Public utility pricing (1938)

First raised as an economic issue by American economist Harold Hotelling (1895-1973), public utility pricing refers to the setting of prices for goods and services in order to maximize the benefit to the community.

Such pricing for rail, telephone, water and electricity (which could not be carried out in normal market conditions) takes into account future demand, the state of future technology and likely costs of factors of production in the future.

Also see: social welfare function, pareto optimality, scitovsky paradox, cost-benefit analysis, compensation principle

Source:
H Hotelling, ‘The General Welfare in Relation to Problems of Taxation and of Railways and Utility Rates’, Econometrica, 6, 3 (July, 1938), 242-69

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.[1][2] The first public utility in the United States was a grist mill erected on Mother Brook in Dedham, Massachusetts in 1640.[5]

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,[6][7][8] 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) [3] 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.[9]

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.[10] 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.

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