This article was downloaded by:[Madureira, Nuno Luís] On: 18 Septe mber 200 7 Access Details: [subscription nu mber 782096242] Publisher: Rout ledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Business History Publication details, including instructions for authors and subscription information: http://www.inf ormaworld.com/smpp/title~content=t713634500 Enterprises, incentives and networks: The formative years of the electrical network in Portugal, 1920-1947 Nuno Luís Madureira Online Publication Date: 01 September 2007 To cite this Article: Madureira, Nuno Luís (2007) 'Enterprises , incentives and networks: The formative years of the electrical network in Portugal, 1920-1947', Business History, 49:5, 595 - 615 To link to this ar ticle: DOI: 10.1080/000767907014 27820 URL: http://dx.doi.org/10.1080/00076790701427820 PLEASE SCROLL DOWN FOR ARTICLE Full terms and conditions of use: http://www.in formaworld.com/ terms-and-conditions-of-access.pdfThi s art icl e may be use d for res ear ch, tea chi ng and pri vat e stu dy purpos es. Any sub sta nti al or sys temati c rep rod uct ion , re-distr ibut ion, re-sel li ng, loan or sub- lic ensi ng, systemat ic supply or di st ri buti on in any form to anyone is expr essl y forbidden. T he pu b li sh er do es n ot giv e an y war ran ty ex pr ess or impl i ed or make any re pr es en ta ti on th at the con tents will be complete or accurate or up to date. The accuracyof any instructions, formulaeanddrug doses should be indepe ndentl y ver ifi ed wit h pri mar y source s. The publis her sha ll not be liable for any los s, act ions, claims , pro cee dings, demand or costs or dama ge s what soever or hows oever caused arising direct ly or indirect ly in co nnec ti on wi th or arising out of the use of this material.
becomes contingent upon the way in which adoptions are built up. The initial section
begins by clarifying the impact of the choices of one user amongst others within the
economy of networks. Next the institutional framework that grants access to markets
in the early days of contemporary Europe and the development of local monopolies
with exclusive rights in the production and distribution of network goods areexamined. This outline introduces the main question of the evolution of networks in
non-selective environments: what happens when the competition to expand the
physical extensions of nodes and links is suddenly blocked, and the enterprises can
only compete to increment supply? What results from a drawback in the competition
for adoption? The answer is given in a twofold manner, with an emphasis on both the
allocational and distributional consequences. The final part of the article explores
these ideas in a case study of the electrical network in Portugal and its historical
configuration.
The Attributes of Economic Networks
Most industries that have network features provide goods and services as part of
the infrastructure for producers and consumers, which means that they cannot be
cut off without the danger of economic collapse. Public utilities such as energy,
communications and transportation are the best known examples of this kind of
supply of essential goods and services, and have long been a concern for governments
and municipalities. One of the main problems is that the network requires the
establishment of physical trunk lines connected to nodes and to secondary links to
reach a wide range of users. Because each user is characterized by distinct seasonalbehaviour, distinct time-schedules and distinct preferences, the overall capacity must
be tailored to respond to the volatility of demand and to avoid any spill-over effects.
The economy of public utilities is thus a specific form of activity based on economies
of scale of technically interrelated undertakings operating under the constraints of
fluctuating demand, non-storability of goods and services, locational specificity and
high initial investments.1
To understand the differences in entrepreneurial strategies, one must look not only
to the institutional framework, but also to the systems of incentives provided by the
networks. In this respect, the distinction between one-way networks and two-way
networks, conceptualized by Economides and White,2 seems to be the most relevant
one, since it covers most of the externalities effects of economic functioning.
Two-way networks (e.g. telephones, bus transport, the internet) are characterized
by reciprocity or reversibility in the forms of access to the switch. This reversibility
stems from the fact that all components are complementary to each other, and so
‘transactions can originate at any non-central node and terminate at any non-central
is presently a technological challenge in some of these types of equipment, 1 KWh
electricity supply or a TV programme broadcast to domestic consumers continues to
occur in only one direction.
This distinction is salient to consumer behaviour with regard to entrepreneurial
strategies and to government regulation, because it affects the type of externalitiesproduced. Each component of a two-way network is connected in a symmetrical flow
to another component, which means that each new connection creates an added
value, since the entry of the new user has positive repercussions on other users. The
value of consumption is thus found to be linked to the size of the network, in the first
instance, because consumption depends upon the number of connections/adoptions
already established. As long as the network has adequate capacity, the value of
incumbent phone-owners increases whenever a new phone is installed. This is a
genuine situation of direct network externalities.
Now, let us examine the case of one-way networks where there is no reciprocal
flow and, consequently, no direct ‘network good’ provided by additional
connections. In this case, the advantages of an extra consumers are felt only
indirectly: either the extra consumer reduces the cost of serving all members of the
network – with possible transference of the gains to the users – or the extra consumer
stimulates the appearance of new products, complementary services or new-user
interfaces, from which all incumbent members of the network can benefit.4 In some
circumstances, these kinds of indirect externalities have a major importance, because
they do not refer to complementary gadgets, but rather to utilities that, once in use,
bring about looping effects in demand and supply. Imagine, for instance, the case of
the diffusion of electrical networks where it is necessary to achieve a critical mass of connections to the grid in order to open a local store for radios, irradiators, lamps,
etc. Once the store is open, the possibility of acquisition of this array of utilities has a
positive feedback upon the levels of individual demand for electricity, and new
adopters benefit from this situation. Thus, cost reduction and diversity of goods and
services are the most important indirect externalities produced by one-way networks,
and both operate through unexploited economies of scale.
