies were in their infancy and continued
until the mid 1940s.
At ?rst, engineers and company owners strug-
gled with the anomaly that as additional customers
were connected to the network; earnings declined.
To unravel this conundrum, costs were classi?ed
as ‘‘standing’’ and ‘‘running’’, a link was forged
between costs and customer demand (load factor)
and type (load diversity), and a two-step billing
structure was created. The cost structure that
emerged from these early discourses was not inev-
itable; other structures were also developed. In this
respect, the cost structure was not simply revealed
it was constructed. Moreover, it did not merely
re?ect a technological or business reality, it worked
to shape the way in which technology was deployed
and the way in which business was conducted. The
‘‘secret to pro?ts’’ lay in strategies to deploy newly
emerging central station technology and attract
7
Capital attraction was to ensure ?nancial soundness, and it
called for a rate of return that was su?cient to assure
con?dence in the ?nancial integrity of the enterprise, so as to
maintain its credit and to attract capital. The comparable
earnings standard called for returns to be set equal to those
earned currently by other ?rms faced with comparable risks.
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 433
customers who improved load factor and diversity,
rather than managing costs per se. The pursuit of
customers led to a period of unbridled growth as
businessmen sought to merge with, acquire or
bankrupt the competition.
Samuel Insull was probably the most notorious
practitioner of ‘‘getting into a larger way of busi-
ness.’’ Insull systematically began o?ering dis-
counted prices to customers who would improve
the load factor and diversity of his company. Iron-
ically, these customers were also his competitors
who self generated energy. The outcome of Insull’s
strategy led to the replacement of small generating
stations in favor of large scale central production.
Insull’s strategy, which was both expansive and
predatory, created considerable turbulence and
instability in electricity markets. Thus, accounting
concepts developed in the early years of the indus-
try became the foundation of a business strategy
that would ultimately transform electricity mar-
kets in the US.
In many respects, Insull was a product of his
time. The US economy was undergoing a signi?-
cant transformation from a bucolic agrarian soci-
ety into an economic system based on large
privately held organizations with minimal state
regulation (Perrow, 2004). Insull’s growth strategy
echoed the rapid growth of big business in other
economic sectors during this period. The rise of
big business was not universally popular during
the Progressive era where many held that the con-
centration of economic power in the hands of the
private sector was a threat to democracy. Again
Insull was aware of these currents of concern
and this may explain why he invited government
regulation of his business in return for monopoly
status. The unique institutional structure adopted
to regulate utilities in the US, had its roots in the
grain elevator and railroad industries but also
re?ected wider tensions in US society and the
economy. The concept of investor-owned, regu-
lated utilities was intended to preserve the ideals
of private ownership, while providing regulatory
oversight to protect customers from the excesses
possible under a monopoly structure. What is
important, is that the regulatory process adopted
for utilities was premised upon and shaped by
accounting rules and practices.
For roughly half a century accounting issues
dominated and de?ned public utility regulation.
Asset valuation and the measurement of expenses
were not only highly disputed; they constituted a
regulatory paradigm for establishing earnings
and prices in which a ‘‘fair return’’ was based on
a ‘‘fair value’’. Utility earnings and prices were
regulated by setting asset values according to
accounting rules which were established and con-
tinually challenged in the Supreme Court. After
approximately 40 years of interminable debate,
particularly about asset valuation, a series of
Supreme Court rulings shifted the debates from
‘‘fair value’’ to ‘‘fair rate of return.’’ With this,
accounting controversies receded as economic jus-
ti?cations of return replaced the determination of
accounting valuation rules. The shift to regulating
earnings and prices by setting the return on invest-
ment a utility could earn, occurred not because the
courts ?nally got accounting right, but rather
because of a growing disa?ection with the inherent
di?culties of determining reproduction cost and
the interminable legal disputes around the mea-
surement of fair value. In short, accounting issues
were simply sidestepped, e?ectively ending over 40
years of accounting’s role in shaping the regula-
tory environment of utilities in the US.
References
Acker vs. United States (1936). 298 US 426.
Baum, R. D. (1942). Federal power commission and state utility
regulation. Washington, DC: American Council on Public
Utilitiesvch.
Bonbright, J. C. (1961). Principles of public utility rates. New
York: Columbia University Press.
Bryer, R. A. (1991). Accounting for the ‘‘Railway Mania’’ of
1845 – A great railway swindle? Accounting Organizations
and Society, 439–486.
Burchell, S., Clubb, C., & Hopwood, A. G. (1980). Accounting,
Organizations and Society, 5–28.
Chicago, Milwaukee & St. Paul Railway Company vs. Minne-
sota (1890). 134 US 418.
Cooper, D. J., & Sherer, M. J. (1984). The value of corporate
accounting reports: Arguments for a political economy of
accounting. Accounting, Organizations and Society,
207–232.
Doherty, H. (1910). Equitable, uniform and competitive rates.
In Presented before the National Electric Light Association
May 1910 [Reprinted in The Development of Scienti?c
434 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
Rates for Electric Supply: The Edison Company of Detroit
1915].
Federal Power Commission vs. Natural Gas Pipeline Company
(1942). 315 US 575.
Federal Power Commission vs. Hope Natural Gas Company
(1944). 320 US 591, p. 601.
Fligstein, N. (2001). The architecture of markets Princeton. NJ:
Princeton University Press.
Georgia Railroad & Power Co. vs. Railroad Commission
(1923). 262 US.
Greene, W. J. (1896). A method of calculating the cost of
furnishing electric current and a way of selling it. The
electrical world, February 29, 1896 (pp. 222–223) [Reprinted
in The Development of Scienti?c Rates for Electric Supply:
The Edison Company of Detroit 1915].
Hirsch, R. F. (1989). Technology and transformation in the
American electric utility industry. Berlin: Cambridge Uni-
versity Press.
Hopkinson, J. (1892). On the cost of electricity supply.
Transactions of the Junior Engineering Society (pp. 1–14)
[Reprinted in The Development of Scienti?c Rates for
Electric Supply: The Edison Illuminating Company of
Detroit 1915].
Hopwood, A. G. (1987). The archaeology of accounting
systems. Accounting, Organizations and Society, 207–234.
Hughes, T. P. (1983). Networks of power: Electri?cation in
Western Society 1888–1930. Baltimore, MD: The Johns
Hopkins University Press.
Insull, S. (1915). Public address reprinted. In W. E. Keily (Ed.),
Central Station Electric Service its Commercial Development
and Economic Signi?cance as set forth in Public Addresses
1987–1914 of Samuel Insull (Chicago: Privately Printed
1915).
Interstate Commerce Comm vs. Goodrich Transit Co. (1910).
224 US 452.
Knoxville vs. Knoxville Water Company (1908). 212 US 1.
Lindheimer vs. Illinois Bell Telephone Company (1934), 292 US
151.
Loft, A. (1986). Towards a critical understanding of account-
ing: The case of cost accounting in the UK, 1914–1925.
Accounting, Organizations and Society, 137–169.
Los Angeles Gas and Electric vs. Railroad Commission of
California (1933). 298 US 287.
Miller, P., Hopper, T., & Laughlin, R. (1987). The new
accounting history: An introduction. Accounting, Organiza-
tions and Society, 479–498.
Miller, P., & O’Leary, T. (1987). Accounting and the construc-
tion of the governable person. Accounting, Organizations
and Society, 235–265.
Munn vs. Illinois 94 (1877). US 113.
Napier, C. J. (2006). Accounts of change: 30 years of historical
accounting research. Accounting, Organizations and Society,
445–507.
Oakes, L. S., Miranti, L. S., Jr., & Louis, D. (1996). Brandeis
and standard cost accounting: A study of the construction
of historical agency. Accounting Organizations and Society,
569–586.
Oxtoby, J. (1910). Reasonable pro?t: Its de?nition, collection and
distribution. Presentation association Edison 1Companies
1910 [Reprinted in The Development of Scienti?c Rates for
Electric Supply: The Edison Company of Detroit 1915].
Passer, H. C. (1953). The electrical manufacturers 1875–1900.
Cambridge, MA: Harvard University Press.
Perrow, C. (2004). Organizing America. In F. Dobbin (Ed.),
The sociology of the economy. New York: Russel Sage
Foundation.
Phillips, C. F. (1965). The economics of regulation. Homewood,
IL: Richard D. Irwin Inc.
Riggs, H. E. (1932). The two radically di?erent concepts of
depreciation. Public Utilities Fortnightly, 559.
San Diego Land and Town vs. National City (1899). 174 US
739.
Smyth vs. Ames (1898). 169 US 466.
Surrey, J. (1996). The British electricity experiment. London:
Earthscan Publications Ltd.
Troxel, E. (1947). Economics of public utilities. New York: Holt,
Rinehart & Winston.
Welch, F. X. (1961). Cases and text on public utility regulation.
Washington, DC: Public Utility Reports, Inc.
West vs. Chesapeake & Potomac Telephone Company (1935).
295 US 662.
Wilcox vs. Consolidated Gas Company (1909). 212 US 19.
Wright, A. (1896). Cost of electricity supply. Minutes of
municipal electrical association (pp. 1–8) [Reprinted in The
Development of Scienti?c Rates for Electric Supply: The
Edison Company of Detroit 1915].
