If the utility generates a larger return—i. Value of assets after depreciation—an incentive to add new pipelines rather than repairing old ones Asset value is at the root of the utility profit margin because a utility only earns a return on its investment in physical assets.
And utilities own heaps of assets, not by accident. Find this article interesting? Support more research like this with a gift! Consider all of the power poles, power generation plants, substations, pipes, regulators, meters, and other equipment that is part of the system that delivers electricity and gas.
Each of these assets has an initial value its installed cost and a depreciation schedule e. Then the utility would also earn a guaranteed annual rate return on its investment in the pipeline. Understanding these guaranteed profits is key to understanding why a utility might be eager to pursue questionable new infrastructure projects like new pipelines or LNG facilities.
Expenses are those costs that utilities pass through directly to their customers with no markup for profits. Maintenance costs e. That is, a utility must charge its customers the same cost that it pays.
Instead, profitability is driven primarily by the value of the assets. So while a utility has little incentive to spend money on upkeep, it does have a built-in incentive to buy new assets—the more infrastructure it builds, the more profits it can generate. As a result, it is common to see utilities prioritize replacement of an asset over repair.
For example, utilities have been replacing sensors when the batteries die, rather than simply replacing the battery. The replacement of the whole sensor can earn profit for the utility while upkeep on a battery is a pass-through cost. It follows that utilities have little motivation to find efficiencies in the pass-through categories of costs. For example, gas leaks waste fuel , but since the cost of the gas is passed through to customers, the expense of fixing gas leaks is likely not an attractive investment—especially if the repair does not result in a new physical asset that can earn a profit.
Similarly, energy efficiency programs administered by utilities do not earn a profit, which may disincentivize a utility from going the extra mile to help their customers save energy. For example, local utilities have been very slow to implement voltage management on their distribution lines, a method of conservation that dwarfs all of the energy efficiency rebate programs, because the costs to implement this method cannot earn a profit.
How utilities make money: Home solar hikes prices and low-income customers bear the brunt. Photo: tami. In the last decade, two trends in energy have emerged that affect both how utilities make money and the price that consumers pay for energy: energy efficiency and net metering in which utility customers sell the power they generate from rooftop solar back to the utility. Both of these trends drive down the volume of energy sold by utilities, but they come with complications.
That means the money-making formula is adjusted annually with a balancing account to allow utilities to collect enough revenue each year, independent of how much energy customers use. If the weather in one year drives customers to use more energy, the balancing account will refund to customers the extra revenue collected. Conversely, if customers focus on conservation and use less energy, the balancing account will allow the utility to collect a little extra revenue from customers to make up for the loss by charging a slightly higher rate.
Both energy efficiency and net metering reduce how much energy customers want to buy, which means, the utility sells less energy on a per-customer basis. They include providers, producers, and suppliers such as:. In addition, some companies are multi-utilities—that is, they are diversified and deal with several different types of utilities.
Among the best utility stocks to buy are:. The utilities sector is an industrial category of stocks, consisting of companies that provide basic everyday amenities, including natural gas, electricity, water, and power.
Utilities companies are private, for-profit entities, but since they provide a public service, they are subject to substantial government oversight and regulation. Typically, investors buy utilities stocks as long-term holdings. These equities typically feature stable prices and good dividend income. The sector also tends to do well as a defensive play against macroeconomic downturns—even in hard times, people need running water, light, and sanitation services.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is the Utilities Sector? Understanding the Utilities Sector. Utilities Supplier Segments. Debt Levels of the Utilities Sector. Consumer Impact on the Sector.
How Investors Trade Utilities. Advantages and Disadvantages. Real-World Example of Utilities. And every month you will see a delivery charge on your electricity bill. This is for the transmission and distribution of electricity to your home or business. These delivery rates are subject to change at least twice a year. Delivery charges pay for the maintenance and operation of the poles and wires that serve your residence or business.
Either way your electricity bill generally has two line items: supply and delivery. The supply charge is for the actual electricity used and this is paid to your electricity provider. The delivery charge is for the transmission and distribution of electricity and this is paid to your local electric utility.
In most states you will receive these charges on one bill, and the company that collects your payment will make sure that the appropriate parties are paid for their services. What is an Electricity Provider? What is an Electric Utility?
With deregulation, the supply of electricity was opened to competition. Electric Utility? For deregulation to function properly, they need clearly defined job descriptions. They must be vigilant, cut costs, and innovate. That is the power of markets. But utilities do not fear competition.
Their customers cannot live without their product, or purchase it elsewhere. Their profits are guaranteed so long as they can justify their rates to a PUC. All they need to do to increase profits is to build more stuff — more power plants, more substations, more power lines, more. When the regulatory compact was established, this made perfect sense. The demand for power was inexorably rising and there was a need to scale up rapidly.
Given all the un regulated monopolies at the time, the regulatory compact was actually fairly progressive — at least it provided explicitly for public oversight.
But make no mistake: it was designed to electrify the country, to enable more people in more places to find more uses for electricity. Demand grew so fast that utilities were proposing, getting approval for, and making huge investments right and left, as fast as they could. And everything got bigger. Finally, a technology powerful enough to fuel the meteoric rise in electricity consumption that was going to last forever.
Now fast-forward to the present. The regulatory compact remains the same, the incentive structure it created remains the same, but circumstances in the U. Depending on which forecasts you believe, electricity consumption may even begin declining in some states over the next few decades. But a substantial chunk is the recent explosion of energy-efficiency technologies and investments. Alongside that , individuals now have the power to generate their own electricity with solar panels and other distributed generation technologies.
And it represents a reduction in demand for what they are selling , a reduction in use of their grid infrastructure, and a reduction in the need for future power infrastructure. For all these reasons, many energy nerds believe that electricity demand in the U. But remember, utilities are in the midst of paying off large, plus-year investments. If they get less than expected from some customers, they have to charge the other customers more in order to get the same rate of return.
They do not like that one bit nor do the other customers.
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