Table 1 extends this classification further, through the introduction of the
consumer’s viewpoint about the way goods and services are provided. The main
distinction is whether the final node of connection coincides with the personal space
of the user or, alternatively, whether it corresponds to some type of interface created
by the enterprise. The fact that some connections make their way into the personal
spaces of the users has significance, because some of the costs of installation,
maintenance and updating run through the user’s initiative. The network appears
embedded in day-to-day routines, and the monitoring of final nodes is a personal
task decentralized all the way through the inclusive community. Hence the regular
working out of the system is enhanced by the continuous process of learning by using
and by informational returns. The personal identity of the consumer with the nodes
translates into ‘increased attractiveness caused by adoption’. In Brian Arthur’s terms,
this means that ‘the more a technology is adopted, the more it is used, and the more
is learned about it; therefore, the more it is developed and improved’. On the other
hand, ‘a more adopted technology enjoys the advantage of being better known and
better understood’.5 With decentralized ‘assimilation’, the technology itself becomes
a social fact. This is a salient attribute of the contemporary world, because the joining
together of people, regions and markets through systematically structured
connections has strengthened the links between communities, increased interaction
and the frequency and speed of contacts, accentuated similarities in material culture,
expression and behaviour, and contributed to reciprocal interdependence. In some
sense, the history of contemporary society is the history of the constitution of a
private and personal identity around the technologies, where the differences betweenindividuals evolve from devices that produce similarities in behaviour and in habits.
Certainly, learning by using and by informational returns still subsists when the
identity of the consumers is made through interfaces that are installed, maintained
and updated by the enterprises (column 2 of Table 1). However, these learning and
informational returns are discontinuous, difficult to adjust and impersonal.
From the framework presented in Table 1, it is possible to conclude that the
strongest network effects are present in two-way networks, where the final node of
connection coincides with the personal space of the user. The weakest are present in
one-way networks where the final node of connection corresponds to interfaces
created by enterprises. Telephone and e-mail thus represent an extreme case, in which
an individual’s consumption is chiefly dependent upon the size of the relevant
network. In this context, the competition between companies is transformed into a
competition for adoptions, forging a strong sensibility to initial states of
development:6 the extension of the network becomes a crucial market incentive,
and if one firm gets ahead by good fortune, it gains an advantage: consumer’s
adoption in moment t is, in large measure, predetermined by those choices
previously made in t -1, t - 2 . . . t -n, by other consumers, which constitute the possible
universe of connections. On a limit this can be interpreted as a constraint upon the
exercising of choice.7
Table 1
The Classification of Economic Networks
Consumer personal identity with the nodes of the network
Consumer identity with theenterprise interfaces
One-way networks Electricity Cable televisionBroadcastingSewage systems
Bank ATM systemsCredit-card systemsOil pipelinesAirline CRSs
Two-way networks TelephoneInternet e-mail and chat groups
Although one-way networks, such as electricity, cable television or credit-card
systems, are also obliged to compete for adoption, they add to this feature a strategic
commitment in competition for supply, either in the form of an increase in the
variety of products, or through incentives to the augmentation of gross
consumptions in non-congested periods. The following sections illustrate underwhat conditions these indirect externalities become part of entrepreneurial strategies
in the competition to increase supply.
Local Monopoly and Entrepreneurial Strategies
Up to this point, the description given of network attributes has been normative and
based upon the principle of free competition. However, competition in the sense of
open bidding in the markets seems to be the exception rather than the rule, at least in
Europe. The driving force that pushes the diffusion of networks, and the physical
expansion of links and nodes, is not always the accumulation of decentralized choices
made by consumers in direct biased transmission processes but, instead, centralized
decisions, made with the purpose of changing the distributional consequences of the
network economy. Seen from this standpoint, the history of networks must
incorporate the area of institutional political economy and the configuration of
relationships between collective entities: firms, municipalities or other sources of
local power, and the central state.
The final years of the nineteenth century constitute a very specific moment,
described as the ‘formative years’8 of public utilities. In this period, the European
countries witnessed the expansion of primary networks and the formation of grids,with technologies that yielded the most effective results when each enterprise
supplied one densely populated area. The framing of private strategies into the
horizon of local concessions is the result of this technological-institutional
background, and becomes further reinforced by the attribution of exclusive rights.
The possibility of capturing the benefits from competition through incentives for the
supply by simultaneous enterprises, for example the railway lines of Prussia and
France, or the gas supply in British towns, is short-lived, due to the dissipation of
revenue and the bankruptcies that followed. Similarly, in the United States, predatory
pricing and the parallel building of railroads, based on the installation of tracks
adjacent to competitors, was a conscious strategy pursued for some time with the
purpose of acquiring control over local business.9 Yet, as the nineteenth century
unfolded, additional controls over the configuration of networks generalized the rule
of local or regional monopoly to prevent the duplication of facilities.10 It is within
this context that the argument for natural monopoly appears: within the domain of
network industries, it is cheaper for goods and services to be produced by a single
firm than by many firms, an idea restated in modern terms by the concept that some
activities, structured through nodes and links, enjoy a sub-additive cost function.11
In European countries with strong traditions of democratic life based upon active
local governments and with large urban units, the scope of municipal undertakings
promptly evolved to incorporate the ownership of public facilities. This was
particularly true in the case of water and gas supply systems in Germany, Sweden and
Britain, and electricity production and distribution in Norway, Switzerland, Germany
and Denmark (this last through the movement of rural co-operatives called
‘andelslag ’). At the other extreme, we find the Mediterranean countries of southernEurope, where the risks of investment in local networks were ascribed mainly to
private enterprises and, sometimes, to the central State (France, Italy, Spain,
Portugal).12
The number and status of the actors involved affected the patterns of development,
and particularly the mix of institutional rules, with a bias towards private supply and
weak regulation – the ‘granting of concessions to applicants on a first-come, first-
served basis’13 – in southern Europe, while forms of tri-partite co-operation between
municipalities, the central state and private enterprises, reinforced by extensive
regulation, prevailed in the northern European countries.