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 435
doc_223785753.pdf
This paper seeks to contribute to a longstanding tradition in accounting research which attempts to understand
accounting within its social and historical context. The topic of this historical narrative is the creation and role of
accounting in the formation of the electricity industry in the US between 1882 until 1944. The paper is divided into
three parts. In the first part we examine how early electrical engineers struggled to understand the nature and behavior
of the costs of generating and distributing electricity at the turn of the 19th Century
The construction of US utility accounting: 1882–1944
Alistair M. Preston
a,
*
, Andrew M. Vesey
b
a
University of New Mexico, Department of Accounting, Albuquerque, NM 87131-1221, United States
b
AES Latin America, DR-CAFTA Region, Arlington, VA 22203, United States
Abstract
This paper seeks to contribute to a longstanding tradition in accounting research which attempts to understand
accounting within its social and historical context. The topic of this historical narrative is the creation and role of
accounting in the formation of the electricity industry in the US between 1882 until 1944. The paper is divided into
three parts. In the ?rst part we examine how early electrical engineers struggled to understand the nature and behavior
of the costs of generating and distributing electricity at the turn of the 19th Century. In doing so, these engineers estab-
lished a relationship between costs and the engineering concepts of load factor and diversity and developed pricing
structures which would recover both standing (?xed) and running (variable) costs. In the second phase, we examine
how this accounting knowledge was deployed by early ‘‘inventor entrepreneurs’’ and businessmen in their attempts
to dominate the early electric markets in the US and how investor owned regulated utilities emerged out of these strat-
egies as a uniquely North American institution. In the ?nal phase, we examine how accounting became the center of
intense con?ict between regulatory commissions and investor owned utilities in the US court system – including the
Supreme Court – as representatives of these entities vied with each other over the chart of accounts, allowable expenses,
the valuation of assets and depreciation. Here we contend that utility accounting did not simply grow to re?ect a reg-
ulatory process but rather worked to shape utility regulation in the US. In 1944 a legal ruling displaced the primacy of
accounting in the regulatory process and shifted its focus from asset valuation to rate of return determination. The
space once dominated by accountants was ceded to regulatory economists. After that, accounting became taken-
for-granted and matter-of-fact.
Ó 2007 Published by Elsevier Ltd.
Introduction
This paper seeks to contribute to a longstanding
tradition in accounting research which attempts
‘‘to describe and interpret the behavior of account-
ing and accountants in the context of the institu-
tions in which they are historically located
(Cooper & Sherer, 1984, p. 214). In particular,
the paper seeks to contribute to the continued
‘‘need for more historical studies of the develop-
ment of accounting’’ and to address the questions
of ‘‘just how has accounting come to function as
0361-3682/$ - see front matter Ó 2007 Published by Elsevier Ltd.
doi:10.1016/j.aos.2007.03.003
*
Corresponding author.
E-mail addresses: [email protected] (A.M. Preston),
[email protected] (A.M. Vesey).
www.elsevier.com/locate/aos
Available online at www.sciencedirect.com
Accounting, Organizations and Society 33 (2008) 415–435
we now know it? What social issues and agents
have been involved with its emergence and devel-
opment? How has it become intertwined with
other aspects of social life? And what conse-
quences might it be seen as having had? (Burchell,
Clubb, & Hopwood, 1980, p. 23).
Since these, and numerous other calls for histor-
ically situated and institutionally contextualized
studies of accounting development in the late
1970s and early 1980s a considerable number of
such studies, typically referred to as the new
accounting history, have emerged (see Napier,
2006, for a review). Although the new accounting
history ‘‘does not represent a unitary research pro-
gramme, with de?nite theoretical boundaries’’ but
rather represents a ‘‘loose assemblage of often
quite disparate research questions and issues’’
(Miller, Hopper, & Laughlin, 1987, p. 396), Napier
(2006) notes that a recurring theme is that
‘‘accounting is not just re?ective but constitutive:
it is not merely a passive e?ect of its environment
but works to shape this environment.’’ (p. 456).
It is this constitutive role of accounting that is
important to this paper. In short, the paper exam-
ines the constitutive role of accounting in the for-
mation of investor owned electric utilities and in
the development of electricity markets in the US
between 1882 and 1944.
Electric utility accounting has been largely over-
looked in the accounting literature. This is surpris-
ing given that this industry arguably provided the
source of energy to power the second phase of
industrialization of the western hemisphere. As
Hughes (1983) notes:
Of the great construction projects of the last
century, none has been more impressive in its
technical, economic, and scienti?c aspects,
none has been more in?uential in its social
e?ects, and none has engaged more thor-
oughly our constructive instincts and capa-
bilities than the electrical power system.
A great network of power lines which will
forever order the way in which we live is
now superimposed on the industrial world.
(Hughes, 1983, p. 1)
In fact, considerably more attention has been
paid to the development of accounting in manu-
facturing and (e.g. Hopwood, 1987; Loft, 1986;
Miller & O’Leary, 1987) than the industry that
made possible its rapid growth in the early years
of the 20th Century.
The electricity industry in the US got o? to a
turbulent start. Heated debates and legal chal-
lenges over technology – direct current (DC) ver-
sus alternating current (AC); ownership structure
– public versus private; and market structure-regu-
lated natural monopoly versus free market compe-
tition, took place in the newspapers, regulatory
commissions and the law courts. The early years
of electricity were characterized by predatory pric-
ing, mergers and acquisitions and bankruptcies.
However, by the mid 1940s some level of stability
had been achieved; central station alternating cur-
rent technology reigned supreme; regulated inves-
tor owned utilities with monopoly rights to serve
de?ned service territories, dominated the market;
and price and service were regulated by state and
federal commissions.
Traditional histories of electric utilities and the
electricity market in the US typically focus on
technology and competition (see Hirsch, 1989,
for example). Fligstein (2001) suggests that
traditional histories argue that new markets form
when:
Opportunistic entrepreneurs ?nd a new mar-
ket for some good or service. This newmarket
often results from a technological break-
through. Then, others see the opportunity
and enter the same market. This creates com-
petition that forces producers to make prod-
ucts more e?ciently and at lower cost. The
winners of this battle are those who ?gure
out how to deliver the best goods at the
cheapest cost. (Fligstein, 2001, p. 3)
In histories of electricity in the US, Thomas
Edison, George Westinghouse and Elihu Thomson
are the legendary entrepreneurs. The technology
breakthroughs include the electric light bulb, the
transformer, the meter, and the electric motor.
One notable entrant into the market is Samuel
Insull, onetime assistant to Edison, who trans-
formed the ?edgling private and municipal power
providers in Chicago into a vast monopolistic
investor owned utility, which became the model
416 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
for the rest of the nation. The problem with these,
admittedly very plausible, histories is that they are
partial at best. As (Fligstein, 2001) notes:
As soon as one observes the formation and
operation of real markets, it becomes obvious
that none of the dynamism is possible with-
out deep involvement by entrepreneurs, man-
agers, workers, ?rms and governments. The
people who run ?rms have to conceptualize
opportunities, ?gure out ways to exploit them
and motivate others to help attain those ends.
They have to obtain funding, secure raw
materials, and build an organization. They
have to ?gure out ways to stabilize their inter-
actions vis-a`-vis their principal competitors.
Finally, the con?ict between owners and
those who work for them is under constant
negotiation. (Fligstein, 2001, p. 3)
This paper seeks to bring agency back in.
Consistent with the position adopted by Oakes,
Miranti, and Louis (1996) we neither regard
individuals as completely constructed nor fully
autonomous but rather ‘‘social positions are con-
structed in such a way that the individuals who
occupy them have the possibility of agency’’ (p.
570). Social position and the possibility of
agency is not exclusively reserved for such ele-
vated personages as Edison, and Insull or for
the Supreme Court Justices such as John Mar-
shall Harlan and Louis Brandeis who ruled on
accounting disputes, but also includes the numer-
ous engineers, accountants, economists and law-
yers who constructed electricity costs, developed
accounting valuation rules, gave expert testimony
and defended the legal position of utilities or
commissions. These often unnamed people were
regarded as experts and they held an important
social position in this period of US history.
These experts had a profound role to play in
the construction of utility accounting and how
it was deployed in the formation and regulation
of electric utilities in the US.
One notable history of electricity which recog-
nizes agency is a work entitled ‘‘Networks of
Power’’ by Hughes (1983). In this study, Hughes
explores not only the emergence and growth of
the technology underpinning of the ‘‘networks of
power’’ lines and generation stations, but also
the social ‘‘networks of power’’ that Edison and
other early inventor entrepreneurs developed to
?nance and operate their businesses. He writes:
The half-century from 1880 to 1930 consti-
tuted the formative years of the history of
electric supply systems, and from the study
of these years one can perceive the ordering,
integrating, coordinating and systematizing
nature of modern human societies. Electric
power systems demanded of their designers,
operators, and managers a feel for the pow-
erful manipulation of things, intellect for
the rational analysis of their nature and
dynamics and an ability to deal with the
messy economic, political and social vitality
of the production systems that embodied
the complex objectives of modern men and
women. (Hughes, 1983, p. 1)
Not surprisingly, even Hughes’ history, has lit-
tle mention of utility accounting and the constitu-
tive role it played during the formative years of the
industry. Where you do ?nd mention of account-
ing is in economic histories of regulation (see Phil-
lips, 1965). Such histories capture some of the
color of courtroom battles over ‘‘allowable
expenses’’ and ‘‘original versus reproduction cost’’
and the nefarious use of accounting numbers by
utility owners. However, the development of utility
accounting is generally represented in terms of an
inevitable progress toward becoming a faithful
mirror of economic reality – it was simply a matter
of getting accounting right.
In studying the constitutive role of accounting
in the emergence of investor owned utilities and
the creation of electricity markets in the US, one
is struck by the fact that the institutional form
and market structure that emerged was unique to
the US. In almost all other countries some form
of nationalization of privately owned and muni-
cipal power companies took place. The creation
of investor owned regulated utilities may be
explained by the relatively weak structure of fed-
eral and state government; however it may also
be seen to re?ect a number of themes that were
prevalent during the Progressive era. Oakes et al.
(1996) list these as follows:
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 417
(1) the rise of expertise as a ‘‘neutral’’ solu-
tion to the crisis of order; (2) a general wor-
rying about perceived threats to democracy
by the concentration of economic power;
(3) the ambiguity and contested nature of
government regulation that focused increas-
ingly on accounting measures of cost and
pro?ts; and (4) the movement to ‘‘expose’’
the truth, especially the prominence of the
‘‘muckraking’’ press. (Oakes et al., 1996,
p. 370)
These threads were interwoven through this per-
iod and following Oakes and Miranti, we argue that
they were instrumental in the ‘‘the development of
regulation which increasingly required the skills of
accountants, lawyers and other experts’’. Investor
owned regulated utilities were created in the
attempt to preserve the ideals of private ownership
yet at the same time regulate against the excesses
possible under a monopoly structure.
This paper has some contemporary relevance in
that the nationalized or state owned electricity
markets in most parts of the world including Eur-
ope, Eastern Europe, South America, Australia
and Africa have been or are being privatized.
