Elements of Value to the Public Utility - Coursework Example

Public Utilities December 22, 2005 Public Utilities - Part One When working to establish an appropriate rate structure, necessity dictates that the public utility industry, accompanied by the overseeing regulatory agency, first determine the value of things, such as land, resources, buildings, and equipment as well as measure the intangible values attached to the services. Elements of value, the assets, either tangible or intangible, of a utility that when combined comprise the rate base. These elements can include buildings, resources, equipments, and the lands on which they work. (Phillips 316). Some intangible elements of value to the public utility might include the following: working capital or property reserved for future use, customer contributions and tax deferrals, and construction work in progress. Regulatory commissions must them establish the measure of value for each of these items; these value determinations are made, not found, rendering the overall value relatively unknown. In a competitive market, value is determined by normal market processes such as supply and demand. However, in the case of regulated industries, earnings are dependant upon the rates established by the regulatory commissions-if rates are set low, the value is consequently low, and the same results from rates that are set high. Time variant rates might occur when the public being served fluctuates in their demands of the public utility. For example, residents living in the northern states will go through periods within the year where they will need more heat, creating a demand for electricity and gas power and services. These times, referred to as "peak times," can cause temporary fluctuations in the rates to ensure proper distribution of the appropriate services. Similarly, phone and Internet companies can see the same fluctuating demands at various times in the day as changes in shifts occur at work or school for the public. As people are relieved from their jobs, they might see the need to begin using the phone to contact family members, set appointments, or call other places of business for problems or clarification of services and bills. These time variant rates can often lead to drastic increases or decreases in rates for a short period, and can also add to the public's opinion of how necessary the services might be. For example, several phone companies across the United States offer a standing rate for service; however, the rates on Sundays for long distance service might decrease drastically to provide consumers with an opportunity to contact family members that live out of state. The development of cell phone technology has further dropped the rates for long distance phone service. However, to continually regulate the rates at which the public utility companies are charging the public, regulatory commissions at the public, state, and federal levels are necessary for several reasons. The first step to successfully regulating industries categorized as public utilities is making sure the public within the communities realize the economic advantages of holding regulated monopolies rather than competitive businesses. After the need for regulations have been expressed, the agencies provided these responsibilities must ensure that they are regulating the industries to the best of their abilities; doing so will not only provide necessary services to the public, but will also offer large economic growth to the community. (Phillips 9). To regulate effectively, state and federal regulation commissions must pay close attention to the methods with which they are regulating their respective areas of industry. They must carefully watch the overall expenditures of the industry to ensure that they are within acceptable limits. Performance evaluations should be used to ensure the overall effectiveness of employees working in the public utility industry. Regulating price control by maintaining knowledge over the current markets being served and the overall cost of production and resources is also invaluable to the assurance that regulation is working effectively. One common method of regulation is the revenue requirement approach to regulation. This method of regulation is accomplished in steps: select a test year, determine the revenue requirement, determine whether or not the existing prices will yield more or less than the determined revenue requirement, and adjust the prices accordingly. This method allows the companies to receive a reasonable return on their investments by periodically adjusting their prices to accurately reflect their costs. The basic formula for determining the revenue requirement in any given test year is as follows: The oldest form of regulation is the public interest theory of regulation. This theory of regulation is often more implied within the statues than expressly articulated. (Phillips 182). Under the public interest theory, regulation is established to ensure and protect that objectives relating to the public interest are upheld. Two main assumptions underline this theory: government regulation is a much lower price than general competition, and economic markets will more likely fail to operate effectively if left alone due to the fragile state. (Phillips 182). Through this theory that the laws of regulation, in the case of public utilities, is able to be substituted for the laws of competition when regarding what is in the public's interest. Public interest is often defined by the needs or demands of the public at the time. While some of these basic demands, such as complete, uninterrupted service, are ongoing, other demands may change with fluctuating markets, economies, and societal standards. Market barriers that may hinder the public interest theory of regulation may include any of the following: market growth, changing technologies and technological barriers, costly information, externalities such as pollution and infrastructure, and ex-post exploitation. For example, as the technology of cable increased and spread beyond television programming, cable telephones and cable Internet providers have come about. These new services supplied consumers with pre-existing services at a higher value than of the telephone services alone, causing a source of competition between two public utilities. With the development of satellite television, telephones, and Internet, more competition has resulted. Yet, these companies are still protected under regulation rather than competition laws because of the types of services they provide Growing fuel and resource prices as a result of war and hurricanes have also resulted in price increases. As the rates of gone up, gas companies have reported their highest profits in years over several television news stations; clearly the public interest theory of regulation is not fully being expressed. As demands for lower prices increase from the public, the theory that the public is regulating the public utilities companies is of fast growing concern. As the entry and price regulation within the public utility industries are reduced several consequences are born. Potential competition begins with the cross-services now available. These newer services provide the public with a false security that prices may begin to drop as a result of the competition. However, because these industries remain as defined public utilities, they are protected under regulation laws-immune to the laws of competition. Making a complete change over the operations of public utilities to go from regulations to competition will both complicate and simplify various areas of the industries. Competition will allow for greater effectiveness and increased public awareness over the services; but this can only occur if the public utility is completely changed over to a competitive market. Complicating the issue remains the problems of reorganization that these public utilities will have to face when deregulating. The basic principles of competition markets vary greatly from those of a regulatory market in which a monopoly is allowed. For example, while under regulation, there is a very low risk; as customers will only have one place to turn to for services; an investment return is all but guaranteed. Competitive markets will also force the industries to share the resources needed to provide their respective services-increasing the rates they are paying and, thusly, the rates they must charge to the consumers. Public Utilities - Part Two 1) Demand commonalities occur when the majority of the population within the community begins expecting similar demands to be met by their respective public utilities industries. Many of these demands consist of uninterrupted service, maintaining that the company must ensure stability within their organization to allow for as few breaks in service as possible. When circumstances happen that are beyond the control or foresight of the company, measures must be taken to quickly fix the problem with as little inconvenience as possible to the public. Demand commonalities often occur with public utilities because they serve the public interest and are necessities to the people. 