Summing up, by the end of the nineteenth century most of the network activities
that provide essential goods for the communities were shaped by the legal,
technological and economic pattern of local monopolies, with the main differences
being in the ownership structure. Two-way networks, namely postal services,
telegraph and telephone, were those in which public authorities did not recognize the
benefits from market competition, preferring instead to set these particular
undertakings under the umbrella of public service, or in a common and centralized
pool, with compatible, interconnected, co-ordinated nodes and links: this evolution
from private to public ownership was consolidated in 1870 for the telegraph, and in
1913 for the post and telephone, in the majority of the European countries.14
Politicalarguments stressing national security, the integrity of the nation-state, and the
military implications of communications, were advanced in order to legitimize the
state’s interference. But, as well as the concern with the control of symmetrical flows
of information, the progressive nationalization of these utilities must be seen as an
attempt to increase the value added in each connection. Through the merging of
local, regional and national systems, the overall value of consumption is enhanced.
In other network activities, competition for adoption followed quite closely the
capture of new concessions, since this was the dynamic element capable of driving the
expansion of the core of the network at the beginning of the twentieth century.
Buying out competing firms and extending the range of vertical integration was yet
another way to attain the same purpose.
Let us now imagine that, within these local monopoly economies, the competition
for adoption is suddenly blocked and that the enterprises can only compete for
supply. What might the result be? Are the firms capable of surviving in this
environment? What happens when local detached networks cannot expand and
develop economies of scale? The next paragraphs will follow this methodological trail,
analysing a case study of electricity diffusion in the formative years of network
building. The sources of blockade are explained by political decisions and by
technological restrictions to expansion. Electricity is a good example of one-way
networks, with final nodes of connection coincident with the personal space of the
users. Incentives do exist to explore economies of scope, based in the launch of new
products, complementary services or improved interfaces. As we shall see, the upshot
of the blockage in competition for adoption is a cascade of historical innovations:
marketing and publicity, thoughtful commercial policy, customers’ campaigns, priceincentives (price discrimination in the supply side perspective). Indirect externalities
and consumers’ know-how become trump cards that are conscientiously used by
managers and boards of directors.
Expansion and Blockage of Electrical Networks
The main risk of incremental supply of incumbent adopters is that the tendency to
concentrate consumption into some geographical areas may take precedence over the
tendency to expand the network. In this section, we examine how this risk was
handled by the two largest electricity producers operating in Portugal at the
beginning of the twentieth century. The low level of Portuguese urbanization and the
high percentage of the active population employed in agriculture (51 per cent in
1930) did not make it possible to achieve the economies of scale that were so
necessary for businesses starting up in the sector. To guarantee appropriate returns
on initial investments, firms had to rationalize the transport of electricity, reducing
expenditure with the installation of posts, wires and transformer stations, as well as
by choosing a voltage that was suited to the size of the market, relying on proximity
networks. The first thermal and hydraulic power stations were therefore located close
to large urban centres, taking advantage of the concentration of people to realizeeconomies of scale, to maximize the return on capital, to stabilize a fixed clientele and
to reduce the economic risk of the new technologies. Yet, the map of Portugal’s
population densities did not display these large concentrations that could provide the
conditions for capital accumulation. The low level of urbanization therefore
restricted the development of electricity producers and the size of companies
through the lack of medium-sized cities, giving rise to a distorted urban structure and
a wide gap between the main urban centres and the agglomerations of population in
agricultural regions.15 It also restricted the market thanks to the country’s bipolar
urbanization, with most of the urban population being concentrated in two large
urban centres, one in the north and the other in the centre of Portugal (Porto and
Lisbon). This meant that, in 1920, these two cities represented 38 per cent of the
population concentrated in urban regions of 5,000–10,000 inhabitants, 58 per cent of
the population living in towns of 10,000–20,000 inhabitants, and 85 per cent of the
population in cities with more than 20,000 inhabitants.16 Finally, the demand for
energy was also one of the weakest in Europe: in 1890, modern fossil fuels represented
only 20 per cent of total primary energy consumption, the remaining 80 per cent
being supplied the traditional sources (firewood, human and animal muscle, wind
and water power). Per capita consumption remained below the values of other
Mediterranean countries, whether measured in terms of electricity – Portuguese
consumption reached 11.9 KWh per capita against 44.9 in Spain, 112 in France, and
129 in Italy (1920) – or in terms of total primary energy consumption – Portugal with
117.4 kilograms equivalent of coal (kgec) per capita as against Spanish, Italian and
French figures of 333, 286 and 1,417 kgec respectively (1920).17
Merging these facts brings up an intricate situation: property rights insufficiently defined, the state withdrawing from public utilities, low urbanization, predominance
of the rural sector in the economic activity, and low per capita consumption of energy
and electricity, all combining to create inappropriate conditions for the dynamics
required by selective environments.
It is worth remembering that competition for adopters supposes the physical
extension of the nodes of distribution (in this case medium and high voltage
transmission lines) to reach more and more consumers. This is a preliminary
condition to select those who are more apt, because the demand for adopters creates
a situation in which previous choices set up a market advantage for prime movers.
However, with limited incentives in the competition for adopters, how could the
electricity grid progress? Structural conditions not only establish narrow margins for
the expansion but also shape the concrete design of this expansion: the axes where a
national electric network structure might emerge had to operate in conjunction with
the concessions of the two main cities of the country (Lisbon and Porto). The
economies of scale offered by these large urban centres meant they were the only ones
capable of whetting the appetite of investors to enlarge the distribution network.
Electra del Lima-UEP was one of these investors, and obtained the concession of the
northern city of Porto.
In April 1922, the energy produced by the Lindoso power station, owned by theSpanish Electra Del Lima group, reached consumers for the first time. It amounted to
just a few hundred kilowatts, but within a few years this business group was to
become the country’s second largest producer and the largest regional distributor of
electricity. Its success was due to two important innovations introduced right from
the start, one at the level of management and organization, and the other at the level
of technological investment.