What is signi?cant is that the model for regulation
and the calculation of rates based on reasonable
cost are derived from those established in the US
in the ?rst 44 years of the 20th Century. Thus,
the institutional structure of regulatory commis-
sions and some form of private ownership, along
with variations on the reasonable rate calculation,
which were laboriously and even painfully con-
structed within the turbulent era of US industrial-
ization, are being transplanted into very di?erent
social, institutional and cultural domains – includ-
ing Ukraine, Cameroon, Victoria, Australia, and
El Salvador in Central America. The resulting
impact of these transplantations and their subse-
quent mutations, including those of accounting,
though beyond the scope of this paper, are never-
theless worthy of study.
This historical narrative is divided into three
phases. In the ?rst phase entitled ‘‘Constructing
Costs’’, we examine articles written in the 1890s
by UK and US engineers on the nature and behav-
ior of costs in ?edgling electricity companies.
The authors of these texts re?ected upon the pecu-
liar nature of electricity as a product and how costs
behaved under di?erent scenarios. These early and
very sophisticated accounting constructions are
reminiscent of Josiah Wedgwood’s correspondence
on the cost of producing pottery (Hopwood, 1987).
Here we can see how costs were ‘‘laboriously cre-
ated’’ through observation of and re?ection upon
the inner workings of early generation plants and
distribution systems. The relevance of this section
is that these cost constructions enabled subsequent
businessmen such as Samuel Insull to conceptualize
opportunities in the electricity industry and ?gure
out ways to exploit them (Fligstein, 2001, p. 3).
The second section entitled ‘‘Constructing Elec-
tricity Markets’’, examines how prominent ?gures
such as Thomas Edison, George Westinghouse
and Samuel Insull used these early cost constructs
to combine technology with business practices
that radically restructured the electric industry.
Through these practices, small privately owned
and municipal power companies were transformed
into large horizontally and vertically integrated
monopolies before ?nally being regulated by state
and federal commissions. It is here that we exam-
ine how individual businessmen negotiated the
ambiguities of Progressive era concerns to ?rst
grow their businesses through predatory pricing,
and acquisitions and mergers and then sought a
regulatory structure that would allow their busi-
nesses to operate as a monopoly and yet retain
their investor owned status. The resulting institu-
tional structure provides the context necessary to
understand the role of the judiciary in the con-
struction of utility accounting which is the subject
of the ?nal section.
In the ?nal section entitled ‘‘Constructing Util-
ity Accounting’’, we examine how a new domain
was opened up for accounting and legal experts,
how a new practice of accounting was constructed
and how accounting contributed to shaping the
regulatory arena in the US. In this period, the
focus of accounting shifted away from manage-
ment concerns about the nature and behavior of
costs, towards issues of ?nancial disclosure,
income measurement and asset valuation. The ?eld
or arena also changed from boardrooms to court-
rooms. Accounting became the focus of, and was
418 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
itself transformed by, a series of highly contested
Supreme Court cases between utility owners and
regulatory commissions. It is here we can see
how accounting played a constitutive role in shap-
ing the regulated utility environment in the US.
Constructing costs
Thomas Edison established a power company
in New York City in 1882 to sell electricity to
owners of his new incandescent light bulbs.
Though typically acknowledged as the inventor
of the light bulbs and a host of other electricity
related technology, Edison was also an accom-
plished entrepreneur. Hughes (1983) describes
him as an ‘‘inventor–entrepreneur.’’ Edison not
only invented things, but also established busi-
nesses and business practices to pro?t from his
inventions. The Edison Electric Light Firm in
New York was the ?rst successful system for pro-
ducing and distributing electric power. Edison’s
Pearl Street power station consisted of coal-?red
boilers that produced steam for reciprocating
engines that turned generators (magnets housed
within coils of wire) to produce direct-current
(DC) electricity. Electricity was distributed to cus-
tomers within an area of one square mile in the
Wall Street district of New York City via under-
ground wires.
: t n e m t s e v n I l a t i p a C
Depreciation
Power Plant Buildings $ 8,500 2% $ 170
Boilers and auxiliary equipment 30,180 10% 3,018
Steam engines and dynamos 48,000 3% 1,440
Auxiliary electrical equipment 2,000 2% 40
0 4 1 , 1 % 2 0 0 0 , 7 5 s r o t c u d n o C
0 5 2 % 5 0 0 0 , 5 s r e t e M
8 5 0 , 6 $ 0 8 6 , 0 5 1 $ l a t o T
Operating and Other Expenses
: ) y l i a D ( r o b a L
0 0 . 5 $ r e e n i g n e f e i h C
0 0 . 3 r e e n i g n e t n a t s i s s A
0 5 . 1 r e p i W
5 2 . 2 n a m e r i f l a p i c n i r P
5 7 . 1 n a m e r i f t n a t s i s s A
Chief voltage regulator 2.25
Assistant voltage regulator 1.75
0 0 . 3 s r e r o b a l o w T
0 5 . 0 2 $ l a t o T
2 8 4 , 7 $ ) l a u n n A ( r o b a L
: r e h t O
Executive wages (annual) 4,000
Rent, insurance and taxes 7,000
8 5 0 , 6 n o i t a i c e r p e D
Coal (annual)
($2.8/ton; 3#/h.p. hour: 5hours
Daily: 1,200 h.p.)
8,212
Oil, waste and water 2,737
Lamps (30,000 at 35c each) 10,500
9 8 9 , 5 4 $ l a t o T
Estimated Minimum Income from 10,000 Installed Lamps $136,875
Expenses - 45,989
6 8 8 , 0 9 $
Fig. 1. Edison’s estimate for a 10,000-lamp central station. From Menlo Park Notebook no. 1 (1880). (Reproduced from Hughes, 1983
p. 39.)
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 419
From the outset, Edison was acutely concerned
with both the capital and operating costs of his
system. His overriding concern was that electricity
‘‘could produce light at a price lower than that of
gas’’ (Passer, 1953, p. 23). Passer further states
that ‘‘from the economist’s viewpoint, the most
signi?cant aspect of Edison’s activities in electric
lighting was his concern at every step of the way
with economic factors’’ (p. 83). By 1880 Edison
had developed the following budget for a 10,000
– lamp central station representing his ?nancial
vision for his Pearl Street Stati (Fig. 1).
This budget reveals both Edison’s grasp of busi-
ness and represents the clear economic concerns of
his enterprise. However such accountings were not
su?cient to run the business pro?tably.
Electricity is a very strange product. It is shape-
less, invisible, and most importantly it cannot be
inexpensively stored. The Edison Electric Light
Firm, which made losses in its ?rst two years of
operations, and other emerging electric light ?rms
in the US and Europe, faced a curious business
anomaly; as additional customers were connected,
earnings declined. As one English manager, remi-
niscing on the early days of electricity, wrote in
1896: ‘‘To ?nd that too much business was under-
mining the stability of the company and jeopardiz-
ing its success was startling’’ (Greene, 1896, p. 24).
This curious anomaly inspired a number of electri-
cal engineers and business owners to turn their
attention to the nature and behavior of costs and
how to bill customers for this unique product.
The root of the anomaly resided in the fact that
because electricity could not be inexpensively
stored, and because response to demand had to
be instantaneous, output had to be maintained
whether the electricity was being used (and hence
billed) or not. This is as true today as it was in
the 1880s. In 1892, an Englishman named Hopkin-
son explained this phenomenon in terms of the
concept of the ‘‘load factor’’ (the ratio of average
daily or yearly use of electricity to the maximum
load sustained during the same period) of a sys-
tem.
1
The load factor essentially explained that if
it were incumbent on the electric companies to
supply electricity at a moment’s notice, then it
would cost practically the same to produce and
distribute electricity to a customer base that used
the energy, for say, 1 h a day as it would for a cus-
tomer base that used electricity, for say, 16 h/day.
In the former case, the company could only charge
the customer for 1 h of energy, while in the latter
case it could charge for 16 h. Recognition of this
phenomenon rested, in part, on a surprisingly
sophisticated discourse on the nature and behavior
of costs.
John Hopkinson began a detailed analysis of
the cost of producing and supplying electricity that
was published in 1892. Hopkinson began his anal-
ysis by distinguishing between ‘‘standing’’ and
‘‘running’’ costs. He described them in the follow-
ing manner:
You are familiar with the fact that the
expenses of an undertaking may be broadly
divided into two classes. On the one hand
there are expenses which are quite indepen-
dent of the extent to which the undertaking
is used (standing costs), and on the other,
expenses which are absent unless the under-
taking is used and which increase in propor-
tion to the use. (Hopkinson, 1892, p. 8)
Having established the cost structure
2
of the
electricity industry he attempted to explain the
dilemma:
Electrical engineers now realize that they
have to provide the same plant and no more
to give a steady supply day and night as to
give a supply for one hour out of twenty
four. They also now realize that if they are
to be ready to give a supply at any moment,
they must burn much coal and pay much
1
According to Hopkinson (1892) the concept of the load
factor was developed by a Mr. Crompton who was on of the
pioneers of the electri?cation of the UK.
2
It is clear from Hopkinson’s opening phrase that the notion
of standing costs (which he subsequently referred to as ‘‘?xed’’)
and running costs were familiar terms of use and were most
likely derived from the railroad industry. This speculation is
reinforced later in Hopkinson’s paper where he used an
example from the railroads to elaborate upon his de?nition of
theses cost categories and to illustrate the dilemma of decreas-
ing earnings with increased sales.
420 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
wages for however short a time the supply is
actually taken. (Hopkinson, 1892, p. 9)
To illustrate his point, Hopkinson created a
hypothetical example. First, he presented the ‘‘cap-
ital outlay required’’ for an electricity company as
follows (Fig. 2).
