Environmental jolts, institutional change, and the creation of ......Research Policy 32 (2003) 185–207 Environmental jolts, institutional change, and the creation of entrepreneurial

Research Policy 32 (2003) 185–207

Environmental jolts, institutional change, and thecreation of entrepreneurial opportunity in the

US electric power industry

Wesley D. Sinea,∗, Robert J. Davidb,1a R.H. Smith School of Business, University of Maryland, 3314 Van Munching Hall, College Park, MD 20742, USA

b Faculty of Management, McGill University, 1001 Sherbrooke Street West, Montreal, Que., Canada H3A 1G5

Abstract

The relationship between institutional change and entrepreneurship is poorly understood. We build the theory in thisarea by tracing institutional change in the US electric power industry over a 40-year period. Our analysis shows that en-vironmental jolts mobilize actors to reformulate institutions, resulting in increased entrepreneurial opportunity. When theinstitutional environment is stable, we find that incumbent organizational forms and embedded logics present formidableobstacles to entrepreneurial activity. Environmental jolts, however, catalyze search processes and motivate the evaluation ofcurrent institutional logics. Specifically, in the case of the electric power industry, environments of abundance and regula-tion resulted in homogeneity of organizational structures and strategies, and few entrepreneurial opportunities. Environmentsmarked by scarcity and crisis, however, witnessed heavy scrutiny of existing institutional arrangements that eroded theirtaken-for-grantedness and symbolic value, resulting in opportunities for entrepreneurial action.© 2002 Elsevier Science B.V. All rights reserved.

Keywords:Environmental jolts; Institutional change; US electric power industry

1. Introduction

Institutional change plays an important role inthe generation of opportunities for entrepreneurialactivity, yet relatively little research has examinedthis relationship. Prevailing institutional logics—i.e. sets of socially-constructed assumptions, values,and beliefs—define appropriate structures, practices,and behaviors within organizational fields (Clemens,1993; Haveman and Rao, 1997; Thornton and Ocasio,1999), and changes in these logics can lead to

∗ Corresponding author. Tel.:+1-301-405-0553.E-mail addresses:[email protected] (W.D. Sine),[email protected] (R.J. David).

1 Tel.: +1-514-398-7463; fax:+1-514-398-3876.

increased entrepreneurial opportunity and ultimatelychanges in industry structure. In this paper, we ex-amine the relationship between institutional changeand entrepreneurial opportunity. Understanding thisrelationship can, we believe, contribute to the existingliterature on technological entrepreneurship, whichhas generally neglected institutional factors (for no-table exceptions, seeTushman and Murmann (1998),Shane (2000)).

We suggest that environmental jolts serve as cata-lysts for action. Specifically, jolts prompt institutionalactors to engage in problemistic search processesthat can both delegitimate existing institutional struc-tures and uncover alternative arrangements. Whileprevious theory has linked environmental jolts to thedecline of institutionalized structures and practices

0048-7333/02/$ – see front matter © 2002 Elsevier Science B.V. All rights reserved.PII: S0048-7333(02)00096-3

186 W.D. Sine, R.J. David / Research Policy 32 (2003) 185–207

(e.g.Leblebici et al., 1991; Singh et al., 1991; Oliver,1992; Burns and Wholey, 1993; Davis et al., 1994;Greve, 1995; Strang and Sine, 2002), little connectionhas been made between environmental jolts, institu-tional change, and entrepreneurial opportunity. Weargue that jolts prompt search processes that erodethe taken-for-granted nature of institutions, resultingin the re-evaluation of the costs and benefits of ex-isting institutional structures and the creation of newentrepreneurial opportunities. Our approach links dis-parate but related research on environmental jolts,organizational search processes, institutional change,and entrepreneurship. We illustrate our approachthrough historical analysis of the regulation and par-tial deregulation of an industry that affects every partof modern life, the electric power industry.

2. Theory

There is growing interest among organizationalscholars in the relationship between institutionalchange and entrepreneurial action (DiMaggio, 1988,1991; Greenwood and Hinings, 1996; Barley andTolbert, 1997; Fligstein, 1997; Hoffman, 1999). Thisis a compelling and difficult topic given that insti-tutions are by definition highly resistant to change.Neo-institutionalists describe institutions as routinizedstructures and behaviors that are taken for grantedas “the way things are done,” and therefore, escapeday-to-day scrutiny (Berger and Luckmann, 1966;Meyer and Rowan, 1977; DiMaggio and Powell, 1991;Scott, 1995). Institutions are described as decoupledfrom typical measurable performance outcomes, andtheir worth is linked more to their historicity andsymbolic value than to the relative effectiveness oftheir technical contributions, which are often assumedby constituents (Berger and Luckmann, 1966; Meyerand Rowan, 1977). Yet, even in highly institutional-ized fields, change can occur. In this paper, we seekto elucidate the relationship between institutionalchange and opportunities for entrepreneurship. Partic-ularly, we examine the complex relationship betweenenvironmental jolts, field-level2 search processes,

2 Explaining institutional change requires looking at the broaderorganizationalfield of actors (Leblebici et al., 1991; DiMaggio,1991; Hoffman, 1999). The concept of “organizational field”

institutional change, and the creation of entrepreneurialopportunity.

2.1. Environmental jolts

Focusing on the organizational level,Meyer (1982,p. 515) defined environmental jolts as “transient per-turbations whose occurrences are difficult to foreseeand whose impact on organizations are disruptiveand often inimical”. Unlike Meyer, however, ourstudy investigates the influence of environmental joltson entire fields of organizational activity (for sim-ilar examples, seeTushman and Anderson, 1986;Kraatz and Zajac, 1996; Haveman and Rao, 1997;Hoffman, 1999). Environmental jolts highlight insti-tutionalized assumptions about the environment, andreveal unexpected relationships between institution-alized practices, technologies, organizational forms,and outcomes that may not be apparent in times ofstasis (Strang and Bradburn, 1994). Jolts can promptfield-wide crisis, that is, perceptions by field actors(organizations, regulators, investors, customers, etc.)that fundamental outcomes are in contrast to ex-pectations, and precipitate action intended to avoiddramatic negative outcomes. For example, in the caseof the US auto industry, exogenous shocks revealedthe reliance of current product strategies on cheap oil(and hence on nations belonging to OPEC, otherwiseknown as the organization of petroleum exportingcountries). This dependency had not been of cen-tral concern prior to the 1973 oil crisis. Similarly inthe 1970s and early 1980s, intense competition fromabroad highlighted the failure of the US auto industryto meet customer expectations regarding quality andefficiency. The result of destabilizing environmentaljolts is often a re-examination of institutionalized log-ics and practices and a reorientation of organizational

is similar to that of “industry”, but more inclusive. Whereas,“industry” typically refers to a group of firms producing similaroutputs and their economic relationships with buyers and suppli-ers, an “organizational field” is a social location of interactionbetween competing firms, suppliers, buyers, regulators and pol-icy makers; that is, the field level includes the “totality of rele-vant actors” (DiMaggio and Powell, 1983, p. 148) and their so-cial and economic relationships. Examining field-level dynamicsis particularly important in the study of the power industry be-cause consumer groups, legislators, and policy analysts are centralactors.

W.D. Sine, R.J. David / Research Policy 32 (2003) 185–207 187

strategies and processes with environmental demands(Oliver, 1992).3

2.2. Institutional actors

Institutional theory has generally neglected ques-tions of interests and agency as they pertain to changein organizational fields and the elaboration of neworganizational forms (DiMaggio, 1988; DiMaggioand Powell, 1991). This neglect is ironic, given thatagency was central to earlier institutional approaches(e.g.Selznick, 1949; Gouldner, 1954). In attemptingto address this gap,DiMaggio (1988, p. 14, emphasisadded) posited that new institutions arise when actorswith sufficient resources see in them an opportu-nity to realize interests that they value highly. Theseindividuals engage in “institutionalization work” atorganizational-field level, which involves the propaga-tion of public theories about labor markets, consumermarkets, expertise, and distinctive products or services(DiMaggio, 1988, p. 15; see alsoFligstein, 1997).This involves, according toLounsbury and Glynn(2001, p. 559), the elaboration of culturally-embeddedstories about how “resources or ideas will lead tofuture benefits for consumers and society”. In thispaper, we pick up on these general notions and elab-orate on how actors operating at the field level createopportunities to build new organizational structuresand change institutionalized practices. In particular,we examine the role jolts played in mobilizing legisla-tors, academics, technical innovators, and proponentsof environmentally-friendly technology to reformthe institutionalized industrial structure of regulatedmonopolies in the US power industry.