In this period, Electra del Lima was the only company in Portugal adopting the
principle of creating separate companies for the production of electricity and for high
voltage transport and distribution: ‘the Spanish group had the idea of forming a
Portuguese company, which would be a consumer and exclusive distributor of the
energy produced by the Lima waterfalls’.18 Entering into a capital consortium with
the Sotto Mayor banking group, the Spanish investors formed Uniao Electrica
Portuguesa (UEP), and obtained for this new company the rights to the legal
concession for distribution. Such a business innovation made it possible to specialize
in the market segment of energy transport, regarding it as a particular market with
some important consequences. First, it resulted in clarification of the factors of price
formation, expressed in the form of policies of positive discrimination designed to
attract industrial clients in need of motive power, with prices being negotiated case by
case and credit also being granted to clients in times of financial difficulty.19
Secondly, there was investment in expansion, maintenance of the network,
installation of new transformer stations and division of substations in order to
minimize transmission losses, which was seen as a competitive factor in the capturing
of new markets. Thirdly, the greatest benefit justifying the creation of UEP, from the
point of view of its directors, was the formation of a company funded by Iberiancapital to sell Spanish energy on an exclusive basis, thereby making it easier to
negotiate contracts with municipal councils through the delegation of powers to
Portuguese directors. The creation of an external interface in the distribution sector
made it possible to overcome the frequently repeated nationalist prejudices that
criticized the exploitation of national resources by foreigners. The possibility was
even suggested of the state’s nationalizing the ‘hydroelectric assets that might become
a matter of great economic and political importance for the nation’.20 Finally, the
creation of this ‘friendly’ interface led in turn to a differentiation of strategic
responsibilities amongst the managers, distinguishing financial planning and long-
term policy guidelines (decided upon by the board of directors) from executive and
operational activities (which were the responsibility of a board of management
consisting of Portuguese members).
The creation of a business organization geared specifically to the segment of high
voltage distribution was accompanied by an investment in the assembly of an energy
transport line with a nominal voltage of 75 kV (1918–1922), which, despite its
provisional character, was to become the very hallmark of electricity distribution in
Portugal. It is sufficient to remember that, in the 1930s, most of the established lines
were still below the 25 kV limit. Overly large for the power existing at the Lindoso
hydroelectric power station, this represented an investment in a nominal voltage thatwas sufficient to support the company’s growth over the next 20 years, or, in other
words, a fourfold increase in installed capacity, a sixfold increase in energy sold and a
twenty-eightfold increase in the extent of the distribution lines.21
The obtaining of concessions in the main urban centres was to act as a catalyst for
the growth and modernization of the network. Uniao Electrica Portuguesa drew up
plans for activity over two phases: firstly the concessions for the large cities would be
obtained, and then this gain would be consolidated through investment. In this way,
the agreements signed with Porto Municipal Council, in 1922 and 1926, gave the firm
a solid financial basis to enter into the energy market; in turn, the agreement signed
with Coimbra Council, in 1927–1928, resulted in a penetration of the lines a further
110 kilometres to the south, changing the focus of the company’s strategy: instead of
investing in intensive geographical coverage with the building of secondary branches
from the main line, the company began to consider the possibility of extensive
coverage through the implementation of a network of urban centres.
This process was therefore one of a slow accumulation of capital and technological
resources based on the capture of local markets. Each new concession changed the
network construction strategy. When the agreement was signed with Porto Municipal
Council, UEP tended towards the sale of temporary energy. Being exclusively
dependent on hydroelectric production, it had to deal with the problem of low water
levels during the summer and the consequent shortfalls in supplies during the hottest
months. This was in fact an obstacle equally faced by other hydroelectric units in the
north of Portugal, which could not guarantee the quality of their service all year
round. Commercial policy was adjusted to this technical reality and the company
guarded against possible compensation claims by demanding the insertion of a clausein which it was made clear that the agreement related to temporary and excess energy:
‘The prices for each customer will be stipulated in due course, and it is understood
that each customer will be required to sign a declaration stating that they undertake
to use the energy that UEP can provide them without making any further claim. It
will be the responsibility of all clients to supply themselves with energy reserves when
UEP is unable to provide this’.22
The decision to build an entirely new thermal power station fuelled by Portuguese
and foreign coal, with the aim of supplying reserve energy, altered this positioning in
the market. The installed load at the two sets of the Lindoso power station amounted
to 17,500 kVA, and a further 9,500 kVA were added through a turbo-alternator set at
the Freixo Thermal Power Station. Besides overcoming the mistrust and criticism of
Porto Council, expressed in the provisional nature of the concession agreement
signed in 1922 and the council’s interest in finding an alternative solution capable of
providing a regular service throughout the year,23 the integration of thermal
production of electricity into the UEP network increased its competitiveness in the
private market of large industrial clients, since, with the sale of permanent energy,
factories were able to make full use of their installed capacity. Technological change
was accompanied by a change in commercial policy: whereas previously customers
were required to sign agreements stating that they would not claim compensation,now it was the company itself that voluntarily offered compensation as a guarantee of
the quality of its service: ‘In order to facilitate the placement of energy, the board
authorized the company’s management to sign contracts for the supply of permanent
energy from October of the current year, undertaking, if necessary, to pay these new
customers for each month of interruption in the supply the amount corresponding to
the invoice of each of the previous months’.24 Another weak point in the electric
network was also eliminated at that time (1926), with the replacement of the
provisional network of wooden posts and copper conductors, which were always
susceptible to accidents, with iron posts and aluminium steel conductors.25
As stated earlier, being awarded the concession for the city of Porto made it
possible to consolidate the network and introduce profitable economies of scale: the
supply to the municipality increased the amount of energy distributed through the
UEP lines by between 30 per cent and 37 per cent.26 With the award of the concession
for high voltage distribution to the city of Coimbra,27 the centre of gravity of this
business initiative was shifted to the relatively unexplored markets of the central
region. The board of directors quickly set in motion studies for continuing to expand
the network southwards with the aim of reaching more urban centres and penetrating
deep into the south. In this way, the company sought to position itself as the
backbone of a national electricity grid and, above all, to limit the competition’s
chances of expansion: ‘UEP’s presence in that area creates a particularly advantageous
situation for being able to negotiate any agreements with the companies that are
currently working in those markets’.28
The first signs of a blockage began to appear in 1932. The application for the
concession of the southern line (Leiria) was held up at the Ministry and not allowedto go forward, whilst all complaints made to the Ministry met with no success.
