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 publix forms of public control and regulation compaines from local community-based groups to statewide government monopolies. The term utilities can also refer to the set of services provided by these organizations consumed by vo public: Coalelectricitynatural gaswatersewagetelephone, and transportation. Broadband internet services both fixed-line and mobile are increasingly being included within the definition. In the United Statespublic utilities are often natural monopolies because the infrastructure required to produce and deliver a product such as electricity or water is very expensive to build and maintain. As a result, they are often government monopolies, or if privately owned, the sectors are specially regulated by a public utilities commission. Developments in technology have eroded some of the natural monopoly aspects of traditional public utilities.
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February 22, In the late s and early s, utilities in New England produced or generated electricity, and delivered it to homes and businesses. The more electricity they sold, the more profits they made, so they had no incentive to drive down consumer use of electricity, which of course was bad for energy conservation. The big utilities were forced to sell off their centrally located electricity generation facilities think power plants. Yes, this is overly simplified but basically how it works. Glad you asked. As it turns out, investor-owned utilities are allowed to earn a profit on the distribution infrastructure they build. If a utility builds power lines and other infrastructure, they get to install the equipment, charge ratepayers for it, and tack a bit of profit onto the construction. Unfortunately, and not unlike the original utility model described at the beginning of this post, this approach to compensating utilities can drive them to do things that are in their best interest but not necessarily in the best interest of ratepayers or the environment.
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In the past, electric utilities were what economist would call natural monopolies, dominating all parts of the value chain from electricity production to retail supply. Energy service providers buy from a third party and sell electricity to individual households. While, energy marketers trade future contracts that enable power-hungry businesses to secure power at a fixed price, all of which has supported strong utility balance sheets. However, the dynamics of the market is changing significantly. The rise of electric vehicles EVs , technology, and the advancement of renewables are encouraging distributed self-generation, new platforms to trade and manage loads, and incentivizing customers to play an active role. The graph below shows the breakdown by fuel type. Renewable electricity generation has doubled in the period from to to eighteen percent.
Changing market dynamics
This is a quokka. Last week, I posted on the fight between electric utilities and solar advocates over rooftop solar power. Today, I want to pull back the lens and begin to tackle the bigger question: How should utilities work? Utilities are shielded by a force field of tedium. Now featuring cute animals! Everything that can be electrified will be. This point calls for its own post, but mark my words: transportation, heat, even lots of industrial work is going to shift to electricity. So the question of how best to manage electricity is key to both economic competitiveness and ecological sustainability.
Public utilities are firms that are sometimes synonymous with natural monopolies. Thus, natural monopolies tend to be regulated by governments in the public. However, being a natural monopoly is not a necessary prerequisite for government regulation. Industries that are not natural monopolies may be regulated for a number of reasons, including service reliability, universal access, and national security. Public utilities generally supply goods or services that are essential, like water, electricity, telephone, and natural gas.
For example, the transmission lines for the transportation of electricity or natural gas pipelines have natural monopoly characteristics in that once these lines are laid by one utility, duplication of such effort by other firms is wasteful. In other words, these industries are characterized by economies of scale in production. Left to themselves, private utility companies would make decisions that are most profitable for.
Such decisions generally involve too high prices and relatively little service compared to competitive conditions. These decisions may or may not be in the best interests of the society.
The government or the society would like to see these services being economically accessible to all or most of the population. Not all utility companies are in the private sector. In many countries, utilities are owned by the government. Generally, in these cases, the government creates autonomous bodies for government utilities to prevent them from day-to-day political interference.
Two main issues facing public utilities are coverage of service area and pricing. Alternately stated, the regulators try to balance the competing aims of economic efficiency and social equity. Economic efficiency generally requires that markets be left to work by themselves with little intervention. Such instances are usually not equitable or fair some consumers might be priced out of the market.
However, these instances can turn out to be inefficient think about the cost to an electric utility of having to run cables a number of miles especially to serve one or two remote fishing cabins that are used sparingly. In general, the pricing of the services of public utilities is problematic. As mentioned above most public utilities are structural monopolies, implying that there is no room for competition in the market for services they provide. However, if they are left alone to price like monopolies, the resulting price is too high and a large part of the market area may not be served.
While the utility companies have no complaints about such arrangements, given the essential nature of the services they do public power utility companies make money, the society would like to provide such services to all or most of the population. Think, for instance, about the undesirability of denying heat to someone in the winter. Hence, their pricing actions are regulated.
However, these decisions are somewhat problematic. If these utilities are mandated to set prices at the low competitive levels, they generally end up making losses. Common alternate pricing actions include 1 setting prices equal to average production costs and serving the maximum area possible; 2 rate of return regulation; and 3 price cap regulation.
Under average cost pricing, the utility is assured of breaking even, since the prices equal average costs. The equity aspects are somewhat met since most of the market is being served. However, the regulated firm lacks incentives to minimize costs. Under rate of return regulation, the regulators let the firms charge any price, provided the rate of return on invested capital does not exceed a specified rate. Whereas such regulation is flexible in allowing pricing freedom and frees the regulators from monitoring prices, a key drawback is that such regulation can lead to overcapitalization.
In other words, when the rate of return is fixed at 5 percent, then the firm can charge higher prices by investing more in capital than it would otherwise i. Price cap regulation directly sets a limit on the maximum price charged by regulated firms. This type of regulation can result in a loss of service area. A somewhat debated plus point of price cap regulation is that such regulation induces firms to seek cost-reducing technologies because they offer a way to increase utility profits.
New technologies might make it possible to break up the different stages of the electric generation process or natural gas transmission such that competition might be allowed to function in some stages. For example, in twenty-first-century United States and elsewhere the electricity generation market is relatively competitive and consumers are able to purchase electricity from competing vendors generators.
