Electric Utilities: Explained

When it comes to talking about power companies, we tend to lump them all together as simply “utilities”. 

The more I learn about the power industry, the more I realize how great the difference between utilities is, and how important those differences really are. 

Utilities…Not Just the Best Squares In Monopoly 

Technically natural gas, water, sewer, trash, etc all fall under the category of utility. In the world of utility poles and attachments, we tend to refer to communications providers as just “providers” and electric companies when using the word “utilities”.

At its most basic, pared-down, simplified definition, electric utilities secure power from some type of resource (solar power, coal, hydroelectric dams, nuclear plants, wind farms, etc) and distribute the power to customers within their footprint. 

But not every electric utility is the same. There are three main kinds of utilities in the U.S.: investor-owned, publicly owned, and cooperatives. How they operate and the challenges they face can vary dramatically. 

IOUs: Investor-Owned 

While they serve the most customers, there are fewer IOUs in the country than publicly owned utilities and cooperatives. 

IOUs are privately owned businesses that operate over a determined region. As a for-profit business, an IOU focuses heavily on ROI. They invest in the infrastructure to bring power to their customers and are recouped for their investments by charging for power. 

The Public Utility Commission oversees IOUs, and usually, the rates IOUs are allowed to charge must be approved by the PUC to help keep customers from getting burned. (Sometimes, the PUC goes by other names: public service commission, commerce commission, etc). 

It’s important to mention that IOUs have two types of expenses: operating and capital. Operating expenses are the sum of employee salaries, office rent, legal fees, etc, and an IOU can collect the cost of these investments from customers, but don’t make a profit on them. 

Capital expenses are investments in long-lasting assets that better the grid. Think grid hardening and improvements. Capital expenses guarantee a rate of return. The balance between operating and capital costs will affect how an IOU approaches new initiatives and investments. 

POUs: Publicly Owned 

Publicly owned utilities are not-for-profit entities that taxpayers own, which are usually run as a division of the government—they’re sometimes referred to as municipality utilities or munis. 

Unlike IOUs, munis make up the largest portion of utilities, but serve a much smaller number of customers. 

Munis are accountable to elected officials, governing boards, and councils, and as nonprofits they can theoretically prioritize public interests and can take bolder stances on clean energy and climate issues. Oftentimes their rates are also regulated by a public utility commission. 

Rural Cooperatives

Cooperatives, aka co-ops, are private, not-for-profit businesses owned and operated by the people they serve. As their name suggests, they primarily serve rural areas. 

While there are more co-ops than IOUs, IOUs on average serve more customers than co-ops (which makes sense: their footprints aren’t nearly as populated as the urban and suburban areas an IOU would cover). 

Because they’re not regulated in the same way that IOUs are, co-ops can collaborate more with one another and share resources and standards. 

Cooperatives often serve less-populated areas with lower-income households, and generally set their rates just high enough to cover the cost of business. If annual revenue exceeds cost, members get a credit. 

Challenges

While power companies face similar challenges, each type of electric utility has their own unique obstacles to overcome. Here’s a quick look at some of the hurdles utility companies are facing: 

Innovation

Because IOUs only really make a profit on their capital expenditures, investing in bettering the grid often ranks high on the priority list. Plus, as technology like vehicle-to-grid (V2G) and vehicle-to-home (V2G) continues to evolve, they’ll need to find creative ways to maintain robust and reliable services under increased demands. 

POUs and co-ops are also trying to meet the new expectations as modern advancements keep raising the standard for reliability. Customers expect less outages and interruptions and higher quality services in, but improvements aren’t cheap.

Affordability 

Co-ops have an uphill battle when it comes to increasing affordability and decreasing costs for their customers. Because they often serve sparser populations, build-outs tend to be a lot bigger and reach less customers. Plus, by nature of where they’re located, cooperatives have to maintain low rates to accommodate the economic environment. 

IOUs have to navigate a fine line between investments in the future and cleaner energy while still maintaining reasonable rates set by PUCs. 

Publicly owned utilities have historically struggled to maintain smaller plants from an economic perspective, and local governments face big costs when trying to create a POU in their own area. 

Aging Infrastructure

Costs of maintenance and upkeep are always expensive, but co-ops are often working with older substations and power lines, which naturally need more upkeep. With a leaner budget, co-ops have to support an aging grid while providing top-notch services. 

Clean Energy 

As clean energy continues to be a hot topic, all utilities have to find creative ways to provide reliable services using renewable sources. (There’s also a lot of conjecture about distributed energy resources (DERs) and what they’ll mean for utilities in the near future. We haven’t dived into DERs much, but you can learn more here.)  

Serving Utilities 

While affordability, advanced tech, and clean energy initiatives are all hot topics, engineering firms looking to support a utility need to be aware of the challenges the company is facing, and the mindset and approach they’ll take. Providing value to IOUs will probably look different than supporting POUs or serving rural co-ops. 

At the end of the day, the greatest concern for all utilities is keeping workers safe, keeping the grid secure, and keeping the lights on for the communities they serve. 

Thanks for reading! As we continue to dive into reliable utilities for people, it’s essential to remember that across the country different electric companies (and internet providers!) are dealing with their own challenges. We’d love to hear your thoughts on supporting utilities and the unique needs facing the industry today! Give us a shout at hello@katapultengineering.com!