2) A natural monopoly is achieved when competition for market shares would not work due to the nature of the available market and resources. In the case of public utilities, the services they provide are necessary to the very welfare of the entire community which they serve. The high levels of expenses and technologies required to maintain adequate service to the community, including production, transmit, and distribution, inevitably lead to a monopoly. Generally speaking, a monopoly can take advantage of the economy of scale; however, in the case of public utilities, having two or more providers of the same public utility in on community would prove to be wasteful and inconvenient. 3) The capture theories of regulation refer to those regulation commissions that appear to fail in upholding the public's best interest. There are two main reasons why a regulatory agency may seem to lose sight of the public's interest: they were created to protect the consumers of a public utility then became captives of the industry they were allocated to regulate, or they were created to serve the industry's interest. The latter comes as a response to demands for cartel management to be placed over the legislation. 4) When referring to peak demand times, a load curve can be used to determine the peak demands over an extended period. 5) Legislative regulations ensures that the public utility operates in a safe and adequate manner, that the utility is serving all people who apply for and are willing to pay for their services, and that all of these paying customers are served on equal terms with just, reasonable rates. While every state has a regulatory commission, several federal commissions have been implemented to help regulate those companies that serve communities in more than one state. These commissions include: the Federal Energy Regulatory Commission (FERC), the Nuclear Regulatory Commission (NRC), the Securities and Exchange Commission (SEC), and the Federal Communications Commission (FCC). 6) Administrative regulation is set up and carried out by regulatory commissions at the public and state levels. While it is the responsibility of these commissions to uphold federal regulations, they remain somewhat independent of the other branches of legislation. 7) In 1877, the United States Supreme Court ruled in the case of Munn vs. Illinois which defined a separate class of business which were affected by public interest; this decision upheld the state laws that were regulating public utilities. While the exact definition of a "public utility" has been refined several times since this decision, the basic principles of public regulation have been upheld legally. This decision marked the first important definition of what a public utility would be as defined by the Supreme Court. (Phillips 94). 8) Declining block rates occur when the price per unit of a particular commodity goes down accompanied by an increase in public consumption. These decreases are usually made in discreet increments. 9) One part rate is a form of linear pricing in which one class of service - set price = average cost. Adding in one or two more parts to this equation can change the average cost, either up or down, and determine whether the average marginal cost is enough to cover the total cost. 10) Coincident peak is the average peak consumption of a commodity between all consumers. For example, gas companies may see their coincident peaks in the winter-time as people try to warm their homes. A non-coincident peak is the customer's individual peak times. These peaks are regular, but may or may not follow the flow of everyone else's peak seasons or times. 11) Frequency-division multiplexing (FDM) is the method used when telephone signals are sent over an analog line. The telephone signals are combined with each other and each one is assigned a frequency band within the single waveform. Digital signals first convert the analog signals in a quantized, discrete time format. These newly formatted signals are then multiplexed together using the time-division multiplexing (TDM) method; each digitized signal from a telephone is assigned a slot within a specific timeframe. 12) The FERC, NRC, EPA, and FCC are acronyms for the leading federal commissions regulating public utilities. The Federal Energy Regulatory Commission (FERC) is an independent regulation agency residing within the Department of Energy. Established in 1977, the FERC supervises regulation over electric power, natural gas and oil pipelines, and water power sites. The Nuclear Regulatory Commission (NRC) maintains responsibility over licensing and regulating civilian nuclear energy, nuclear research, as well as some import and export responsibilities. The Environmental Protection Agency (EPA) regulates the amount of natural resources consumed and what limitations are in place to help protect the natural environment in which the industries acquire their power, transmit their services, and distribute their goods. The Federal Communications Commission (FCC) was established in 1934, and now covers regulations over all communications systems, including radio, television, telephone, cable, and satellite communications companies. (Phillips 142). 13) Joint costs, or inputs, are those costs affiliated with an input that is used in the production of two or more outputs; put simply, when one resource is used to make several finished products. This production is usually in a fixed ratio. For example, in raising cows for the purpose of meat and leather, there are procedures established for allocating how much feed to give the cow, but no way of knowing how much of that feed goes towards the production of leather and how much to meat. 14) Open access implies that public, state, and federal regulatory agencies may, at any point, acquire, review, and interpret documents or related materials pertaining to the public utility company. This also helps to ensure that the operations within the company are maintained at a high level of quality. 15) When disputing resolutions, several alternative are available to the consumer. Paying customers can write the local or federal agencies set up to regulate these industries with concerns or questions about price gouging. Calling the company directly is often unproductive in resolving a dispute; however it can sometimes shed light on a subject. Collecting petitions and bringing attention of the problems to the federal authorities are the fastest and easiest way to resolve a dispute. Works Cited Phillips, first name. "Title of Book." Publishing city and company, Published year. 22 December 2005. The areas in blue need to be filled in with information unavailable to me. Please read this over and let me know what needs to be changed right away. As I said, I am worried about #14  in part two as I could not find reference to those in any of the materials accessible to me. Read More