Such an attitude provided the first indications that something was changing: the
silence of the authorities was a silence that had political significance, foreshadowing
the change in the policy of the regime of Oliveira Salazar – a military revolution
in 1926 was followed by a new constitution of 1933. The new state was reluc-
tant to hand the concession of economic infrastructures to private enterprises
(and, furthermore, in this case, to Spanish capital). As a result of this blocking
manoeuvre, the possibility of developing the electric network through market forces
was completely thwarted. After some years of insistence, Uniao Electrica Portuguesa
readjusted its aims: it returned to its policy of strengthening secondary branches by
building roughly 600 kilometres of new 15,000-volt lines to supply smaller villages
and industrial clients requiring motive power; from 1941 onwards, it was awarded
an isolated concession in the south. Price discrimination towards large industrial
consumers in the extractive and transforming industries appears as the sign of
change in the entrepreneurial strategy: contrived to abandon network expansion, to
abandon competition for adoption, the company strengthened the incremental of
supply.
The new political picture altered the relationship between collective actors and had
two consequences for the map of Portuguese electrification in the 1930s: first, itobliged UEP to concentrate the distribution of electricity in the districts through
which the main supply line passed, accentuating the asymmetries in relation to other
regions and establishing an architecture for the network in a herringbone shape,
through a point-to-point transmission, with multiple lines branching off this main
north–south line (an average of 2.2 to 2.6 transformer stations per kilometre of line);
secondly, it impeded the development of an integrated national network, confining
companies to regional markets and thus preventing the challenges of co-operation or
competition between networks that were physically close to one another.
The Origins of the Publicity Campaign
Companhias Reunidas de Gas e de Electricidade (CRGE) was the uncontested leader
of the market for the production and distribution of electrical energy during the first
half of the twentieth century. The company had been granted the concession for the
country’s main urban network, consisting of the capital, Lisbon, and its surrounding
areas spread over a semicircle with a radius of roughly 35 kilometres from its thermal
power station. The company profile was, in this case, quite different from the one to
be found in the northern hydroelectric companies: it was a company that resulted
from mergers that had taken place in the nineteenth century, and simultaneously
combined the production of coal gas and electricity, so that it was able to guide the
competition between these energy alternatives in the most profitable direction (as did
in fact happen with the rapid replacement of gas street lamps with electric lighting in
the 1920s). When SOFINA, one of the European giants in the sector, became a
shareholder at the end of the First World War, the company’s financial resourceswere opened up, facilitating the transfer of scientific and managerial know-how, as
well as international contacts with suppliers. From a technological and business point
of view, Companhias Reunidas was distinguished by being a producer and distributor
that also fulfilled the role of providing municipalized services in the direct sale of
energy to consumers.
Producing thermal energy from imported coal, CRGE installed a continuous
current and alternating current low voltage network to serve the main Lisbon arteries
(3.3 Kv), to which a (10 Kv) line was added for transporting electricity to more
distant urban agglomerations, to the east and north-east, and then a third medium
voltage line of 30 Kv, launched in 1935, to supply the outlying districts of the Vale do
Tejo region.29 The growth dynamics were sustained with the award of concessions by
municipalities in the western region of the city and, later, by others to the east. This
network had the form of an irregular web whose ramifications converged on the
central point of the thermal production unit.
In any case, this situation represented a concentration of the installed capacity of
thermal energy and a multiplication of the distribution lines to various points. The
separation of the lines and the relatively short distance between each of them ensured
that they could continue to operate at a low voltage. However, the expansion of the
network at the end of the 1920s began to generate an overload in the already installeddistribution paths. With new concessions being contemplated, the management
chose to raise the nominal voltage to 30 Kv. Thanks to this carefully considered
investment policy, CRGE managed to expand its network from 420 kilometres (1914)
to 1,617 kilometres (1937) without such growth resulting in an increase in
transmission losses.
As far as the technological choices of CRGE were concerned, an investment was
made in the growth of consumption in the immediate sphere of influence in
detriment to geographical expansion into new districts. The management policy
consisted of strengthening the local monopoly and adjusting the network in the
region by taking advantage of the population density. The Burnay banking house
proposed the idea of supplying electrical energy from waterfalls, but this possibility
was rejected by the management, which preferred not to invest in hydroelectric
production and high voltage transport, remaining faithful to the principle of not
altering the local scale of the business.30
In fact, the market potential of the city of Lisbon and its surrounding areas was
sufficiently large to risk investments outside the consolidated area of influence.
Although CRGE distributed electricity over a fairly limited radius, its growth rate in
the first half of the century was higher than that of Uniao Electrica Portuguesa, the
Priority was given to maximizing local opportunities: in the first phase, up to the
1930s, CRGE sought above all to increase the number of localities served, and thereby
to increase the number of consumers. Having exhausted its coverage of the most
important urban centres, CRGE then turned its attention to reinforcing the
commercial component, with the aim of encouraging greater energy consumption inhouseholds and capturing the industrial clients requiring motive power. This meant
that after completing the cycle of the physical implementation of the network, there
were still opportunities in economies of scope.