2.3. Institutional logics

Sociologists have argued that culturally-embeddedand taken-for-granted understandings play a funda-mental role in defining organizational arrangements

3 Our approach to jolts as catalysts of change bears some simi-larity to the work of ThomasKuhn (1970)on the nature of “scien-tific revolutions”. For Kuhn, novel scientific theories emerge onlyamid a mountingstate of crisiscaused by the failure of exist-ing paradigms to adequately explain observed reality. Crises arethus a “necessary precondition” for the emergence of new theo-ries (Kuhn, 1970, p. 77). We thank an anonymous reviewer forpointing out this link.

and individual actions. These beliefs explain andjustify social structures by integrating them into thesocially-available stock of knowledge (Berger andLuckmann, 1966, pp. 61–64). We define institutionallogics as socially-constructed assumptions, values, andbeliefs that define formal and informal rules of behav-ior and guide interpretation about why certain struc-tures and practices exist (Clemens, 1993; Havemanand Rao, 1997; Thornton and Ocasio, 1999). For ex-ample, Haveman and Rao (1997)found that formsof thrifts were underpinned by “theories of moralsentiments,” or institutional logics comprising opin-ions, beliefs, and judgments about savings and homeownership.Thornton and Ocasio (1999), meanwhile,found that executive attention was guided by currentlogics that influenced which organizational and indus-trial variables powerful actors paid attention to andthe types of actions they undertook when determiningexecutive succession. In line with this prior work,we argue that institutional logics underlie processesby which “individuals and organizations produceand reproduce their material subsistence, organizetime and space, and provide meaning to their socialreality” (Thornton and Ocasio, 1999, p. 804). Anychange in these logics, in turn, can be expected toshape field level search processes and the creation ofentrepreneurial opportunity.

2.4. Problemistic search processes and the“solution bazaar”

A common primary reaction by actors within anorganizational field (managers, board of directors,policy makers, political action groups, etc.) to environ-mental jolts is to instigate search processes in whichthey scrutinize the symptoms of the crisis and lookfor its causes (Cyert and March, 1963, p. 121).4 Thissearch, we contend, weakens important institutionalqualities, resulting in institutional degradation. Onceinstitutional actors identify problems and weaknesseswith existing institutions, previously institutionalizedlogics are disrupted and the search for new logics,forms, and practices begins. Problemistic search pro-cesses are usually carried out in the neighborhood

4 Although Cyert and March discussed search processes in thecontext of organizations, we believe that these same principlesapply at the organizational field level.


of institutionalized policies (Cyert and March, 1963,p. 122), robbing them of their pre-conscious statusas the attention of institutional actors is focused onbehaviors that had previously been taken for granted.This process makes embedded assumptions and be-liefs concerning institutionalized forms and practices(i.e. institutional logics) more salient and available forevaluation by constituents within the organizationalfield. Thus, powerful actors that once took founda-tional logics about institutional practices for grantedstart to re-examine these assumptions during times ofcrisis.

A common outcome of a search process is thediscovery of unexpected weaknesses that were notwidely known or salient before the crisis. For ex-ample, Strang and Bradburn (1994)found that theoccasion for re-evaluation of entrenched structuresand practices in the healthcare sector was the crisisof a spiraling health budget. As this crisis emerged, itmotivated powerful actors to search for practices andorganizational forms that were connected with thecrisis. They carefully examined their current assump-tions about how the health care industry functioned.Strategies and practices connected with healthcarethat were taken for granted before became the focus ofattention. Increasing costs motivated not only scrutinyof existing practices, but also a search for and eval-uation of possible solutions (Strang and Bradburn,1994).

When institutional actors search for and sanctionalternatives outside of institutionally prescribed bar-riers, they disrupt institutional logics by redefiningthe set of available solutions (Cyert and March, 1963,p. 123). Search processes, such as these can iden-tify as potential “solutions” structures and practicesthat, for various reasons in the past, were not con-sidered to be legitimate alternatives. Additionally,the loss of legitimacy of prevailing institutional log-ics opens up previously-stable organizational fieldsto entrepreneurs with “packaged” solutions (Cohenet al., 1972). This redefinition of available solutionscaused by an institution’s loss of legitimacy createsa “solution bazaar,” where decision makers shop forappropriate solutions and entrepreneurs with solu-tions (e.g. consultants, innovators, and managers fromother industries) sell themselves as the best alterna-tive to decision makers’ needs. This mixture of deci-sion makers and alternatives—solution bazaars—and

the decreased legitimacy for incumbent institutionalstructures is, we posit, a very fertile environment forentrepreneurship.

In summary, crisis shakes the foundations of organi-zational fields by motivating scrutiny and search pro-cesses for causes and solutions. Crisis environmentsprompt powerful actors to engage in search processesthat can ultimately result in profound institutionalchange. The resulting loss of taken-for-grantedness,recoupling of outcomes and behaviors, and redefini-tion and expansion of alternatives renders practicesthat were once taken for granted as “the way thingsare done” vulnerable to reform or replacement.

3. Research design

3.1. Research site

The electric power industry is a particularly inter-esting context for the study of institutional conflictand change because the nature of the structures, prac-tices, and exchange relationships in the industry—what we call its “industrial form”—remained stableand taken for granted for over 40 years, from 1935to 1978. By the time this regulated-monopoly indus-trial form changed, most living Americans had neverexperienced or could not remember a different sys-tem for the generation and distribution of electricity.This industrial form is the institution that we exam-ine in this paper. The US electric power industry’sindustrial form of regulated monopoly was sup-ported by some of the most powerful organizationsin American industry, including organized labor andthe electric utilities, yet it changed after a dramaticenvironmental jolt: the energy crisis of the 1970s. Weprovide a brief timeline of the industry’s history inFig. 1, and examine its evolution in detail in the nextsection.

The case of the electric power industry exempli-fies the institutionalization of regulated monopoliesin a country espousing free-market policies. For over40 years, national and regional regulation of largecentralized utilities operating in geographically de-fined monopolies had been accepted as the natural wayto generate and allocate electricity (Hellman, 1972;Hyman, 1988; Hirsh, 1989). The electric power in-dustry was distinguished from other institutions by


Fig. 1. Key Events in the structuration of the US Electric Power Industry.


various boundaries and institutional myths (which wewill detail in the next section), and was thus insulatedfrom the spread of market-based structures (Primeaux,1986). The fact that the institutional logic of regu-lated monopolies contradicted many of the assump-tions the public, the government, and many socialscientists had concerning the importance of free enter-prise and competition rarely surfaced in discussionsin the media from 1935 until the 1970s energy cri-sis (Primeaux, 1986). Beginning in 1973, petroleumprices and interest rates skyrocketed, greatly increas-ing the cost of electricity generation (Energy Informa-tion Administration, 1993). This resulted in an energycrisis that motivated Congress (Crew, 1985), the aca-demic community (Primeaux, 1986), concerned citi-zens (Hirsh, 1999), and other stakeholders to search foralternative energy sources and organizational forms(Sine, 2001).

3.2. Data and methods

In the tradition of Leblebici et al. (1991), weuse historical analysis to examine the relationshipbetween environmental jolts, field level search pro-cesses, and institutional change in the electric powerindustry. This requires that we first provide evidencethat the industrial form of a regulated monopolywas indeed institutionalized within the electric powerorganizational field. Second we must establish theeffect of jolts on field level search processes, particu-larly the mobilization of institutional actors, such aspolicy makers, innovators/entrepreneurs, academics,and popular social movements (such as environmen-tal groups and consumer activists). Third, we needto provide evidence that access to policy makers byactors promoting alternative technologies and indus-trial forms (innovators/entrepreneurs, academics, andsocial movements) changed as a result of the jolt.Finally, we need to provide evidence that the policymakers’ agendas changed in light of alternative log-ics and technologies, producing rich opportunities forentrepreneurship.

We follow the dominant industrial form of thepower industry, the regulated monopoly, from incep-tion in 1935 to the passage of the Public UtilitiesRegulation Act in 1978, a law that crystallized the de-cline of the institution of regulated monopolies in theUS power industry. We chose these two dates because

they represent years when key legislation was passedthat helped create and reform the industrial structureof the electric power industry. Our historical analysisis based on industry histories, archival documents, andinterviews with utility analysts, executives of powerfirms, and policy makers. The first author interviewed25 executives from utilities and non-utility firms, aswell as officials at the Department of Energy, the Fed-eral Energy Regulatory Commission, the CaliforniaPublic Utility Commission, and the New York StateEnergy Research & Development Authority.

