"Power Corrupts" #4B: When FDR Called Utilities a "Private Empire"
"Power Corrupts: Cleaning Up America's Biggest Industry" was published last Thursday and is now available nationwide at bookstores and online! Get the complete investigation that reveals the full scope of utility corruption across America. If this newsletter series has opened your eyes to utility corruption, please share it with friends, colleagues, or anyone who pays an electric bill.
Introduction
Last week you learned how Samuel Insull created the regulatory compact that still governs utilities today. This week: how that monopoly system evolved into the corruption scandals that would set the template for Chuck Jones and modern utility schemes.
The regulatory compact worked exactly as Insull intended—utilities gained guaranteed returns that convinced investors to fund massive expansion across the country.
The Corruption Begins
Monopoly power, however, shielded utility executives from the discipline of competition. They no longer worried whether another power company could build generators, and deliver electricity, cheaper. Managers, instead, focused on controlling the state commissions that reviewed their finances. Monopolies, as a result, led to scandals.
The Frank Smith Scandal
In 1925, for instance, when Frank Smith declared he would run against the incumbent Illinois senator—William McKinley, who had refused to sell to Insull his interurban electric railway and utility franchises in southern Illinois communities—the chief wrote company checks totaling more than $125,000, or some $1.8 million in today's dollars. The problem was that Smith had been director of the Illinois Commerce Commission that was supposed to be an independent overseer of Insull's state-based companies. A subsequent United States Senate investigation found the power executive's self-serving payments to be "brazen" and "arrogant."
The Scale Grows and Roosevelt's Warning
The scandal grew as the Federal Trade Commission (FTC) criticized utilities for "buying" elections and spending enormous sums, surpassing $30 million annually ($455 million in inflation-adjusted dollars), on political advertising. Even more damning, the FTC concluded that 75 percent of power companies inflated their assets and that their holding companies regularly claimed fictitious income among their subsidiaries. New York Governor Franklin Roosevelt in 1930 blasted Insull's network as "a kind of private empire within the nation" that represented a menace "of such a highly centralized industrial control that we may have to bring forth a new declaration of independence." The future president already feared for our democracy in light of deceits by utility magnates.
Federal Charges
The Securities and Exchange Commission charged utility holding companies with "stock watering and capital inflation, manipulation of subsidies, and improper accounting practices." The Federal Trade Commission's general counsel added that "words such as fraud, deceit, misrepresentation, dishonesty, breach of trust, and oppression are the only suitable terms to apply."
The Fugitive
Upon hearing he was about to be indicted, Insull fled to Greece under disguise, darkening his hair and mustache and abandoning his glasses "in such a manner as to avoid publicity." Inspired by a U.S.-government bounty of $200,000—four times that offered for Al Capone—Turkish authorities boarded Insull's ship in international waters, arrested the disgraced tycoon, and extradited him back to the United States.
Reform and Reversal
A Chicago jury eventually sided with the elderly executive, who had taken the stand for three hours and weaved a tale of being a public benefactor persecuted for the greed of an entire generation. While twelve of Insull's peers dismissed the charges, the scandal prompted more oversight of utilities. Congress approved the Public Utility Holding Company Act (PUCHA) of 1935 that broke up the parent companies and gave the federal government more oversight of the industry. Also in the 1930s, Washington financed massive public-power entities, including the Tennessee Valley Authority and the Bonneville Power Authority, which brought electricity to the millions of rural residents that private utilities had ignored.
With monopolies and guaranteed profits, however, utility companies pushed to reduce oversight and competition. They convinced federal lawmakers in 2005 to reverse many provisions of the Public Utility Holding Company Act (PUCHA) of 1935 and to allow conglomerates to re-consolidate their markets and political power. As discussed in Power Corrupts and later newsletters, the Supreme Court in 2003—McConnell v. FEC—closed the door to prosecuting corruption and in 2010—Citizens United v. FEC—opened the floodgates to corporate political spending.
This is where we are today, as federal prosecutors have been told to look the other way and the nation's highest court has given corporate sponsorship of political candidates its blessing. Yet utilities' increasing moves to corruptly obtain subsidies for their old, dirty, and uneconomic facilities result largely from their own mismanagement—and misreading of economic trends. The monopolists have become unrestrained bailout beggars.
Why This Matters to You
The corruption patterns from the 1920s are nearly identical to what you witnessed in Chuck Jones's 2020 scheme: utilities buying politicians who are supposed to regulate them. Insull wrote $125,000 in company checks to elect a senator, while Jones spent $60 million to buy state legislators. The amounts have grown dramatically, but the playbook remains the same. What's changed is that federal oversight was dismantled in 2005, and the Supreme Court made political corruption much harder to prosecute. Your utility company operates in a system designed in 1907, corrupted by the 1920s, briefly reformed in 1935, and deregulated again in 2005. This century-long cycle shows that without strong oversight, utility monopolies inevitably abuse their power.
Next Week
The corruption continues today. Next week: FBI raids at dawn, death threats over coffee, and what happens when ordinary citizens try to fight back against billion-dollar utility schemes. The drama of corruption in the modern era.