Business Strategies in Electricity Firms in Comparison: Hidrola and Unión Eléctrica Madrileña, 1907-1935[*]
Anna M. Aubanell Jubany
UAB/UPF
1. Creation and firm’s organisation
Sociedad Hidroeléctrica Española, Hidrola, was founded in 1907 because of the financial strategy of Hidroeléctrica Ibérica, which was reluctant to increase its capital in order to finance the expansion of the company beyond the Basque Country. Ibérica looked for capital elsewhere in order to bring realise its projects. The company owned several water falls in the Xúcar river that could supply Madrid with large amounts of electricity. The contacts between Ibérica’s general manager, Juan Urrutia, and Lucas Urquijo resulted in mobilising enough funds from Madrilenian investors to create Hidrola.
Since Urrutia designed the project, Hidrola’s structure was identical to that of Ibérica. Hidrola’s activity was generation and transport of electricity, while distribution was carried out by other companies that bought electricity from Hidrola. Only big customers were served directly from the producer[1].
Hidrola intended to convert the existing companies in each city into her distributors. At the beginning of the 20th century, most electricity companies distributed the electricity produced in their own coal-fired power stations. It was a question of replacing the companies’ own expensive thermoelectricity by cheaper hydroelectricity that Hidrola was generating. This sensible strategy would avoid competition, which otherwise was inevitable, when a company intended to get into established distribution markets. Simultaneously, it would save the producer new investment to place its electricity when making good use of existing networks.
Although Hidrola’s strategy was not to create distributing subsidiaries, the particular events in every city determined the degree of commitment Hidrola had with the distributors. In the case of Madrid, the first intention of the company was to come to an agreement with the different electrical companies present in the market. This was not possible due to the lack of agreement with another hydroelectric producer, and Hidrola decided to create a subsidiary, Cooperativa Electra Madrid. Nonetheless its strategy of concentrating its activity in the generation phase and keep its involvement in distribution to the minimum was shown in the 1912 statement when Hidrola sold the Unión Eléctrica de Cartagena’s shares because “ this society [Hidrola] must not have the associate's character of that one [Unión Eléctrica de Cartagena] but of supplier of energy”[2].
Unión Eléctrica Madrileña (Unión) was the result of a merger of three companies in 1911: Compañía General Madrileña de Electricidad (Madrileña), Sociedad de Gasificación Industrial and Salto de Bolarque. Madrileña had been founded in 1889 by AEG. It was part of this company’s commercial strategy, Unternehmergeschäft. Soon it attracted the French capital, Crédito Mobiliario Español, that at the time was the owner of the only gas company in Madrid. In 1894 the French gained control of Madrileña which, by that time, had become the largest electricity company in Madrid. In 1901 it had a market share of 78% falling to 50% in 1909. Madrileña’s economic activity included generation in several thermo power stations as well as distribution.
The Sociedad de Gasificación Industrial (Gasificación) created at the end of 1902 was funded by the Madrilenean investors who would later finance the two major companies which are the object of this study, Hidrola and Unión. Since Gasificación began its operation in 1906 losses followed year after year due to, first, the difficulties in distribution and, then, the accidents in generation. When the technical problems were solved, the electricity generated by the big water falls reached Madrid making the generation of electricity by Gasificación uneconomical. The risk that the investors ran on having bet on a system that had not been completely developed was big but it shows, in turn, their enterprising capacity. The bad results did not discourage them to continue investing in the sector, although they changed from thermo companies to hydroelectric ones. Lucas Urquijo, himself a main shareholder in Gasificación, got almost all the other shareholders interested in the creation of Hidrola in 1907. Two of Gasificación’ shareholders who did not participate in Hidrola were his brother Juan Manuel Urquijo, who had inherited the Banco Urquijo form their uncle, and his nephew Estanislao. The reason being the Urquijos’ involvement in another hydroelectrical project, that of Salto de Bolarque owned until then solely by Juan Ron.
