Public utility

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.

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

• 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, selling directly to the final consumer. In some markets, final consumers can choose their own retail 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 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.[10]

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:

• 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 [11]

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.[12]

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 do not have incentives to minimize costs.
• 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 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]

• Building block model, form of public utility regulation common in Australia

Look up utility in Wiktionary, the free dictionary.

• World Bank report on Water, Electricity and Utility subsidies
• Latest News in Utilities and Information Technology Archived 2016-04-10 at the Wayback Machine
• Latest in UK business utility news