Public utility

From Wikipedia
https://en.wikipedia.org/wiki/Public_utility

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/services that are considered essential; examples are: water, gas, electricity, telephone, and other communication systems. The transmission lines for example for the transportation of electricity or natural gas pipelines have natural monopoly characteristics since once lines are laid by one utility, duplication of such effort by other firms would result wasteful. 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 services together. Other companies specialize in one specific service, typical example is for water. More and more utilities start relying on clean and renewable energy sources in order to produce sustainable electricity. Wind turbines and solar panels are those used the most. The industry now days breaks down the supply of public services in different segments that can be included in the same utility or distributed between different companies. -Generators are operators in charge of creating or collecting the specific source needed for a certain service. -Network Operators are grid operators, regional network operators, and distribution network operators in charge of selling the access to their networks to the pool of retail service providers. -Traders and Marketers buy and sell the actual public service and create further complex structured products, combined services and derivatives products. these companies take care of providing to utilities and power-hungry businesses a steady and guaranteed supply of a service like electricity at a stable, predictable price. -Service Providers and Retailers are at the last segment of the supply chain, relating directly with the final consumers that can choose their own retail service providers. [2]

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. [3]

Public utilities are generally so called because there is structurally no room for market competition. One firm can produce at lower a cost and as a consequence hypothetical competitors are priced out of the market. With this market conditions, natural monopolies grow up and 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. [2]

The management of public services has always had great importance for satisfying the needs of local and national communities as well as for promoting the development of the competitive capacity of nations. Over the last few years, public services have been at the center of intense processes of change giving rise to more or less successful processes of liberalization and privatization. [3]

Traditionally, public services have been provided by public legal entities. The main reason was to eliminate the risks that an activity, if left to private initiative, was not carried out or was neglected because it was considered not sufficiently profitable. Left to themselves, private utility companies would follow strategies that are most profitable for their interests. The correlated risk is that too high prices are set in contrast with the principle of universality of the service: companies decisions generally involve too high prices and relatively little service compared to competitive conditions. 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. [3]


Public pressure got stronger under covid-19 pandemic and other more frequent natural disasters and has spurred public interest into a transition toward green energy.

An early 2021 power and utilities industry outlook report by Deloitte identified five trends for the utilities industry.

  • Enhanced competition, 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 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 [4]

finance

public utilities face principally two main issues:  coverage of service area and pricing. regulators need to balance the economic needs of the companies and the social equity needed to guarantee to everyone the access to primary services. Economic efficiency requires autonomy: generally markets need to be left to work by themselves with little intervention. Such instances are often not equitable for some consumers that might end up being priced out of the market. Equity simply requires that all citizens get the service at a fair price. [5]

Alternative pricing methods include (1) setting prices equal to average production costs; (2) rate of return regulation; (3) price cap regulation. Under average cost pricing, 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 costs. Under rate of return method, 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 regulation is flexible and allows for pricing freedom force regulators to monitor prices. The drawback is that this method could lead to overcapitalization. For example if the rate of return is set at 5 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 directly sets a limit on the maximum price. This method can have as consequence a loss of service area; a good aspect for cap regulation is that such regulation leads firms to seek cost-reducing technologies as a strategy to increase utility profits. [6]

Utilities are considered stable investments because they guarantee regular dividends to shareholders and have low volatility. 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. [2]

Utilities require expensive and important infrastructure always needing for updating and maintenance. In order to cope these needs, utilities often count on floating debt products that as a typical consequence increase their debt loads. The high debt ratio furthermore make companies particularly sensitive to interest rate risk. Should rates rise, the company must offer higher yields to attract bond investors, driving up their costs. Being capital intensive, and so needing continuous inflows of funds brings to a sensitive debt-to-equity ratio that can have meaningful impact also on the companies credit rating, that if deteriorates decreases again the availability of funds. [7]

United States

In the United States, public 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. [8] [9] The first public utility in the United States was a grist mill erected on Mother Brook in Dedham, Massachusetts in 1640. [10]

Developments in technology have eroded some of the natural monopoly aspects of traditional public utilities. For instance, electricity generation, electricity retailing, 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]

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, [11] [12] [13] and operate for profit, often referred to as a rate of return.

Public utilities provide services at the consumer level, be it residential, commercial, or industrial consumer. In turn, utilities and very large consumers buy and sell 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]

Public utilities commissions

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) [14] 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. 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. [15]

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.

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.

References

  1. ^ "Public Utility | Encyclopedia.com". www.encyclopedia.com. Retrieved 2021-04-27.
  2. ^ a b c Murphy, Chris B. "How the Utilities Sector is Used by Investors for Dividends and Safety". Investopedia. Retrieved 2021-04-26.
  3. ^ a b c Gilardoni, A (2015). Public Utilities e Infrastrutture. Profili economici e gestionali. Agici.
  4. ^ "2021 Power and Utilities Industry Outlook". Deloitte United States. Retrieved 2021-04-29.
  5. ^ "Public-Private Partnerships for Infrastructure | ScienceDirect". www.sciencedirect.com. Retrieved 2021-04-27.
  6. ^ Murphy, Chris B. "How the Utilities Sector is Used by Investors for Dividends and Safety". Investopedia. Retrieved 2021-04-27.
  7. ^ Berg, Sanford, Tschirhart (1998). natural monopoly regulation. Cambridge University.CS1 maint: multiple names: authors list ( link)
  8. ^ "Public utility - Definition". Merriam-Webster Dictionary. Archived from the original on 2011-11-05. Retrieved 2011-10-11.
  9. ^ "public utility definition". Investorwords.com. Archived from the original on 2011-09-28. Retrieved 2011-10-11.
  10. ^ "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
  11. ^ "investor-owned utility (IOU), private utility, private power company". www.energyvortex.com. Archived from the original on 2 February 2017. Retrieved 8 May 2018.
  12. ^ "Electric Utilities". www.utilityconnection.com. Archived from the original on 27 October 2017. Retrieved 8 May 2018.
  13. ^ 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.
  14. ^ "California Public Utilities Commission". Cpuc.ca.gov. 2007-03-23. Archived from the original on 2011-10-10. Retrieved 2011-10-11.
  15. ^ "Public Utilities Commission of Texas". Public Utilities Commission of Texas. Archived from the original on 14 August 2012. Retrieved 17 February 2017.
  16. ^ "Utilities Websites". Uk250.co.uk. Archived from the original on 2011-11-04. Retrieved 2011-10-11.

External links