Public utility

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A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and regulation ranging from local community-based groups to statewide government monopolies.

Public utilities are meant to supply goods and services that are considered essential; water, gas, electricity, telephone, waste disposal, and other communication systems represent much of the public utility market. The transmission lines used in the transportation of electricity, or natural gas pipelines, have natural monopoly characteristics. A monopoly can occur when it finds the best way to minimize its costs through economies of scale to the point where other companies cannot compete with it. [1] For example, if many companies are already offering electricity, the additional installation of a power plant will only disadvantage the consumer as prices could be increased. If the infrastructure already exists in a given area, minimal benefit is gained through competing. In other words, these industries are characterized by economies of scale in production. [2] Though it can be mentioned that these natural monopolies are handled or watched by a public utilities commission, or an institution that represents the government. [3]

There are many different types of public utilities. Some, especially large companies, offer multiple products, such as electricity and natural gas. Other companies specialize in one specific product, such as water. Modern public utilities may also be partially (or completely) sourced from clean and renewable energy in order to produce sustainable electricity. Of these, wind turbines and solar panels are those used most frequently.

Whether broadband internet access should be a public utility is a question that was being discussed with the rise of internet usage. This is a question that was being asked due to the telephone service being considered a public utility. Since arguably broadband internet access has taken over telephone service, perhaps it should be a public utility. The Federal Communications Commission in the United States in 2015 made their stance on this issue clear. [4] Due to the telephone service having been considered a public utility, the Federal Communications Commission made broadband internet access a public utility in the United States. [5]

Management

Public utilities have historically been considered to be a natural monopoly. This school of thought holds that the most cost-efficient way of doing business is through a single firm because these are capital-intensive businesses with unusually large economies of scale and high fixed costs associated with building and operating the infrastructure, e.g. power plants, telephone lines and water treatment facilities. [6] However, over the past several decades, traditional public utilities' monopoly position has eroded. For instance, wholesale electricity generation markets, electric transmission networks, [7] electricity retailing and customer choice, [8] telecommunication, some types of public transit and postal services have become competitive in some countries and the trend towards liberalization, deregulation and privatization of public utilities is growing. However, the infrastructure used to distribute most utility products and services has remained largely monopolistic.[ citation needed ]

Key players in the public utility sector include: [9]

Public utilities must pursue the following objective given the social responsibility their services attribute to them:

The management of public utilities continues to be important for local and general governments. By creating, expanding, and improving upon public utilities, a governmental body may attempt to improve its image or attract investment. Traditionally, public services have been provided by public legal entities, which operate much like corporations, but differ in that profit is not necessary for a functional business. A significant factor in government ownership has been to reduce the risk that an activity, if left to private initiative, may be considered not sufficiently profitable and neglected. Many utilities are essential for human life, national defense, or commerce, and the risk of public harm with mismanagement is considerably greater than with other goods. The principle of universality of utilities maintains that these services are best owned by, and operating for, the public. The government and the society itself would like to see these services being economically accessible to all or most of the population. Furthermore, other economic reasons based the idea: public services need huge investments in infrastructures, crucial for competitiveness but with a slow return of capital; last, technical difficulties can occur in the management of plurality of networks, example in the city subsoil. [10]

Public pressure for renewable energy as a replacement for legacy fossil fuel power has steadily increased since the 1980s. As the technology needed to source the necessary amount of energy from renewable sources is still under study, public energy policy has been focused on short term alternatives such as natural gas (which still produces substantial carbon dioxide) or Nuclear power. In 2021 a power and utilities industry outlook report by Deloitte identified a number of trends for the utilities industry:

Finance

Issues faced by public utilities include:

Alternative pricing methods include:[ citation needed ]

Utility stocks are considered stable investments because they typically provide regular dividends to shareholders and have low volatility. [13] Even in periods of economic downturns characterized by low interest rates, such stocks are attractive because dividend yields are usually greater than those of other stocks, so the utility sector is often part of a long-term buy-and-hold strategy. [9]

Utilities require expensive critical infrastructure which needs regular maintenance and replacement. Consequently, the industry is capital intensive, requiring regular access to the capital markets for external financing. A utility's capital structure may have a significant debt component, which exposes the company to interest rate risk. [14] Should rates rise, the company must offer higher yields to attract bond investors, driving up the utility's interest expenses. If the company's debt load and interest expense becomes too large, its credit rating will deteriorate, further increasing the cost of capital and potentially limiting access to the capital markets. [15]

