Most utility companies enjoy monopolies over an entire region or an area. These companies are primarily responsible for providing essential services such as electricity, natural gas, water, sewerage, and other public services. In most cases, these companies offer these services at an affordable cost.
Utility companies mainly function as monopolies because their scale and start-up costs are colossal. Since most utility facilities are essential for most people to operate in their daily lives, the prospect of running a particular service across a whole territory efficiently can be impractical for privatized corporations.
This article will provide an extensive idea of why utility companies mainly function as monopolies. In addition, you will get an overview of all the upsides and downsides that stem from how these utility companies operate in a state.
What Is A Natural Monopoly?
In a natural monopolistic system, a company is the only provider of a particular service in a specific region or industry. The type of monopoly that utility companies fall under is often regarded as a natural monopoly.
The natural monopoly only exists because the scale and cost of providing such services are highly convoluted. Therefore, these impediments can prevent many potential competitors’ entrance. The cost of investing in a business responsible for providing utility services in a state or nationwide is too steep an ask for any private investor to efficiently operate.
In most cases, natural monopolies are only permitted when a company can afford to supply a product at a lower cost than any potential competitor can offer. More importantly, natural monopolies are heavily regulated in the interest of the consumer.
Reasons Why Utility Companies Operate As Monopoly
There are many benefits to why utility companies operate as a monopoly. It is almost impossible to sustain utility companies in a privatized way where corporations are responsible for handling multiple distribution networks.
For instance, maintaining the sewer lines, electricity poles, and water pipes for different competitors is not feasible where almost every citizen is the recipient of such essential services.
Furthermore, the start-up cost of instituting all the utility plants and maintaining all the distribution of products would be unrealistically high. As a result, this insurmountable capital cost disincentivizes many potential investors from making investments.
Some other companies may also be regarded as utility companies. The railroad industry works as a natural monopoly in most countries. Because of this, railway companies often get government-sponsored subsidies that can help make the program more efficient and productive. Therefore, it works in favor of the public to keep the company under monopoly.
Also, it is essential to note that it is untenable to allow multiple corporations to handle a company such as a railway, given the number of resources the corporations will need to operate. From acquiring land for rail tracks to building train stations and building infrastructure, it would be virtually impractical to allow the privatization of such large-scale operations.
How Do The Utility Companies Operate In General?
Despite being monopolistic in nature, there are various different ways utility companies can operate. Based on how these companies are run, the incentives for prioritization might also vary from corporation to corporation. For example, shareholders’ interests come first in cases where the company is owned by an investor.
As it happens, corporations, where shareholders have their own stake to worry about, are bound to function in a way that prioritizes the owners’ interest. However, places regulated by public commissions can prioritize the public’s interest, considering the commission is made of elected officials.
City, state, and federal governments always play a significant role in shaping the regulation policies of these utility companies. Since only governments can decide whether to put more emphasis on the existing fossil fuel industry or put an added focus on renewable energies, decisions like these have a tremendous impact on the climate, job market, and the economy of that region.
Guardrails Against Exploitations Of Natural Monopolies
There are times when even utility companies exploit the existing rules and loopholes to garner profits for their directors or executives. For instance, a utility company can unilaterally choose to increase gas or electricity rates without indulging any opinions from experts or even the public. This can often put an undue burden on the lives of those affected.
Because these utility companies can enforce many of their policies on their own, there are often regulations and guardrails installed to protect the general mass from alleged abuse. Such laws involve allowing open access to their services without prohibiting supply or showing a discriminatory attitude toward their customers.
Utility companies can only function as independent entities as long as they do not violate any common laws imposed by the federal or state governments. In return, these companies also enjoy a fair share of autonomy and immunity from potential misuse by the customers. In this way, a balance of interest is retained to keep the people’s interest at the front.
Since utility companies provide their services throughout a widespread area across the country, many regulatory bodies work as stewards on behalf of the public in many regions. Different departments of the state and federal government are responsible for regulating these state-wide or nation-wide public utilities or commissions.
In the United States, the Department of Transportation is responsible for ensuring the travelers’ safety on railroads. On the other hand, the Department of Energy overlooks the oil and natural gas companies.
People living in any state usually do not have other options but to opt for utility services from monopolistic companies. Most of the time, utility companies provide people services with high reliability. But there are times when these companies do not serve the best interest of the consumers or the environment.
Some laws govern and regulate the utility companies in a way that can serve the interest of ordinary citizens by and large. Since these companies often operate in the service of the people, they offer their services at the most affordable price. But necessarily, authorities put guardrails in place to prevent possible exploitations.