Hopkinson then developed annual charges for
each item of capital under two scenarios and this
is where his accounting di?ered from the one
developed by Edison (see above). Both scenarios
had the capability of supplying 40,000 ‘‘sixteen-
candle lamps’’ at one time. In one scenario, the
lamps were hardly ever used while in the other,
the lamps were used continuously. The ?rst sce-
nario was referred to as running light, and has a
load factor of ‘‘nil’’ while the second scenario
was referred to as fully loaded and has a load fac-
tor of 100%. Hopkinson then developed the
annual charges for the company. For example,
the charges for land and buildings were estimated
at 4% while annual repairs for these items were
estimated at 10%. He then notes that:
The boilers, engines and dynamos will have a
charge for interest, and a charge for writing
o?, or amortization as the French call it, that
is, for writing o? the value of the plant before
the time at which it becomes antiquated.
(Hopkinson, 1892, p. 11)
Hopkinson argued that for each of these items,
the charge for running light or fully loaded would
be the same. However in the case of engines and
dynamos there would be an added charge for a
fully loaded operation because running the equip-
ment at full capacity would create additional wear
and tear and thus a higher maintenance expense.
His analysis of annual operating and maintenance
costs was as follows (Fig. 3).
Finally, Hopkinson added coal and other con-
sumables that vary between running light and fully
loaded and came up with this ?nal analysis
(Fig. 4).
In summary Hopkinson notes:
The cost of merely being ready to supply
2500 units per hour at any moment through-
out the year will be £28,010, and the cost of
actually supplying 2500 units per hour for
every minute of the year will be £59,250.
(Hopkinson, 1892, p. 13)
While a fully loaded system costs nearly twice
as much as running light, under the running light
scenario little revenue would be generated, while
under the fully loaded scenario revenue would be
generated continuously.
Based on this analysis, Hopkinson argued for a
two-step rate structure; namely one that applies ‘‘a
?xed charge per quarter proportioned to the great-
Land………………………………… 25,000
Buildings……………………………. 15,000
Boilers and Pipes……………………. 14,000
Engines……………………………… 24,000
Dynamos……………………………. 15,000
Switchboard and Instruments………. 2,000
Feeders and Mains………………… 50,000
145,000
Fig. 2. Estimated capital outlay for a maximum of 40,000-lamp
station. (Reproduced from Hopkinson, 1892, p. 10.)
Running Light Fully Loaded
Land………………………………… 1,000 1,000
Buildings……………………………. 1,500 1,500
Rates………………………………… 500 500
Boilers……………………………… 2,100 2,100
Switchboard and Conductors………. 7,800 7,800
Engines……………………………… 2,160 3,600
Dynamos……………………………. 1,350 2,250
16,410 18,750
Fig. 3. Fixed charges for a 40,000-lamp station ‘‘running light’’ vs. ‘‘fully loaded’’. (Reproduced Hopkinson, 1892, p. 11.)
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 421
est rate of supply the customer will ever take, and a
charge by meter for the actual consumption.’’
(p. 13) For the example given:
The undertaker, therefore who incurs the lia-
bility to supply, ought to receive £11 per
annum per unit per hour from those on
whose behalf he incurs the liability, and if
he receives the £11, he need not charge more
than 1/3d. per unit for what he actually sup-
plies to cover his expenses. (Hopkinson,
1892, p. 13)
Given that Hopkinson was an engineer, the
undercurrent of technological determinism in his
writing is not unexpected. However, the classi?ca-
tion of costs into standing and running was not
inevitable. As Hopwood (1987) notes of Wedg-
wood’s e?orts to develop cost statements for his
potteries, the costs of electricity had to be labori-
ously created rather than revealed. The di?erence
being is that unlike Wedgwood, Hopkinson and
his colleagues had some procedures for observing
the inner workings of electricity companies estab-
lished in the railroad companies. Nevertheless
other cost constructions could and indeed did
emerge. For example, Greene (1896) an engineer
from the US, instead of two cost categories,
o?ered four:
First. Expenses a?ected by equipment, from
real estate to meters, and expressed by the
relation of the maximum number of lights
burned at one time during the year to the
investment.
Second. Expenses a?ected by the number of
consumers.
Third. Expenses a?ected by the amount of
work done by engines, boilers, dynamos,
etc., and shown by the output of watt-hours.
Fourth. Expenses practically unvarying, and
practically independent of the size of the
plant, the number of consumers or the
amount of current supplied. (Greene, 1896,
p. 24).
The multiplicity of cost structures proposed
during this era reinforces the position that they
were constructed and not revealed.
Arthur Wright (1896) from Brighton in the UK
provided a con?rmation of Hopkinson’s cost
model. Wright presented his results in the follow-
ing graph (Fig. 5):
Sales were represented by the solid line,
monthly costs by the upper dotted line and the
maximum annual load as the lower dotted line.
As can be clearly seen, ‘‘there is no obvious con-
nection’’ between the sales and cost curve.
However,
a very obvious tendency becomes apparent
after the ?rst or second year for the monthly
total expenditure to follow this line joining
the points representing the annual maximum
loads and the slight deviation from this line
will be found to be roughly proportional to
the monthly sales of electricity. (Wright,
1896, p. 39)
In conclusion he notes that:
The chief governing factor in determining the
monthly expenditure of any Central Station
will probably be found to be the maximum
annual load which the station has to be pre-
pared to meet. (Wright, 1896, p. 39)
Wright was also quick to note that the cost of
supplying electricity fell rapidly as ‘‘the average
time of use increases.’’ This phenomenon made
some customers more desirable than others. Indeed,
Running Light Fully Loaded
Fixed Charges..…………………… 16,410 18,750
Coal ……………………………. 6,000 30,000
Stores……………………………... 600 3,000
Wages……………………………… 5,000 7,500
28,010 59,250
Fig. 4. Total expenses for a 40,000-lamp station ‘‘running light’’ vs. ‘‘fully loaded’’. (Reproduced Hopkinson, 1892, p. 12.)
422 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
Hopkinson, Wright and Greene all noted that those
customers who used electricity when demand was
low, or who used electricity for long continuous
periods of time were particularly desirable and
argued that discounted rates should be used to
attract them. Thus, di?erent classes of customers
were created. This was referred to as ‘‘load diver-
sity.’’ In this respect, discourses on costs not only
constructed costs but also the customer.
As can be seen from the above texts, the focus
of the discussion was primarily concerned with
developing appropriate methodologies to capture
revenue that re?ected the pattern of cost incur-
rence. Each author argued for a two-step method.
One would recover the ?xed costs of the enterprise;
the other would recover the variable costs. How-
ever this two step method was not universally
applied. In fact, Doherty (1910) noted that there
were at least seven methods of charging for elec-
tricity in the US at the turn of the century:
First – Flat rates
Second – Uniform rates
Third – Meter rates di?ering on quantity of
consumption
Fourth – Meter rates with minimum guarantee
Fifth – Meter rates di?erent on amount of time
maximum capacity of installation is used
Example: New York System
Sixth – Meter rates varied by the amount of
time maximum demand is used
Example: Wright demand system
Fig. 5. ‘‘Curves showing relation between Monthly Expenditure, Output in Units and Annual Maximum Load (Reprinted from
Wright, 1896, p. 29.)
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 423
Seventh – Meter rates varying according to time
of day at which current is used
Example: ‘‘General Electric Company two-rate
meter.’’ (Doherty, 1910, p. 58)
The variety of methods proposed for classify-
ing costs and methods used for charging for
electricity re?ect the unsettled structure of the
electricity industry at the turn of the century.
Electricity was a small and fragmented indus-
try. Electric companies were almost exclusively
located in large metropolitan centers in the East
and Midwest. The sector largely comprised muni-
cipal power companies, who focused on street
lighting, and waterworks and electric trolley com-
panies, who generated their own electricity to
power their enterprises. There were only a limited
number of small private companies seeking to
expand the market by supplying residential and
retail establishments with electric light. Competi-
tion was relatively benign, there was no formula-
tion of the concept of a natural monopoly and
there were no giant investor owned utilities to
dominate the market. However, early cost con-
structs, which recognized the need to spread high
?xed costs over large numbers of customers and
to diversify load by attracting particular kinds
of customers, set the stage for intense competi-
tion, predatory pricing, bankruptcies and market
instability.
Constructing electricity markets
In this section we examine the role of account-
ing in the creation of investor owned regulated
monopolies which is the institutional form that
came to dominate electric utilities in the US. In
traditional economic texts, natural monopoly is
expressed in technologically deterministic terms.
For example:
A natural monopoly is meant to indicate that
this type of business, by virtue of its inherent
technical characteristics rather than by virtue
of any legal restrictions or ?nancial power
cannot be operated with e?ciency and econ-
omy unless it enjoys a monopoly of its mar-
ket. (Bonbright, 1961, p. 10)
However, assigning monopoly status to the
electricity industry was a highly charged and labo-
rious enterprise. Consistent with Fligstein’s (2001)
position, in order to understand the formation of
markets, one must move beyond traditional expla-
nations of technology and competition and con-
sider how ‘‘the dynamism of technology and
competition is situated in, de?ned by and struc-
tured through the production of ?rms, their social
relations with each other and their relations to
government’’ (p. 4), and thus we should in part
focus our study on entrepreneurs, managers,
workers, ?rms and government agencies.
3
Initially, the electricity industry comprised a
number of independent small power companies,
municipalities, street railways, and public and pri-
vate water companies which constructed and oper-
ated their own generating stations. The growth of
the power companies and their subsequent
monopoly status only came after heated debates,
extensive lobbying, developments in technology
and a ?nancial panic that destroyed investors’
faith in municipal bonds (Hirsch, 1989). The com-
bination of accounting and engineering knowl-
edge, which was rapidly accumulated during the
early years of the electricity industry in the US,
also played a critical role in this process. It was
the application of the newly acquired understand-
ing of the nature and behavior of costs in electric-
ity generation and distribution that the ‘‘secret’’ to
pro?ts through growth was constructed.
One of the earliest exponents of this business
strategy was Samuel Insull who was Thomas
Edison’s secretary until 1892 when he became
president of the small Chicago Edison Company.
It is in Insull’s business strategy that we see the
3
Some historians have recognized the ‘‘social’’ in the forma-
tion of markets. For example Hughes (1983) notes that in the
construction of the Pearl Street station, Edison was challenged
by ‘‘economic, legal, and legislative factors as well as technical
and scienti?c ones’’ (p. 29). According to Hughes, Edison hired
Grosvenor Lowery to guide him ‘‘in matters involving Wall
Street, New York City politics, . . . patent applications . . . and
gaslight interests and lamplighters who might be thrown out of
work by the new incandescent light.’’ (pp. 29 and 30).