Since the end of 1898, Juan Ron had been acquiring the adjacent areas of the Hoya de Bolarque in the Tajo river, obtaining the concession for the use of the water fall in 1904. It was in 1907 when Estanislao Urquijo got interested in the project. The arrival of the electricity produced by Bolarque would alter Gasificación’s perspectives. At the beginning of 1907 Urquijo informed the Board that "I came to know that they are working to have the power station on Bolarque’s water fall ready very soon [...] I have considered it to be appropriate that this business is not in strange hands to our society giving place to industrial competition, which is convenient to avoid, and therefore I have acquired the above mentioned water fall in order that both companies would help each other"[3].
The strategy of Urquijo was to neutralise a possible competitor. Also, the imminent creation of Hidrola with the intention to bring hydroelectricity to Madrid provided more grounds for Urquijo to control Bolarque. Although it was only Estanislao Urquijo who invested in Bolarque while the remaining Gasificación shareholders did not take part, it was a personal initiative. The neutralising strategy was to become a characteristic of the corporate strategy that marked the development of the activities of the Urquijos in the electrical industry during the first third of the 20th century.
At the beginning of 1909, the Urquijos doubled their participation in Gasificación holding over a quarter of the stock[4]. It should not have proven to be difficult for them to acquire the shares because they did not surpass 83 % of their par value, which showed the company's precarious situation. Urquijo’s control of the company and its fragile situation facilitated the agreement with Bolarque by which Gasificación would stop production and only work as a reserve power station[5]. In this way Bolarque, that is Urquijo, was sparing himself the construction of a thermo power station to complement the hydroelectric production.
Bolarque like Gasificación restricted themselves to the generation of electricity. Like Hidrola their first choice was to sell electricity to the existing companies. It is necessary to point out that this strategy was the most common amongst the hydroelectric companies. The first hydroelectric company in Madrid, Hidráulica Santillana, devoted itself principally to the generation of electricity and only when distribution companies did not exist extended its activity to distribution. For this reason Urquijo tried to obtain an agreement with Hidrola to act in common accord as producers in the market of Madrid, which would strengthen their negotiation power with the existing electricity companies when convincing them to became only distributors.
The imminent arrival of the hydroelectricity from Bolarque and Hidrola set off multiple negotiations between hydroelectric producers, between them and the old companies and between those ones. The main aim was to avoid competition whilst securing the best market share. The events that followed would not only change the market structure but also altered Urquijo, and modified Hidrola’s, organisation strategy.
From Madrileña's perspective the best solution was that the three hydroelectric producers (Hidrola, Bolarque and Hidráulica Santillana) would reach an agreement and they would act according to the distributors. The second option was that Madrileña would arrive at an agreement with the two main producers, Bolarque and Hidrola, or if this was not possible with just one of them. All options would have as a result an organisation that separated the generation and transportation phases from that of distribution.
In this direction Hidrola and Bolarque negotiated in 1909 an agreement to act jointly as producers in the Madrid market. In April 1909 Bolarque proposed to allocate the revenue in the proportion of 40 % to the producers and 60 % to the distributors, who would hand over their thermo power stations to the producers who would take charge of maintenance[6]. The negotiations with the rest of the companies did not prosper and opened other possibilities for Bolarque who in November agreed the bases to come to an agreement with Madrileña and the Sociedad de Electricidad de Chamberí[7].
At the beginning of 1910 the inevitable competition started in the distribution market of Madrid. Since no agreement with the old companies had been reached, Hidrola decided to create its own distribution company. This route meant major capital investment that were the main barrier of entry in the distribution market, but it had the advantage of having a better network with higher technical and economic efficiency. Moreover, the absorption of the Cooperativa Eléctrica de Madrid project by Hidrola’s distributor facilitated the entry in the market thanks to two factors. The first one was the great popularity of the Cooperativa project due to the publicity it had received because of its promises of breaking the existing agreements between the electrical companies and reducing prices. The second factor, which also explains why Hidrola opted for the merger of its subsidiary with Cooperativa, was the agreement between Cooperativa and the city Council which eliminated the administrative barriers for the extension of the distribution network[8]. Those were the reasons why Hidrola modified its initial organisation strategy of not creating distribution subsidiaries.
