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.

Contents

Public utilities are meant to supply goods/services that are considered essential; water, gas, electricity, telephone, 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. 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. [1]

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.

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. [2] Natural monopolies tend to be regulated by governments following the public interest. However, being a natural monopoly is not a necessary prerequisite for government intervention and regulation. Industries that are not natural monopolies could be regulated for several reasons, for example service reliability, universal access, and national security.

Over the past several decades, traditional public utilities' monopoly position has eroded. For instance, wholesale electricity generation markets, electric transmission networks, [3] electricity retailing and customer choice, [4] 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: [5]

Public utilities must pursue the following objective given the social responsibility their services attribute to them: -Ensuring services are of the highest quality and responsive to the needs and wishes of patients; -Ensuring that health services are effectively targeted so as to improve the health of local populations; -Improving the efficiency of the services so the volume of well-targeted effective services is the widest, given the available resources. [6]

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. [6]

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 provide they typically provide regular dividends to shareholders and have low volatility. [9] 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 utilities are a reliable long-term buy-and-hold option. [5]

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. 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. [10]

United States

The first public utility in the United States was a grist mill erected on Mother Brook in Dedham, Massachusetts in 1640. [11]

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. [12]

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. [13] As a result, utilities were either government monopolies, or if investor-owned, regulated by a public utilities commission. [14] [15]

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. [16] [17] 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. [18] 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. [19] [20] [21]

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, [22] [23] [24] 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) [25] 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. [26]

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. [27]

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 ]

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. [28] 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.

See also

Related Research Articles

Federal Energy Regulatory Commission

The Federal Energy Regulatory Commission (FERC) is the United States federal agency that regulates the transmission and wholesale sale of electricity and natural gas in interstate commerce and regulates the transportation of oil by pipeline in interstate commerce. 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.

The 2000–01 California electricity crisis, also known as the Western U.S. energy crisis of 2000 and 2001, was a situation in which the U.S. state of California had a shortage of electricity supply caused by market manipulations and capped retail electricity prices. The state suffered from multiple large-scale blackouts, one of the state's largest energy companies collapsed, and the economic fall-out greatly harmed Governor Gray Davis's standing.

Electric power industry

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.

Eversource Energy is a publicly traded, Fortune 500 energy company headquartered in Hartford, Connecticut, and Boston, Massachusetts, with several regulated subsidiaries offering retail electricity, natural gas service and water service to approximately 4 million customers in Connecticut, Massachusetts and New Hampshire.

The Ontario Energy Board regulates natural gas and electricity utilities in the province of Ontario, Canada. This includes setting rates, and licensing all participants in the electricity sector including the Independent Electricity System Operator (IESO), generators, transmitters, distributors, wholesalers and electricity retailers, as well as natural gas marketers who sell to low volume customers.

Public Utility Regulatory Policies Act

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.

ENMAX

ENMAX Corporation (ENMAX) is a vertically integrated utility that generates and distributes electricity, natural gas, renewable energy, and value-added services to customers in Alberta, Canada.

Electricity deregulation in Texas, approved by Texas Senate Bill 7 on January 1, 2002, called for the creation of the Electric Utility Restructuring Legislative Oversight Committee to oversee implementation of the bill. According to the law, deregulation would be phased in over several years.

Rate-of-return regulation is a system for setting the prices charged by government-regulated monopolies, such as public utilities. Its main premise is that monopolies must charge the same price that would ideally prevail in a perfectly competitive market, equal to the efficient costs of production, plus a market-determined rate of return on capital.

Community Choice Aggregation

Community Choice Aggregation (CCA), also known as Community Choice Energy, municipal aggregation, governmental aggregation, electricity aggregation, and community aggregation, is an alternative to the investor owned utility energy supply system in which local entities in the United States aggregate the buying power of individual customers within a defined jurisdiction in order to secure alternative energy supply contracts. The CCA chooses the power generation source on behalf of the consumers.

A power purchase agreement (PPA), or electricity power agreement, is a contract between two parties, one which generates electricity and one which is looking to purchase electricity. The PPA defines all of the commercial terms for the sale of electricity between the two parties, including when the project will begin commercial operation, schedule for delivery of electricity, penalties for under delivery, payment terms, and termination. A PPA is the principal agreement that defines the revenue and credit quality of a generating project and is thus a key instrument of project finance. There are many forms of PPA in use today and they vary according to the needs of buyer, seller, and financing counter parties.

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, 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.

ISO New England

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.

Electricity sector of the United States U.S. energy sector

The electricity sector of the United States includes a large array of stakeholders that provide services through electricity generation, transmission, distribution and marketing for industrial, commercial, public and residential customers. 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 in order to promote competition.

New York Public Service Commission

The New York Public Service Commission is the public utilities commission of the New York state government that regulates and oversees the electric, gas, water, and telecommunication industries in New York as part of the Department of Public Service. The department's regulations are compiled in title 16 of the New York Codes, Rules and Regulations. The current chairman of the Commission and chief executive of the Department is John B. Rhodes. His term began on June 21, 2017 and runs through February 1, 2021.

An electric utility 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.

The term Smart Grid describes a next-generation electric power system that is classified by the increased use of communication and information technology in the generation, delivery, and consumption of electrical energy. For individual consumers, smart grid technology offers more control over electricity consumption. Typically, the goal is greater overall energy efficiency.

Natural Gas Act of 1938

The Natural Gas Act of 1938 was the first occurrence of the United States federal government regulating the natural gas industry. It was focused on regulating the rates charged by interstate natural gas transmission companies. In the years prior to the passage of the Act, concern arose about the monopolistic tendencies of the transmission companies and the fact that they were charging higher than competitive prices. The passage of the Act gave the Federal Power Commission (FPC) control over the regulation of interstate natural gas sales. Later on, the FPC was dissolved and became the Federal Energy Regulatory Commission (FERC). FERC continues to regulate the natural gas industry to this day.

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.

Reliant Energy

Reliant Energy is an American energy company based in Houston, Texas.

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