Government regulation dominates the utilities sector in the United States. 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. In many regions, government agencies regulate the prices utility companies charge their customers, their budgetary process, their ability to construct new facilities, the services they are allowed to offer, and their energy efficiency programs. In this article, we'll review two specific utilities subsectors that are the most commonly and heavily regulated: water and electricity.

Key Takeaways

  • In the United States, utility companies are regulated at the state and municipal levels by public service commissions.
  • The Federal Energy Regulatory Commission (FERC) is the U.S. government agency regulating the interstate transmission of electricity, natural gas, and oil.
  • A power purchase agreement or PPA is a contract a private utility company enters into with a government agency to provide power over an extended time.
  • Critics claim government regulation of the utility sector drives up costs, restricts production, and enriches a select few.

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 is common in California.

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. The regulation of the industry 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.

Utility companies are considered to be stable investments that provide regular dividends to shareholders, making them a popular option for buy-and-hold investors.

Federal Energy Regulatory Commission (FERC)

The Department of Energy Organization Act of 1977 established the Federal Energy Regulatory Commission (FERC) as an independent agency regulating the interstate transmission of electricity, oil, and natural gas. This Act, along with the Energy Policy Act of 2005, has given FERC a whole slew of regulatory functions in the utility sector, including the power to:

  • Oversee hydroelectric dam licensing and safety
  • Establish oil pipeline transportation rates and services
  • Review certain electric company mergers and acquisitions
  • Approve plans for new interstate natural gas pipelines
  • License and inspect private, municipal, and state hydroelectric projects

The overall stated mission of FERC is to use its regulatory control to give consumers access to reliable, efficient, and sustainable energy.

Power Purchase Agreement (PPA)

A power purchase agreement (PPA) is a contract between a private utility company and a government agency. Through a PPA, the private utility produces power for the government agency for an extended time, often between 15 and 25 years. In essence, the government becomes the sole client of the private utility company.

FERC regulates power purchase agreements. In this capacity, FERC wields enormous influence in the utility sector. FERC can award contracts, establish pricing, and instigate or delay lawsuits against power companies.

Environmental Regulations

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. FERC is responsible for overseeing environmental matters related to a utility company's projects in natural gas and hydroelectricity. FERC will issue environmental impact statements reporting potential effects on the environment by proposed natural gas or electricity-generating projects. PPA contracts might include stipulations regarding the environment that the PPA partner must abide by in order to maintain their contracts.