Our primary data sources for our examination offield-level search processes are: (1) theCongressionalMasterfile (which includes House of Representa-tives and Senate published and unpublished reports,documents, executive documents, executive reports,committee hearings and prints); (2)Reader’s Guideto Periodicals, (which reviews some 300 popularmagazines and journals, such asNewsweek, Harper’sMagazine, Readers Digest, and Time); (3) the Peri-odical Contents Index(PCI, 2000), a data base thatfollows more than 2000 academic journals in a widevariety of disciplines, such as sociology, business,economics, anthropology, political science, and publicadministration. We analyzed political discussions rel-evant to the industry by searching theCongressionalMasterfilefor topics related to the electric power in-dustry, cogeneration, and alternative energy duringthe years 1935–1978. We assessed popular discus-sion of the industry and its structure by searching forreferences to the electric power industry, alternativeenergy, and cogeneration in theReaders Guide toPeriodicals1935–1978. Finally, we investigated aca-demic discussions about the industry by conducting asimilar search in thePeriodical Contents Index.

In the following section, we briefly review theevents that led to the construction and implementationof regulated monopolies. We then examine the insti-tutionalization of the industrial form in question—large centralized utilities operating in a geographicalmonopoly—and the various field level structures thatincreased its resistance to change. Finally, we addressthe role of the energy crisis in mobilizing institutionalactors. In particular, we discuss the search processesmotivated by this jolt and the effect of these searchprocesses in delegitimating the current institution andlegitimating alternative industrial and technologicalforms for generating power.


4. Environmental jolts and institutional change inthe electric power industry, 1935–1978

4.1. Origin and institutionalization

The electric power industry began in the late 1870s,and was characterized by rapid technological de-velopment. The industry was essentially technicallymature by the early 1900s (McGuire et al., 1993),and operated within a stable paradigm for some 60years into the 1970s (Samuels and Trebing, 1972).After 1935, the industry was characterized by a reg-ulated monopoly structure with sustained growth andsignificant economies of scale. Throughout this pe-riod, utilities operated essentially as organizationalislands, serving their own loads with their own re-sources (Shapiro, 1989). The advent of this regu-lated system reflected widespread dissatisfaction withthe provision of service in the early years of theindustry.

The first significant electric experiments began inEurope in the 1730s, and the first practical applica-tions were invented in the early 1800s. As early asthe mid 1800s, arc lighting was used commercially. InJanuary 1879, the nation’s first outdoor electric lightserving a public purpose was installed in the belfryof Sage Chapel at Cornell University. The first com-mercial electric generating in the US began with arclighting service in downtown San Francisco in 1879at the California Electric Light Company. About thissame time, Thomas Edison perfected the incandescentlight bulb. Three years later, he operated the PearlStreet Station, which provided reliable lighting servicein downtown New York City. Technology increasedexponentially in the decades following the construc-tion of Pearl Street Station. By the early 1900s, therewere over 3000 private electric generating companiesand over 1000 generators owned and operated in thepublic sector.

The structuration of the industry is an interestingstory in and of itself. Early in the industry’s develop-ment state and federal policy makers tried to foster anenvironment of competition, by granting nonexclu-sive competitive franchises and passing laws aimed atpreventing price fixing agreements (Hellman, 1972,p. 9). Despite state and local governmental attempts tomaintain competition within the industry, large hold-ing companies devoured their smaller competitors,

and by 1907 many areas, such as greater New York,Detroit, and Denver were dominated by a single com-pany (Hellman, 1972). Captive markets were charac-terized by high rates and price collusion was commonbetween adjacent electricity providers (Kwoka, 1996).New York and Wisconsin were the first states to reactto the increasing costs and established state com-missions to regulate electricity prices. This practicequickly diffused and by the early 1920s most stateshad appointed regulatory commissions (Hellman,1972; Kwoka, 1996).

In order to justify captive markets, early en-trepreneurs enthusiastically argued that the businessof generating and distributing electric power was a“natural monopoly and should be granted geograph-ical monopolies in order to best serve the interestof the public” (seeHirsh, 1999, pp. 17–29 for amore detailed discussion of this process). The naturalmonopoly rationale had its roots in the late 1800s anddifferentiated certain industries from others, claim-ing that some economic norms (competition) did notapply to certain industries, such as the railroads andwater, because large fixed costs and small marginalcosts made competition impossible (Varian, 1996;Primeaux, 1986). Generally, this logic became quitepervasive and was used extensively by legislators andacademics for decades to rationalize the industry’sform (Hirsh, 1999).

Samuel Insull was a key figure early in the indus-try. His influence shaped electricity generation anddistribution for generations.5 Insull and many leadersof other large holding companies realized that pub-lic sentiment toward electricity providers was growingincreasingly negative, and became afraid that the mu-nicipalities might revoke their franchises. Hence, theydecided to support state regulation, becoming heavilyinvolved in its formulation in various states (Hellman,1972). They struck an informal public-policy bargainwith many state lawmakers in which utilities wouldoperate on a cost-plus basis. Considering possible sav-ings from huge economies of scale, protection frommost forms of competition, and virtually unlimitedgrowth, this deal was a coup for Insull and other hold-ing companies.

5 SeeMcGuire et al. (1993)for a rich description of the earlystructuration of the electric power industry.


State regulatory commissions found it difficult toregulate giant holding companies that had complexstructures spanning many states. Additionally, theimmense power of these companies was often usedto influence state governments through donations topolitical parties and at times for illegal payments toregulators (McDonald, 1962; Ramsay, 1937).6 Thepublic remained highly dissatisfied with high pricesand rampant corruption within the industry. In re-sponse to public outcry, the Federal Trade Commis-sion began a thorough investigation of the industry in1927 that lasted for seven years. The findings from thisstudy, released in stages beginning in 1928 and contin-uing through the Depression, increased public outrageas they detailed inflated valuations, watered stock,control of newspapers, and opposition to municipalownership (Hellman, 1972). When Franklin Roosevelttook over the presidency in 1933, the stage was set forchange. At that time, over 60% of the population hadaccess to electricity. Unfortunately, many rural areashad been bypassed by electric utilities, only 10% ofwhich had access to electricity. In reaction to thegrowing power of a few large holding companies, theirabuses, and reluctance to provide power to rural areas(Gioia, 1989), the Congress decided to crack down.

In 1935, a year and a half after Roosevelt’s inaugu-ration, he created the Rural Electrification Adminis-tration (REA) to promote rural electrification.7 In thatsame year, Congress passed the Public Utility Hold-ing Company Act (public law 74–333), commonlyknown as PUHCA, that gave the Securities and Ex-change Commission broad authority over companiesthat produce, transmit, or distribute electricity in morethan one state. Utilities that operated in only onestate fell under state jurisdiction (Energy InformationAdministration, 1993). The SEC “required holdingcompanies to divest their holdings until they becamea single consolidated system serving a circumscribedgeographical area” (Energy Information Adminis-tration, 1993, p. 19). By 1940, the law was fullyimplemented, and the industrial structure that wouldremain dominant for almost three decades was inplace.

6 Insull admitted to paying US$ 150,000 to one commissioner.7 The REA provided loans to both private and public organiza-

tions that were expanding electricity to rural areas without elec-trical infrastructure.

4.2. Institutionalization and maintenance:1940–1965

A variety of environmental factors contributed tothe institutionalization of the electric power industry’sstructure, such as its designation as a “naturalmonopoly,” low fuel prices, and rapidly advancingtechnology. This resulted in low electric rates, andpolitical and popular satisfaction with the industry.Any real impetus to scrutinize the appropriateness ofthe power industry’s structure of regulated regionalmonopolies was ultimately lacking. AsCyert et al.(1965) explained, search processes are motivated byeither dissatisfaction or conspicuous alternatives. Thestatic environment between 1940 and 1965 providedneither. In this section, we review the factors thatcontributed to this stability.

4.2.1. Increasing demandDuring WWII, the war industry needed vast amount

of energy to produce planes, tanks, guns and othernecessary equipment. Increasing demand invigoratedthe industry after the Depression (Fenn, 1984). It con-tinued to thrive after WWII as the booming postwareconomy resulted in a dramatic increase in both in-dustrial and household use of electricity. Consumersin search of the American dream bought large num-bers of household appliances, such as refrigerators,that demanded energy both to manufacture and useon a daily basis (Hyman, 1988). Increased demandand large monopolies enabled utilities to reduce costsby building large power plants, thus taking advan-tage of economies of scale to keep rates relativelylow.

4.2.2. Technological advancesAdditionally, various technological advancements

in the electric power industry were made possibleby wartime improvements in materials (metals) thatwere stronger and more resistant to aggressive steamconditions (Hirsh, 1989, p. 64). Cooling technologyalso improved after 1940. Between 1940 and 1965,technological advances enabled utilities to take ad-vantage of their captive markets by building plantswith larger capacities, and profiting from economiesof scale. For example, in 1935 the largest generatorproduced 208 MW, and this rose to 300 MW in 1956and 1000 MW in 1965 (Fenn, 1984). The greater the


capacity of a generator, the fewer generators neededto produce the same amount of electricity, and giventhe same efficiency and down time, greater savings.Moreover, thermal efficiency continued to increaseduring this time period resulting in lower retail prices8.Average adjusted prices for a kilowatt-hour declinedover 50% between 1940 and 1965 (Edison ElectricInstitute, 2002).

