The public utility undertakings play an important role in the economic and social life of the community. The term public utilities refer to those undertakings, which provide the basic needs of the society such as water, electricity, transport etc.
Since their services are clothed with public interest and competition in the supply of these essentials of life is undesirable, the public utility undertakings are organized as monopolies working under the control of a public authority. Thus, public utility is a distinctive industry and fundamentally a necessary step towards the welfare of the community.
Meaning and Definition of Public Utilities
The term public utility refers to a special type of business that is engaged in supplying some essential products or services with a definite market area on a monopolistic basis. To illustrate the various facts of the term public utility, it will not be out of place, if we take here some of the definitions given by distinguished authors.
Definition of R.G. Hawtrey:
A public utility is a service in which a tendency to a local monopoly necessitates the intervention of a public authority to defend the interests of the consumers.
Definition of Graham Roper
Public utility refers to any undertaking that meets the needs or conveniences of a considerable section of the public and that places the undertaking in a position, justifying the imposition of control in return for monopolistic or special privileges.
These definitions make it clear that public utilities are concerned with a considerable section of the public and aims to safeguard the interests of the consumer by meeting their needs.
Salient Features of Public Utilities
The salient features of the public utilities can be outlined as follows: .
1. Supply of Necessaries
Public utilities are engaged in the supply of indispensable products and services to the society at reasonable prices without any discrimination. They ensure an uninterrupted flow of such necessities into the market. Examples of such necessities are water, gas, electricity, transport etc.
An institution, which provides the necessities free of charge, shall not be considered as a public utility concern. To be denoted as such it must charge a price for its products or services.
2. Monopolistic Position
The public utilities, generally, enjoy monopolistic or semi-monopolistic position i.e. they enjoy natural monopoly. Experiences show that competition in these lines of activities is undesirable because it leads to much social waste, hopeless duplication of plans and unsatisfactory catering of the consumer’s needs. Therefore, they are granted legal monopolies, which place them in a secured position. Their field of operation is generally limited in a particular area or region.
3. Inelastic Demand
The demand for the goods or services provided by the public utilities is generally inelastic. The demand may even increase but in no way it will decrease. Therefore, the risk involved in running the public utilities is very little.
4. Huge Capital Investments
Public utilities generally require a large capital outlay for procuring equipment and installing machinery. Most of it is sunk capital i.e. the break up value will be far less than the original cost. Besides the initial fixed investment, they have to meet heavy charges on account of maintenance, repairs and replacements.
Public utilities are generally granted a special franchise by the Governmental authority before they commence business. A franchise is in the nature of the grant of certain powers, rights, privileges and immunities by a competent authority.
The special franchise is accorded to them to proceed performance of their functions. This franchise enables the public utilities to make use of the public properties and even private properties in case of emergency. For instance, a water supply concern can make use of the roads or streets for laying water pipes.
6. Regulation and Control
Since the principal concern of the public utilities is public interest and are endowed with numerous powers for its attainment, they are supposed to work for the maximum social advantage. Therefore, effective regulation and control over them are
necessary than any other forms of enterprise.
The regulation may relate to the fixation of prices, determination of the quality, regular and adequate supply of services etc. The Government preserves ample powers to control and regulate their activities in any way it likes. It can even nationalize a concern whose workings are found unsatisfactory.
7. Absence of Middlemen
Absence of middlemen or intermediaries is another distinguishing feature of the public utilities. Goods are supplied to the consumers directly.
Rights of the Public Utilities
The special franchise granted to the public utilities confers certain rights upon them. The following are the important rights conferred on them.
1. Rights to charge reasonable price for the products or services rendered by them.
2. Right to withdraw the supply of goods or services after giving due notice to the consumers who fail to pay the price.
3. Right to use public and private properties. If they make use of the private property, reasonable compensation must be paid. This right is known as “Eminent domain”.
Duties of the Public Utilities
The duties of the public utilities are the following:
1. Service to All
The public utility must offer its services to all who apply for such services, regardless of the caste, creed, race, economic or social status or other differences.
2. Adequate Service
It should render adequate services so as.to fulfill the demands made by the public in its jurisdiction. It must provide prompt service. For this purpose, it must utilize all its capacity.
3. Reasonable Price and Conditions
The goods and services under normal conditions must be supplied at a reasonable price and should not attach unreasonable conditions for the supply of such goods or services.
4. No Unjust Discrimination
It should not practice unjust discrimination. This does not mean that there should not be rate differentials based on a fair or just classification of the consumers. But the classification must not be unjustifiable or unreasonable.
Problems of the Public Utilities
Due to their distinct nature of activities, the public utilities are confronted with certain peculiar problems that are not found in other forms of business enterprises. Their problems centre around-
- Ownership and management,
- Plant location and size, and
- Determination of prices.
Public utilities are generally organized as limited companies or statutory corporations. Smaller concerns are generally established as companies.
2. Ownership and Management
Public utilities are originally vested in the hands of private individuals. Public control has emerged slowly and lately in the history of these privileged bodies. Now-a-days, public utilities are owned and managed by private individuals as well as by the state. However, the recent tendency is towards state ownership.
For the sake of convenience, the forms of management and ownership of public utilities can be divided into the following five classes.
1. The public authority having public ownership and operation (i.e. Municipalities, State and Central Governments).
2. The private company operating under a limited monopoly.
3. The public utility trust.
4. Mixed undertaking composed of private and public capital.
5. Private individuals.
3. Plant Location and Size
The size of the public utility concern is generally large. Huge capital is required for procuring the machinery, equipment etc. Further, they have to start their operations at the full swing in the very beginning itself and gradual expansion. cannot be made like other concerns.
The choice of location is generally confined to the site selected or allotted by the Government; Since their size is large, they require a larger space for their operations.
4. Determination of Prices
The rate charged by the concern must be fair and reasonable. But determination of this fair rate is not an easy job. A number of considerations are involved in it. There are three broad aspects in the price policy of these undertakings. They are:
- Promotional aspect,
- Price discrimination, and
- Social considerations.
1. Promotional Aspect
This aspect is concerned with the adoption of a policy, which can promote the demand for the services offered by the undertaking. Only by promoting the demand, the undertaking can utilize its maximum available capacity. Concessional rates to regular consumers or special classes of consumers etc. come under this category,
2. Price Discrimination
The demand for the products or services of the public utilities is generally inelastic in nature. Therefore, it can follow discrimination policies based on the division of the market, consumers etc. However, the price discrimination should not do injustice to any section of the society.
3. Social Considerations
Since the public utilities are based on the doctrine of public interest, social considerations must be given importance in determining the price policy rather than those pure economic considerations.
- Meaning and Definition of Public Utilities
- Salient Features of Public Utilities
- Rights of the Public Utilities
- Duties of the Public Utilities
- Problems of the Public Utilities