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By the end of the nineteenth century, the United States had completed its transition from using wood as a major energy source to using coal, and the next transition from coal to oil and natural gas was just beginning. By the early twentieth century, both homes and businesses increased their demand for electric power, and electric utilities obtained long-term franchises from municipalities.

In 1920, the Federal Power Act (FPA), 16 U.S.C.A. §§ 791a–828c, was passed in response to increased competition between electric utilities and a lack of consistent service to rural areas. The Federal Power Act gave the Federal Power Commission the authority to license hydroelectric plants. Later, President FRANKLIN D. ROOSEVELT encouraged Congress to create part II of the act, which gave the Federal Power Commission the power to regulate the transmission of electric energy (16 U.S.C.A. §§ 824–824m). This legislation was necessary to guard against potential abuses of the utility companies' monopolistic structure and to ensure adequate and consistent service nationwide.

As more and larger electric generating plants were constructed and as more electric power lines were strung, legislators believed that through economies of scale, electric utility monopolies could actually offer lower costs to consumers than could competition between smaller utilities. Because of the capital-intensive nature of providing electric power, and the sunken costs of building plants and stringing lines, it is more cost-effective to spread these costs over the large and consistent customer base provided by a MONOPOLY.

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