4.2.3. Fuel pricesFuel prices were also favorable to the industry and

declined after WWII, as cheap foreign oil flooded themarket (Hyman, 1988). The abundance of fuel, ad-vancing technology and economies of scale enabledutilities to maintain or lower their prices and reap goodprofits for many decades.

4.2.4. The myth of a natural monopoly“The institutional world requires legitimation, that

is, ways by which it can be explained and justified”(Berger and Luckmann, 1966, p. 61). The academicexplanation of natural monopoly provided the elec-tric power industry’s structure with araison d’être.It was frequently used by proponents of the sys-tem as an explanation for why the industry deservedmonopoly status9, and served as a powerful legitima-tor. Although this was the prevalent view, however,not all economists viewed electricity generation anddistribution as a natural monopoly, and there alwaysremained a few skeptics tucked away in academia10

(Gray, 1940). (SeePrimeaux (1986)for a detailed

8 Thermal efficiency increased from 2.5% early in the industry’shistory to over 33% by 1965 (Fenn, 1984).

9 Legislators and academics rationalized the industry’s structureas a “natural monopoly, despite the existence of several examplesin the Northwest where competition among generating facilitieswas very successful and resulted in lower prices (Primeaux, 1986).10 In retrospect, Primeaux noted that “upon close examination,

conditions cited as characteristics of natural monopolies are eithernon-existent or unimportant” in electricity generation (Primeaux,1986, p. 1). The monopoly structure of the electric utilities wasnot a natural state, but merely the outcome of institutional factorssuch as contracts, laws, investor influence, etc. (Primeaux, 1986,pp. 1–18). After the original goals of the electric power industry’sregulatory structure had been fulfilled, it remained rationalizedas a “natural monopoly.” Thus, the formal organization of theelectric power industry became institutionalized, reflecting morethe “myths of (its) institutional environment instead of the demandsof (its) work activities” (Meyer and Rowan, 1977).

history of the natural monopoly rationale as appliedto the electric power industry.)

4.2.5. Monopoly and monopsonyThe structural power of the utilities helped assure

the absence of legitimate alternatives both to utilitiesand to their preferred technology, large centralized fos-sil fuel plants and large hydroelectric power plants.11

Because utilities were the only distributor and whole-sale buyer in a specified area, this created a monopsonyenvironment giving utilities the ability to decide whocould connect to the grid. This power enabled utilitiesto keep other sources of electricity off the grid. In thefew cases that entrepreneurs tried to build competinggenerators using alternative forms of power genera-tion, such as cogeneration technology,12 utilities ei-ther refused to purchase or distribute the power for areasonable price.

The regulated monopoly structure also gave theindustry the ability to decide how power would begenerated for their clients and how research and de-velopment budgets would be allocated. This enabledthe industry to influence the type of technology thatwould be developed and implemented in the future.Because the premise of natural monopolies is basedon building larger and larger centralized plants in

11 Between 1935 and 1978, utilities nationwide had very homoge-nous technological strategies, relying almost exclusively on largecentralized coal, oil, natural gas, and large hydroelectric genera-tors. The amount of power generated by utilities using alternativeenergy sources and technology such as solar, cogeneration tech-nology, wind, small hydroelectric, or biomass was virtually zerothrough 1973. In the early 1960s, the utilities also began to gen-erate power using nuclear technology, but this accounted for lessthan one-half of 1% of energy generated in the US. Utility tech-nological strategies were very homogenous during the time periodexamined in this paper (Energy Information Administration, 1993).12 Utilities tried to undermine these attempts at expansion despite

the fact that onsite cogeneration accounted for up to 15% ofthe power generated in the US in 1950 as many firms used thistechnology to decrease their energy costs (Pierce, 1995). Becauseutilities had captive markets, there were few incentives to motivatestrategic alliances with non-utilities. Utilities used several strategiesto discourage non-utilities from generating power, such as denyingthem interconnection, charging them higher than normal prices forbackup electricity, or offering them sub-market prices for electricityproduced (Energy Information Administration, 1983). Thus, thetotal amount of electricity sold by cogenerators to the grid prior to1978 was insignificant. A study conducted in 1981 of purchasesof power by public utilities from cogenerators could not identifya single purchase (Resource Dynamics Corporation, 1983).


order to take advantage of economies of scale, andbecause existing plants predominantly used coal andoil as fuels (and in some cases large hydroelectricplants), utility research and development focused onthese technologies (Hirsh, 1989). Utilities failed to se-riously consider or develop promising alternatives,13

such as cogeneration,14 wind, geothermal,15 and so-lar technologies.16 The utilities’ structural power

13 Wind, geothermal, and biogas were not considered by largeutilities as legitimate methods for generating electricity and there-fore little money was spent on research and development. Inde-pendent companies that did try to develop wind, geothermal, andsolar power after 1935 did not have access to the grid and wererejected by large utilities (seeRighter, 1996). The only clients ofthese manufacturers were farmers without access to the grid. Mostof these companies quickly died as large centralized utilities usedgovernment funding to build power lines to rural areas.14 For example, while other developed countries around the world

were capturing wasted energy from factories through cogenera-tion (Energy Information Administration, 1983) and experimentingwith alternatives to petroleum and hydroelectric sources of energysuch as solar, thermal and wind, the US electric power industry’sstrategy remained remarkably stagnant and unidirectional. Whenthe US policy makers finally got around to studying alternatives tocentralized power, studies of relative energy efficiency conductedin the late 1970s “revealed that countries using cogeneration ex-perienced higher electricity conversion efficiencies than did theUnited States” (Energy Information Administration, 1983, p. vi).The total amount of oil used in a cogeneration plant is less thanthe oil used by utilities and manufacturers in separate operations(Energy Information Administration, 1983, p. 6). In fact, advocatesof cogeneration have argued since the early 1930s that cogenera-tion has inherent thermodynamic advantages over even the mostadvanced condensing plants of the time (Pierce, 1995).15 Italy provides another example of the far sightedness of Europe

on approaches to alternative power generation. Italy began usinggeothermal energy as early as 1904 and was the largest producerof electricity by geothermal means up to 1976. Other countriesthat used significant amounts of geothermal resources includedIceland, New Zealand, and the Soviet Union. Prior to the 1970s,the US had approximately four geothermal units. Despite adoptionby other countries, the electric generating industry in the US spentvirtually no effort on developing geothermal resources in the US.16 Photovoltaic technology was first developed in Britain in the

early 1900s with a very low efficiency. This changed in 1954 at BellLaboratories when they produced a silicon cell that converted lightenergy into electricity at an efficiency of 5%. The US Governmentpurchased 10 million small cells for satellites and spacecraft. How-ever, the electric generating industry ignored the potential use ofthis medium, and the lack of any sizable market kept photovoltaiccell prices high for years (Pryde, 1983). Other countries quicklyadopted the technology and between 1955 and 1973, Japanese andFrench companies led the world in research, production, and useof electricity from photovoltaic electricity (Pryde, 1983).

increased the homogeneity of industrial processes andtechnology and ultimately decreased the number ofalternative technologies that were available when theenvironment changed. For example, between 1935and 1973, 99.9% of power generated by electric util-ities used one of four energy sources, coal, oil, gas,or large hydroelectric. Moreover, the records we havefrom this time period indicated there were virtually nonon-utility private firms generating power and sellingit to the grid.

4.2.6. Legislative and popular scrutiny, 1940–1965The lack of public and political discussion and

scrutiny of the industrial structure of the electricpower industry is reflected in the low number of arti-cles in the popular media and the paucity of legislativediscussion between 1940 and 1965 about the currentindustrial structure and alternatives to this struc-ture. This lack of scrutiny provides evidence of thetaken-for-grantedness of the electric power industry’sindustrial form (Figs. 2–4).17 Similar to other institu-tional theorists, we interpret the taken-for-grantednessas an indicator of institutionalization (Berger andLuckmann, 1966; Tolbert and Zucker, 1983), andpoint to both the taken-for-grantedness and ubiq-uity of the regulated monopoly structure during thistime frame as evidence that this industrial form washighly institutionalized. A study of media discussionsabout the electric power industry in popular outletssurveyed byReaders’ Guide to Periodicals(Fig. 2)demonstrates a paucity of public discussion aboutthe monopoly structure of the electric power industryfrom 1940 to 1965. Besides the slight increase in themid 1950s,18 there was an astounding absence dur-ing 1940–1965 of federal legislative scrutiny of themerits of the electric power industry structure. This isespecially surprising in light of the fact that according

17 Our approach here is similar toTolbert and Zucker (1983), whomeasured the degree of institutionalization of civil service reformas an inverse function of the level of debate in the popular press.18 A slight increase in articles published on this topic in 1953

is related to a surge in electricity demand during this period anda healthy public discussion about how and where dams would bebuilt to fill this need rather than critiques of the standing industrialstructure. Likewise,Fig. 3 depicting Congressional hearings andreports on the industry, shows a slight increase in roughly the sametime period, again reflecting concerns about the demand increasesand Congressional concern about where to build dams to provideelectricity for the increased demand.


