Public Utilities: Meaning, Characteristics and Problems | Business Management

After reading this article you will learn about:- 1. Meaning of Public Utilities 2. Characteristics of Public Utilities 3. Problem of Ownership and Control 4. Organisation of Undertakings.

Meaning of Public Utilities:

Public utilities are those business undertakings which are engaged in the supply of some such services which are absolutely necessary for the community. There are certain services like water supply, gas, electricity, transportation, communication, etc., which cannot be dispensed with without a serious setback to the smooth and successful economic living of the community.

These services are so essential to the public that any interruption in their supply would throw the normal life of the community out of gear. Economic enterprises established to operate such services are known as public utility undertakings. Public utility concerns, therefore, may be defined as undertakings which are “clothed with public interest.”

Characteristics of Public Utilities:

1. Indispensability Arising Out of Necessity:

Public utilities are very important for the economic well-being of the community. They satisfy our basic wants. For example supply of water, light, power, transport and communication are essential to everyone for civilised and comfortable living. Therefore, it is necessary that these services are supplied regularly, uniformly and adequately.

2. Monopoly or Semi-Monopoly Position:

By monopoly we mean absence of competition or predominance of a single seller in a particular market. The existence of monopoly or near-monopoly is another important characteristic of public utility concerns.

This is so because competition in the operation of public utility service is wasteful. For example, if several concerns or companies are to run competing railways, telegraph or telephone lines, it would certainly lead to duplication of efforts and materials, waste of money and resources.

Moreover, public utility enterprises require heavy fixed capital and have to operate under fixed costs. Therefore, there is always a natural tendency towards monopoly or semi-monopoly in the spheres of public utility undertakings. A public utility concern may take the form of a monopoly recognised by law or the form of an economic monopoly as a result of combination.

3. Public Regulation and Control:

Public utility undertakings are subject to relatively minute government control and regulation than non-utility concerns. As these enterprises enjoy a monopoly position and are engaged in the supply of essential services to the community, their working and policies are regulated by the government. Regulation may relate to the fixation of rates, determination of the quality, regular and adequate supply of services, etc.

The object is to ensure that services of standard quality at fair rates are adequately and regularly made available to public according to their normal requirements. Special laws are passed and relevant rules are framed to guarantee satisfactory functioning of the public utility concerns.

4. Special Franchise:

To enable the public utility concerns to carry out their functions economically, efficiently and satisfactorily, special rights are granted to them by the government. The rights and privileges are specified in the ‘Franchise’ issued to the enterprise by the government.

Franchise is a charter containing the powers, privileges and rights granted to them as well as the duties and liabilities cast upon them in the course of their working. Public utilities need the extensive use of streets and other public properties for which special franchises become necessary.

The franchise is liable to be withdrawn by the government if the undertaking does not comply with the regulations or restrictions subject to which the franchise is issued.

5. Costs:

Public utilities have to invest large amount of capital for acquiring fixed assets. For example, railways have to spend a lot on the construction of railway line, coaches, engines, station buildings, plant and machinery etc. The costs are heavy and fixed.

The fixed nature of the cost-structure is a special feature of public utility concerns. Because of fixed costs, increase in the turnover of their services does not cause corresponding increase in the overall cost of the undertaking. On the other hand, costs per unit of service rendered go on decreasing with the increase in the supply of services.

6. Demand:

Demand for public utility service is also one of the distinctive features.

(i) Public utility services cannot be shared and hence demand for them may at any time increase.

(ii) Public utility services “sell themselves” and there is, therefore, no need to create a demand by salesmanship or advertisement.

(iii) Demand for public utility services is both direct and derived. Direct demand arises from requirements for direct and immediate consumption. Derived demand means utilisation of the service for other industrial and commercial purposes. For example, electricity for lighting is a direct demand while it is a derived demand if it is utilised as a motive power for running a factory.

(iv) Demand for public utility services is both elastic and inelastic. Derived demand is particularly elastic and direct demand is normally inelastic.

7. Price Policies:

The price policies of public utilities are to be in tune with the peculiar nature of demand and costs. Since they work under the condition of decreasing costs, the prices charged by them should cover the average costs. A price which covers all the operational expenses and leaves a fair margin of profit on the capital invested is determined with the consent of the government.

8. Rights and Duties:

The special franchise granted to the public utility undertakings confers certain rights on them and also binds them with some duties.

Rights include the following:

(i) To collect a reasonable price;

(ii) To render service subject to reasonable rules and regulations;

(iii) To withdraw service under prescribed conditions after giving notice to customers; and

(iv) Privilege of reasonable rules and regulations which ensure them prompt payment, such as meter readings and investigations, acceptance of service deposits, etc. They are also given the power to use streets and buildings for fixing appliances.

Their duties include the following:

(i) Public utilities are under the extraordinary duty to supply reasonably adequate service to all those who apply.

(ii) They are required to serve up to the limit of their capacity. Here capacity does not refer to the physical capacity only, but the capacity of the undertaking “determined by profitableness.”

(iii) They must not let customers wants go unsatisfied. Nor should they attach unreasonable conditions for supplying services to customers.

(iv) They must serve without discrimination all consumers in similar circumstances.

(v) They must observe more than ordinary care in the course of supplying their services so that public safety is not endangered.

Problem of Ownership and Control of Public Utility Services:

Public utility services may be under private ownership or may be owned and operated by the public authorities. Since they require heavy capital investments, they usually take the form of joint stock companies. The privately-owned public utility undertakings tend to earn undue profits at the cost of public welfare.

Though they are governed by statutory rules, the government regulation fails to be completely effective. Therefore, recent tendency is towards government ownership, control and management of these undertakings.

The following reasons have prompted the State ownership of public utilities:

(i) “Difficulties in effective regulation” can be removed by direct government ownership and management.

(ii) The “need for co-ordination” can be met more effectively if all these undertakings are under government ownership, management and control.

(iii) Substitution of profit motive by service motive is practicable only when these undertakings are owned and managed by the government.

(iv) In a planned economy, the key services which are clothed with public interest should necessarily be in Public or State sector. The Industrial Policy Resolution of 1956 declares that the public utility service will, as far as possible, be under State ownership and management.

Organisation of Public Utility Undertakings:

Public utilities under state ownership are generally organised in one of the following forms:

(i) Departmental undertakings, i.e., run by a department of Central, State or Local Government.

(ii) Public corporation created under a special Act passed by the Legislature.

(iii) Government company registered under the Companies Act.