Investor-Owned Utilities (IOUs) Defined
Investor-owned utilities (IOUs) work like for-profit corporations and are publicly or privately owned by shareholders.
Common IOUs include electricity, natural gas, water, and sewage companies.
According to the U.S. Energy Information Administration (EIA), IOUs served 72 percent of U.S. electricity customers in 2017. Although there are fewer IOUs than publicly owned utilities and cooperatives, IOUs tend to be larger.
IOUs serve three out of four utility customers in the country.
How Do Investor-Owned Utilities Work?
Investor-owned utilities have a monopolistic position in their industry, meaning they can set prices and control the market. They differ from government-owned or cooperative power utilities, which focus on service and community involvement rather than profits.
The IOUs run similarly to for-profit companies: they generate revenue through selling goods and services, resulting in high profitability. Utilities use this money to cover costs, such as plant maintenance, salaries, marketing, and other operating expenses. Prices of these services are often regulated by state laws or public utility commissions.
IOUs are protected from competition against other providers by jurisdictional boundaries, meaning they are limited to the area they serve. This limits the utility's ability to influence the market, unlike a completely open market.
While a monopoly is considered illegal, IOUs are regulated by the government. In theory, this prevents them from having unfair market power. The regulations prioritize the interests of consumers.
Advantages of Investor-Owned Utilities
Below are some advantages of investor-owned utilities:
Cost Efficiency
IOUs are more efficient because they have a structure of incentives and oversight.
If a company is publicly traded, investors will want the best returns on their investment. This encourages management to cut costs and increase profits as much as possible.
Such a move can result in lower prices for customers as well as cheaper means of generating revenue.
Additionally, IOUs are required by law to operate at "arm's length" from one another. This means that they cannot provide preferential services or pricing to other utilities even if they own stock in them.
With this separation, there is less risk of collusion with higher government regulation. It allows each utility to develop services independently, meaning they do not compete directly against each other.
More Innovative
Since IOUs are privately owned, they can focus on innovation rather than providing an equal or better service to another utility. They can experiment with new energy generation methods and services without focusing on the same efficiency as other companies.
IOUs often have more revenue than government-owned utilities, which allows them to invest in research and development for renewable energy sources. They also have the capital to put their ideas into action, resulting in more sustainable electricity generation.
Experience and Expertise
IOUs are publicly traded companies that have been around for a while. This means they have more experience managing resources than other types of utilities.
IOUs benefit from the expertise of their board members and senior management, which can streamline their planning, development, and deployment of cost-saving strategies. This makes it easier to achieve high-efficiency levels even with their size and scale.
They can also better provide tailored and innovative solutions that meet the needs of their customers.
Disadvantages of Investor-Owned Utilities
There are also some disadvantages to having IOUs as your primary utility provider:
Higher Prices
Although they are regulated by the government, IOUs still can raise rates for their customers.
Since they are publicly traded companies, this means that stockholders can demand higher returns on their investments. As a result, this could mean higher prices for consumers.
Monopolies
IOUs may appear the most profitable type of company because they have no competition within their area of service provision. Since they have exclusive rights to supply power within a given region, no other company can provide the same service at a lower price.
This means their prices, although regulated by the government, may still exceed other types of utilities.
IOUs may also become monopolies or near-monopolies within their region if another utility goes out of business or cannot compete with them. This is why it is important for regulatory agencies to act when there are threats of market power abuse.
Lack of Local Ownership and Accountability
IOUs are publicly traded companies, which means management, board members, and investors are all located at corporate headquarters rather than locally.
This often results in less local accountability since decisions about rates and services are decided centrally rather than through dialogue with customers or stakeholders.
How Can I Get My Utility To Become Sustainable and Use More Renewables?
Fuel Choice
As a consumer, you have the power to require IOUs to open "community choice" programs that focus on renewable energy generation. In these programs, customers can choose to support 100 percent renewable power for their homes and businesses.
To do this, you must be ready to support renewable energy generation from the utility. This may involve paying a higher rate per kWh or committing to a fixed monthly fee. However, you can still save money by choosing a cleaner option.
Renewable Energy Requirement
Another way to improve your local utility is through voter-approved initiatives that require them to purchase a certain percentage of power from renewables.
An example of this is the remarkable move by Nevada voters to amend the state constitution mandating Nevada’s electricity providers to shift to at least 50 percent renewable energy by 2030.
Public Concerns and Pressure
Another way IOUs can become sustainable is through public pressure due to concerns about resource availability. If communities fear their utilities will run out of resources, they can push their providers to use renewable energy sources to increase efficiency.
Tax Incentives and Grants
For a utility company to switch to renewables, they need to spend a lot of money on research and development.
In addition, new technologies, such as smart grids, are expensive and need government subsidies or private investments for companies to afford them.
If you want your utility provider to switch toward renewable energy sources, talk to your representatives about providing more tax incentives and grants.
Community-Owned Utilities
There are also some examples of locally or community-owned utilities. These companies are usually more responsive to local needs since they are managed by people who live and work in the same community as their customers.
They also tend to use more renewable energy sources since they care about keeping their communities sustainable for future generations.
Final Thoughts
The main advantage of IOUs is that they are in business to make a profit. This means they can research, implement, and manage new technologies to remain competitive with other utilities in their regions.
However, it has been difficult for IOUs to meet demands for clean energy sources. This is because most investor-owned utilities’ management focuses on stockholders' interests in profitability rather than customers' preferences for renewables.
Still, some companies can find ways around these problems by collaborating with government organizations that provide financial incentives for using renewable resources instead of non-renewables.
As a consumer, you can also play your part in pushing for more sustainable power sources. For instance, you can do this by getting your utility to open "community choice" programs that focus on 100 percent renewable power generation.
Also, try to find out what your utility's policies are and get involved with environmental advocacy groups or political campaigns that push for renewable energy initiatives.
FAQs
1. What is an investor-owned utility?
An investor-owned utility (IOU) is a company that provides utility services. IOUs are typically privately run and own their infrastructure and equipment, which they use to provide these services to customers under a regulated rate schedule.
2. How do IOUs set an electricity price?
IOUs must file their rate proposals with the governments where they do business. The authorities review these proposals and determine whether the prices are fair and reasonable.
3. How does IOUs' energy generation affect the environment?
IOUs have a difficult time becoming sustainable because their primary concern is keeping shareholders satisfied. This means they focus first on maximizing profits before making decisions about the best way to produce and source energy for their customers. As a result, IOUs still rely heavily on non-renewable energy sources, such as coal and natural gas, and are reluctant to invest in renewables because of additional costs.
4. What is a community-owned utility?
Community-owned utilities are typically run by members of their communities, which gives them more incentive to respond to customer demands for sustainable energy sources. They are also usually controlled by boards or committees comprising peers rather than stockholders. This means they have more flexibility when making decisions on pricing and new technology.
5. What are the primary driving factors that push IOUs toward sustainability?
Government regulations are the primary driving factor. IOUs must be licensed by local governments, requiring them to follow certain guidelines regarding their operations and how they do business. Also, the decreasing cost of renewable energy sources makes them more affordable. Finally, consumer demand for sustainable power sources continues to increase, which may motivate IOUs to follow the trend.