Fig. 2. Popular press articles on the public utility industry fromReaders’ Guide to Literature, 1935–1978.

to Vital Statistics of the US Congress, Senate activ-ity, measured by the number of Senate committeeand subcommittee meetings and reports, increased60% from the 84th Congress (1955–1957) to the94th Congress (1975–1977). Activity in the Houseof Representatives increased by 40% over that sametime period (Ornstein et al., 1992). Fig. 4 shows thatbetween 1945 and 1965 we found no Congressionalinvestigations aimed specifically at evaluating themonopoly structure of the electric power industry. Thefailure of policy makers to ask fundamental questionsabout the industry was both a result of its institution-alization and also reinforced the maintenance of thisinstitution. It is important to note that the decisionto continue with this structure was one made by de-fault, not by deep comparative studies of alternativestructures. Arguing that the structure was maintainedbecause it was the “best alternative” is misleading,because the public record demonstrates that few other

alternatives were seriously considered on a nationalbasis (seeFig. 4). In other words, the electric powerindustry’s structure was taken for granted at that time,reflecting its high degree of institutionalization.19

It is important to note, however, that this absenceof serious consideration in both the public media andcongressional hearings of alternative means for gen-erating power did not mean that alternatives did notexist. In fact, throughout this time period, innovatorsand entrepreneurs in both the US and abroad were ex-perimenting with alternative methods, in some casesvery successfully, but could neither enter the marketnor catch the attention of policy makers or the popularmedia.

19 Other evidence of the institutionalization of the industrial struc-ture of regulated monopolies in the power industry is that its adop-tion at the state level was 100%. Only a few cities nationwide hada system in which generating firms competed (Primeaux, 1986).


Fig. 3. Congressional hearings and reports of the electrical utility industry, 1935–1978.

Fig. 4. Congressional hearings and reports on alternative energy, cogeneration and competition in the EUI, 1935–1978.


4.2.7. SummaryThe industrial form of geographic monopolies was

originally implemented for very specific purposes.Yet after the first decade, the supporting rationalefor this form changed from functional to symbolic(Tolbert and Zucker, 1983). Geographic monopolies—originally used to promote technological coherence,rural electrification, and lower prices—were laterrationalized as appropriate and natural; soon there-after, public discussion on the structure of the electricpower industry became exceedingly rare. Technolog-ical advances and decreasing fuel prices provided theindustry with a great deal of slack resources that hidinefficiencies from constituents, such as customers,government regulators, suppliers, and industry lead-ers. To the average consumer, between 1940 and 1965,the electric power industry seemed very successful.Without obvious signs of crisis, the regulated formbecame taken for granted. It was no longer a salientissue, even though it contradicted widely supportedeconomic principles. It was simply accepted as theway things were done.

4.3. Environmental changes, 1965–1972

The year 1965 was important for the industry:“electric utility prices peaked, rate reductions wereat the lowest since Vietnam” (Hyman, 1988, p. 97).The year ended with a large blackout in the Northeastaffecting 30 million people distributed over roughly80,000 square miles. Utilities responded to this eventby installing interconnections that allowed genera-tors to transfer energy throughout the country andbegan emphasizing reserve generation.20 However,the massive blackout shook many customers’ faithin public utilities. The outage drew the attention ofacademics, politicians, and consumers. The FederalPower Commission (FPC) immediately launched sev-eral investigations that uncovered a history of smallpower outages and a need for massive investment ininfrastructure.

Electricity costs also began to rise in the late 1960sand early 1970s, due to a minor increase in fuel costsand interest rates. As these costs were passed on to

20 This added infrastructure turned out to be vital to the futurecompetitive market. It allowed generators to be in different loca-tions than distributors and to transmit energy to central retailers.

customers and rising prices motivated rumblings in thepopular press, Congress held several hearings between1967 and 1972 to investigate pricing policies. How-ever, Congressional hearings and publications werefocused on incremental reform of the current struc-ture and ignored important questions, such as whetherthe current industrial structure was better than alter-natives. Price increases also caught the eye of theacademic community. A few social scientists pub-lished papers and books during this time critical of thenon-competitive structure (Kahn, 1970; Landis, 1960).An important contribution in 1971 was a critical studyby an economist that compared the effects of elec-tric utility regulation with a few US cities that useda more competitive structure (Primeaux, 1986, p. 10).Its highly critical results had little impact at that time,however. Those in a position to change the system fo-cused their deliberations (Congressional hearings, re-ports, etc.) on pricing policies instead.

The late 1960s and early 1970s were a time ofsocial unrest and loss of public confidence in publicinstitutions. This distrust was driven by the unpopularVietnam War and the Watergate scandal and exacer-bated by economic difficulty, fuel rationing, and hugejumps in utility costs (Derthick and Quirk, 1985). Ad-ditionally, growing awareness of the environmentaldestruction occurring at the hands of regulated utilitiesincreased the hostile attitude of many environmen-tal groups (Fenn, 1984, pp. 51–52). Environmentalactivists in the late 1960s and early 1970s pressuredgovernment agencies to investigate the environmentalimpact of the growing electric power industry. Thesegroups succeeded in working with policy makers tocraft the National Environmental Policy Act of 1969that required utilities to prepare and defend environ-mental impact statements.

In sum, the period 1965–1972 was characterizedby a large power failure, increasing electricity pricesand greater levels of scrutiny by both academics andenvironmental activists. Although, during this period,both the concept of natural monopoly and the indus-trial structure of regulated monopolies were beingheavily scrutinized by fringe actors, congressionalrecords show very little discussion of changing thecurrent industrial structure. Moreover, debate aboutwhether or not power generation actually met thedefinition of a natural monopoly was not widespread,but rather confined to various academic publications.


The institutional structure of power generation as anatural monopoly remained stable and entrenched.

4.4. Oil crisis

In October 1973, the electric power industry washit by a sudden environmental jolt. OPEC, a multi-national Arab-dominated organization that had beenestablished to coordinate oil prices, retaliated againstthe US for its support for Israel during the Yom Kip-pur War by temporarily cutting off oil supplies andthen raising its price by over 200%. OPEC continuedto raise prices, from US$ 3.00 per barrel in 1973 toUS$ 30 in 1980. Increased fuel costs were passed onto both industrial and home consumers, raising elec-tric energy prices sharply. Electric utilities reacted byreducing reliance on oil through conversion to moreexpensive solid fuel plants and by building large nu-clear facilities. This required huge capital investmentsat a time when interest rates were very high21 mak-ing the already expensive fuel substitution programseven more costly. Attempts by electric utilities to di-versify fuel types during the energy crisis of the 1970sresulted in huge, expensive production facilities (nu-clear or coal) that took many years to build and inthe case of nuclear facilities, when finished were sub-stantially over-budget,22 sometimes by more than abillion dollars. The new nuclear facilities were oftennot cost-efficient relative to other forms of generation(Michaels, 1996).

OPEC’s embargo and the resulting increase in oilprices created two major problems for the industry.First, the embargo disrupted the economy on a na-tional scale. “The economic disruption resulting fromthe oil embargo and the inflation crisis resulted in amore fragile national economy, with less stability inprices, interest rates, and inflation” (Crew, 1991, p. 6).The oil embargo and its subsequent effect on the na-tional economy were interpreted as not only an eco-nomic issue but also as a national security dilemma.As long as the US was dependent on foreign oil, it

21 Ironically, high interest rates were in part caused by federalgovernment anti-inflation policies in response to increasing prices,which in turn were partially caused by high oil prices.22 Economist Charles Komanoff estimated cost overruns and can-

cellations of nuclear plants topped the US$ 100 billion mark andresulted in rate increases of up to 30% for every household in thenation (Rudolph and Ridley, 1986, p. 185).

would be vulnerable to the political whims of the NearEast. Second, consumers (i.e. voters) were extremelydissatisfied with the energy crisis in general and withthe huge jumps in electric prices in particular. In reac-tion to rising prices, consumer organizations, such asPOWER (People Outraged With Energy Prices) sprangup all over the country to pressure Congress and stategovernments to act (Primeaux, 1986, p. 238).

