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A public utility company (usually just utility) is an organization that maintains the infrastructure for a
public service A public service is any service intended to address specific needs pertaining to the aggregate members of a community. Public services are available to people within a government jurisdiction as provided directly through public sector agencies ...
(often also providing a service using that infrastructure). Public utilities are subject to forms of public control and
regulation Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. ...
ranging from local community-based groups to statewide government monopolies. Public utilities are meant to supply goods/services that are considered essential;
water Water (chemical formula ) is an inorganic, transparent, tasteless, odorless, and nearly colorless chemical substance, which is the main constituent of Earth's hydrosphere and the fluids of all known living organisms (in which it acts as ...
, gas, electricity,
telephone A telephone is a telecommunications device that permits two or more users to conduct a conversation when they are too far apart to be easily heard directly. A telephone converts sound, typically and most efficiently the human voice, into e ...
, and other communication systems represent much of the public utility market. The transmission lines used in the transportation of
electricity Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as describe ...
, or natural gas pipelines, have natural
monopoly A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...
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 microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
'' in production. 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 turbine A wind turbine is a device that converts the kinetic energy of wind into electrical energy. Hundreds of thousands of large turbines, in installations known as wind farms, now generate over 650 gigawatts of power, with 60 GW added each year. ...
s and solar panels are those used most frequently.


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. However, over the past several decades, traditional public utilities' monopoly position has eroded. For instance, wholesale electricity generation markets, electric transmission networks, electricity retailing and customer choice,
telecommunication Telecommunication is the transmission of information by various types of technologies over wire, radio, optical, or other electromagnetic systems. It has its origin in the desire of humans for communication over a distance greater than that ...
, some types of
public transit Public transport (also known as public transportation, public transit, mass transit, or simply transit) is a system of transport for passengers by group travel systems available for use by the general public unlike private transport, typi ...
and postal services have become competitive in some countries and the trend towards
liberalization Liberalization or liberalisation (British English) is a broad term that refers to the practice of making laws, systems, or opinions less severe, usually in the sense of eliminating certain government regulations or restrictions. The term is used m ...
, deregulation and
privatization Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...
of public utilities is growing. However, the infrastructure used to distribute most utility products and services has remained largely monopolistic. Key players in the public utility sector include: * Generators produce or collect the specific product to be used by customers: for example, electricity or water. * Network operators (grid operators, regional network operators, and distribution network operators) sell access to their networks to retail service providers, who deliver the product to the end user. * Traders and marketers buy and sell the actual product and create further complex structured products, combined services and derivatives products. Depending on the product structure, these companies may provide utilities and businesses with a reliable supply of a product like electricity at a stable, predictable price, or a shorter term supply at a more volatile price. * Service providers and retailers are the last segment in the
supply chain In commerce, a supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. It refers to the network of organizations, people, activ ...
, selling directly to the final
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
. In some markets, final consumers can choose their own
retail Retail is the sale of goods and Service (economics), services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturing, manufacturers, dire ...
service provider. 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 Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organ ...
services are effectively targeted so as to improve the health of local
population Population typically refers to the number of people in a single area, whether it be a city or town, region, country, continent, or the world. Governments typically quantify the size of the resident population within their jurisdiction usi ...
s; * Improving the efficiency of the services so the volume of well-targeted effective services is the widest, given the available
resource Resource refers to all the materials available in our environment which are technologically accessible, economically feasible and culturally sustainable and help us to satisfy our needs and wants. Resources can broadly be classified upon thei ...
s. The
management Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business. Management includes the activitie ...
of public utilities continues to be important for local and general
government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government i ...
s. 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 In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environm ...
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 A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government i ...
and the
society A society is a group of individuals involved in persistent social interaction, or a large social group sharing the same spatial or social territory, typically subject to the same political authority and dominant cultural expectations. Soc ...
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 Subsoil is the layer of soil under the topsoil on the surface of the ground. Like topsoil, it is composed of a variable mixture of small particles such as sand, silt and clay, but with a much lower percentage of organic matter and humus, and ...
. 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 In physics, energy (from Ancient Greek: ἐνέργεια, ''enérgeia'', “activity”) is the quantitative property that is transferred to a body or to a physical system, recognizable in the performance of work and in the form of ...
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 Carbon dioxide ( chemical formula ) is a chemical compound made up of molecules that each have one carbon atom covalently double bonded to two oxygen atoms. It is found in the gas state at room temperature. In the air, carbon dioxide is t ...
) or
Nuclear power Nuclear power is the use of nuclear reactions to produce electricity. Nuclear power can be obtained from nuclear fission, nuclear decay and nuclear fusion reactions. Presently, the vast majority of electricity from nuclear power is produced b ...
. In 2021 a power and utilities industry outlook report by Deloitte identified a number of trends for the utilities industry: * Enhanced
competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, ind ...
, sparked by regulations such as FERC's Order 2222 that open up the market to smaller, innovative firms using renewable energy sources, like wind or solar power * Expansions in infrastructure, to manage new renewable energy sources * Greater
electrification Electrification is the process of powering by electricity and, in many contexts, the introduction of such power by changing over from an earlier power source. The broad meaning of the term, such as in the history of technology, economic histo ...
of transportation, and longer-range batteries for cars and trucks * Oil companies and other traditional-energy players entering the renewable-energy field * A greater emphasis on disaster readiness


