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Technology and Transformation in the American Electric Utility Industry.

Technology and Transportation in the American Electric Utility Industry In this extremely readable account of the technological evolution of the U.S. electric utility industry, Richard Hirsh focuses on the origins of the industry crisis of the early 1070s. After years of uninterrupted price decreases, strong profits, and amicable relations with customers, regulators, and investeors, electric utilities experienced sharp reversals in each of these areas. Whereas most observers have stressed the impact of external economic and social shocks to explain this transformation, Hirsh argues convincingly that the stagnation (stasis) of technological progress was also a critical factor.

The first part of the book summarizes the technological development of the U.S. electric utility industry from 1882 to 1930, drawing on the seminal work of Thomas P. Hughes. Hirsh lucidly explains the "grow and build" strategy pursued by electric utilities to create a virtuous circle of increasing economies of scale, falling prices, and rising demand. He also describes the supporting role played by equipment manufacturers, whose cautious "design by experience" approach led to gradual increases in the scale and thermal efficiency of generating units.

Hirsh then moves forward to the booming economy of the postwar decade, when utility managers struggled to satisfy growth rates for electricity demand in excess of 10 percent per year. He notes that even after capacity had been expanded to accommodate pent-up demand, an almost mystical fascination with "growth" and "progress" led utilities to implement extensive promotional campaigns (for example, the "all-electric home") and repeated price reductions. However, since improvements in thermal efficiency had peaked by the early 1950s, utilities had to rely primarily on increases in scale economies to reduce costs and rates. To meet this need, equipment manufacturers abandoned the incremental "design by experience" strategy for "deign by extrapolation," building ever larger generating units without excessive testing in the field. From 1952 to 1965, maximum unit size rose from 160 to 1000 megawatts (MW).

Although industry participants believed that such dramatic increases in scale would continue unabated, units of 1000 MW and above experienced unusually severe reliability problems, suggesting that technological stasis had set in. Hirsh argues persuasively, however, that utility managers, regarding these problems as temporary setbacks, refused to acknowledge that a fundamental shift in the economics of the electric utility business had occurred and continue to order larger units to promote higher consumption. This "business as usual" strategy left the industry particularly vulnerable to the effects of increases in inflation, interest rates, environmentalism, and fuel costs that arrived shortly thereafter. By the 1970s, utility managers found themselves in a reactive mode, defending themselves against electricity customers, regulators, and utility investors. Hirsh maintains that only in the 1980s did electric utilities begin to achieve a new consensus with their stakeholders and to embark on creative approaches for overcoming technological stasis.

Hirsh's story of technological transformation is well researched, including the use of over one hundred interviews with industry managers and engineers. However, although the basic narrative is well-grounded in factual documentation, some of the author's inferences and interpretations are less convincing. Particularly questionable is Hirsh's attempt to place primary blame on "low quality" engineers and managers to explain the onset of technological stasis and the industry's subsequent difficulties in dealing with external shocks.

The author draws on anecdotal evidence to suggest that because the electric utility industry was perceived as "dull" and "predictable" in the post-war period, and offered lower salaries relative to such fields as electronics and aviation, utilities and their equipment manufacturers were able to attract only mediocre engineers and managers, which ultimately led to mediocre performance. Even if one accepts Hirsh's argument that the utility industry did not attract the nation's top graduates, one wonders whether outcomes would have been different under the "best and the brightest." Given the industry's remarkable history of overcoming technological roadblocks, it seems questionable to assume that smarter engineers would have rejected the "design by extrapolation" strategy from the outset and would have immediately recognized the moment at which limits to scale economics had been reached. Similarly, it is not clear that the presence of more "high-powered" managers would have saved the industry from the effects of external shocks and the inevitable backlash of customers and regulators to higher prices.

Instead of focusing on employee quality to explain stasis and managerial failure, Hirsh might have gone further in his analysis of the incentives embedded in the American "regulated investor-owned utility" paradigm to elucidate these outcomes. The author contrasts the industry's seemingly reckless pursuit of scale economies with the more cautious and, implicitly, more successful approach of the state-owned electricity systems of the United Kingdom and France. Since Hirsh does not argue that American utility engineers and managers were inferior to their European counterparts, one is left wondering how the latter avoided stasis and managerial gridlock in the late 1960s and early 1970s.

Finally, the broader implications of Hirsh's book are somewhat fuzzy. He asserts, "the lesson is that (contrary to conventional wisdom) history may not repeat itself" (p. 179), yet he suggests that "executives can use historical understanding to provide long-term vision that can help them determine whether new situations pose novel challenges that require fundamental changes in business practices" (p. 183).

Although Hirsh could have analyzed causal linkages somewhat more rigorously, he has done an excellent overall job of describing the rise, fall, and current renewal of the U.S. electric utility industry, with an emphasis on the key role played by technology. His interdisciplinary approach, which incorporates history, engineering, economics, business theory, and social theory, results in a book that will be of interest to a diverse audience.

Willis Emmons is assistant professor of business administration at the Harvard Business School. His primary field of research is the political economy of business regulation. His 1989 Harvard University dissertation is entitled, "Private and Public Responses to Market Failure in the U.S. Electric Power Industry, 1882-1942."
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Author:Emmons, Willis
Publication:Business History Review
Article Type:Book Review
Date:Mar 22, 1990
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