As far as the supply to industry was concerned, the company’s share of this market
segment represented 36 per cent of energy sold in 1920, 65 per cent in 1930 and 70
per cent in the following two decades.31 On the eve of the Second World War, a
group of factories based in Lisbon consolidated this area of business and led CRGE to
invest in the quality of its service by installing a high-frequency telephone network
with the specific aim of ‘guaranteeing perfect continuity in the supply of energy to the
region’s most important factories’.32
During the 1930s, CRGE produced the first commercial publicity campaign in the
country. The word ‘campaign’ suggests that various resources from the media were
systematically mobilized to transmit a commercial message. The aim was to alter the
patterns of urban consumption, through a pedagogical demonstration of the benefits
of brightly lit homes, also praising the ease and comfort achievable through the
catalogue of ‘equipment for domestic use’ made available to the inhabitants of
Lisbon: refrigerators, toasters, electric irons, water-heaters, fans, kettles. A series of
advertisements were published in the press containing images of modern,
cosmopolitan everyday life; a magazine was launched for women readers explaining,exemplifying and publicizing the ‘new’ appliances; ‘advertising and sales’; a new
department was set up, responsible for credit and hire-purchase sales; lighting
campaigns were launched under the title ‘Better Light, Better Sight’, as well as
campaigns for the sale of wirelesses, irons and Christmas presents. Finally, the
company joined forces with the national broadcasting company, Emissora Nacional,
to promote the sale of popular radio sets, and a consultant was hired to monitor the
newspapers and write articles for CRGE. All these examples testify to the innovation
of marketing and advertising in the company strategy, taking advantage of the freshly
available media technology.33
The need to exploit the local market intensively, together with the technological
limitations preventing the expansion of the low and medium voltage network, led
CRGE to invest in the creation of social images of the cosmopolitan user and modern
housewife. The positional affinities of consumers in a network became manufactured
affinities. In the segment for the sale of electrical household appliances, the company
bore the economic cost of encouraging the development of indirect externalities,
actively stimulating processes for the social identification of consumers.
There were fewer incentives for the development of business strategies when the
activity of electricity production was carried out by a private company and the low-
voltage distribution was undertaken by municipalized services; the high-voltage
suppliers were not interested in channelling specific investments into changing the
habits of a consumer population subject only to a temporary concession agreement
(the northern situation of Electra del Lima-UEP); the municipalized services were, in
turn, more interested in ensuring an improvement in the coverage and quality of the
network’s service, leaving the actual use that was made of the electricity provided upto people’s own private decisions.34
In the growth period of the electric network led by private enterprises, there was a
tendency to concentrate consumption into geographical areas of concession, as was
made clear by the analysis of the business strategies developed over the 1930s and
1940s. The investment in an intensification of consumption within the zones of
influence resulted, in the case of CRGE, from the technological constraints of the low
and medium voltage network and, in the case of UEP, from the political blockage of
the expansion of new lines. The decision to reinforce per capita consumption within
local areas and to invest in intensification of networks of low voltage distribution was
motivated by political conditions in the markets, by strategic defence of concessions
granted, and by technological opportunities of capital accumulation. The result was a
slowdown in the rate of adoption and an increase in the levels of consumption of
adopters. There was a deliberate intention to stimulate the uses and applications of
electricity in areas where levels of consumption were already high. Incentives in
prices, in the quality of services, in the coverage of the net and in advertising (an
innovative aspect for the epoch) strengthened the asymmetry to other regions. In the
end, competition for adopters turned into a strategy to increment supply.
With the publication of Law No. 2002, in 1944, the first steps were taken towards
the creation of an economic and legal framework for a National Electricity Grid. In1947, a new company was formed with mixed capital from private companies and the
state – Companhia Nacional de Electricidade (CNE) – which was given the
concession for the transport and distribution network under the same model of a
joint venture. The Plan for the National Electricity Grid was closely associated with
the restructuring of the industry, searching for economies of scale, as well as
concentrating the new electrochemical sectors and making them viable through the
supply of energy at competitive prices. The technological impasses resulting from the
integration of various networks through bilateral interconnections were overcome
with the investment in a new network with a higher nominal voltage and with a
broader coverage of the country’s coastal region. A significant detail is that the link-
ups between the main urban centres are an improvement in transportation of
previously installed networks. In other words, the map of the primary network
strengthened the potential for energy transport and consumption into areas where
there already existed private enterprise networks.
Asymmetry of Adoption
The hypothesis is therefore put forward of an asymmetrical development, in which
the better positioned regions strengthened their positions of access to more
competitive forms of energy distribution linked to economic modernization, whilst
regions with few initial infrastructures did not manage to recover from their state of
backwardness. This situation dragged on for a long period of time, which meant that
the implantation of electric networks exacerbated regional disparities.
To test this hypothesis, Table 2 establishes a comparison between various districts,placing them all at the same comparative level, by considering only the population
that, in each district, enjoyed access to the electricity network. In this way, the
percentages represent the relative number of individuals who were given the
possibility of choosing and who ‘chose’ to install a connection to the network.
Some conclusions may be drawn. First of all, the differences between the regions
with the highest adoption rate (Lisbon, Porto and Viana) and the most backward
areas grew more accentuated throughout the period under analysis, and also the
overall distortion between regions.35 Next, there is evidence of a phenomenon of
recovery, although this only includes a group of districts (Aveiro, Setubal, Braga,
Coimbra, Braganca, Viana), almost all of them situated in the coastal region and in
the geographical areas of the National Electricity Grid; finally, the remaining regions
showed some inertia in people joining the network, particularly evident in the south
of the country (Beja, Faro, Portalegre).
Table 2
Adoption Rate: Percentage of Adoption of Electricity in the Population Enjoying
Notes: *(Consumers connected to networks6 average family size/population served by networks).Sources: Estatısticas das instalac o es electricas (published in Lisbon, 1930–1932, 1940, 1950 and 1960);
Bandeira, Demografia e Modernidade, 523, Table V.1. Average family size by district.