Bolarque continued negotiations with Madrileña during 1910. The options considered ranged from leasing the hydropower station with call option to just selling hydroelectricity. They did not reach an agreement either because Madrileña considered it had to buy too many kWh or Bolarque did not accept the commitment of exclusive supply without the guarantee that Madrileña would buy all electricity produced[9]. In parallel Bolarque also was negotiating with Hidrola. In November 1910 they reached an agreement by which the market of Madrid would be shared in equal parts and in case Santillana would join them they would cede the corresponding percentage. The above mentioned agreement contemplated coming to a settlement with the existing electrical companies in the maximum time limit of a year or, otherwise, they would supply electricity through Electra, Hidrola’s distributor[10].
At that stage it seemed that the hydroproducers would become the suppliers of the old firms which in turn would became only distributors of electricity. That is there would be a production market and a distribution market. At the end of 1910, Electra proposed to Madrileña to share the distribution market in a way that Madrileña would get 2.600.000 pesetas plus 25% of the rest of the revenue. Madrileña would stop generating electricity and take electricity from the Hidrola, Bolarque or Santillana[11]. Madrileña’s Board of directors refused that offer since they needed 3.000.000 pesetas and 30% of the rest in order to be able to pay the debentures interest and a dividend of 6%.
From the 11th until the 17th of January 1911 negotiations between Madrileña, Gasificación-Bolarque and Hidrola-Electra took place in Paris[12]. The new agreement that had to be ratified on the first of April established the distribution of revenue between the distributors (Electra and Madrileña) and the producers (Gasificación-Bolarque and Hidrola) as follows:
Table 1 Revenue coefficients established in the January 1911 agreement
Revenue / Electra / Madrileña / Producers4.000.000 / 20,00 / 54,25 / 25,75
6.000.000 / 28,00 / 44,50 / 27,50
8.000.000 / 33,00 / 39,63 / 27,38
10.000.000 / 33,00 / 35,70 / 31,30
Source: Minutes Board of Directors SHE, 31-1-1911
At the end of 1911 Bolarque accused Hidrola of breaking the agreement that the two producers had signed in November 1910. On the other hand, Hidrola held that “Bolarque has let down our hopes cutting our relations short under the pretext of unfulfillment of the agreement. We know already with whom we deal, and we must take note of this action for the opportune moment to come[13].
Undoubtedly Bolarque, that is to say, Urquijo caused the breaking of the agreement because they were to win most from the change. The result of Urquijo’s action was the foundation of Unión, which combined the plants of Bolarque and Gasificación with Madrileña’s power stations and network. Table 2 shows the revenue coefficients recalculated considering the outcome. The first two columns show the percentages each group would get. The third column indicates the percentage Bolarque would have gotten with the agreement of January 1911 (Bolarque-producers) and the fourth one how much would Bolaque get by breaking the agreement to form Unión (Bolarque-Unión). The substantial difference between the third and fourth columns explain that Urquijo had a good reason to explore the possibilities of arriving at an agreement with Madrileña in order to create a company or a group like the one formed by Hidrola-Electra. This was not the only reason for Urquijo to follow this path as we are going to see in the next part.
Table 2 Distribution of revenue in a scenario with two vertical integrated groups
Hidrola-Electra / Unión / Bolarque producers / Bolarque Unión4.000.000 / 32,87 / 67,12 / 12,87 / 28,98
6.000.000 / 41,75 / 58,25 / 13,75 / 25,15
8.000.000 / 46,68 / 53,31 / 13,68 / 23,02
10.000.000 / 48,65 / 51,35 / 15,65 / 22,17
Note: Bolarque-producers: it is half of the revenue that was allocated to producers according to the agreement of January 1911. Bolarque-Unión: Based on the coefficient that Madrileña received plus half of the producers weighted by Bolarque’s share in Unión.