What’s the Difference Between Investor-Owned, Government-Owned, and Co-Op Utilities?

When it comes to getting electricity, water, or other utilities, there are three main types of companies that provide these services: investor-owned, government-owned, and co-ops. Let’s break down what makes each one different.

1. Investor-Owned Utilities

These are companies owned by private or public investors who are in the business to make a profit. They vary in size of the number of customers they serve, with some of the largest utilities in the country serving as Investor-Owned Utilities (IOUs),+. . Since they are focused on making money for their shareholders, they might charge higher rates, but all IOUs are regulated by government agencies to make sure the rates they charge are just and reasonable. . IOUs are permitted to earn an authorized return on investment for money they invest in capital projects necessary for serving their customers. Example: Big utility companies like the ones you hear about on the stock market (such as HECO).

Pros to Investor Owned Utilities:

• Cost efficiencies and economies of scale are two of the primary benefits of IOUs. The profit motive encourages operational efficiency and adoption of innovative technologies that reduce costs.
• IOUs often have better access to capital markets as a result of their for-profit structure, and most utilities are financially stable and reliable for shareholders and investors.
• IOUs are often innovative and resourceful in grid planning and modernization, investing heavily in improving infrastructure necessary to serve customers.
• IOUs are regulated by government entities, who are tasked with ensuring that capital and operational expenditures are reasonable and in the public interest.
• Some IOUs have very large service territories and can spread business cost across a large customer base, thereby reducing large rate increases on customer bills.

Cons to Investor Owned Utilities:

• IOUs are motivated to maximize shareholder returns, which can mean higher rates than public power and co-op models of ownership. They operate under a cost-plus structure, which allows them to earn a return on capital investment, which can lead to capital investment bias, where IOUs are heavily incentivized to make large capital expenditures in order to maximize returns.
• IOUs are permitted to raise rates to cover the capital investments, which while regulated by government agencies, can still result in overbuilding or stranded assets, where ratepayers bear the responsibility to cover these costs.
• IOUs may not prioritize energy equity, sustainability, or renewable energy, unless it aligns with shareholder interest or they are mandated to pursue those initiatives. This can result in high energy burdens for underserved or low income communities, mismanagement of natural resources, and underinvestment in less costly renewable energy (e.g. solar and wind power).
• IOUs are often disincentivized from promoting distributed energy resources, like rooftop solar, because these resources reduce dependence on the centralized energy infrastructure owned by the utility.
• Finally, IOUs are shielded from competition by state and federal regulations, which reduces the market pressure to lower costs and provide affordable service to customers.

2. Government-Owned Utilities

These utilities are owned by local, state or federal governments and are also called public power. Local government electric utilities usually operate at the city level, and exist in every state except for Hawaii. Examples of state government utilities include the Salt River Project (Arizona), Lower Colorado River Authority (Texas), the New York Power Authority and the Nebraska Public Power District. Federal government utilities include the Tennessee Valley Authority, the Western Area Power Administration and the Bonneville Power Administration. The Navajo Tribal Utility Authority plays a similar role for the Navajo Nation. The main goal of these utilities is to serve the public, not to make a profit. Because of this, their rates are often lower (see also Co-Op Utilities), and they reinvest money into infrastructure, improving services or keeping rates down.

Pros to Government-Owned Utilities: 

• Electricity is typically sold at a lower price, similar to that provided by co-op utilities. 
• According to the American Public Power Association (APPA), on average residential public power customers pay 13% less than customers of IOUs. 
• Accountability to customers and transparency will typically be greater; the local community will control the priorities of the utility. 
• Tax-exempt municipal bonds are a cornerstone for financing public power infrastructure, which is lower than most borrowing rates for IOUs. 
• Technical assistance is available through the APPA. 
• Also according to the APPA, when all taxes, tax equivalents and other contributions to state and local government are considered, public powers contributions, as a percent of electric operating revenues, were 33% higher than those of IOUs.

Cons to Government-Owned Utilities: 

• While Maui County runs a water utility, it does not have experience operating an electric utility. 
• Moreover, given the large range of responsibilities and budgetary challenges currently facing Maui County, it is not in a great position to provide electric service. In addition, since a County-level electric utility would not be regulated by the Hawaii Public Utilities Commission, this lack of oversight may result in less control over poor decisions taken by the utility. 
• Also, government- owned utilities are only as successful and reliable as the people who run them, so recruiting and retaining high quality professionals is critical to maintain reliable electric service. 
• It may be difficult to attract top management personnel who seek the higher salaries and fringe benefits offered by IOUs. 
• It may also be challenging to maintain adequate financial capital resources to ensure that the utility is run efficiently, modernly, reliably and sustainably.

3. Co-Op Utilities

Co-ops are owned by the customers they serve. That means if you get electricity from a co-op, youre also part-owner! Like governments, co-ops are nonprofit organizations so any extra money they make goes back into the co-op or is returned to members. They are common in agricultural regions and other rural areas and typically emphasize volunteerism, ethical and social values. There are 896 rural electric co-ops in 48 U.S. states (832 of which provide distribution service only), which serve the majority of the land in the country. The main example in Hawaii of a small, community-run electric company is the KIUC (Kauai Island Utility Cooperative), which was created in 1999 and started operating in November 2002. KIUC provides complete electric generation, transmission and distribution services. While co-ops are normally not subject to regulation, since the KIUC is regulated by the Hawaii Public Utilities Commission it is likely that an electric co-op formed on Maui would also be subject to state regulation.

Pros to Cooperative Utilities: 

• Electricity is usually sold at a lower price, similar to that provided by government-owned utilities. KIUC also has the highest renewable energy usage rate, (and hopes to be using 100% renewable energy by 2033) and since 2019 the lowest retail electricity rates among the Hawaiian islands. 
• The co-op model promotes local democracy and reliable electric service, with more involvement of community members in the activities of the utility. 
• Financing is available through the Rural Utilities Service of the U.S. Department of Agriculture (USDA) and the National Rural Utilities Cooperative Finance Corporation (CFC). 
• In addition, technical assistance is provided through the National Rural Electric Cooperative Association (NRECA).

Cons to Cooperative Utilities: 

• Since co-ops operate primarily in rural areas they are usually small, so Mauis larger customer base may be challenging. However, there are some larger sized co-ops (e.g., Georgia’s Oglethorpe Power with 4.5 million customers, and Basin Electric Power Cooperative, which serves 3 million customers across four states). 
• Also, co-ops are only as successful and reliable as the people who run them, so recruiting and retaining high quality professionals is critical to maintain reliable electric service. For example, it may be difficult to attract top management personnel who seek the higher salaries and fringe benefits offered by IOUs. 
• It may also be challenging to maintain adequate financial capital resources to ensure that the co-op is run efficiently, modernly, reliably and sustainably.

Why Does It Matter?

Understanding who runs your utility company helps you know where your money is going. Whether it’s to investors, back to the government, or into your own community, the type of utility can affect costs, reliability, and customer service.