The hypothesis of an asymmetry of adoption thus seems to be confirmed, at least
until the decade of 1960. It is, however, possible to test the hypothesis by another
means: transforming the data about the adoption rate into a dependent variable and
trying to gauge how the various socio-economic factors help to explain them. For this
purpose, a four-variable model36
was constructed with statistical data for each districtand for each of the periods considered in Table 2: literacy rate; active population
employed in industry and the tertiary sector; real purchasing power of electricity;
scale of the connections to the network (see Table 3).37
The panel data methodology includes both a cross-sectional and a time-series
dimension, and is a multiple regression that allows us to measure the contribution
of these variables towards the process of electricity adoption, by considering
the historical evolution as an aggregate set of influences. In statistical terms,
this technique of panel data with fixed effects is expressed in the form of the
estimation of a multiple regression to which are added regional dummies expres-
sing, for each regional administrative unit, characteristics that are constant in time
(Table 3).
As this is an explanatory model, not a predictive one, the most significant
comparison is between the standardized coefficients, as these express the effect of
each variable in terms of standard error.
Overall, the model captures the meaning of the historical evolution: the most
influential factors are synthesized in the four variables, the coefficients are statistically
significant, the statistical conditions are verified and the relationships between the
variables have the expected direction.
It can be seen that the real cost of electricity has a negative influence on adoption(the higher the price, the lower the adoption rate). However, it has very little
Table 3
Panel Data Analysis of the Adoption of Electricity
Standardized Coefficients Signif.
(Constant) 0.381Literacy 0.266 0.005Population (second/tertiary) 0.638 0.000Scale of electrification 0.669 0.000Real cost of electricity 70.139 0.082
Notes: N¼ 1864 Adjusted R 2¼ 0.916.Regional dummies included.
Sources: Population Census of the Kingdom of Portugal on 1st December 1930 (Lisbon, 1931); General Population Census of Mainland Portugal and the Adjacent Islands in 1940, 1950 and 1960 (Lisbon, 1941–1961); Estatısticas das instalac o es electricas (Lisbon, 1930–1932, 1940, 1950and 1960); Statistical Yearbook for the years 1930, 1940, 1941, 1950, 1960 (Lisbon 1930,1940, 1941, 1950, 1960); Industrial Statistics for 1950 , Industrial Statistics for 1960 (Lisbon,1951, 1961); Bandeira, Demografia e Modernidade; Nunes, ‘‘Populacao Activa e Actividade
explanatory power about consumers’ decisions (70.139). In other words, although
locally consumers took into account the amounts that they would have to pay for
electricity, this was not the prime reason leading them to install a connection in their
houses. In fact, the same thing happened with literacy, which was positively related to
adoption but was also a fairly unimportant factor (0.266). To understand why certaindistricts lagged behind whilst others enjoyed rapid progress, one must basically call
upon two variables: one is the importance of the active population from the
industrial and tertiary sector (0.638), expressed in the idea that the regions
undergoing transition to ‘modern economic growth’ (Kuznets)38 are positively
distinguished in the adoption rate whilst regions where agriculture is predominant
lag behind; the other is the scale of electrification (0.669), expressed in the idea that
the greater the total number of consumers installing a connection to the network, the
quicker is the subsequent adherence of new consumers. In simple terms, this means
that the more modernized regions, and consequently the ones with a significant
volume of connections to the network, tend to accelerate the diffusion process. The
reverse formulation of this argument is also interesting, for it allows us to see that in
places where electricity consumption habits are marginal, there are also fewer
incentives for the entry of new consumers. In the context of an asymmetrical
development of the network, such a situation introduces the vicious circle of
backwardness.
Conclusion
Network activities must be understood over a double axis: first, the technology of access to the switch, which tells us if the flow of transactions can originate at any non-
central node and terminate at any non-central node. This is a remarkable feature
because it affects reciprocity or reversibility, and therefore the type of externalities
produced. Second, the point of view of the consumer and its relative position in the
chain of nodes and links. The main distinction is whether or not the final node of
connection coincides with the personal space of the user. This is also an important
feature, because it affects the process of learning by using and the informational
returns of network technologies.
The most interesting point is that these classifications are not only theoretical
insights, but also practical incentives that instil business strategies. This study
highlighted what happens when a network economy concentrates in the increment to
supply. The particular case analysed was a one-way network, where the final node of
connection coincides with the personal space of the user, under the framework of
exclusive local concessions (electricity in the first half of the twentieth century). In
such an historical context, incentives do exist to launch new products,
complementary services, improved interfaces and price discrimination rates. These
indirect externalities and consumers’ know-how were conscientiously used by
managers and boards of directors to strengthen their entrepreneurial position and
The consequences were twofold: on the allocational side, entrepreneurial
restructuring led to thoughtful commercial policy based on price discrimination to
large customers and in innovations like marketing and publicity campaigns; on the
distributive side, the result was the asymmetry of adoption with few incentives for
additional entry of new consumers into the network. The implementation of networks thus had a discriminatory effect, increasing the distances in the positioning
of consumers and non-consumers, increasing the homogeneity within regions and
the heterogeneity between regions. Because competition for adopters turned into
incremental underpinning of supply, there was a flood in the consumption of certain
areas while others stand, literally, in the dark.
References
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3 White, ‘‘US Public Policy toward Network Industries,’’ 5.
4 Economides and White, ‘‘One-way Networks, Two-way Networks,’’ 6, use the concept of ‘inter-
product network externality’; Katz and Shapiro, ‘‘Network Externalities, Competition and
Compatibility,’’ 424, talk of ‘consumption externalities’.
