public utility, industry required by law to render adequate service in its field at reasonable prices to all who apply for it. Public utilities frequently operate as monopolies in their market. In the United States, public utilities are most commonly involved in the business of supplying consumers with water, electricity, telephone, natural gas, and other necessary services. Such an industry is said to be
"affected with a public interest"
and therefore subject to a degree of government regulation from which other businesses are exempt.
Opinions differ as to the characteristics that an industry must possess to merit classification as a public utility, since all industries in a sense serve the public. By its nature a public utility is often a monopoly and as such is not prevented by competing companies from charging exorbitant prices. It usually operates under a license or franchise by which it enjoys special privileges, such as the right of eminent domain. Finally, it may supply an essential service, such as water or light, the unavailability of which would injuriously affect public health and welfare. From an early period there was public regulation of canals, turnpikes, toll roads and ferries, inns, gristmills, and pawnshops. Docks, sleeping cars, commodity exchanges, warehouses, insurance companies, banks, housing, milk, coal mines, and (in the 20th cent.) broadcasting, are other types of goods and services held to be affected with public interest. Important utilities that satisfy the vital needs of large populations include water, gas, and electric companies; transportation facilities, such as subways, bus lines, and railroads; and communication facilities, such as telephones and telegraphs. In most European nations such industries have often been owned by the state, although many have been privatized in recent years. In the United States, however, many public utilities are privately owned.
Regulation of Utilities
Public utility rates and standards of service are established by direct legislation and are administered by state regulatory commissions and by such federal agencies as the Federal Energy Regulatory Commission (FERC), the Securities and Exchange Commission (SEC), and the Federal Communications Commission (FCC). These federal agencies supervise utilities conducting interstate business. Rates are subject to review by the courts, which have held that they must provide a "fair" return on a "fair" valuation of investment. How valuation is to be determined, whether on the basis of prudent investment, present earning power, or present cost of production, has been the subject of much controversy. That a utility may not earn excessive profits is an established principle of regulation. The means of regulation include supervision of accounting and control of security issues.
Municipalities dissatisfied with the results of public regulation of privately owned local utilities have often acquired ownership of such enterprises, especially in the case of urban public transportation systems (see public ownership). To keep rates down and make utilities available to more people, the United States has formed public corporations or agencies, such as the Tennessee Valley Authority, which also has served as a yardstick for measuring the efficiency of privately owned utilities, and the National Railroad Passenger Corporation (Amtrak; see railroad), which operates virtually all intercity passenger rail lines in the United States.
In the 1970s and 80s, U.S. government agencies broke up some utilities and deregulated others. In 1974 an antitrust suit was filed against American Telephone and Telegraph (AT&T); in 1982 the company settled the suit by agreeing to divest itself (1984) of 22 local telephone operating companies. In return, AT&T was given the right to enter new businesses. Since then federal regulators have made it easier for companies to enter the telecommunications industry and for phone companies to set rates for long-distance services. Legislation passed in 1978 partially deregulated natural gas prices in 1985 and legislation passed in the late 1970s and early 80s deregulated trucking, railroad, and airline rates, which had been set by the federal government.
In the 1990s state regulators began to end utilities' monopolies, by permitting business and residential consumers to select utilities (primarily electricity and gas suppliers) based on rates and service; lower rates were expected to result. Such deregulatory efforts have not been entirely successful. In 2000–2001, parts of California experienced an energy crisis that was due, at least in part, to the way deregulation had been set up several years earlier, The deregulated electrical companies had been required to divest themselves of their power plants and purchase power on the spot market (rather than through long-term contracts) and were not allowed to pass the price increases they eventually experienced along to consumers. Evidence also later emerged that other deregulated energy companies had contributed to the crisis through market manipulation and price gouging.
Tighter regulatory controls designed to limit acid rain and other environmental problems have, however, been imposed on electricity companies that run coal-fired generators or nuclear power plants. The cable television industry, which had been regulated by local governments, was deregulated in 1984, and cable operators were allowed to set their own rates. Consumer complaints, however, led to a 1992 law that allowed the FCC to regulate cable rates.
See E. Hungerford, The Story of Public Utilities (1928); M. Crew, The Economics of Public Utility Regulation (1986); L. Hyman, America's Electric Utilities: Past, Present and Future (1988).