Accounting numbers played a central role in the social and
political dimension of the formation and expansion of Edison’s
business.
424 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
application of the cost constructs developed by
Hopkinson and others. Insull’s aim was not to
manage costs directly, but rather to manage load
factor and diversity. As Hirsch (1989) notes:
Companies could improve their return on
investment by attracting customers who
boosted the load factor, managers learned
that they could lower their own costs, expand
service to new users, and o?er lower rates to
everyone. (Hirsch, 1989, p. 19)
Insull was acutely aware of the relationship
between load factor and diversity and the cost of
electricity. Insull wanted customers; not just any
customers, but those that would increase load fac-
tor and diversity. As it turned out the customers
Insull sought to attract were also his competitors.
To attract desirable customers, he aggressively dis-
counted rates to capture the big daytime users:
If you bring down your price to a point
where you can compel a manufacturer to
shut down his private plant because he will
save money by doing so; if you can compel
the street railway to shut down its generating
plant; if you can compel the city waterworks,
whether privately or publicly owned, to shut
down its power plant because of the prices
you quote – then you will begin to realize
the possibilities of this business, and these
possibilities may exceed your wildest dreams.
(Insull, 1915, pp. 116–117)
Insull’s wildest dreams were not just to make
pro?ts for the business, but also to transform his
small company into the region’s single provider
of electricity. Cost and customer constructs that
were developed to bill customers for their con-
sumption of energy, became those that informed
Insull’s obsession to become the dominant pro-
vider of energy in the Chicago area.
Before Insull could transform his small com-
pany, he had to enroll two emerging technologies
as his allies; namely, alternating current and the
steam turbine engine. In what has been termed
the ‘‘war of the currents’’ or the ‘‘battle of the sys-
tems’’, George Westinghouse and Elihu Thomson
championed AC technology as an alternative to
Edison’s DC system. The advantages of AC for
long distance transmission eventually made it the
winner; and Insull’s choice. Edison, despite a spir-
ited defense of his DC system, including claims
that AC current was far too dangerous – citing
that it was used in the electric chair – was ?nally
forced to merge with the Thomas-Houston ?rm
forming the General Electric Company.
At about the same time as the development of
AC systems, steam turbines were invented. These
turbines produced more energy more e?ciently
than the older reciprocating engines, allowing for
larger and larger generating stations to be built.
While the new technologies were instrumental in
the development of the monopolistic structure that
came to dominate the US electrical scene, it was
only in combination with the business strategy of
managing load factor and diversity that the
technology came to life and shaped the electricity
market. As observed by Fligstein (2001): ‘‘Techno-
logical change certainly can have independent
e?ects on social structures. But technological
change can have these e?ects only where the social
organization exists that makes technology rele-
vant’’ (p. 4). Insull described the combination of
technology and business strategy thus:
The perfection of the alternating-current sys-
tem, followed by the marvelous development
of the steam turbine, gave us great possibility
of low cost of production of electricity if we
could ?nd the customers to take it o? our
hands. (Insull, 1915, p. 130)
It was around these technologies that he articu-
lated his strategies of ‘‘getting into a larger way of
business’’ namely to quote low prices overall and
charge even lower prices for customers that
increased load factor and diversity. Insull’s entre-
preneurial approach and his adoption of AC and
steam turbine technology rendered existing busi-
ness practices and technologies obsolete. In his
quest to dominate the Chicago electricity market,
Insull ?rst targeted the street and elevated railway
businesses, as these companies would have the
greatest impact on the load factor of his company.
In so doing, Insull was able to rapidly expand his
business. The reduction in the cost of electricity led
to the ‘‘abandonment of small generating stations
and the massing of production on a very large
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 425
scale’’ (Insull, 1915, p. 148). In e?ect, Insull took
over or bankrupted the competition. The account-
ing constructs created in the early days of the
industry and deployed by Insull therefore did not
merely re?ect but rather helped shape the market
structure of electric companies in the Chicago area
in the early part of the 20th Century.
Insull’s thirst for growth through acquisition
also re?ected a broader trend in corporate Amer-
ica at this time. Electric utilities emerged at a time
when the US was undergoing profound changes in
its economic system. Perrow (2004) notes that in
1890 there were only a few large privately held cor-
porations in textiles, railroad and the oil steel and
locomotive industries and these hardly dominated
society, but:
At the turn of the century they made their
move, and in about ?ve years mergers had
produced most of the two hundred biggest
businesses of the time. Most of these still rule
their industries. (Perrow, 2004, p. 29)
This era included the rise of such industrial
giants as Borden, American Tobacco, Standard
Oil, Singer Sewing Machine, H.G. Heinz, Swift
and Company, and American Telegraph and Tele-
phone (Oakes et al., 1996, p. 575). Thus, Insull’s
arguments of getting into a larger way on business
echoed those within the Progressive era who cham-
pioned big business and as noted by Oakes et al.
(1996) couched their arguments inter alia in terms
of reducing costs to customers.
Recognizing the increasing size and market
share of his enterprise would soon attract the
attention of the state legislator, Insull began to
encourage government supervision in return for
monopoly status as early as 1889:
The business in which we are engaged can be
most successfully operated as a monopoly
business. If the communities which we serve
are to get electrical energy at the lowest pos-
sible cost, they can only expect to achieve
this by preventing duplication of investment
and by concentrating production under one
organization. The fact that low prices cannot
be permanently obtained by the old method
of encouraging competition is being very
generally recognized today; and as this
becomes more recognized, the regulation of
our business, our methods of conducting it,
our methods of ?nancing, will be subject
more and more to governmental supervision
in some form or another. (Insull, 1915, p.
155)
Insull’s proposal to accept government supervi-
sion in return for monopoly status was not popu-
lar with all owners of private electric companies.
However, (Oakes et al., 1996) note that in the Pro-
gressive era there was considerable opposition (as
well as support) for big business. The opposition
viewed the concentration of economic power as a
threat to democracy. Those who opposed the
growth of big business ‘‘were dismayed by the dis-
placement of small business by large competitive
?rms [and] the declining quality of life as the US
became more urban, more industrialized and more
centralized.’’ (Oakes et al., 1996, pp. 574–575)
As such, the growth of the electricity companies
was not altogether popular during an era when
‘‘big business’’ was increasingly distrusted. As
Hirsch (1989) notes, reformers, trust-busting poli-
ticians and so-called ‘‘muckraking journalists’’
were supporting public power movements. Indeed,
to counter the growth of private electricity compa-
nies, municipalities created their own power sta-
tions. By 1902 there were 815 municipal electric
systems in the US.
In 1907, after the collapse of the municipal
bond market, which prompted investors to favor
private rather than public enterprises, New York,
Massachusetts, and Wisconsin established regula-
tory commissions to grant monopoly status and
supervise the electricity companies in these states:
other states were soon to follow. The principle
aim of these commissions was:
To assure the public that it would receive a
socially and economically signi?cant com-
modity – electricity – at reasonable rates
and with reliable service; and to enable utility
companies to earn a ‘‘reasonable’’ return on
investments so they could produce electricity,
construct new facilities, and, in general,
maintain their ?nancial integrity. (Hirsch,
1989, p. 22)
426 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
As noted in the ‘‘Introduction’’ section, the
market structure of investor owned utilities was a
uniquely US phenomenon. In Europe, and subse-
quently in most other parts of the world, public
services including electricity were nationalized.
The institutional form of investor owned utilities
may in part be explained by the precedent of the
railroads which had adopted a similar institutional
form. Indeed, the National Association of Rail-
road and Utility Commissions (NARUC) was
soon formed to represent both railroad and other
utility commissions including electricity at the
state and national level. However, the Progressive
era concerns, discussed above, and we argue the
structure of the US state at the turn of the century,
in which the ‘‘federal state was kept weak, small
and divided’’ (Perrow, 2004, p. 31) led business-
men and state governments to adopt a structure
in which both the ideals of private ownership were
preserved but where business was conducted under
the scrutiny of a regulatory authority.
In stronger statist countries like the UK,
nationalization of public service companies was
the norm. From the earliest days of electricity in
the UK, the British Parliament created legislation
for the electri?cation of the country. As Hughes
(1983) cryptically notes:
In the United States authorization [for build-
ing power stations] came from the local gov-
ernment or authority, but in Britain the
problem moved quickly to the national level,
where Parliament and the Board of Trade
sought a general solution in legislation. Tho-
mas Edison had wined and dined New York
City alderman prior to the erection of the
Pearl Street station; but in Britain Joseph
Swan, J.E.H. Gordon and R.E.B. Cromp-
ton, all pioneer entrepreneurs in electric
lighting, gave a dinner for the Speaker of
the House of Commons and other leading
M.P.’s in a bid to win passage of the Electric
Light Act in 1882. (p. 58)
After passage of the 1882 Act, the electrical sys-
tem in the UK grew as a collection of private and
municipal companies which supplied electricity to
localized markets. In fact, by the end of the First
World War there were 600 electrical companies
in the UK, often with di?erent voltages which
made inter-connection di?cult (Surrey, 1996).
However, instead of evolving into investor owned
and regulated utilities, the UK electrical system
was nationalized, re?ecting very di?erent sets of
social concerns and a very di?erent government
structure. The process of state ownership began
in 1926 when the Conservative Government estab-
lished the Central Electricity Board which devel-
oped, owned and operated the transmission
system (The National Grid). In 1948 the electrical
system was fully nationalized and the British Elec-
tricity Authority was created to own and operate
generation stations and transmit power to 12
newly formed semi-autonomous Regional Distri-
bution Boards. This structure persisted until priv-
atization in 1990–1991. (Surrey, 1996, p. 21)
Although the creation of investor owned utili-
ties alleviated some of the ambiguities and tensions
between private ownership and regulation of pub-
lic services in the US, another set of ambiguities
and tensions emerged between the newly created
utilities and regulatory commissions. The resolu-
tion of these tensions as indicated by Oakes et al.