However, the transportation of electricity still remains a natural monopoly and continues to be regulated. Further, often times the deregulation of some or all functions of public utilities might occur over time due to political-economic compulsions. In practice, however, both deregulation and increased regulation are plagued by uncertainties, both for regulators and the firms they oversee. For instance, the firms do not know when and whether they will face additional regulation or deregulation.
The regulators, on the other hand, are unaware whether new technologies would mandate additional regulation. Another related issue facing nations involves how to make the regulations somewhat consistent across international borders so that utilities from one nation do not have undue advantages over utilities from other nations U.
There is some criticism of public utility regulation in that over time the regulated utilities tend to take over the regulatory agencies that oversee them called the capture theory of regulation.
Thus the societal interests that the regulatory agencies are supposed to further are somewhat compromised. The evidence regarding the capture of regulatory agencies is mixed. Further, some researchers, including John Galbraith in his work, have questioned the supposed underproduction by monopolies. To summarize, whereas over time changes in environment and technology warrant changes in regulation of public utilities, the nature of markets that utilities serve generally warrants they be overseen in some form or another by government bodies.
Berg, Sanford V. Natural Monopoly Regulation. Cambridge, U. Galbraith, John K. Power and the Useful Economist. American Economic Review 1 — Kahn, Alfred E. The Economics of Regulation: Principles and Institutions. New York : Wiley. Cite this article Pick a style below, and copy the text for your bibliography. January 19, Retrieved January 19, from Encyclopedia.
Then, copy and paste the text into your bibliography or works cited list. Because each style has its own formatting nuances that evolve over time and not all information is available for every reference entry or article, Encyclopedia.
Businesses that provide the public with necessities, such as water, electricity, natural gasand telephone and telegraph communication. In Junethe U. Supreme Court resolved a dispute that arose about energy contracts that California utilities and others signed during the state’s energy crisis in and Officials in several states, including California, Washington, and Nevada, had asked officials with the Federal Energy Regulatory Commission FERC to allow utility companies to nullify or renegotiate deals that were struck when electricity prices were dramatically inflated due to illegal trading by Enron Corp.
FERC is also involved with setting the terms and prices for services to electricity purchasers. Utilities may additionally set rates with individual electricity purchasers through bilateral agreements. Both the rate schedules and the contracts must be filed with FERC. On the other hand, the commission may allow the rate to go into effect without making a determination that the rate is fair and reasonable. This occurrence does not prevent FERC from concluding later, in response to its own motion or in response to a complaint, that the rate is not fair and reasonable.
Inthe Supreme Court decided two cases that together establish the principles that apply when the commission considers modifications through rates established bilaterally by contract rather than unilaterally through a rate schedule. United Gas Pipe Line Co. Mobile Gas Serv. MobileU. Power Comm’n v. Sierra Pac. Power Co. SierraU. These cases resolved the question of how the commission may evaluate whether a contract rate is just and reasonable.
According to the Court:. In such circumstances the sole concern of the Commission would seem to be whether the rate is so low as to adversely affect the public interest-as where it might impair the financial ability of the public utility to continue its service, cast upon other consumers an excessive burden, or be unduly discriminatory. The Court, as well as lower federal courtshas further refined the Mobile-Sierra doctrine during the more than fifty years since it was decided.
This presumption may be overcome only if FERC determines that the contract causes serious harm to the public. During the s, California underwent a massive restructuring of its electricity market. The limitation on long-term contracts later caused problems when the State of California suffered through an energy crisis beginning in the summer of A variety of factors caused energy prices to skyrocket by as much as fifteen times their normal rates, and this price increase hit the spot market hard.
The result was that utilities became buried in debt, and several parts of the state experienced rolling blackouts. In response to the energy crisis, FERC effectively eliminated the reliance on the spot market and encouraged utilities to enter into long-term contracts.
FERC likewise capped the price of wholesale electricity. Although prices fell to normal levels by Junethe long-term contracts that were executed prior to that time caused significant problems. Several utilities agreed to long-term contracts under which the utilities were required to pay several times the normal rate, even though these rates were much less than they were at peak times during the energy crisis. After the energy crisis ended and the prices fell, several utilities were unhappy with the prices established in the long-term contracts.
The utilities asked FERC to modify the contracts, arguing that the commission should not presume the rates to be just and reasonable under the Mobile-Sierra doctrine. FERC determined that the Mobile-Sierra presumption applied and that the utilities were not entitled to have the contracts modified. Moreover, the court held that FERC had not properly considered the public interest of any of these long-term contracts.
The court thus remanded the case to FERC for further consideration.
Public Power VS Investor Owned Utilities (30sec)
Posted by Coley Piblic. There have been a lot of discussions around the country of late about the regulatory changes needed to create powrr 21st century electricity. New business models are mobey to integrate higher levels of mxke energy resources, take advantage of new technologies, meet environmental goals, and address changing customer needs and expectations. In an industry that has been slow to change historically, there is a lot at stake for utilities, advanced energy companies, and consumers. Electric utilities are monopolies, so they have to be carefully regulated in order to protect the interests of their captive customers. Public Utility Commissions PUCs or their equivalent in each state serve as a replacement for the competitive market. In exchange for granting the exclusive right to sell electricity in a given service territory, PUCs determine how much the utility is allowed to invest and in what, how much it can charge, and what its profit margin can be. The revenue requirement represents the amount of money a utility must collect in order to cover its costs and make a reasonable profit. Individual utilities file rate cases, usually every few years, but sometimes less frequently. The simplified formula looks like this:. Expenses are simply passed through, including fuel in cases where regulated utilities own monej plants. They also have limited incentive to keep expenses in check if those costs are simply passed through to customers.