Benefits for utility businesses vary greatly from country to country and region to region. Partly because of barriers to entry and other legislative restrictions on competition, both lateral and horizontal. In the first quarter of 2022, the average net profit margin in the utilities sector was 9.68%. For the last 12 months (TTM), the net profit margin increased to 10.88%.

Looking at other margin metrics, the average gross margin increased to 66.04% in the first quarter of 2022. The average gross margin earnings before interest, taxes, depreciation and amortization The margin (EBTIDA) stands at 34.29%.

To get an idea of ​​how widespread profit margins are in the industry, we can compare the most recent profit margins of two different power utilities operating in different parts of the world. Spark Infrastructure Group and Duke Energy (DUKE). Spark Infrastructure Group provides electric power and infrastructure across Australia and reported a net profit margin of 29% for 2021. In contrast, Duke Energy operates generation projects in the United States and Canada and recorded a net profit margin of 15%.

Utilities and the pricing process

Despite wide variations between different countries, the utility sector has relatively high profit margins in the United States. Utility companies are de facto run monopolies in the regions where they operate, making it difficult for competitors to establish themselves in profitable areas and compete for energy revenues. This is partly due to the extremely high levels of capital investment required to provide energy, but most of it comes from local and federal government restrictions on new projects.

U.S. state governments use utility pricing to set the prices that utility companies can charge their customers. This also necessarily restricts the profit margins of utility companies. The legal requirement for these providers to undergo the rate-setting process is another reason why utility companies tend to become natural monopolies.

Utilities required to go through the rate-setting process in the United States typically include telecommunications providers, natural gas providers, electric companies, and railroads.

Utility competition

Typically, profits serve as a signal to other companies or entrepreneurs that a valuable service is provided above its cost in a given region. This attracts competitors and ultimately helps reduce profits and improve products. However, given regulations and high start-up costs, this does not necessarily apply to the utility sector.

The pricing process for public service providers has five objectives:

1. Attract capital to the sector
2. Control prices
3. Encouraging efficiency in the production and distribution of public services
4. Controlling demand for public services or rationing them to consumers
5. Redistribute wealth from consumers to utility owners and across consumer classes

Pricing formula

Traditionally, regulators use the following pricing formula to determine a utility provider’s revenue needs:

R = O + (V – D)r

Or:

• R = the public service tariff level or revenue requirements
• O = operating expenses of the utility company
• V = the value of intangible or tangible public service assets
• D = cumulative depreciation of the supplier
• r = the rate of return the utility company is allowed to receive on its capital investment

Because it allows the utility company to receive a rate of return on its capital investments, the traditional model encourages utility providers to invest more capital in their operations: the more the utility company and its investors invest capital, the greater the returns.