Finance

Issues faced by public utilities include: * Service area: regulators need to balance the economic needs of the companies and the social equity needed to guarantee to everyone the access to primary services. * Autonomy: Economic efficiency requires that markets be left to work by themselves with little intervention. Such instances are often not equitable for some consumers that might be priced out of the market. * Pricing: Equity requires that all citizens get the service at a fair price. Alternative pricing methods include: * Average production costs: the utility calculates the break-even point and then set the prices equal to average costs. The equity issue is basically overcome since most of the market is being served. As a defect regulated firms don't have incentives to minimize
cost In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in whic ...
s. * Rate of return regulation: regulators let the firms set and charge any price, as long as the rate of return on invested capital does not exceed a certain rate. This method is flexible and allows for pricing freedom, forcing regulators to monitor prices. The drawback is that this method could lead to overcapitalization. For example, if the rate of return is set at five percent, then the firm can charge a higher price simply by investing more in capital than what it is actually needed (i.e., 5% of $10 million is greater than 5% of $6 million). * Price cap regulation: regulators directly set a limit on the maximum price. This method can result in a loss of service area. One benefit of this method is that it gives firms an incentive to seek cost-reducing technologies as a strategy to increase utility Profits. Utility stocks are considered stable investments because they typically provide regular
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
s to shareholders and have low volatility. Even in periods of economic downturns characterized by low
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...
s, such stocks are attractive because
dividend yield The dividend yield or dividend–price ratio of a share is the dividend per share, divided by the price per share. It is also a company's total annual dividend payments divided by its market capitalization, assuming the number of shares is constant ...
s are usually greater than those of other stocks, so the utility sector is often part of a long-term buy-and-hold strategy. 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 Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemical ...
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.


By country


Azerbaijan


Chad


Colombia


Turkey


United Kingdom and Ireland

In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
and
Ireland Ireland ( ; ga, Éire ; Ulster-Scots: ) is an island in the North Atlantic Ocean, in north-western Europe. It is separated from Great Britain to its east by the North Channel, the Irish Sea, and St George's Channel. Ireland is the s ...
, the state, private firms, and charities ran the traditional public utilities. For instance, the Sanitary Districts were established in
England and Wales England and Wales () is one of the three legal jurisdictions of the United Kingdom. It covers the constituent countries England and Wales and was formed by the Laws in Wales Acts 1535 and 1542. The substantive law of the jurisdiction is En ...
in 1875 and in Ireland in 1878. 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 Electricity is the set of physical phenomena associated with the presence and motion of matter that has a property of electric charge. Electricity is related to magnetism, both being part of the phenomenon of electromagnetism, as describe ...
supplies,
natural gas Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbon d ...
supplies,
water Water (chemical formula ) is an inorganic, transparent, tasteless, odorless, and nearly colorless chemical substance, which is the main constituent of Earth's hydrosphere and the fluids of all known living organisms (in which it acts as ...
supplies, sewage works, sewage systems and
broadband In telecommunications, broadband is wide bandwidth data transmission which transports multiple signals at a wide range of frequencies and Internet traffic types, that enables messages to be sent simultaneously, used in fast internet connections. ...
internet The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, p ...
services. 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 A gristmill (also: grist mill, corn mill, flour mill, feed mill or feedmill) grinds cereal grain into flour and middlings. The term can refer to either the grinding mechanism or the building that holds it. Grist is grain that has been separat ...
erected on Mother Brook in Dedham, Massachusetts in 1640. 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. 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.


Monopoly vs. competition

Public utilities were historically regarded as
natural monopolies A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...
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. As a result, utilities were either government monopolies, or if investor-owned,
regulated Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. ...
by a public utilities commission. In the electric utility industry, the monopoly approach began to change in the 1990s. In 1996, the Federal Energy Regulatory Commission (FERC) issued it
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. 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. 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.


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 In general, a rural area or a countryside is a geographic area that is located outside towns and cities. Typical rural areas have a low population density and small settlements. Agricultural areas and areas with forestry typically are de ...
areas. Publicly owned utilities are non-profit. Private utilities, also called investor-owned utilities, are owned by investors, 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 Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbon d ...
, telecommunications, water, railroad, rail transit, and/or passenger transportation companies. For example, the California Public Utilities Commission (or CPUC) 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. 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. 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.


See also

* Building block model, form of public utility regulation common in
Australia Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With an area of , Australia is the largest country by ...


References


External links


World Bank report on Water, Electricity and Utility subsidies

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