(1996) called upon legal and accounting experts
to develop a method of establishing electricity
prices through the regulation of cost and pro?ts.
This regulatory emphasis relied centrally on
accounting measurement which became the center
of a new and highly contested domain.
Constructing utility accounting
With the advent of regulation, the focus of
accounting in electric utilities shifted, as did the
arena in which the construction of accounting
took place. The new arena was that of the law
courts. Within this highly stylized and formal
arena, utilities and commissions argued their cases
and judges ruled in favor of the plainti? or the
defendant – in so doing, accounting was con-
structed through the rule of law. With this change
of location, the actors also changed. Historic per-
sonages like Edison, Westinghouse, Thomas and
Insull were eclipsed by more bureaucratic ?gures
– accountants, economists and lawyers – in short
the experts of the Progressive era.
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 427
The court rulings often involved other utilities
including gas, water and the railroads. However,
each ruling applied to all public utilities. The Judi-
ciary became involved in utility accounting as
early as 1890. In the Chicago, Milwaukee and St.
Paul Railway vs. Minnesota Case (1890), the
Supreme Court ruled that the reasonableness of
rates was subject to judicial review.
4
This marked
the beginning of the ‘‘judicial phase’’ of utility reg-
ulation, which was to last over ?ve decades (Phil-
lips, 1965, p. 135).
5
As a result of the numerous court rulings, a new
form of accounting was constructed in the US
between 1907 and 1944. This came to be called
public utility accounting. It was unique to the
US; in part because of the institutional structure
that was created to operate and regulate public
utilities. This is not to suggest that utility account-
ing was a byproduct of the creation of regulated
utilities, but rather was constitutive of that regime.
As we shall see below, for over 40 years utility reg-
ulation was shaped by accounting rules and dis-
putes. While public regulation of utilities was
deemed necessary, the degree and form of regula-
tion to be imposed was not initially clear. In this
respect, a regulatory regime had to be constructed
and accounting was inextricably involved in that
process of construction.
From the very outset regulation of prices was
integral to the principles of regulation in the US.
In Munn vs. Illinois (1877), a case concerning
grain storage plants in Chicago, the de?nition
and criteria for public utilities was laid out and
the imperative to regulate prices was expressed.
Chief Justice Waite commented:
Every bushel of grain for its passage pays a
toll which is a common charge and therefore
every such warehouseman ought to be under
public regulation, viz.: that he should take
but a reasonable toll. (Munn vs. Illinois,
1877, pp. 131–132)
Although the primary focus was on regulating
price, regulation also grew to cover quality and
quantity of service, safety of operation and e?-
ciency of management (Phillips, 1965, p. 123).
The centrality of accounting to the process of reg-
ulation was expressed by Oxtoby (1910).
The chief elements in determining a reason-
able rate for any particular public service
are (a) the fair value of the property used
in serving the public, (b) the reasonable value
of the service to the public, (c) the proper
deductions to be made for expenses, includ-
ing depreciation and obsolescence, and (d)
the reasonable rate of pro?t or return to be
allowed on the value of the property used.
(Oxtoby, 1910, p. 130)
Clearly operating costs or expenses, property
valuation and depreciation, all critical to the calcu-
lation, fell within the domain of accounting.
During this period, the focus of accounting
shifted away from understanding the nature and
behavior of costs towards issues of disclosure,
income measurement and asset valuation. The
newmeasurement, recording and reporting orienta-
tion of accounting took form within the tense rela-
tionship that existed between rate commissions and
utilities. There was not a great deal of trust between
the utilities and commissions in the early days and
rate of return regulation set the stage for a tumultu-
ous relationship between the two parties.
A gamesmanship was soon to emerge in which
utilities sought to manipulate the rate calculation
by in?ating the value of their property and maxi-
mizing the value of deductible expenses. Commis-
sions were justi?ably concerned that the property
valuations and accounts prepared by utilities were
biased or even fraudulent given that ‘‘many irreg-
4
The 1890 railway ruling was applied to the electric utilities
when the regulatory commission structure was put in place
beginning in 1907.
5
It is interesting to compare this judicial approach to
resolving accounting disputes with the approach adopted in
the UK. In England the issue of railroad regulation, as with
electricity regulation, took place in Parliament. In fact, William
Gladstone was the champion of both the bill to regulate the
railroads in 1844 when he was President of the Board of Trade
and the bill to regulate electricity in 1882 when he was Prime
Minister. In the UK accounting disputes were solved by
Parliamentary Committees rather than courts of law. For
example, the dispute over railroad depreciation was handled by
a House of Lords Select Committee – the Monteagle Commit-
tee – which was formed in 1849 (see Bryer, 1991, pp. 454–455)
While in the US, the nature and method of calculating
depreciation (see below) was contested in the Supreme Court.
428 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
ular accounting procedures and ?nancial abuses
were an integral part of American Indus-
try. . . from the turn of the century until the early
1930s.’’ (Phillips, 1965, p. 144)
Inaccurate or fraudulent records, capitalizing
expenses or expensing capital expenditures, in?at-
ing the value of property and equipment and com-
mingling regulated utility business with non
regulated non-utility business were all areas over
which regulators had concerns. Troxel (1947)
explains one such irregular practice:
Sometimes a plant was exchanged several
times, or was included in several successive
consolidations. And as each exchange or
consolidation was e?ected, the plant was
recorded at higher and higher book val-
ues . . . Other companies wrote up book val-
ues to the reproduction costs of their
properties; or they wrote up property
accounts to whatever ?gures suits their ?nan-
cial purposes. (Troxel, 1947, pp. 123–124)
In response to these concerns, state regulators
called for the right to prescribe accounting prac-
tices and disclosure requirements. Phillips (1965)
summarizes the various arguments put forward
for a uniform set of accounts:
In the ?rst place, rate-of return regulation
requires accurate records of operating costs,
depreciation expenses, and investment in
plant and equipment . . . In the second place,
accounting regulation is needed so as to dis-
tinguish between expenditures that should be
charged to capital and those that should be
charged to income. In the third place, as reg-
ulated companies are entitled to a fair rate-
of-return on the fair value of their property,
an accurate statement of a company’s prop-
erty account is one of the most important
objectives of accounting regulation and uni-
form systems of accounts. In the fourth
place, carrier and utility business must be
separated from non-carrier and non-utility
business. (pp. 145–146)
In 1912 commissions were given the right to
prescribe a ‘‘system of accounting’’ by the US
Supreme Court:
If the Commission is to successfully perform
its duties in respect to reasonable rates, with-
out undue discrimination, and favoritisms, it
must be informed as to the business of the
carriers of a system of accounting which will
not permit the possible concealment of for-
bidden practice. (Interstate Commerce
Comm. vs. Goodrich Transit Co., 1910)
With this ruling by the Supreme Court, individ-
ual state commissions developed speci?c charts of
accounts for utilities and determined reporting
requirements. These requirements typically dif-
fered between jurisdictions and were therefore of
limited value to federal regulators most impor-
tantly the Federal Power Commission (FPC)
6
.
After much lobbying, a uniform set of accounts
was adopted in 1935 by the Federal Power Act
of that year. The chart of accounts governs electric
utility accounting to this day. One year later,
NARUC adopted the uniform set of accounts pro-
posed by the FPC. Baum (1942) (in a somewhat
overstated fashion) summarizes the importance
of accounting to the regulatory process and the
magnitude of the FPC’s achievement in securing
agreement for uniformity in accounting practices:
No work of the Federal Power Commission
is more signi?cant than its control of
accounting. A basic tool for e?ective regula-
tion, accounting is the key to determination
of the actual legitimate original cost of all
licensed projects and therefore the ‘‘net
investment’’ which forms the basis for gov-
ernment acquisition of any project at the
expiration of the license period. It is the
source of accurate information to determine
the rate base (and therefore the reason-
ableness) of interstate wholesale rates, the
desirability of security issues, disposition of
property, such as write-ups in the value
of property and improper charges to capital
or operating expenses, and thereby the elim-
ination of such amounts from the costs that
are passed along to the consumer. Account-
ing is the basis for comprehensive ?nancial
6
The Federal Power Commission was charged with regulat-
ing rates for interstate wholesale transactions.
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 429
statistics of the industry, which in turn make
possible the arrival at useful tests and statis-
tical ratios, of value not only to the commis-
sion itself, but also to other state and Federal
agencies as well as the industry. Moreover it
makes possible a vast storehouse of informa-
tion regarding individual companies and
groups of companies. The importance of
measuring expenses and property valuations,
in rate-of-return regulation, prompted the
call for a uniform set of accounts for utilities.
In the case of electric utilities these debates
and court rulings continued from the turn
of the century until 1935 which is available
to the public at large and the state commis-
sions in particular. (Baum, 1942, p. 135)
The chart of accounts provided a framework
which established meaning and limited interpreta-
tion of accounting numbers. The subsequent uni-
formity permitted comparison of one utility
against another and these comparisons played a
prominent role in rate cases as both utilities and
commissions attempted to justify their claims for
and against a particular rate of return. In this
respect, the uniform chart of accounts signi?cantly
impacted the regulatory process. However the uni-
form chart of accounts only prescribed what
accounts were to be maintained and reported; it
did not resolve disputes over alternative methods
of measurement and valuation.
Because of the large asset base in electric utili-
ties, depreciation was a highly contested issue. A
President of NARUC when giving a retrospective
on depreciation accounting stated:
More confusion has arisen with respect to, or
has been injected into, regulatory thinking
with regard to depreciation in rate-making
than seems possible. In ratemaking, the
deduction has run the gamut from:
(1) no deduction at all, to
(2) deduction of an engineering determination,
to
(3) deduction of the accumulated accounting
reserve for depreciation, and
(4) to the deduction of a computed amount
which is alleged the accountants should have
accumulated if they had known what they
were doing.
