Public utilities are a special type of business undertakings which are engaged in the supply of essential public services in limited market area on a monopolistic basis.
Public utility concerns supply electricity, gas, water, communication and transport services or products which are absolutely indispensable for the community.
Experience shows that competition is undesirable in these lines of activities, because it leads to much social waste, hopeless duplication of plants and unsatisfactory catering to consumers’ needs.
Therefore, the State allows them to operate as monopolistic or semi-monopolistic enterprises. The public utilities are generally granted legal monopoly power in public interest.
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As the well-being of the community is closely linked up with their efficient working, public utilities are not allowed to operate freely like other private enterprises.
The State regulates the working of such concerns to ensure that the essential products or services are available to consumers at reasonable prieces and in proper quantity and quality.
A public utility may be defined as an undertaking that supplies essential services, enjoys special privileges and operates under State regulation and control.
Public utilities should be differentiated from public enterprises. Public utilities are wholly owned by Government and enjoy monopoly power. They render essential public services.
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On the other hand, public enterprises do not necessarily enjoy monopoly power and do not provide essential services. These may not be wholly owned by the Government.
Characteristics of Public Utilities
A public utility concern possesses certain essential features which make it quite distinct from other types of business concerns. Some of the basic characteristics of public utilities are given below:
1. Supply of essential services:
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Public utilities are engaged in the supply of products or services which are indispensable to the community. In the absence of these services, the normal life of the community is dislocated.
For instance, any disruption in the supply of water or electricity would create a great inconvenience to the general public. Therefore, it is necessary that these services must be supplied regularly, adequately and efficiently.
2. Inelastic demand:
As the public utilities supply essential public services, the demand for their products or services is inelastic. In other words, the demand for their services, e.g. water or electricity, does not change substantially with a change in price.
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This is fully true about the direct demand, i.e. for immediate consumption. But the derived demand for industrial and commercial purposes may be elastic.
3. Non-transferable demand:
The demand for the services of public utilities is non-transferable. If a consumer is not satisfied with the services or rates charged by the concern, he cannot change over to another concern unless he shifts to another city. Due to regular demand, the earnings of a public utility concern do not fluctuate vary widely.
4. Heavy fixed investment:
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A large amount of capital expenditure is required for the establishment and operation of a public utility concern. For instance, an electricity undertaking has to install a generating plant, build up a network of cables and other apparatus for the distribution of electricity to the public.
Purchase and maintenance of plant, machinery and equipment need huge fixed capital. Overheads constitute the major proportion of the operating costs of a public utility concern.
Therefore, it is necessary to make the best and maximum use of the installed capacity. A public utility concern has also to maintain extra capacity to meet peak and uneven demand.
5. Local area of operation:
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A public utility concern is usually allowed to operate within a defined and limited market area. For instance, a water supply concern provides services to a particular city or town and its operations are confined to that particular area. Therefore, there is little scope for the expansion of market.
6. Monopoly position:
A public utility concern enjoys a natural monopoly due to the essential nature of its services. As competition is not desirable in the supply of essential public services, only one concern is allowed to operate in a particular area.
If there is competition between two public utility concerns, efficiency will not be high and neither of the concerns will be able to operate at the optimum level.
Therefore, it is usually an essential condition of public utilities that one undertaking should have monopoly in one particular area. As there is only one supplier in one area, consumer cannot transfer his demand to another supplier.
7. Public regulation and control:
Public utility concerns are subject to strict regulation and control by the State. As these concerns enjoy a monopoly power and their services are of an essential nature, the Government regulates their policies and working in public interest.
The object of public regulation and control is to ensure that services of reasonable quality at fair rates are regularly and adequately available to the public.
These concerns are not allowed to exploit consumers. A public utility concern is clothed with public interest and, therefore, the public authority that owns it exercises public regulation which may take the following forms:
(a) Regulation of rates, prices and service charges so that the public utility concern does not misuse its monopoly power to exploit consumers by charging unreasonably high prices for the services supplied by it.
(b) Regulation of the quality of service to protect public health, e.g., regulation of water supply to ensure supply of wholesome water to public.
(c) Regulation to ensure that there is minimum possible inconvenience to the public by the installation of services. For example, the laying of pipelines” for water should cause minimum possible dislocation of traffic
8. Special Franchise:
Since the public utilities are recognised as natural monopolies, a franchise is generally granted to protect them from competition. A franchise is a charter containing special powers, privileges and immunities.
Under the franchise, a public utility concern is permitted to make use of public property like roads, streets, etc. The franchise may be perpetual or for a period of say 50 to 99 years.