Wiktor Wise
Electric and water companies can be privately or publicly owned. In the US, there are over 2000 cities and towns that get their electricity from a community-owned and -operated utility. In the case of water, more than 10% of the US population gets drinking water from privately-owned water utilities. In the UK, most public utilities were privatized in the 1980s. In Central and Eastern Europe, private water companies expanded during the late 1990s, especially in Bulgaria, the Czech Republic, Hungary, and Romania.
Characteristics of Electric and Water Companies
| Characteristics | Values |
|---|---|
| Ownership | Private or government-owned |
| Types | Investor-owned utilities (IOUs), publicly-owned utilities, and member-owned or cooperative utilities |
| Examples of IOUs | Pacific Gas and Electric, Southern California Edison Company |
| Examples of POUs | Puerto Rico Electric Power Authority (PREPA), Los Angeles Department of Water and Power |
| Cooperative Utilities | Not-for-profit, member-owned utilities located in 47 states |
| Public Control | Local community-based groups to statewide government monopolies |
| Services Provided | Water, gas, electricity, telephone, waste disposal, and other communication systems |
| Infrastructure | Transmission lines, natural gas pipelines, power plants |
| Monopoly | Utilities are often granted monopolies by states to operate in specific areas |
| Privatization | Traditional public utilities in the UK and Ireland were mostly privatized in the 1980s |
| Customer Satisfaction | Rising bills have been a driver of dissatisfaction with IOUs |
| Efficiency | No major differences found between private and public utility companies in terms of efficiency and quality of services |
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What You'll Learn
Investor-owned utilities (IOUs)
In the United States, there are three main utility models: investor-owned utilities (IOUs), publicly-owned utilities, and member-owned or cooperative utilities. IOUs are large electric distributors that issue stock owned by shareholders. They are regulated to prevent them from exploiting their monopoly to overcharge customers.
According to the US Energy Information Administration's (EIA) electric power sector survey data, there were almost 3,000 electric distribution companies or utilities operating in the US in 2017. Of these, IOUs served 72% of electricity customers in 2017, with an average of 654,600 electric customers each. The two largest IOUs are in California: Pacific Gas and Electric, with 5.48 million customers, and Southern California Edison Company, with 5.07 million customers.
IOUs are most common in heavily populated areas on the East and West coasts. In the late 1800s and early 1900s, most utilities were run by municipalities, but technological advancements in generation and transmission later made smaller plants uneconomical, leading many cities to sell their equipment and transfer their customers to IOUs.
While IOUs have been found to charge higher rates than publicly-owned utilities, there is no significant difference in the efficiency and quality of services that commercial end-users receive from private or public utility companies.
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Publicly-owned utilities
In the United States, there were nearly 3,000 electric distribution companies in operation in 2017, according to the U.S. Energy Information Administration (EIA). Of these, 72% were investor-owned, while the remaining were a combination of publicly-owned and cooperative utilities. POUs in the U.S. include the Puerto Rico Electric Power Authority (PREPA) and the Los Angeles Department of Water and Power, serving approximately 1.47 million and 1.43 million customers, respectively.
While investor-owned utilities are driven by profit, POUs are focused on providing essential services to the public. They are regulated by public utilities commissions, which are governmental agencies that oversee the commercial activities of associated electric, water, and other utility companies. These commissions are composed of appointed commissioners and dedicated staff who enforce rules, approve rate changes, and monitor relevant activities.
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Cooperative utilities
Utility cooperatives, or co-ops, are not-for-profit, member-owned utilities. Each customer is a member and owner of the business, and members have voting rights to elect the cooperative's board members each year. Co-ops are located in 47 states but are most prevalent in the Midwest and Southeast.
Co-ops were created by the New Deal to bring electric power and telephone service to rural areas where investor-owned utilities would not provide service due to insufficient revenue to justify the capital expenditures required. Many electric cooperatives have formed their own wholesale power cooperatives, often called G&Ts for "generation and transmission", to supply their member-owners with electricity.
Co-op members often have a say in operational matters like rate increases, infrastructure investment, or how to spend a budget surplus. While such a surplus would be categorized as profits that go to shareholders in the case of a privately-owned utility, a cooperative might opt to distribute a surplus as credits spread across all members or reinvest it for infrastructure.
The key difference between a publicly owned utility and a cooperative is that publicly owned utilities are publicly controlled by residents of a state or local area and run more like a municipal power system than a cooperative system. Cooperatives are owned and operated by the customers they serve within their designated service area.
In terms of efficiency and quality of services, there are no major differences between private and public utility companies. However, firms in lower-income economies report a much higher incidence of bribe-giving to get an electricity connection from a publicly owned utility than from a privately owned one.
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Private vs public electricity distribution
The debate between private and public electricity distribution has been ongoing, with no clear consensus on which is optimal. Distribution utilities are typically either private or government-owned, and there are arguments for and against both.
Private Electricity Distribution
Privately-owned utilities are more common in higher-income economies and wealthier societies, where efficient stock markets allow firms to issue public debt. They are also more prevalent in middle-income economies. Private companies tend to perform better in terms of profitability, and it is often easier to obtain electricity connections from them, especially in lower-middle-income economies. In Guatemala City, for example, the private utility Empresa Electrica de Guatemala connects new clients to the grid in 44 days.
Public Electricity Distribution
Publicly-owned utilities include federal, state, and municipal-run operations. They are more common in lower-income economies and are subsidized by the government, resulting in lower tariffs for end-users. Public utilities have implemented more significant reforms, such as the Dubai Electricity and Water Authority, which reduced the time for new connections from 55 days in 2010 to 10 days in 2018. Publicly-owned utilities are also less likely to involve bribery for connections, according to World Bank Enterprise Surveys.
While private companies may be more profitable, there is no significant difference in the efficiency and quality of services provided by private or public utility companies. The choice between private and public electricity distribution depends on various factors, including the economic status of the region, the desired level of government control, and the importance of profitability versus social welfare.
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Public control and regulation
Public utilities are subject to public control and regulation, which can range from local community-based groups to statewide government monopolies. In the United States, there are three main utility models: investor-owned utilities (IOUs), publicly-owned utilities, and member-owned or cooperative utilities. IOUs are regulated to prevent them from exploiting their monopoly power and overcharging ratepayers. Publicly-owned utilities, on the other hand, have their rates set by publicly accountable officials who run the utility. These can be elected or appointed officials.
Publicly-owned utilities, or POUs, include federal, state, and municipal-run utilities. In addition, political subdivisions may run POUs, also known as public utility districts, which are utilities that residents vote into existence and operate independently of city or country governments. The United States has 1,958 POUs, with an average of 12,100 electricity customers each. The largest POUs are the state-run Puerto Rico Electric Power Authority (PREPA) and the Los Angeles Department of Water and Power, a municipal utility.
Co-ops, or cooperatives, are not-for-profit member-owned utilities. They are located in 47 states but are most prevalent in the Midwest and Southeast. While there are fewer IOUs than the other two types of utilities, they tend to be very large and serve almost three-quarters of utility customers nationwide. IOUs are most common in heavily populated areas on the East and West coasts.
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. Public utilities were historically regarded as natural monopolies because the infrastructure required to produce and deliver products 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 relatively small, and duplicating these facilities would be wasteful. As a result, utilities were either government monopolies or, if investor-owned, regulated by a public utilities commission.
In the United Kingdom and Ireland, the state, private firms, and charities have historically run traditional public utilities. Public utilities in the UK are regulated by Ofgem, Ofwat, Ofcom, the Water Industry Commission for Scotland, and the Utility Regulator. They were mostly privatized during the 1980s.
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Frequently asked questions
Electric companies can be privately owned, publicly owned, or owned by a cooperative. In the US, there are more than 2,000 cities and towns that get their electricity from a community-owned and -operated utility. In Nebraska, every single resident and business receives electricity from a community-owned institution rather than a for-profit corporation.
Water companies can also be privately owned, publicly owned, or owned by a cooperative. In the US, more than 10% of the population gets drinking water from privately-owned water utilities. In other countries, the percentage of the population served by private water companies varies. For example, in France, there is a coexistence of public and private management of water companies, with their respective shares fluctuating over time.
Proponents of privately owned utility companies argue that they can operate more efficiently and cost-effectively than publicly owned companies. Libertarian organizations, such as the Reason Foundation, assert that privatizing utilities enhances environmental compliance and reduces bureaucratic inefficiencies. Private utilities also contribute to local economies through tax revenues and have fewer violations, fines, and work orders related to the Safe Drinking Water Act.
Critics of privately owned utility companies argue that they have little incentive to invest in long-term improvements or maintenance of public systems beyond the duration of their contracts. In the US, privatization of water companies has tended to favor wealthier communities, often neglecting lower-income areas. Private companies have also been known to prioritize profit maximization over the quality and quantity of service provided.
