Utility Business Models - Part #1

I see so much misinformation on LinkedIn about this that it is not funny. Probably 10% of the posts about the industry make the mistake of either lumping all utilities into one business model or making the wrong assumptions about the business model. There are just under 5,000 electric utilities in the US, about double that in water and wastewater, and over 200 natural gas utilities.

They have several different business models including but not limited to municipal utilities (the largest group because of water), cooperatives, federal, investor owned, and private utilities that are owned by a single company. Their models are very different.

Let’s start with municipals (also known as Public Power). First, they are primarily regulated by the unit of government that they serve. Some of them serve several units of government, so they may have a board that is made up of representatives from each unit of government that is in their service territory. The board or the unit of government makes the final decisions for investment, tariffs, rates, charges, and most policy in most locations. In some states the state regulator may have some or all the regulatory power.

However, most are regulated by their unit of government. There are State and Federal laws that set rules and guidelines that the utility must follow. The municipals are essentially non-profits, but the local government can set an amount of revenue that has to be given to the general fund for that unit of government. So, while the utility may be non-profit, the government may make money off the utility to use for non-utility purposes.  More than 50 million people are served electricity by municipals.

Almost all water and sewage is run by municipals, some under the same structure (e.g., Los Angeles Department of Water and Power [LADWP]) some is in different structures - one for water and one for electricity.

Capital normally is raised by issuing bonds, low cost, reliability and universal service are the key principles when operating a municipal utility. A local government changes can have impacts on the policies and rates for that municipal utility. The amount of bonds and the interest rate on those bonds has more to do with rates than historical spending or invested capital. There is little difference to the municipal utility if they spend capital or O&M (operations and maintenance funds).

{next post – cooperatives}