By country

Azerbaijan

Chad

Colombia

Turkey

United Kingdom and Ireland

In the United Kingdom and Ireland, the state, private firms, and charities ran the traditional public utilities. For instance, the Sanitary Districts were established in England and Wales in 1875 and in Ireland in 1878.[ citation needed ]

The term can refer to the set of services provided by various organizations that are used in everyday life by the public, such as: electricity generation, electricity retailing, electricity supplies, natural gas supplies, water supplies, sewage works, sewage systems and broadband internet services. [16] They are regulated by Ofgem, Ofwat and Ofcom. Disabled community transport services may occasionally be included within the definition. They were mostly privatised in the UK during the 1980s.

United States

The first public utility in the United States was a grist mill erected on Mother Brook in Dedham, Massachusetts in 1640. [17]

In the U.S., public utilities provide services at the consumer level, be it residential, commercial, or industrial consumer. Utilities, merchant power producers and very large consumers buy and sell bulk electricity at the wholesale level through a network of regional transmission organizations (RTO) and independent system operators (ISO) within one of three grids, the Eastern Interconnection, the Texas Interconnection, which is a single ISO, and the Western Interconnection.[ citation needed ]

U.S. utilities historically operated with a high degree of financial leverage and low interest coverage ratios compared to industrial companies. Investors accepted these credit characteristics because of the regulation of the industry and the belief that there was minimal bankruptcy risk because of the essential services they provide. In recent decades several high-profile utility company bankruptcies have challenged this perception. [18]

Monopoly vs. competition

Public utilities were historically regarded as natural monopolies because the infrastructure required to produce and deliver a product such as electricity or water is very expensive to build and maintain. Once assets such as power plants or transmission lines are in place, the cost of adding another customer is small, and duplication of facilities would be wasteful. [19] As a result, utilities were either government monopolies, or if investor-owned, regulated by a public utilities commission. [20] [21]

In the electric utility industry, the monopoly approach began to change in the 1990s. In 1996, the Federal Energy Regulatory Commission (FERC) issued its Order No. 888, which mandated that electric utilities open access to their transmission systems to enhance competition and "functionally unbundle" their transmission service from their other operations. The order also promoted the role of an independent system operator to manage power flow on the electric grid. [22] [23] Later, FERC Order No. 889 established an electronic information system called OASIS (open access same-time information system) which would give new users of transmission lines access to the same information available to the owner of the network. [24] The result of these and other regulatory rulings was the eventual restructuring of the traditional monopoly-regulated regime to one in which all bulk power sellers could compete. A further step in industry restructuring, "customer choice", followed in some 19 states, giving retail electric customers the option to be served by non-utility retail power marketers. [25] [26] [27]

Ownership structure

Public utilities can be privately owned or publicly owned. Publicly owned utilities include cooperative and municipal utilities. Municipal utilities may actually include territories outside of city limits or may not even serve the entire city. Cooperative utilities are owned by the customers they serve. They are usually found in rural areas. Publicly owned utilities are non-profit.[ citation needed ] Private utilities, also called investor-owned utilities, are owned by investors, [28] [29] [30] and operate for profit, often referred to as a rate of return.

Regulation

A public utilities commission is a governmental agency in a particular jurisdiction that regulates the commercial activities related to associated electric, natural gas, telecommunications, water, railroad, rail transit, and/or passenger transportation companies. For example, the California Public Utilities Commission (or CPUC) [31] and the Public Utility Commission of Texas regulate the utility companies in California and Texas, respectively, on behalf of their citizens and ratepayers (customers). These public utility commissions (PUCs) are typically composed of commissioners, who are appointed by their respective governors, and dedicated staff that implement and enforce rules and regulations, approve or deny rate increases, and monitor/report on relevant activities. [32]

Ratemaking practice in the U.S. holds that rates paid by a utility's customers should be set at a level which assures that the utility can provide reliable service at reasonable cost. [33]

Over the years, various changes have dramatically re-shaped the mission and focus of many public utility commissions. Their focus has typically shifted from the up-front regulation of rates and services to the oversight of competitive marketplaces and enforcement of regulatory compliance.[ citation needed ]

See also

Related Research Articles

<span class="mw-page-title-main">Federal Energy Regulatory Commission</span> Independent agency of the United States federal government

The Federal Energy Regulatory Commission (FERC) is an independent agency of the United States government that regulates the interstate transmission and wholesale sale of electricity and natural gas and regulates the prices of interstate transport of petroleum by pipeline. FERC also reviews proposals to build interstate natural gas pipelines, natural gas storage projects, and liquefied natural gas (LNG) terminals, in addition to licensing non-federal hydropower projects.

