What is a utility company? A utility company is a company that maintains the public utility infrastructure for a specific public service. Public utilities are normally subject to various forms of public regulation and control ranging from state-based communities to statewide municipal monopolies. In most states, there are several types of utility companies including electric, gas, water, sewer, cable and telephone services. The most important functions of utility companies include transmission, distribution, generation, and furnishing of energy, water and communications services.
Electricity distribution involves the transmission of electricity from a utility company’s electrical grid to end-users, such as homes, businesses, hospitals and even farms. Electric distribution can also include transmission, distribution, generation and furnishing of natural gas. Gas distribution involves the transportation of natural gas and its products between refineries, power plants and production plants. In addition, it provides a connection between the utility company’s high-voltage lines and the low voltage electric lines.
Natural gas and electricity markets are highly regulated by the Texas Natural Commission (NEC) which sets rates and fees and intervenes whenever needed to ensure that markets remain healthy. The EC is responsible for regulating rates for residential customers, commercial customers, and NEX Gasoline distributors. For example, in Texas, residential customers may have up to one-third rate increase per year and NEX Gasoline wholesalers may be regulated according to the same rates. Most major US utilities have largely remained unregulated in the past decade; however, recent deregulation initiatives by the EC is resulting in more competitive prices and more consumer choice for both consumers and wholesalers.
The recent EC efforts to deregulate the utility sector have resulted in several effects ranging from rate increases for residential customers to utility company profits. Among the main deregulated electricity and natural gas providers are AT&T, Duke Energy, Entergy, Georgia Power, Kentucky Power, and Consumers Energy. In all of these cases, the rate increases are directly related to EC initiatives to stimulate growth. In short, utility company rate increases are directly related to deregulated electricity and natural gas prices that result from EC initiatives. Over the long term, investors will continue to focus their attention on these issues, and over the short term investors will begin to focus on the rising cost of these services for residential and commercial customers.
Despite recent EC initiatives to deregulate the utilities sector, several analysts expect further decreases in future years. While most analysts agree that the long-term trends in this sector are positive for investors, short-term investors have become increasingly leery of the utility industry following recent reports that showed steep increases in energy prices. For instance, rates increased by six percent in January alone. Over the long term, analysts expect rates to decline slightly, but remain high by the end of the current quarter.
Even with recent decreases in the rates that consumers pay for natural gas and electricity, investors must be concerned about the future of this sector. With almost three-fourths of the cost of utilities tied to crude oil and high gasoline prices, it is expected that deregulated electricity and natural gas rates will continue to rise over the next several years. However, the utility industry is undergoing rapid growth, and over the short term, investors can benefit by owning shares of a number of publicly-traded companies that offer both utility services and a variety of property-based products.