That's an interesting theory. I don't think the Mako Reactor first coming online and turning the city into a hellhole theory is altogether bad either. If you recall the lore, Midgar was built by taking all the various towns and cities in the area and combining them into a metropolis with the 8 Mako Reactors circling the central Shinra Tower. This would also explain why we see the highways and trains running throughout.



As for Mako being the thing creating electricity, that is a snagging point. But we see clear signs of electricity in one place nowhere near a Mako Reactor in the game. Icicle Inn. (My headcanon is that Gold Saucer was powered by the Gongaga and Corel Reactors and Rocket Town by Nibelheim.) So maybe Mako was just a cheaper energy alternative that could be easily controlled.



Then again, they are called the Shinra Electric Corporation, not the Shinra Mako Corporation, so I could be wrong.



Edit: I would love to hear Shademp's thoughts on this.