Electricity retailing is the final sale of electricity from generation to the end-use consumer. This is the fourth major step in the electricity delivery process, which also includes generation, transmission and distribution.

<span class="mw-page-title-main">Electric power industry</span> Industry that provides the production and delivery of electric energy

The electric power industry covers the generation, transmission, distribution and sale of electric power to the general public and industry. The commercial distribution of electric power started in 1882 when electricity was produced for electric lighting. In the 1880s and 1890s, growing economic and safety concerns lead to the regulation of the industry. What was once an expensive novelty limited to the most densely populated areas, reliable and economical electric power has become an essential aspect for normal operation of all elements of developed economies.

Commonwealth Edison, commonly known by syllabic abbreviation as ComEd, is the largest electric utility in Illinois, and the primary electric provider in Chicago and much of Northern Illinois. Its service territory stretches roughly from Iroquois County on the south to the Wisconsin border on the north and from the Iowa border on the west to the Indiana border on the east. For more than 100 years, Commonwealth Edison has been the primary electric delivery services company for Northern Illinois. Today, ComEd is a unit of Chicago-based Exelon Corporation, one of the nation's largest electric and gas utility holding companies. ComEd provides electric service to more than 3.8 million customers across Northern Illinois. The company's revenues totaled more than $7 billion in 2023.

The Open Access Same-Time Information System (OASIS), is an Internet-based system for obtaining services related to electric power transmission in North America. It is the primary means by which high-voltage transmission lines are reserved for moving wholesale quantities of electricity. The OASIS concept was originally conceived with the Energy Policy Act of 1992, and formalized in 1996 through Federal Energy Regulatory Commission (FERC) Orders 888 and 889.

<span class="mw-page-title-main">Public Utility Regulatory Policies Act</span>

The Public Utility Regulatory Policies Act is a United States Act passed as part of the National Energy Act. It was meant to promote energy conservation and promote greater use of domestic energy and renewable energy. The law was created in response to the 1973 energy crisis, and one year in advance of a second energy crisis.

<span class="mw-page-title-main">Regional transmission organization (North America)</span> Electric power coordinator

A regional transmission organization (RTO) in the United States is an electric power transmission system operator (TSO) that coordinates, controls, and monitors a multi-state electric grid. The transfer of electricity between states is considered interstate commerce, and electric grids spanning multiple states are therefore regulated by the Federal Energy Regulatory Commission (FERC). The voluntary creation of RTOs was initiated by FERC Order No. 2000, issued on December 20, 1999. The purpose of the RTO is to promote economic efficiency, reliability, and non-discriminatory practices while reducing government oversight.

<span class="mw-page-title-main">Demand response</span> Techniques used to prevent power networks from being overwhelmed

Demand response is a change in the power consumption of an electric utility customer to better match the demand for power with the supply. Until the 21st century decrease in the cost of pumped storage and batteries, electric energy could not be easily stored, so utilities have traditionally matched demand and supply by throttling the production rate of their power plants, taking generating units on or off line, or importing power from other utilities. There are limits to what can be achieved on the supply side, because some generating units can take a long time to come up to full power, some units may be very expensive to operate, and demand can at times be greater than the capacity of all the available power plants put together. Demand response, a type of energy demand management, seeks to adjust in real-time the demand for power instead of adjusting the supply.

The Texas electricity market is deregulated, meaning that there is competition in the generation and distribution of electricity. Power generators in the Texas Interconnection, managed by the Electric Reliability Council of Texas, participate in an energy-only electricity market and are compensated only for the electricity they produce. The wholesale generation market was deregulated in 1995 and the distribution market in 1999, with Texas Senate Bill 7. This replaced the prior system in which power was generated and consumed locally by the same utility with one in which retail providers contracted with generators across the state.

