Electrifying Rural Texas for Fun and Profit

Why didn’t Texas Power & Light or another private utility bring electricity to rural Texas in the years before FDR’s 1936 Rural Electrification Act?

In The Years of Lyndon Johnson, Robert Caro suggests that the venture looked profitable ex-ante:

Experiments—notable ones had taken place in Red Wing, Minnesota, and in Alabama—had conclusively proved that within two or three years after farmers had obtained electricity and seen the savings possible from its use (the increased value of their milk and eggs, once spoilage was reduced by refrigeration, paid many times over for the cost of using refrigerators) their usage of electricity soared—to a point where there was substantial profit for the utilities.

And electrification appears to have been profitable ex-post as well. So why did it take Roosevelt’s New Deal and the REA to make it happen? Here’s Caro’s preferred explanation:

When the utilities ignored these studies, their true attitude became clear: not that rural electric service could not be profitable, but that it would not be as profitable as urban service, or as surefire. Waiting two or three years for usage to build up was what industry called a capital risk: why take a risk for a profit, when there existed in the urban market profit without risk?

This logic is lacking; if companies making sure profits never pursued speculative profits, no established company would innovate. Some further explanation is needed. Here are a few possibilities.

First: contrary to Caro, the venture was not profitable, or else was not a good bet ex-ante.

Second, prejudice: Caro notes that utility leaders across the country felt “contempt for country people.” Maybe arrogance made them underestimate farmers’ potential productivity.

Third, inefficiency of private markets: maybe the people who understood the size of the opportunity didn’t have access to enough capital, or couldn’t control it for the length of time necessary to see a profit. (Since Texas had low density and low land productivity, returns would’ve been slower there than in Minnesota or Alabama. The REA offered 35-year loans.) Maybe Roosevelt’s administration had a patience and access to capital that allowed it to make a bet private markets couldn’t make.

Fourth, expected regulation. This is suggested by the fact that TP&L leaders did not just decide against rural electrification, they fought to create and maintain a norm that only urban customers would be served: they enacted a policy that only customers who lived within 50 yards of a power line would be allowed to connect to it, and refused to make exceptions—even in cases where it would cost them nothing, as when farmers offered to pay for extension lines themeselves, or (amazingly) move their houses into the 50 yard limit.

As Caro observes, “Their policies were quite firm because they did not want to establish any precedent that might be used as an argument against them. […] If they once began to extend lines into rural areas, there would be no end to the demands for more extensions.” Presumably these demands would have come from the state legislature.

Any utility operating in Texas would depend on political goodwill to hold off price controls and service requirements. Extending service to rural areas risked attracting regulation that would make that service unprofitable. And for TP&L, the risk was not just speculative rural profits but also stable urban profits.

Quotes are from Chapter 29 (“I’ll Get It For You”) of The Years of Lyndon Johnson: The Path to Power. I only have the audio version, so the punctuation is my own.