4.5. Problemistic and solution searches

As Kuhn (1970)has noted in the context of scien-tific revolutions, a response to crisis is typically theinitiation of a search for a replacement for the dis-credited paradigm. In the electric power industry, avariety of searches for solutions to the problems de-scribed above were initiated in the public, non-profit,and private sectors. These included searches withinthe current system in the US as well as outside ofthe US electric power industry. State regulatory agen-cies scoured utility operations, scrutinizing operationalprocedures, costs, and billing practices. Many stateregulatory commissions responded to the crisis by in-creasing ex-post prudence reviews of building costs,that is they reviewed building costs and disallowed therecuperation of portions of the cost that the commis-sion felt were inflated or due to negligence on the partof utility managers. Between 1945 and 1975, therewere less than a dozen ex-post prudence cases in theentire country; after 1975 prudence reviews becamecommon (Joskow and Schmalensee, 1983, p. 160).

Congressional committees called utility managersand state regulators to fact finding hearings. Searcheswithin the electric power industry for the causes andsolutions to the high cost of electricity revealed no ob-vious answers but uncovered a slew of problems, suchas the inefficiency of nuclear energy and the dearth ofsolutions entertained by the current electric power in-dustry, thus intensifying the impetus to find a solution(Munson, 1985). Congress, the President’s advisors,state regulators, and policy makers engaged in morecomplex searches, both geographically and technolog-ically, scouring the world for possible solutions. Forexample, soon after OPEC’s announcement, AbrahamA. Ribicoff (D-Conn.), on behalf of the Committee ofGeneral Affairs, went on a fact finding trip where hetoured a number of European nations in an effort tounderstand their systems and find alternatives to the


current crisis (Committee on General Affairs, 1973).Presidential advisors created various reports outlin-ing alternative options and Congressional committeescalled over 50 hearings about the electric power indus-try between 1973 and 1978 (compared to five over theprevious five years; seeFig. 3). Each hearing lastedfrom several days to several weeks and representedmonths of preparation and work by its participants.The committees involved, ranged from the Commit-tee on Commerce Science and Transportation to theHouse Means and Ways Committee and the Commit-tee on Labor and Human Resources. Congressionalcommittees invited academicians, professionals, andrepresentatives of foreign systems to write reports andsuggest alternatives. Committee members called onvarious bureaucrats from regulating agencies (such asthe Securities and Exchange Commission and the En-vironmental Protection Agency) to testify about thecurrent state of the industry and suggest alternatives.Regulating agencies in turn searched the academic andindustrial sectors for solutions to the crisis and pre-sented them to Congress.

It soon became clear to policy makers, based onforecasts by experts within and outside of the indus-try, that prices were going to continue to rise and thecurrent structure of the electric power industry hadcreated a climate where organizations were unableto “fully respond to the political pressure to insulateconsumers from dramatic cost increases” (Joskowand Schmalensee, 1983, p. 159). The electric powerindustry’s structure and strategies that had been takenfor granted for so long were no longer taken forgranted, but were now the focal point of deep scrutinyand criticism.

During this scrutiny processes, many myths aboutthe electric power industry were dispelled. It was nolonger taken for granted that the generating industrywas promoting the best interests of the public. The in-creased number of instances where construction costsfor new plants were disallowed exemplified regulatorydistrust for the industry. Growth strategies advocatedby power companies were no longer merely acceptedby regulators and the public as the best alternative.Moreover, it was not just the strategies and policies ofthe industry that were under attack, but also its funda-mental structure. In several hearings, economists testi-fied that electric utilities were not necessarily a naturalmonopoly (Primeaux, 1986; Hirsh, 1999).

The many search processes catalyzed by the energycrisis coupled negative outcomes, such as high prices,inflexibility, and inefficiency with the structure andpractices of the electric power industry, eroding its le-gitimacy. Critics of the industry whose voices had longbeen silent or largely ignored were heard and consid-ered after 1973. Consumers, regulators and politiciansintensely scrutinized every aspect of the industry, crit-icizing its structure, strategy, and management (Fenn,1984; Hirsh, 1989).

4.5.1. A new set of alternativesThe oil crisis changed the set of strategies and

solutions to power generating problems consideredby regulators and legislators. Fringe energy expertsand environmentalists, who had for years advocatedconservation instead of growth strategies and softalternative energy instead of fossil fuels and nuclearpower, were granted access to the political elite andsuddenly found themselves explaining their ideasin Congressional committees (Hyman, 1988; Hirsh,1999). Experts in cogeneration and alternative energyeducated policy makers at all levels about variouspockets of resources that the industry had been ig-noring for decades. For example, between 1968 and1972 cogeneration and alternative energy sourceswere discussed briefly in committee meetings onlyfour times (all in 1972), while during the next 4 years,they were a topic in 74 hearings and a focus of 28committee prints and three reports (Fig. 4). Before1973, many alternative energy experts were unable topresent their ideas to key legislators (Righter, 1996).Economists arguing against the standard conceptionof the electric power industry as a natural monopolybecame highly involved in discussing alternative in-dustrial forms with policy think tanks (Primeaux,1986). Most of the solutions considered by policymakers in Congressional committees during the crisiswere not recent discoveries. Instead they were eitherfrom fringe areas of the industry or borrowed fromother industries; in effect, they were pre-packaged.This is similar to whatKuhn (1970, p. 75) noted inhis discussion of scientific revolutions: the solutionsin question had “at least been partially anticipatedduring a period when there was no crisis. . . [but]in the absence of crisis those anticipations had beenignored”. In other words, the jolt of the oil crisis didnot create a new set of solutions, but merely altered


the focus of the public and policy makers to includepre-existing solutions as legitimate alternatives.

4.5.2. A new policy agendaEarly on in the search process, two themes emerged

in the hearings: the country needed to conserve whatenergy it had, and it needed to find alternative sourcesand strategies for electricity generation besides thoseoffered by the large public utilities (e.g. large coal, oiland nuclear facilities). Both cogeneration, a technol-ogy that harnesses excess energy (usually in the formof heat) from large industrial plants and converts itinto electricity, and small power plants fueled by alter-native energy sources (e.g. solar, wind, geo-thermal,small hydroelectric, etc.), that had been advocated byindependent power enthusiasts and environmentalistsfor several years but were largely ignored, frequentlysurfaced during committee hearings as possible solu-tions after 1973.

This new energy agenda focused on moving awayfrom the use of oil and natural gas, decreasing the en-vironmental impact of energy generation, and increas-ing the variety of organizations participating in thegeneration industry. In 1977, the Carter administra-tion delivered the National Energy Plan to Congress, a283-page bill that contained over 100 different piecesof legislation that, among other things, advocated ratereform, wholesale power markets, power generationby small power plants and cogenerators, and requiredelectric utilities to buy electricity from independentpower firms and distribute it. Moreover, this bill stipu-lated that cogenerators and small power plants, unlikeutilities, would be unregulated. This bill, if passed,would open the door to non-utility producers and lim-ited wholesale competition. The portion of the bill thatadvocated alternative power generation would later beknown as the Public Utility Regulatory Policies Act.

Although many members of Congress were support-ive of the bill, electric power industry representativeslaunched a powerful lobbying campaign against mostmeasures of the bill. Their key concerns centered onrate restructuring, coal conversion, and natural gas use.Generally, utilities felt that there was little to fear fromsmall peripheral actors advocating cogeneration andalternative power. Thus, while provisions of the billrelated to rate restructuring and fuel use were severelyweakened in committees, advocates of alternativepower generation, such as Senator Percy of Illinois, a

founding member of the alliance to save energy, andSenator Durkin of New Hampshire were able to pro-tect provisions intended to foster alternative methodsof power generation (SeeHirsh, 1999, pp. 74–82 for anexcellent description of the political processes behindthe 1978 passage of the National Energy Act (NEA)).

In 1978, the Congress passed President Carter’sfive-part National Energy Act (Public Law 95–617),the national policy response to the energy crisis. Thelegislation was intended to reduce reliance on im-ported oil and natural gas through conservation, thedevelopment of renewable energy resources, expandeduse of coal, and to increase efficiency of utilizationwhen oil and gas must be consumed. The Public Util-ity Regulatory Policies Act (PURPA) was arguably themost significant portion of the NEA (DOE/EIA-0562,1993: 22). It provided for non-utility entities to con-struct new power generation facilities free from theconstraints of regulation, and as such introduced lim-ited competition into the generation aspect of the util-ity industry.

