Government regulation dominates the utilities sector. The majority of all American consumers receive their utilities services from private companies that are regulated at the state level by public service commissions. Larger federal or state power utilities are run directly by the government, as are many rural and municipal utilities. There are literally almost no areas in the entire utilities market that are not burdened by government regulation.

Two specific subsectors are the most commonly and heavily regulated: water and electricity.

Water Regulations

Of all the regulated utilities, the water subsector seems to generate the most controversy. This is particularly true whenever drought conditions persist, as with California in 2015.

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.

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 Regulations

Electric companies weren't always overseen by the government. The early pioneers of economic electricity included famous private entrepreneurs such as Thomas Edison, J.P. Morgan and Nikola Tesla. The later decades of the 19th century were marked by intense rivalries and competitions among electricity producers.

By the 1920s, 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.

Environmental Regulations

Unlike water, electricity is not often directly regulated by environmental authorities. All utilities are heavily influenced by regulations on coal, oil, nuclear power and natural gas. More than 95% of the electricity in the U.S. comes from these sources.

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