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What is a Utilities Sector?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 22 September 2016
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A utilities sector is an area of an economy based on providing utility services and supportive infrastructure. This includes gas, electric, water, and phone companies, along with companies specializing in providing products and services to these companies, like manufacturers of wiring, transformers, and other components. This market sector is viewed together because the fortunes of utility companies tend to be closely linked, just like those of companies in other sectors like healthcare and technology.

For investors, analysis of the utilities sector can be used to determine if investments should be made in this area, and how they should be distributed. Utilities are typically run under government regulation and they may carry more debt than other kinds of companies to pay for their supportive infrastructure and the other costs associated with meeting regulatory requirements. They may also be limited in terms of how much they can charge customers, presenting a barrier to profits when compared with companies in other industries.

Companies in the utilities sector can be impacted by a number of market fluctuations including changing energy prices, shifts in interest rates, and employment. When energy prices are high, for example, utilities pay more for raw materials they use, and may not be able to pass this immediately on to customers. Understanding the relationship between a utilities sector and other areas of the market is important for people making investment decisions.

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Financial performance and projects in this sector can also provide valuable information about the future direction of other areas of the market. Market analysis often breaks down performance by sector to allow people to drill down as they are viewing data and draw more meaningful conclusions about what the market is doing. It is possible for a utilities sector to remain stable when the market fluctuates, or for it to trail the market, earning less than companies in other sectors during upticks in market performance.

Demand for the services of a utility sector can vary, depending on region and time of year, but tends to trend upwards over time. This can make investments in this sector sound from a financial standpoint, as these companies are unlikely to experience radical changes in fortune. With reduced risks usually come fewer opportunities for windfall profits, and the same holds true for investors in utilities. Performance tends to be stable, but not outstanding, and while such companies can be valuable in a portfolio, they are usually balanced with more high return investments.

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everetra
Post 4

@Mammmood - Are you serious? You want the regulators to be kept at bay? They are not there to be party poopers; they are there to make sure that the environment is not harmed and people are not made sick.

Fracking, which is the dominant process for natural gas extraction, has been implicated in a lot of cases of poisoned water wells, and in some cases has forced people to move out of their homes and relocate elsewhere.

I share your desire to put more people to work, but not at the expense of making even more people sick.

Mammmood
Post 3

@hamje32 - I am really excited about what has been going on in the natural gas sector. Massive reserves of natural gas have been uncovered in parts of Pennsylvania and in other parts of the country.

It’s part of a long term strategy for energy independence. I just wish that government would get out of the way so that the shale extracts can be drilled through without interference from regulators.

The process is safe in my opinion and the natural gas industry employs a lot of people, and can put even more people to work if the regulators will be kept at bay.

hamje32
Post 2

@allenJo - I can second that motion. I would also like to reinforce what the article points out about government regulations in the utilities sector.

I work for a software company that caters to the utilities and we’ve seen the effects of government regulations. On the one hand, they can have a chilling effect on innovation, but this does keep them from making speculative bets that could harm their bottom line.

On another level, government regulations are actually good for utilities. Lately there has been an increase in government audits of the companies in the gas sector and the electricity sector, to make sure they are working within acceptable safety and testing standards.

This ensures that the utilities can avoid disasters like equipment failures, which lead to massive government fines and sky high insurance costs. For an investor, a safer utility means a solid investment.

allenJo
Post 1

I don’t think you can go wrong with investments in the energy utilities as part of your portfolio. The article is right, you probably won’t get rich, but they do deliver stable investment returns over the long run.

Some people think that green energy initiatives will render traditional utilities, such as those that use coal and gas, obsolete. That will be far off into the future, if ever, in my opinion.

Frankly, I believe green energy companies are riskier bets right now. Even with government subsidies some of these companies have been forced to fold amid massive bankruptcy filings.

The mass market simply isn’t there for alternative energy, at least not on a scale that would justify the billions that are poured into it, in my humble opinion. Good old fashioned fossil fuel, while still derided by some critics, will be a bread and butter staple for years to come.

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