The pendulum has indeed swung far, and the
process hasn’t been free from political in?u-
ences. (Quoted in Phillips, 1965, p. 245)
Thus, even the very principle of depreciation
itself was challenged. In 1909, the Supreme Court
stated the right of a regulated company to a depre-
ciation expense:
Before coming to the question of pro?t at all
the company is entitled to earn a su?cient
sum annually to provide not only for current
repairs but for making good the depreciation
and replacing the parts of the property when
they come to the end of their life. The com-
pany is not bound to see its property gradu-
ally waste, without making provision for its
replacement. (Wilcox vs. Consolidated Gas
Company, 1909)
Even by 1934 the courts were still only just
resolving the meaning of depreciation. The Court
de?ned depreciation thus:
Broadly speaking, depreciation is the loss, not
restored by current maintenance, which is due
to all the factors causing the ultimate require-
ment of the property. These factors embrace
wear and tear, decay, inadequacy, and obso-
lescence. Annual depreciation is the loss
which takes place in the year. In determining
reasonable rates for supplying public service,
it is proper to include in operating expenses,
that is, in the cost of producing the service
an allowance for consumption of capital in
order to maintain the integrity of the invest-
ment in the service rendered. Lindheimer vs.
Illinois Bell Telephone Company (1934)
In the intervening time, con?ict emerged
around depreciation methods. ‘‘One group [the
regulators] favored depreciation accounting or
the ‘‘periodic charge’’ method whereby reserves
were built up by charges during the estimated use-
ful life of the property. The other group, composed
largely of representatives of the gas and electric
industry, favored the ‘‘retirement accounting
430 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
method’’ (Baum, 1942, p. 42). Under this method,
replacements were not charged to operating costs
until they were actually made. (Riggs, 1932)
The reasonableness of other expenses was also
challenged in the law courts. The concern was to
limit the ‘‘abuse of discretion’’ by utility owners
and managers in what they claimed to be reason-
able costs. For example, in 1936 Justice Roberts’
rejected certain marketing costs and stated:
The contention is that the amount to be
expended for these purposes is purely a ques-
tion of managerial judgment. But this over-
looks the consideration that the charge is
for a public service, and regulation cannot
be frustrated by a requirement that the rate
be made to compensate extravagant or
unnecessary cost for these or any other pur-
poses. (Acker vs. United States, 1936)
Another major area of contention was the valu-
ation of assets and this controversy spilled over
into the depreciation accounting issue. The valua-
tion of assets was essential to determine the rate
base of the utility, or the asset base upon which
to calculate a return. The issue of valuation was
brought sharply into focus by a Supreme Court
ruling in one of the early landmark cases. In Smyth
vs. Ames in 1898, Justice Roberts stated:
The basis of all calculations as to the reason-
ableness of rates to be charged by a corpora-
tion . . . must be the fair value of the property
being used by it for the convenience of the
public. And in order to ascertain that value,
the original cost of construction, the amount
expended in permanent improvements, the
amount and market value of its bonds and
stock, the present as compared with the origi-
nal cost of construction, the probable earning
capacity of the property under particular
rates prescribed by statute, and the sum
required to meet operating expenses, are all
matters for consideration, and are to be given
such weight as may be just and right in each
case (Smyth vs. Ames, 1898, pp. 546–547).
While this ruling was most notable for its artic-
ulation of what factors commissions should con-
sider in determining the value of a company’s
property, it did not o?er any advice on how each
factor should be weighed. Over the following
years, many of the factors outlined in Smyth vs.
Ames were rejected in subsequent lawsuits on the
grounds that they were theoretically unsound.
For example, earnings capacity and the market
value of bonds were rejected on the grounds that
they involved circular reasoning; they depended
on the company’s earnings which, in turn,
depended on the rates charged (Knoxville vs.
Knoxville Water Company, 1908). The amount
of bonds and stock was rejected on the grounds
that using these amounts for rate-making purposes
would encourage stock watering and overcapitali-
zation. Finally, it was decided that operating
expenses had nothing to do with the determination
of the rate-base. As a result of these rejections,
arguments centered on the remaining factor of
original cost or reproduction cost of the asset
base. And ‘‘so started the valuation contro-
versy. . . which was to occupy much of the commis-
sions’ and companies’ time for many years.’’
(Phillips, 1965)
Initially, the commissions and the courts
favored reproduction cost largely on the grounds
that inconsistent and sometimes fraudulent
accounting practices made the determination of
original cost problematic. These issues led one
court to suggest: ‘‘the property may have cost
more than it ought to have cost’’ (San Diego Land
& Town vs. National City, 1899). Utilities on the
other hand favored original costs. Despite this,
reproduction cost was ?rmly established by the
rule of law when the Supreme Court in 1909 ruled
that:
There must be a fair return upon the reason-
able value of the property at the time it is
being used for the public. . . And we concur
with the court below in holding that the
value of the property is to be determined as
of the time when the inquiry is made regard-
ing the rates. If the property, which legally
enters into the consideration of the question
of rates, has increased in value since it was
acquired, the company is entitled to the ben-
e?t of such increase. (Wilcox vs. Consoli-
dated Gas Company, 1909)
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 431
Although in these and other rulings, the courts
emphasized that reproduction cost must be given
due consideration in rate cases, they never deter-
mined that reproduction cost furnished an exclu-
sive test, nor how reproduction cost should be
calculated. Rather the courts declared that:
The exercise of a reasonable judgment as to
the present ‘‘fair value’’ required some con-
sideration of reproduction cost as well as of
original cost, but that ‘‘present fair value’’
is not synonymous with ‘‘present replace-
ment cost’’. (Georgia Railroad and Power
Company vs. Railroad Commission (1923),
pp. 629–630)
The ambiguity contained in such rulings left the
determination of ‘‘fair value’’ wide open to inter-
pretation. Rate setting became a matter of legal
disputes over the appropriate method to account
for the fair value of assets. A number of Justices
became increasingly dissatis?ed with the fair value
approach. Indeed, a minority of the Supreme
Court repeatedly rejected the emphasis given to
reproduction cost. Justice Brandeis consistently
argued for the original costs of ‘‘prudent invest-
ment’’ – total assets minus any fraudulent, unwise,
or extravagant expenditure. The aim of Justice
Brandeis was to achieve a measure of value that
would be ‘‘certain and stable’’ and that would
‘‘not be determined as a matter of opinion.’’ Phil-
lips 1965 noted ‘‘instead of ?uctuating rate base
valuations, Justice Brandeis was perfectly willing
to adjust the rate-of-return as conditions varied.’’
(Phillips, 1965, p. 225) Likewise Justice Stone
argued:
In assuming the task of determining judicially
the present fair replacement value of the vast
properties of public utilities, courts have been
projected into the most speculative undertak-
ing imposed upon them in the entire history
of English jurisprudence. . . . When we arrive
at a theoretical value based upon such uncer-
tain and fugitive data we gain at best only an
illusory certainty West vs. Chesapeake and
Potomac Telephone Company (1935).
It was not until the mid 1930s that the courts
began to approve asset values based on original
cost. Phillips (1965) identi?es this period as consti-
tuting a ‘‘judicial shift’’ beginning with the Los
Angeles Gas and Electric vs. Railroad Commis-
sion of California in 1933 and culminating in the
Federal Power Commission vs. Hope Natural Gas
Company in 1944. For example, in 1942, the
Supreme Court ruled that:
We think this is an appropriate occasion to
lay the ghost of Smyth vs. Ames . . . which
has haunted utility regulation since
1898. . . . As we read the opinion of the
Court, the Commission is now freed from
the compulsion of admitting evidence on
reproduction cost or of giving any weight
to that element of ‘‘fair value.’’ The commis-
sion may now adopt, if it chooses, prudent
investment as a rate base – the base long
advocated by Mr. Justice Brandeis. (concur-
ring opinion, Federal Power Commission vs.
Natural Gas Pipeline, 1942)
The use of original cost was formally sanc-
tioned in The Federal Power Commission vs. The
Hope Natural Gas Company of 1944.
The Federal Power Commission vs. The Hope
Natural Gas Company is noted for much more
than establishing original cost; it created a twofold
shift in the regulatory process – a shift which
diminished accounting’s role in rate setting. First,
the case shifted attention from the rate base to
the rate of return. Second it largely withdrew the
courts from direct involvement in the rate setting
process. Welch (1961) explained the implications
of the 1944 ruling.
The departure of the old fair rate of return –
fair value doctrine, in e?ect, frees the regula-
tory commission from the federal court dom-
ination and close supervision which
prevailed in former years. This does not
mean that the regulatory problem of ?xing
reasonable rates is all settled. To the con-
trary, reasonable rates will probably be a
troublesome question as long as there is leg-
islation. This does however, place greater
responsibility on commissions, since reason-
able rates now become more a matter of
expert commission judgment and less a mat-
432 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
ter of rules and formulas. (Welch, 1961, p.
311)
In short, if the end result was reasonable,
regardless of the accounting rules and formulae
used to determine the fair value of assets, the
courts would not intervene. With this, regulatory
arguments shifted from justifying operating costs,
depreciation and particularly asset values to justi-
fying the rate of return and in particular the return
on equity a ?rm should earn.
The return to the equity owner should be
commensurate with returns on investments
in other enterprises having corresponding
risks. The return moreover, should be su?-
cient to assure con?dence in the ?nancial
integrity of the enterprise, so as to maintain
its credit and to attract capital. (Federal
Power Commission vs. Hope Natural Gas
Company, 1944)
The signi?cance of this shift may be illustrated
by examining the rate determination formula
namely R = O + (V À D)r. The variables ‘‘O’’
(operating costs), ‘‘V’’ (value of tangible assets)
and ‘‘D’’ (depreciation) which in the past were
contentious accounting issues were metaphorically
‘‘taken out of the equation’’, which left ‘‘r’’ the
rate of return that would ultimately determine
‘‘R’’ (the revenue requirements necessary to cover
operating costs and earn the appropriate return
on investment). In short, it was the rate of return
that would become the point around which future
disputes would take place. What is important is
that rate of return disputes were led by economists
not accountants. Instead of the ‘‘periodic charge
method’’ versus the ‘‘accounting accumulation
method’’ and ‘‘original’’ versus ‘‘reproduction
cost’’, debates raged over ‘‘comparable earnings’’
versus ‘‘capital attraction’’.
