How Utility Companies Cover Expenses And Make Profits

How Utility Companies Cover Expenses And Make Profits

For the most part, utilities that supply electricity and natural gas to the public operate as regulated monopolies. To promote a consistent supply of power at a theoretically fair price, state governments grant utilities the exclusive right to distribute gas and electricity to the public within a specific region. The system requires public oversight of the rates charged to customers but also gives utilities a mechanism for generating profits. The cost of operating a utility is broken into two broad categories of operating expenses and capital expenses.

Operating Expenses

The day-to-day cost of doing business represents operating expenses. Simply managing the vast number of utility customers requires significant resources to operate customer service centers. Utilities run call centers with systems like NICE call recording that save conversations with customers and collects other data. A utility setting up a customer service call center might choose Nice Call Recording from Market Communications.

NICE software enables the management of customer service calls as people contact a utility to turn service on or off, pay bills, and report problems, like a downed wire or suspected gas leak. NICE call recording can take place in the cloud with NICE VoIP Call Recording. On top of paying for NICE VoIP Call Recording, a call center has other operating expenses like staff salaries, office space, paper supplies, and postage.

The salaries of everyone working at the utility from executives to utility workers out in the field also count as operating expenses. Payments to lawyers who lobby the government officials who regulate the utility also count as an operating expense.

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State regulations typically require that utilities collect only the cost of their operating expenses. They do not derive a profit from the portion of the utility bill designated for these expenses. A $100 in operating expenses can only be expressed as $100 on a customer’s bill. The utility companies are only allowed to break even. However, different rules apply to capital expenses.

Capital Expenses

A capital expense differs from an operating expense because it pays for a physical asset that forms the infrastructure that a utility company needs to function. All of the power lines and poles that crisscross the country are obvious examples of utility infrastructure. Storage tanks and pipes for natural gas serve as infrastructure as well. In some states, utility companies own power plants, but other states require that separate entities own the power plants. Either way, power plants are a significant part of the power grid infrastructure.

Regulators allow utilities to charge customers an amount beyond the actual cost of a capital expense. For example, every $100 in capital expenses could be billed to customers at a rate 10% higher, or $110.

Why Can Utility Companies Charge More For Capital Expenses?

Utilities build massive pieces of infrastructure, such as power lines covering hundreds of miles. For this reason, capital expenses for a utility easily reach into the tens of millions of dollars.

Huge sums of money like this come from loans and investors. If utilities were not permitted to generate profits off of billing for capital expenses, they would have no way to convince a lender or investor to provide cash. Banks and investors need to see that a utility can provide a return on their money.

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New Investments Needed To Modernize The Grid

As the power grid evolves from power plants supplying end-users to external generation on the rooftops of customers with solar panels, infrastructure improvements become necessary. To manage an increasingly complex flow of energy, utilities can be expected to seek more money for capital improvements in the coming years.

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