<span class="mw-page-title-main">Midcontinent Independent System Operator</span> Transmission system operator in the United States and Canada

The Midcontinent Independent System Operator, Inc., formerly named Midwest Independent Transmission System Operator, Inc. (MISO) is an Independent System Operator (ISO) and Regional Transmission Organization (RTO) providing open-access transmission service and monitoring the high-voltage transmission system in the Midwest United States and Manitoba, Canada and a southern United States region which includes much of Arkansas, Mississippi, and Louisiana. MISO also operates one of the world's largest real-time energy markets. The 15 states covered by MISO are: Arkansas, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, North Dakota, South Dakota, Texas, and Wisconsin.

<span class="mw-page-title-main">Jon Wellinghoff</span>

Jon B. Wellinghoff is an American attorney who served as the chairman of the Federal Energy Regulatory Commission (FERC) from 2009 to 2013. The FERC is a U.S. government agency that regulates the interstate transmission of electricity, natural gas, and oil. The FERC also reviews proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines and licenses hydropower projects.

A power purchase agreement (PPA), or electricity power agreement, is a long-term contract between an electricity generator and a customer, usually a utility, government or company. PPAs may last anywhere between 5 and 20 years, during which time the power purchaser buys energy at a pre-negotiated price. Such agreements play a key role in the financing of independently owned electricity generators, especially producers of renewable energy like solar farms or wind farms.

<span class="mw-page-title-main">Electricity pricing</span>

Electricity pricing can vary widely by country or by locality within a country. Electricity prices are dependent on many factors, such as the price of power generation, government taxes or subsidies, CO
2 taxes, local weather patterns, transmission and distribution infrastructure, and multi-tiered industry regulation. The pricing or tariffs can also differ depending on the customer-base, typically by residential, commercial, and industrial connections.

Through the 1996 Electric Utilities Act the Alberta's deregulated electricity market began.

<span class="mw-page-title-main">ISO New England</span> Oversees the operation of New Englands bulk electric power system

ISO New England Inc. (ISO-NE) is an independent, non-profit regional transmission organization (RTO), headquartered in Holyoke, Massachusetts, serving Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.

<span class="mw-page-title-main">PJM Interconnection</span> Major electric grid coordinator in northeastern USA

PJM Interconnection LLC (PJM) is a regional transmission organization (RTO) in the United States. It is part of the Eastern Interconnection grid operating an electric transmission system serving all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia.

There is a large array of stakeholders that provide services through electricity generation, transmission, distribution and marketing for industrial, commercial, public and residential customers in the United States. It also includes many public institutions that regulate the sector. In 1996, there were 3,195 electric utilities in the United States, of which fewer than 1,000 were engaged in power generation. This leaves a large number of mostly smaller utilities engaged only in power distribution. There were also 65 power marketers. Of all utilities, 2,020 were publicly owned, 932 were rural electric cooperatives, and 243 were investor-owned utilities. The electricity transmission network is controlled by Independent System Operators or Regional Transmission Organizations, which are not-for-profit organizations that are obliged to provide indiscriminate access to various suppliers to promote competition.

An electric utility informally called the Power company is a company in the electric power industry that engages in electricity generation and distribution of electricity for sale generally in a regulated market. The electrical utility industry is a major provider of energy in most countries.

Smart grid policy in the United States refers to legislation and other governmental orders influencing the development of smart grids in the United States.

Utility ratemaking is the formal regulatory process in the United States by which public utilities set the prices they will charge consumers. Ratemaking, typically carried out through "rate cases" before a public utilities commission, serves as one of the primary instruments of government regulation of public utilities.

