Electricity is a key part of our modern lives. And for many years, regulation of the energy sector kept the lights on. However, as time has passed, regulations have become less necessary (and sometimes burdensome) as it limits competition and can slow innovation. Energy deregulation has become a popular topic in many states as they look to allow more free competition, which can benefit the energy industry and consumers alike.
But what exactly is energy deregulation? We’ll answer that question and delve into its history, the pros and cons, and what it means for you.
What Is Energy Deregulation?
Energy deregulation is a relatively simple concept that takes the power from utility companies and places it back into the consumer’s hands. In a deregulated energy market, utility companies are still responsible for producing electricity, but they don’t set retail prices or sell directly to consumers.
Instead, independent agencies negotiate a rate to purchase the electricity from the utility companies on the wholesale market, then resell it — at a profit — to consumers. In a regulated energy market, consumers must purchase their electricity from a local utility company at the rates the company sets.
A Brief History of Energy Regulation
In the early years of electricity generation and distribution, the market was not regulated. This led to widespread competition — especially in urban areas — and led to competitive pricing. As a result, rates continually fell as utility companies built larger, more efficient power plants.
Numerous laws were enacted from the 1930s through the 1970s to regulate the energy sector. These laws aimed to control rising energy prices due to increasing oil prices and limited competition and imports. Today, about 40% of states have at least partially deregulated energy markets or are transitioning to energy deregulation.
Which Industries Have Been Deregulated?
Throughout American history, several industries have endured heavy government regulation and eventual deregulation. In addition to the energy sector, other deregulated industries include airlines, motor carriers, railroads, banks, and natural gas.
Is Deregulation Good or Bad?
It’s not so simple to say that energy deregulation is good or bad. Instead, it’s best to look at its pros and cons to see if its benefits outweigh the negatives. Let’s take a closer look at the potential upsides and drawbacks of a deregulated energy market.
Why Is Energy Deregulation Good?
Deregulation is good if it eliminates a monopoly created in a regulated market. Whether it’s commercial or residential customers, people can choose their electricity provider.
For instance, in the energy market, deregulated states like Texas give consumers the power to choose their energy provider based on factors that matter most to them, whether it’s a lower price, better reliability, or renewable energy usage.
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This means if a consumer wants an electric company that’s adopted cleaner and more sustainable power generation — such as solar, hydropower, or wind energy — they may find one that aligns with their preferences and values.
Why Is Energy Deregulation Bad?
A deregulated energy market could be considered bad in the sense that consumers must be vigilant about making educated decisions. When there are so many energy companies vying for your business, it can get confusing. For instance, the state of Texas alone has more than 140 retail electricity providers (REPs), each with their own energy plans.
There’s also the opportunity for utility scammers to offer incredibly low energy prices or claim you overpaid and request your banking and personal information to sign you up for a new service or refund. Unfortunately, these people are not legitimate representatives of any electricity provider. There’s also the risk of price fixing, where energy resellers work together to increase their electricity rates for more profit.
What Was Energy Deregulation in the 1980s?
The 1980s was all about deregulation, mostly under the guidance of President Ronald Reagan. Deregulation in the 1980s reached the energy sector, telecommunications, transportation, and natural gas industries.
Many large corporations, politicians, and economists backed this deregulation, claiming the Public Utility Regulatory Policies Act (PURPA) established a new type of power facility called a qualifying facility (QF). These QFs could receive special fees for selling their electricity back to the local utility companies, proving companies other than local utilities could generate efficient and cost-effective electricity.
The steady deregulation of the 1980s eventually came to a head with the passing of President George Bush’s Energy Policy Act (EPACT) of 1992. This act granted companies other than utilities access to the electricity transmission lines network. It also created a new type of QF called exempt wholesale generators (EWGs), which weren’t subject to the same regulations as utility companies.
Who Benefits from Deregulation?
Deregulation in general is a win-win for consumers and businesses alike. For the consumer, deregulation can increase competition and help lower prices. Without strict regulations, it also allows providers — electric companies, in this case — to develop new power-generation methods. This can lower costs, reduce greenhouse gas (GHG) emissions, and spur further innovation.
For businesses, deregulation lowers the financial barrier of entry, allowing small business owners to enter the market and compete with larger organizations.
Deregulation also helps the local workforce. It does so because less regulation means more competition. As more businesses enter the market, more jobs open up. It also creates additional demand for workers, which could lead to higher wages.
How Many States Have Deregulated Energy?
In total, 18 states have full or partial deregulation. Full deregulation means the entire state has a free electricity market, and consumers can choose their providers based on their preferences.
According to CNET, these fully deregulated states are as follows:
- Connecticut
- Delaware
- Massachusetts
- Illinois
- Maine
- Maryland
- New Hampshire
- New Jersey
- New York
- Ohio
- Pennsylvania
- Rhode Island
- Texas
Partial deregulation means customers in certain areas can choose their electricity providers, but others only have a single provider. For example, Texas cities like Lubbock, Fort Worth, and Dallas are deregulated energy markets while Austin and San Antonio remain regulated.
The five partially deregulated states are:
- California
- Georgia
- Michigan
- Oregon
- Virginia
Why Did California Deregulate Electricity?
Until the early 1990s, California was a regulated electricity state, meaning statewide regulations controlled all electric utilities, and consumers had no freedom to choose their power supplier. At this time, it was part of the Western Interconnection power grid, which comprised 11 states in the western U.S. that made up one large energy market.
Within this group, California was a net importer of electricity, meaning it bought more electricity from other states than it produced and sold. This led to California having electricity rates approximately 75% higher than others in the Western Interconnection.
Before restructuring and moving toward deregulation, California electricity customers got most of their electricity from one of three large, investor-owned utility providers. Without competition, these utility providers could easily pass on the high costs of importing electricity to the customer. This spurred the introduction of several proposed changes to the electric utility space in 1994 that, combined with law AB 1890 of 1996, brought about big changes to electric distribution in California.
Some of the key changes during the restructuring of the California electricity crisis was partial electricity deregulation. Here’s a closer look below.
Divesting of Investor-Owned Utilities
California required the three large investor-owned energy suppliers to divest at least 50% of their natural gas, oil, and coal power plants. These utilities also had to transfer control of their transmission networks to the California Independent System Operator (CAISO), but they retained network ownership.
Wholesale Electricity Auctions Established
California then set up wholesale electricity auctions and established the Power Exchange (PX) to manage them. This change required all electricity utilities to purchase any power they imported from the auction instead of entering into long-term electricity-importing contracts.
Retail Prices Were Frozen and Provider Options Given
All retail electricity prices were frozen until 2002. Also, retail consumers could choose between buying power from their traditional utility provider or from other suppliers, introducing much-needed competition. Unfortunately, due to the price freeze, few customers opted for the switch to a competitive supplier.
What Are 3 Examples of Deregulation?
Deregulation can mean many things, and it doesn’t always mean all regulations are removed. It often means that only certain barriers are lowered to help positively impact that industry. Here are three examples of deregulation:
- Reducing barriers of entry: This is when the government eliminates or loosens requirements to enter an industry, such as licensing or capital requirements. This allows new businesses to more easily enter the market and create competition that may spur lower pricing and increased innovation. The 1978 deregulation of the airline industry in the U.S. is a prime example of this.
- