Public utility is a company that provides an essential service to the public. Public utilities include firms that offer electric power, natural gas, telephone, telegraph, water, and sewerage services. Airlines, bus lines, railroads, and other transportation systems are also public utilities.
Most public utilities in the United States are privately owned. But in Canada and some European countries, a majority are owned by the government. Government ownership in the United States exists chiefly at the local level. For example, the governments of cities, towns, and counties own most airports and transit, sewage disposal, and water supply systems.
Most public utilities enjoy a certain amount of protection from competition. In the United States, this protection is granted by local governments and by local, state, and federal regulatory agencies. In a given geographical area, a protected utility often can provide a service more efficiently and at a lower price than could several companies competing with each other. Vigorous competition may result in higher prices because each competing company may have to buy the same type of expensive equipment while serving fewer customers than would be served by a single, protected company.
Government regulation.
Public utilities that enjoy protection from competition must be regulated to ensure that they charge reasonable rates and provide adequate service to the public. Utilities are required by law to serve any customer who is willing to pay for service. In addition, the service provided must be safe. In the United States, utilities are regulated by commissions, primarily at the state and federal levels.
By law, utilities also have certain rights. For example, each is entitled to rates that cover its operating costs and yield a reasonable profit. If the profit is not high enough, the company will be unable to attract investors and maintain and expand its services to customers.
In the United States, federal commissions regulate utilities that provide services across state boundaries. For example, the Federal Energy Regulatory Commission regulates natural gas and oil pipelines and hydroelectric power plants. The Federal Communications Commission controls broadcasting as well as telephone and telegraph services. The Securities and Exchange Commission regulates the finances of companies that control electric power and natural gas utilities.
Other federal regulatory commissions in the United States include the Federal Aviation Administration, which establishes the rules that all planes must follow when flying in the United States; and the Nuclear Regulatory Commission, which regulates the production of nuclear energy. All 50 states, plus the District of Columbia, also have their own regulatory commissions.
History.
Public utilities in the modern sense can be traced to early English common law. Common law designated certain activities as “peculiarly affected with the public interest.” Included were activities of docks, inns, warehouses, ferries, and canal companies. At first, these activities were regulated by court decision only. Later, they were also regulated by legislation.
The Interstate Commerce Commission became the first U.S. government commission with regulatory powers in 1887. It regulated the rates and trade practices of companies that transported goods and people by train and, eventually, those that handled transport by motor vehicle and boat. By 1920, more than two-thirds of the U.S. states had set up regulatory commissions. Many federal utility commissions were set up after 1930.
Developments in the late 1960’s and the 1970’s forced many public utilities in the United States to struggle for financial survival. During those years, interest rates, fuel prices, and construction and other costs rose sharply. As a result, public utilities found it necessary to increase their rates by large percentages. In addition, the increased construction costs led to a slowdown in the building of new facilities and thus prevented some utilities from providing adequate levels of service. Rates for electricity also rose because new federal regulations required electric power plants to install millions of dollars worth of pollution control equipment. Pressures by the public, by commercial and industrial groups, and by the federal government to limit utility rate increases in time helped lead to financial problems for many utilities. The financial position of utilities also worsened because of a new emphasis on conservation.
By the mid-1970’s, many people in the United States had come to believe that public utilities could operate more efficiently if they were subject to less regulation. As a result, Congress began to significantly reduce regulation. Legislation passed in 1976 and 1980 granted railroad companies greater freedom in pricing and in abandoning unprofitable services. The Airline Deregulation Act of 1978 phased out federal control of fares and routes in the passenger airline industry. The Motor Carrier Act of 1980 increased competition in the trucking industry by allowing trucking firms greater freedom in setting rates. Deregulation in the natural gas industry led to the elimination by 1990 of price controls on all natural gas sold in the United States. Beginning in the 1980’s, lower inflation and moderate fuel prices led to an improved financial position for most public utilities.
In the telephone industry, competition increased in 1984, when a federal lawsuit forced the American Telephone and Telegraph Company (now part of AT&T Inc.) to give up its local telephone companies. At the time, AT&T dominated both local and long-distance telephone service in the United States. By the late 1990’s, some states had begun taking steps to allow for increased competition among providers of electric power.