This change in institutional logic created enormousopportunities for entrepreneurs. Since the passage ofthe bill, thousands of independent power generatorshave been built and the power supplied by non-utilitieshas grown to approximately 10% of the US market(Sine, 2001). As a result of PURPA, renewable formsof energy have increased from virtually 0–3% of thenation’s overall electricity production. This is a signif-icant increase in absolute terms, considering the sizeof the energy market in the US (3706 billion kW/h).In sum, in the advent of crisis the dominant institu-tional logic of regulated monopolies was significantlyeroded, and alternative power generation technologyand logics that had been relegated to the fringes of thefield became salient and widely adopted.

5. Discussion

The deregulation of the utilities is a case wheresome of the most politically potent of Americanindustries, in collaboration with organized labor,fought as hard as they could to protect their inter-ests and lost. (Derthick and Quirk, 1985, p. 12)

The electric power industry exemplifies the role thatenvironmental jolts can play in institutional change.


Fig. 5. Institutionalization and erosion of the regulated-monopoly industrial form in the US electric power industry.

In this paper, we have illustrated the strong relation-ship between environmental jolts, field level searchprocesses, changes in institutional logics, and the gen-eration of entrepreneurial opportunity. We summarizeour model of these relationships inFig. 5.

As this figure shows, regulated geographical mo-nopolies were the norm for electric utilities for over 40years, from 1935 to 1973. This form was embedded inthe social fabric and everyday reality. Most users didnot question the lack of competition or the unidirec-tional strategy of the electric power industry. Utilitiessituated in regulated geographical monopolies, withcentralized mega-generators, were the “current the-ory in use” (Strang and Bradburn, 1994), espousedby economists, professional managers, investors, andpublic servants. It was rationalized by academic pub-lications and industrial journals as the most efficient,fair, and just system. The academic and popularpress reinforced the important theoretical points (ofnon-competitive regulation) for decades, labeling it anatural monopoly. While a few dissenters questionedthe legitimacy and effectiveness of non-competition inthe electric utilities, their voices were rarely heard orheeded.

As several crisis rocked the nation and its leaders,various fringe movements (i.e. environmental, alter-native energy, cogeneration, etc.) gained in influence,size, organization and power. Academics, reporters,political analysts, policy makers and their staffs re-acted to the crisis by searching for inefficiencieswithin the electric power industry that might causeor exacerbate the high prices. During this period ofscrutiny, inefficiencies were recoupled with the in-dustrial structures that promoted them, resulting in anincreased distrust and delegitimation of the existinglogics supporting the structure of regulated monop-olies. Once weaknesses were discovered, solutionswere sought. Fringe voices that had long been ex-cluded from the national spotlight were sought outand heard. Intellectual as well as financial resourceswere funneled to organizations that supported alterna-tive strategies and structures. Because of the attentionfocused on the industry, policy makers, academicians,investors, potential entrepreneurs, and other membersof the public became more informed of the weak-nesses of the electric power industry, as well as theexistence of alternatives. The public redefinition ofthe set of strategies and structures available to combat


the crisis changed the institutional landscape fromthat of homogeneity to diversity and competition be-tween solutions. The energy crisis did not force theabandonment of the current industrial structure (regu-lated geographical monopolies) and its accompanyingpower generation strategies (reliance on centralizedgenerators using fossil fuels, nuclear, and large hy-dro). Instead, their prominence was degraded dra-matically, as their status changed from being viewedas the only or natural way of fulfilling US energydemands to one of many methods for fulfilling de-mand. This shift in institutional logic, we contend,created a fertile environment for entrepreneurship,and ultimately a new set of organizational forms andpractices.

Our account has several implications for theory,which we now discuss.

5.1. Exogenous versus endogenous disruptions

Our research differs from past explanations aboutthe source of jolts or crisis. For instance,Kuhn(1970)argued that crisis results from anomalies thatarise in the course of everyday, normal activity; inother words, the source of crisis is endogenous tothe field in question. Other theorists have tendedto focus on endogenous technological shocks (e.g.Schumpeter, 1942; Tushman and Anderson, 1986).In contrast, we examine exogenous, environmentaljolts, i.e. crisis that originate outside the focal sec-tor of activity. Although endogenous technologicalshocks and environmental jolts have similar effects—that is, they hasten change—our research echoesfindings by Cyert and March (1963)and Leblebiciet al. (1991)about the sources of change. We showthat exogenous jolts disrupt institutional logics andstructures by motivating search processes that createawareness of flaws in the current arrangement andincrease the salience of alternatives. While Schum-peterian technological shocks and ensuing change arecaused by the advent of new technology, resulting in“creative destruction” (Schumpeter, 1942), we findthat crisis resulting from exogenous jolts did not re-sult in the creation of new technological alternativesso much as the delegitimation of existing institu-tional logics, and increased awareness of pre-existingtechnological solutions (e.g. alternative energy andcogeneration).

5.2. Institutional logics and industrial change

We found that institutionalized logics play an im-portant role in the persistence of industrial structuresbecause they shape search processes, empower incum-bent actors, and shape organizational and technologi-cal strategies. We expand on these below.

5.2.1. Institutional logics shape search processesWe found that industrial structures are embedded

in institutional logics that shape search processes andlegitimate the authority and expertise of incumbentactors, and that the disruption of these logics by dis-confirming environmental jolts weakened institutionalmaintenance processes. Similar toThornton andOcasio (1999), we found that the actors’ ability to re-form or replace industrial structures and processes ishighly dependent on current institutional logics. Priorto 1967, it is clear from congressional records thatmost members of Congress were generally satisfiedwith the electric power industry23 and gave little heedto the few innovators and social scientists working onthe industry’s periphery. Congressional hearings andstudies rarely asked fundamental and critical questionsabout the industrial structure because policy makerswere not aware of fundamental structural flaws andtheir implications. Policy makers were not aware ofreform opportunities because their examinations ofthe industry were cursory and shaped by the logicof “natural monopolies”. Thus, taken-for-grantedassumptions influenced information-gathering pro-cesses in a way that reinforced institutional logicsrather than challenging them because these logicsdetermined the boundaries of information gathering,such as what questions would be investigated, whowould be contacted for information, who would tes-tify in congressional hearings, etc. Institutional log-ics, therefore became self-reinforcing. Opportunitiesfor industrial reform and technological change weremissed because they were not recognized. Opportuni-ties were not recognized because legislative inquiriesrarely transcended prevailing institutional logics aboutthe industry, its structure, strategies, and technicalpractices. This resulted in circular information gath-ering processes that reinforced rather than questioned

23 Instances of dissatisfaction typically had to do with operationaldetails of the current system such as rate structures.


institutionalized logics, leaving actors within the fieldignorant of weaknesses inherent in the status quo.

The oil crisis, however, disrupted circular informa-tion gathering processes and mobilized advocates ofalternative structures and technology. When it becameclear to legislators, regulators, consumer advocates,and energy consuming businesses that the current in-dustry did not offer solutions to the current crisis, thiscatalyzed broad search processes that resulted in in-creasing access for peripheral actors to central policymakers. Powerful institutional actors, such as firmswith cogeneration potential and some state regulators,in alliance with peripheral players (alternative energyadvocates, environmentalists, and advocates of com-petition and rate reform), presented their argumentsto federal and legislative fact finders in an effort to re-frame those institutional logics that provided the foun-dation for the current industrial structure and henceinfluence legislation, thereby opening up new opportu-nities for entrepreneurs. The records of policy makersafter 1973 are rich with testimonies from diverse ac-tors trying to make convincing arguments that wouldresult in paradigmatic change. Thus, a solution bazaarwas created as policy makers looking for solutions andadvocates of alternatives interacted. The legislationultimately presented by President Carter was forgedfrom information gathered from diverse movementsand groups, such as the environmental movement, al-ternative power advocates, economists, entrepreneurs,captains of industry, utility managers, regulators, sci-entists, and engineers. Many of these actors wereactively engaged in explicit institution building.

5.2.2. Institutional logics authorize incumbent actorsThis research also reinforces previous work on

the importance of culturally-embedded logics, whichargues that cultural explanations play a central rolein embedding new practices in societal structures,rationalizing them as part of the larger universe, andauthorizing incumbent actors to maintain existing in-stitutions (Berger and Luckmann, 1966; DiMaggio,1982, 1991; Thornton and Ocasio, 1999; Lounsburyand Glynn, 2001). We found that between 1935 and1973, various fringe entrepreneurs, inventors, andeconomists tried to persuade the public and policymakers to consider alternative structural and techno-logical paradigms, yet failed at gaining the attentionof powerful actors and making fundamental changes

in prevailing institutionalized logics and practicesuntil the energy crisis hit.24 Legitimate incumbentutilities used their status as the de facto experts onpower to create the rules or laws surrounding electric-ity production and distribution. They used their influ-ence with legislators to draft laws that promulgatedthe interests of utilities at the expense of independentproducers (Righter, 1996), thus increasing the diffi-culty, expense, and infeasibility of independent star-tups. The ability of the utilities to resist change wasincreased by the utilities’ power that was partially de-rived from their legitimacy as “natural monopolies”.Institutional change was more likely once the legiti-macy of incumbent actors and hence their power toshape policy was disrupted. The energy crisis andrelated search processes provided disconfirming ev-idence of the viability of current logics, decreasingthe legitimacy of both the logic of natural monopoliesand the organizational actors that it empowered.