7
It is important to be clear that the reduced role
of accounting and accountants in the rate setting
process was neither because the ‘‘right’’ formula
for asset valuation was determined, nor was it
because accounting disputes between the utilities
and regulators were resolved. There was at least
the implicit recognition that the accounting for
asset valuation issue was irresolvable. In order
to dispense with interminable debates, it was
decided to focus on the end result of the rate of
return calculation, rather than the accounting
inputs. The method of asset valuation became
moot as regulators and utilities vied with each
other over the rate of return that would produce
a fair result regardless of the asset valuation
method applied. Accounting controversies were
quite literally side stepped. At this point the
courts not only sanctioned original cost valuation
they ceded power to the regulatory commission
who were free to establish valuation rules (almost
all adopted original cost) and thus e?ectively
eliminating accounting disputes from the utility
arena.
Conclusion
We began this paper by suggesting that
accounting played a constitutive role in the crea-
tion of electric utilities in the US. It was noted that
accounting concerns emerged when electricity
companies were in their infancy and continued
until the mid 1940s.
At ?rst, engineers and company owners strug-
gled with the anomaly that as additional customers
were connected to the network; earnings declined.
To unravel this conundrum, costs were classi?ed
as ‘‘standing’’ and ‘‘running’’, a link was forged
between costs and customer demand (load factor)
and type (load diversity), and a two-step billing
structure was created. The cost structure that
emerged from these early discourses was not inev-
itable; other structures were also developed. In this
respect, the cost structure was not simply revealed
it was constructed. Moreover, it did not merely
re?ect a technological or business reality, it worked
to shape the way in which technology was deployed
and the way in which business was conducted. The
‘‘secret to pro?ts’’ lay in strategies to deploy newly
emerging central station technology and attract
7
Capital attraction was to ensure ?nancial soundness, and it
called for a rate of return that was su?cient to assure
con?dence in the ?nancial integrity of the enterprise, so as to
maintain its credit and to attract capital. The comparable
earnings standard called for returns to be set equal to those
earned currently by other ?rms faced with comparable risks.
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 433
customers who improved load factor and diversity,
rather than managing costs per se. The pursuit of
customers led to a period of unbridled growth as
businessmen sought to merge with, acquire or
bankrupt the competition.
Samuel Insull was probably the most notorious
practitioner of ‘‘getting into a larger way of busi-
ness.’’ Insull systematically began o?ering dis-
counted prices to customers who would improve
the load factor and diversity of his company. Iron-
ically, these customers were also his competitors
who self generated energy. The outcome of Insull’s
strategy led to the replacement of small generating
stations in favor of large scale central production.
Insull’s strategy, which was both expansive and
predatory, created considerable turbulence and
instability in electricity markets. Thus, accounting
concepts developed in the early years of the indus-
try became the foundation of a business strategy
that would ultimately transform electricity mar-
kets in the US.
In many respects, Insull was a product of his
time. The US economy was undergoing a signi?-
cant transformation from a bucolic agrarian soci-
ety into an economic system based on large
privately held organizations with minimal state
regulation (Perrow, 2004). Insull’s growth strategy
echoed the rapid growth of big business in other
economic sectors during this period. The rise of
big business was not universally popular during
the Progressive era where many held that the con-
centration of economic power in the hands of the
private sector was a threat to democracy. Again
Insull was aware of these currents of concern
and this may explain why he invited government
regulation of his business in return for monopoly
status. The unique institutional structure adopted
to regulate utilities in the US, had its roots in the
grain elevator and railroad industries but also
re?ected wider tensions in US society and the
economy. The concept of investor-owned, regu-
lated utilities was intended to preserve the ideals
of private ownership, while providing regulatory
oversight to protect customers from the excesses
possible under a monopoly structure. What is
important, is that the regulatory process adopted
for utilities was premised upon and shaped by
accounting rules and practices.
For roughly half a century accounting issues
dominated and de?ned public utility regulation.
Asset valuation and the measurement of expenses
were not only highly disputed; they constituted a
regulatory paradigm for establishing earnings
and prices in which a ‘‘fair return’’ was based on
a ‘‘fair value’’. Utility earnings and prices were
regulated by setting asset values according to
accounting rules which were established and con-
tinually challenged in the Supreme Court. After
approximately 40 years of interminable debate,
particularly about asset valuation, a series of
Supreme Court rulings shifted the debates from
‘‘fair value’’ to ‘‘fair rate of return.’’ With this,
accounting controversies receded as economic jus-
ti?cations of return replaced the determination of
accounting valuation rules. The shift to regulating
earnings and prices by setting the return on invest-
ment a utility could earn, occurred not because the
courts ?nally got accounting right, but rather
because of a growing disa?ection with the inherent
di?culties of determining reproduction cost and
the interminable legal disputes around the mea-
surement of fair value. In short, accounting issues
were simply sidestepped, e?ectively ending over 40
years of accounting’s role in shaping the regula-
tory environment of utilities in the US.
References
Acker vs. United States (1936). 298 US 426.
Baum, R. D. (1942). Federal power commission and state utility
regulation. Washington, DC: American Council on Public
Utilitiesvch.
Bonbright, J. C. (1961). Principles of public utility rates. New
York: Columbia University Press.
Bryer, R. A. (1991). Accounting for the ‘‘Railway Mania’’ of
1845 – A great railway swindle? Accounting Organizations
and Society, 439–486.
Burchell, S., Clubb, C., & Hopwood, A. G. (1980). Accounting,
Organizations and Society, 5–28.
Chicago, Milwaukee & St. Paul Railway Company vs. Minne-
sota (1890). 134 US 418.
Cooper, D. J., & Sherer, M. J. (1984). The value of corporate
accounting reports: Arguments for a political economy of
accounting. Accounting, Organizations and Society,
207–232.
Doherty, H. (1910). Equitable, uniform and competitive rates.
In Presented before the National Electric Light Association
May 1910 [Reprinted in The Development of Scienti?c
434 A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435
Rates for Electric Supply: The Edison Company of Detroit
1915].
Federal Power Commission vs. Natural Gas Pipeline Company
(1942). 315 US 575.
Federal Power Commission vs. Hope Natural Gas Company
(1944). 320 US 591, p. 601.
Fligstein, N. (2001). The architecture of markets Princeton. NJ:
Princeton University Press.
Georgia Railroad & Power Co. vs. Railroad Commission
(1923). 262 US.
Greene, W. J. (1896). A method of calculating the cost of
furnishing electric current and a way of selling it. The
electrical world, February 29, 1896 (pp. 222–223) [Reprinted
in The Development of Scienti?c Rates for Electric Supply:
The Edison Company of Detroit 1915].
Hirsch, R. F. (1989). Technology and transformation in the
American electric utility industry. Berlin: Cambridge Uni-
versity Press.
Hopkinson, J. (1892). On the cost of electricity supply.
Transactions of the Junior Engineering Society (pp. 1–14)
[Reprinted in The Development of Scienti?c Rates for
Electric Supply: The Edison Illuminating Company of
Detroit 1915].
Hopwood, A. G. (1987). The archaeology of accounting
systems. Accounting, Organizations and Society, 207–234.
Hughes, T. P. (1983). Networks of power: Electri?cation in
Western Society 1888–1930. Baltimore, MD: The Johns
Hopkins University Press.
Insull, S. (1915). Public address reprinted. In W. E. Keily (Ed.),
Central Station Electric Service its Commercial Development
and Economic Signi?cance as set forth in Public Addresses
1987–1914 of Samuel Insull (Chicago: Privately Printed
1915).
Interstate Commerce Comm vs. Goodrich Transit Co. (1910).
224 US 452.
Knoxville vs. Knoxville Water Company (1908). 212 US 1.
Lindheimer vs. Illinois Bell Telephone Company (1934), 292 US
151.
Loft, A. (1986). Towards a critical understanding of account-
ing: The case of cost accounting in the UK, 1914–1925.
Accounting, Organizations and Society, 137–169.
Los Angeles Gas and Electric vs. Railroad Commission of
California (1933). 298 US 287.
Miller, P., Hopper, T., & Laughlin, R. (1987). The new
accounting history: An introduction. Accounting, Organiza-
tions and Society, 479–498.
Miller, P., & O’Leary, T. (1987). Accounting and the construc-
tion of the governable person. Accounting, Organizations
and Society, 235–265.
Munn vs. Illinois 94 (1877). US 113.
Napier, C. J. (2006). Accounts of change: 30 years of historical
accounting research. Accounting, Organizations and Society,
445–507.
Oakes, L. S., Miranti, L. S., Jr., & Louis, D. (1996). Brandeis
and standard cost accounting: A study of the construction
of historical agency. Accounting Organizations and Society,
569–586.
Oxtoby, J. (1910). Reasonable pro?t: Its de?nition, collection and
distribution. Presentation association Edison 1Companies
1910 [Reprinted in The Development of Scienti?c Rates for
Electric Supply: The Edison Company of Detroit 1915].
Passer, H. C. (1953). The electrical manufacturers 1875–1900.
Cambridge, MA: Harvard University Press.
Perrow, C. (2004). Organizing America. In F. Dobbin (Ed.),
The sociology of the economy. New York: Russel Sage
Foundation.
Phillips, C. F. (1965). The economics of regulation. Homewood,
IL: Richard D. Irwin Inc.
Riggs, H. E. (1932). The two radically di?erent concepts of
depreciation. Public Utilities Fortnightly, 559.
San Diego Land and Town vs. National City (1899). 174 US
739.
Smyth vs. Ames (1898). 169 US 466.
Surrey, J. (1996). The British electricity experiment. London:
Earthscan Publications Ltd.
Troxel, E. (1947). Economics of public utilities. New York: Holt,
Rinehart & Winston.
Welch, F. X. (1961). Cases and text on public utility regulation.
Washington, DC: Public Utility Reports, Inc.
West vs. Chesapeake & Potomac Telephone Company (1935).
295 US 662.
Wilcox vs. Consolidated Gas Company (1909). 212 US 19.
Wright, A. (1896). Cost of electricity supply. Minutes of
municipal electrical association (pp. 1–8) [Reprinted in The
Development of Scienti?c Rates for Electric Supply: The
Edison Company of Detroit 1915].
A.M. Preston, A.M. Vesey / Accounting, Organizations and Society 33 (2008) 415–435 435
doc_223785753.pdf