5 In a more complete systematization of the economic factors that contributed to the increased
attractiveness caused by adoption, Brian Arthur considered five main sources: learning by using,network externalities, scale economies in production, informational returns, technological
interrelatedness. The interpretation also supposes a dynamic of increasing returns and
significant assets embodied in the technology. Arthur, ‘‘Competing Technologies: An
Overview,’’ 590–591.
6 David, ‘‘The Hero and the Herd in Technological History’’; idem, ‘‘Path-dependence and
Predictability’’; Cohendet and Schenk, ‘‘Irreversibilites, Compatibilites et Concorrence.’’
7 Callon, ‘‘Variety and Irreversibility,’’ 235.
8 Hughes, Networks of Power .
9 Dowd and Dobbin, ‘‘Origins of the Myth of Neo-liberalism,’’ 69–71.
10 Millward, Private and Public Enterprise in Europe, 28–29.
11 Baumol, ‘‘On the Proper Cost Tests.’’12 Millward, Private and Public Enterprise in Europe; idem, ‘‘European Government and the
Infrastructure Industries’’; Thue, ‘‘Electricity Rules’’; Paquier , Histoire de L’electricite en Suisse;
Toninelli The Rise and Fall of State-Owned Enterprise in the Western World .
13 Frederico and Giannetti, ‘‘Italy: Stalling and Surpassing.’’
14 Some of the exceptions were the telephone trunk lines of some countries that were only
nationalized by the 1950s. Millward, Private and Public Enterprise in Europe, 99–110.
15 Justino, A Formac ¸a o do Espac ¸o Economico Nacional , 363–373.
16 Nunes, Populac a o Activa e Actividade Economica em Portugal dos Finais do Seculo XIX a
Actualidade.
17 Estimates based on Etemad and Luciani, World Energy Production; Maddison, Dynamic Forces in
Capitalist Development ; Mitchell, European Historical Statistics; Madureira, A Historia daEnergia: Portugal ; Sudria, ‘‘Un factor determinante: la energia.’’
18 Centre for Documentation of EDP, Minutes of UEP Board Meetings, UEP Book 1–3, 1920–
1941, Management Report and Accounts for 1920.
19 For example, in 1925, ‘After consulting the management about the financial difficulties of the
market in Porto, which made it difficult for industrialists to immediately acquire stations and
make the connection to UEP, it was decided that the management should be given permission
to install stations at the expense of UEP and that the customers would then pay for this over
periods of no more than 2 years at an interest rate of 10% . . .’ Centre for Documentation of
EDP, Minutes of UEP Board Meetings, Book 1, from 28 Nov. 1919 to 22 May 1925, Minutes of
13 March 1925.
20 Campos, Textos de Economia e Polıtica.
21 Centre for Documentation of EDP, Minutes of UEP Board Meetings, Book 1–3, 1920–1941;
Statistics of Electric Generation Facilities (Lisbon, 1929–1941).
22 Centre for Documentation of EDP, Minutes of UEP Board Meetings, Book 1, Minutes of 28
Feb. 1922.
23 Matos, O Porto e a Electricidade, 114.
24 Ibid .
25 Anon., Electrica del Lima.
26 Calculations based on the comparison of the following sources: Porto Municipal Council,
Reports of the Management of Gas and Electricity Services, 1925, 1927, 1929; Report and
Accounts of Uniao Electrica Portuguesa, 1924–1929; and Ferreira, ‘‘A energia electrica em
27 The award of the contract for the construction of the 110 kilometres of 60 kV lines was only
made after the competitive bid for the supply of electricity to Coimbra had been accepted: ‘the
board reached the conclusion that the supply was only likely to be awarded to UEP if the
company were also given responsibility for building the transport line from Porto to Coimbra.
The manager further stated that, were the supply price to be presented by UEP to be equal to the
one made to Porto Council, plus an amount per kWH for amortization and the interest on thecost of the transport line, such a price would be acceptable to Coimbra Council.’ Centre for
Documentation of EDP, Minutes of UEP Board Meetings, Book 2, Minutes of 21 May 1927.
28 Ibid., Book 3, Minutes of 22 Dec. 1931.
29 Fernandes, Lisboa e a Electricidade.
30 Centre for Documentation of EDP, Minutes of CRGE Board Meetings, Minutes of 24 March
1923.
31 Fernandes, Lisboa e a Electricidade, 371–377.
32 Centre for Documentation of EDP, Minutes of CRGE Board Meetings, Minutes of 26 Sept.
1938.
33 Ibid., 1931–1939; Minutes of the Executive Committee from 1938 to 1941.
34 Vaz, ‘‘Aplicacoes domesticas de electricidade na cidade do Porto’’; idem, Trinta anos de evoluc a ona electrificac a o da cidade do Porto.
35 The inter-quartile statistics of the distribution was 0.084 in 1930; decreased to 0.071 in 1940;
returned to 0.097 in 1950 and, finally, to 0.169 in 1960.
36 In the initial tests of the data panel model, the variable of urbanization was also included,
representing the percentage of the population living in cities with more than 5,000 inhabitants.
We have, however, chosen to remove this variable from the model due to very high indicators of
multicollinearity and its redundancy in relation to the variable ‘population in the secondary and
tertiary sector’. Although the standardized coefficients of ‘urbanization’ were high, they did not
alter the conclusions presented here regarding the explanatory role of the variable ‘scale of
electrification’.
37 Literacy rate¼
percentage of population that was literate, aged between 18 and 45, in eachdistrict.
Active population employed in industry and the tertiary sector ¼ percentage of the active
population employed in industry and the tertiary sector in each district.
Real purchasing power of electricity ¼ estimated in terms of the percentage of the regional
price of 1KWh in relation to the district’s average wage.
To calculate the average wage per district, the average figure was calculated for the wages paid
in industry and agriculture weighted by the active population employed in these sectors.
Scale of the connections to the network: estimated as the percentage of the total number of
individuals connected to the network in each district in relation to the country’s total number