References

  1. ↑ "What is a public utility? Definition and meaning". Market Business News. Retrieved 2023-04-25.
  2. ↑ "Public Utility | Encyclopedia.com". www.encyclopedia.com. Retrieved 2021-04-27.
  3. ↑ "What is a public utility? Definition and meaning". Market Business News. Retrieved 2023-04-25.
  4. ↑ "What is a public utility? Definition and meaning". Market Business News. Retrieved 2023-04-25.
  5. ↑ "What is a public utility? Definition and meaning". Market Business News. Retrieved 2023-04-25.
  6. ↑ Ulbrich, Holley H. (1991). "Natural Monopoly in Principles Textbooks: A Pedagogical Note". The Journal of Economic Education. 22 (2 (Spring 1991)): 179–182. doi:10.1080/00220485.1991.10844706. JSTOR   1182423.
  7. ↑ "FERC Order 888".
  8. ↑ Clark, Doug (5 November 2019). "Electricity customer choice program participation examined (Nov, 15, 2019)". Daily Energy Insider. Retrieved 14 May 2021.
  9. 1 2 Murphy, Chris B. "How the Utilities Sector is Used by Investors for Dividends and Safety". Investopedia.
  10. 1 2 Gilardoni, A (2015). Public Utilities e Infrastrutture. Profili economici e gestionali. Agici.
  11. ↑ "2021 Power and Utilities Industry Outlook". Deloitte United States. Retrieved 2021-04-29.
  12. ↑ Yescombe, E. R.; Farquharson, Edward (2018). Public-Private Partnerships for Infrastructure. ISBN   9780081007662.[ page needed ]
  13. ↑ Murphy, Chris B. "How the Utilities Sector is Used by Investors for Dividends and Safety". Investopedia. Retrieved 2021-04-27.
  14. ↑ "Utilities Sector Definition & Meaning in Stock Market with Example". kalkinemedia.com. Retrieved December 14, 2022.
  15. ↑ Berg, Sanford, Tschirhart (1998). natural monopoly regulation. Cambridge University.{{cite book}}: CS1 maint: multiple names: authors list (link)[ page needed ]
  16. ↑ "Utilities Websites". Uk250.co.uk. Archived from the original on 2011-11-04. Retrieved 2011-10-11.
  17. ↑ "Where Growth Centers". The Salina Evening Journal. Salina, Kansas. November 6, 1922. p. 13. Archived from the original on April 2, 2015. Retrieved March 17, 2015– via Newspapers.com. Open Access logo PLoS transparent.svg
  18. ↑ Howe, Jane Tripp (1997). Handbook of Fixed Income Securities; Frank J. Fabozzi, editor (Fifth ed.). New York NY: McGraw-Hill. pp. 392–393. ISBN   0-7863-1095-2.
  19. ↑ Tomain, Joseph; Cudahy, Richard (2004). Energy Law in a Nutshell. St. Paul, Minnesota: West Publishing Company. pp. 120–121. ISBN   0-314-15058-7.
  20. ↑ "Public utility - Definition". Merriam-Webster Dictionary. Archived from the original on 2011-11-05. Retrieved 2011-10-11.
  21. ↑ "public utility definition". Investorwords.com. Archived from the original on 2011-09-28. Retrieved 2011-10-11.
  22. ↑ Melvin, Jasmin (26 February 2021). "Former FERC, DOE officials mull Texas, climate, transmission policy quandaries (28 Feb 2021)". S&P Global Platts. Retrieved 15 May 2021.
  23. ↑ "Order No. 888". Federal Energy Regulatory Commission. Retrieved 14 May 2021.
  24. ↑ Tomain and Cudahy op cit. pp. 278–279.
  25. ↑ Clark, Doug (5 November 2019). "Electricity customer choice program participation examined (Nov, 5, 2019)". Daily Energy Insider. Retrieved 14 May 2021.
  26. ↑ "Can electric utility customers choose their electricity supplier?". U.S. Energy Information Administration. Retrieved 14 May 2021.
  27. ↑ "Participation in electricity customer choice programs has remained unchanged since 2013". U.S. Energy Information Administration. Retrieved 14 May 2021.
  28. ↑ "investor-owned utility (IOU), private utility, private power company". www.energyvortex.com. Archived from the original on 2 February 2017. Retrieved 8 May 2018.
  29. ↑ "Electric Utilities". www.utilityconnection.com. Archived from the original on 27 October 2017. Retrieved 8 May 2018.
  30. ↑ Pentland, William. "Investor-Owned Utilities: Asleep at the Switch or Above the Law?". forbes.com. Archived from the original on 29 July 2017. Retrieved 8 May 2018.
  31. ↑ "California Public Utilities Commission". Cpuc.ca.gov. 2007-03-23. Archived from the original on 2011-10-10. Retrieved 2011-10-11.
  32. ↑ "Public Utilities Commission of Texas". Public Utilities Commission of Texas. Archived from the original on 14 August 2012. Retrieved 17 February 2017.
  33. ↑ Louiselle, Bruce M. and Heilman, Jane E. (1982). "The Case for the Use of an Appropriate Capital Structure in Utility Ratemaking: The General Rule Versus Minnesota". William Mitchell Law Review, Mitchell Hamline School of Law. 8 (2): 426. Retrieved 12 May 2021.{{cite journal}}: CS1 maint: multiple names: authors list (link)
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