5.2.3. Institutional logics shape adoption oftechnology

Technological advances do not always result in im-mediate entrepreneurial activity, but instead are me-diated by institutional logics. In the case of the powergeneration industry, the technical opportunities forproducing power in a multitude of ways had existedfor years, but the institutional conditions were not ripefor change. Important technological developments inturbine, geothermal, and other alternative generatingmethods occurred long before waves of entrepreneursemerged to implement these technologies. The ge-ographical monopoly structure and accompanyinginstitutional logic, natural monopoly, that definedhow power should be produced and distributed cre-ated almost insurmountable barriers for new ventures,impinging on their ability to obtain financing andprofit by selling power to the grid. Entrepreneurialopportunities to implement technical power gener-ation alternatives depended upon first persuadingpowerful actors, such as legislators, regulators, andpotential investors, and other relevant stakeholders,of the weaknesses of the taken-for-granted industrialstructures and strategies and potential opportunitiesfor increasing the effectiveness of the current system.

24 For example, seeRighter (1996)for a discussion of windentrepreneurs and their inability to influence prevailing logics.


Moreover, powerful actors had to be motivated toengage in institutional reform. That is, actors, suchas legislators, regulators, equipment manufacturers,and other important stakeholders needed to createan economic, social, and technical environment thatenabled innovative risk takers to organize resources,generate, and sell electricity to the grid. Environmen-tal jolts and resulting search processes both elucidatedstructural weaknesses and innervated actors to makeinstitutional changes. As Hirsh put it, “the energycrisis caused politically powerful individuals to chal-lenge the standard business strategies of utility elites. . . After blindly supporting managers’ actions fordecades. . . presidents, federal and state legislators,and regulatory commissioners became more activist”(Hirsh, 1999, p. 69).

5.2.4. Interdependence of structure and strategyThis study highlights the interdependence of or-

ganizational strategy and industrial structure. In thiscase, industrial structure and institutional processesshaped the set of organizational strategies used withinthe industry, resulting in homogeneity. Regulatedmonopolies created an environment antithetical toentrepreneurship. Moreover, the logic of economiesof scale, closely linked with the logic of naturalmonopoly, dictated that the best way to take advan-tage of this particular structure was through largecentralized power plants. These strategies precludedthe use of alternatives, such as alliances with indus-trial partners to produce power through cogenerationand smaller decentralized generation technology, suchas small hydroelectric, solar, biogas, and wind power.The institutionalized logic of natural monopoly advo-cated the regulated monopoly structure. This structureled to a series of strategies that overlooked conser-vation, as well as decentralized generation technolo-gies, such as most green power alternatives (biomass,wind, solar, and small hydroelectric) and cogenera-tion. Thus, research and development in the powerindustry focused, for decades, on specific technol-ogy types while overlooking technology that couldtap alternative energy resources. Moreover, utilitiesresisted buying and distributing electricity from inde-pendents using alternative generating technology, andalso refused to develop alternative generating meth-ods besides nuclear power. It was up to each utilityto decide how much money to spend on research and

development and which technologies to pursue. It isnot surprising, then, that most electric utilities did notpursue alternative technologies that might competewith their existing technological strategy or possiblyplay an important role in a more decentralized mar-ket. In other words, strategies at the organizationallevel were strongly influenced by the institutionalizedindustrial structure that existed for over 40 years.25

5.2.5. Environments of stasis and innovationFinally, we find a strong inverse relationship be-

tween environments of stasis and innovation. We arguethat in the electric power industry, frame-bending tech-nological change between 1935 and 1973 was rare,not necessarily because equally-promising technologywas not possible, but instead because dominant logicsand powerful incumbents reduced resources and in-centives for radical innovations and access to marketsfor fringe innovators and entrepreneurs. It took onlya year after the Supreme Court upheld PURPA fordramatic changes in generation technologies to sur-face in the form of combined cycle-gas turbines whichalmost doubled generation efficiencies. This technol-ogy was not really new—it had been around for atleast a decade before PURPA—but it had never beenadapted to generate power for the grid. Pre-PURPA,the monopsony environment and lack of investmentin alternative technologies limited the possibilities ofrefining this technology and applying it to the powerindustry.

The institutionalized logic of power generation asa natural monopoly was based on the assumptionthat firms with captive customers could maximizeutility by building large centralized plants. Thus, thetype of technology used and developed by electricutilities was as much defined by the logic of naturalmonopoly, as was the principle of captive customers.

25 In this sense, our findings are in accord with the well-knownperspective on industry structure elucidated by MichaelPorter(1980), whose framework would predict high barriers to entry, lowbuyer power, and low rivalry during the period 1940–1972. Our fo-cus however, while not inconsistent with Porter, differs somewhat.His framework is explicitly intended to predict the profitabilityof industries and to prescribe organizational-level strategies undervarious industrial structures. In contrast, we seek to explain thesources of radical change within fields of activity that are highlyinstitutionalized, and to predict the emergence of entrepreneurialactivity in areas that have long been stagnant.


These two basic pieces of the logic underlying the le-gal structure of the power industry shaped technolog-ical development and entrepreneurial opportunity (orthe lack thereof) for over 40 years. In contrast, the 15years following the passage of PURPA was ripe withtechnological advancement and entrepreneurial op-portunity as entrepreneurs applied for permits to buildover 5000 non-utility generators in a variety of sizesand using many different technologies including solar,biomass, wind, cogeneration, etc. (Sine et al., 2002).26

5.3. Limitations

The generalizability of our analysis merits discus-sion. First, we argue that powerful environmental joltswill mobilize actors and generate search processesregardless of the industrial structure and the extent towhich the feedback loops within the industry are selfreinforcing or far reaching. In terms of generatingchange, however, these search processes will have thebiggest impact on industries that are dominated bya single institutionalized structural and technologicallogic, and hence, are somewhat closed to alternativeideas. While jolts in diverse and dynamic industrieswill also mobilize actors and generate search pro-cesses, jolts in these environments will be less likelyto result in radical change because we assume thatin a dynamic industry powerful actors have greaterawareness of fringe alternatives and fringe actors arealready mobilized to some degree.

Second, our definition of an environmental jolt,adopted fromMeyer (1982)as a difficult to predictdisruptive environmental perturbation, does little inhelping us to identify such events a priori and is quitecontext dependent. Clearly, stasis and crisis are twopoints on a continuum of environmental stability, anda difficult question we do not fully answer is howlarge of an environmental jolt is required to move anindustry from stasis to radical change. In our anal-ysis, we find that small perturbations in the powerindustry in the mid-1950s and late-1960s motivatedsearch processes, yet the associated discussions were

26 The US Office of Technology Assessment reported in 1985that the independent power industry created by PURPA served asthe major source of innovationin power generation technologyin the US between 1980 and 1985. This is remarkable given thatby 1985, this sector produced only 5% of US power and thuscontrolled only 5% of revenues derived from electric generation.

more focused on incremental change rather than fun-damental paradigmatic reform. The taken-for-grantedlogic of natural monopoly was never successfullychallenged in these debates. Our study suggests thatthe breadth of the search processes motivated byan environmental jolt is related to several factors,such as the degree to which the current paradigm istaken for granted, the extent to which the jolt dis-rupts “normal” day-to-day routines and threatens theinterests of powerful actors. Thus, issues about damsite locations and rate formulae in the 1950s led todiscussions of process and rate reform, leaving funda-mental issues, such as competition and fundamentalchanges in generation technology untouched. Not un-til the oil crisis of the 1970s did meaningful changeensue.

6. Conclusion

In conclusion, the shock waves of the oil crisis con-tinue to reverberate throughout the US Weaknesseshighlighted during the crisis drive continuing scrutinyand deregulation of the electric power industry. Bothstate and national legislation are presently recreat-ing the industry, and a national market that treatselectricity as a commodity has developed. Moreover,thousands of new firms have entered the industry atall levels: generation, distribution, commodity mar-kets, etc. Although there are still many barriers (suchas infrastructure and state laws) to a market whereelectricity is freely traded and distributed throughoutthe country, the US is moving very quickly towardsthis model. The current turbulence in the electricpower industry can be traced to the oil crisis of the1970s, which continues to drive a diversification ofalternative structures and strategies for power pro-duction and distribution. It is to these alternativesthat we turn our attention in subsequent work alreadyunderway.

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