This is particularly true whenever drought conditions persist, as with California in In the most heavily regulated areas, water authorities restrict production, prices and distribution. Economists have long known that artificially manipulating any one of these pillars results in inefficiency, but these rules are forgotten or ignored when it comes to water.
Promoting competition and protecting customers? Regulation of the GB retail energy market 2008–2016
As with all historically monopolized utilities, the water industry benefits substantially from economies of scale and massive sunk infrastructure costs. Water is not particularly easy to move around the city in a pressurized, safe and ecologically healthy way. Regulation encourages water waste, drives up costs and enriches specific entrenched political interests.
Electric companies weren't always overseen by the government. The early pioneers of economic electricity included famous private entrepreneurs such as Thomas Edison, J. Morgan and Nikola Tesla. The later decades of the 19th century were marked by intense rivalries and competitions among electricity producers.
By the s, governments had distributed so many monopolistic grants to single-utility providers that the direct competition had all but vanished. This created an atmosphere with different regulations from jurisdiction to jurisdiction, especially for federally operated electric utilities, which are often exempted from state and local regulations. Unlike water, electricity is not often directly regulated by environmental authorities.
5 Regulatory and Policy Questions Keeping Utility Leaders Awake at Night
All utilities are heavily influenced by regulations on coal, oil, nuclear power and natural gas. Top Stocks. But non-differentiated goods and services like residential water and electricity compete principally on price. Differentiated goods, however, can compete on other metrics, such as the characteristics of the product.
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Transportation infrastructure, common carriers, and wireline networks were all once argued to be public utilities, but the existence of competing, differentiated versions of these services demonstrated that public utility treatment was inappropriate. Over time, this has led to deregulation and private sector competition. Utilities require the construction and maintenance of fixed, capital-intensive infrastructure networks to serve customers.
This usually entails using rights-of-way, easements, or similar encumbrances on public and private land — a fact which ensures involvement by local government. The capital-intensive nature of public utilities also means that competing infrastructure networks serving the same customers would be highly inefficient.
Antitrust in 60 Seconds: Public Utility Regulation - Disruptive Competition Project
For this reason, public utilities are usually sole-source. They have a captive audience.
As a result, public utilities usually though not always tend toward natural monopoly. This is because it makes little economic sense for two competing infrastructure networks to tear up the same road in building out to the same customers. The same number of customers would face twice the network maintenance costs, while receiving exactly the same commodity from each.
As discussed below, however, the quid pro quo of a company being the monopoly provider of a particular commodity is substantial. Utilities usually sell to the residential and commercial customers, i. This is where federal and state law diverge: various entities sell electricity, gas, and oil into energy markets, which move commodities over gathering systems and networks of local distribution carriers. For example, power producers like nuclear power plants and coal- and gas-fired electricity generation facilities mostly sell into secondary markets, where electricity is purchased and resold to end consumers.
Mischief in these secondary markets played a prominent role in the California energy crisis in the early part of the century. But their power production and transmission functions occur in a competitive market, they do not provide service to residential and retail customers, and have not made a regulatory commitment to provide an indefinite amount of service. This means utility customers generally expect that whatever their needs are, the utility will satisfy it, within reason. While there are some exceptions to this rule, open-ended albeit metered service is a defining aspect of public utilities.
Because it would be inefficient to charge customers to build overlapping, competing networks, customers only have one choice. Once there are other alternatives, however, and no obligation to serve all comers, the rationale for a sole-source provider and regulator-guaranteed rate of return disappears. As noted above, this regulated status is substantially different from free market competition, and it is a status that brings considerable obligations and benefits.
One obligation is usually to guarantee service in a given area, on a full requirements basis. Utilities typically serve all customers in a municipality or region, even those who are too remote to serve efficiently. These rates are generally determined by the cost of providing service, maintaining the network, plus a reasonable rate of return on the invested capital.
On the regulatory side, we have been involved in many major privatisations, acting either for Governments or for the privatised entities. In addition to initially assisting in designing and putting into place the regulatory frameworks, we have subsequently been involved in the development of those regulatory structures and interplay between the sectoral regulators and the regulated utilities subsequent to privatisation.
We have developed significant expertise in the areas of economic regulation, quality regulation, licence enforcement and value creation. We are also at the forefront of the convergence of regulatory practice and the application of competition law.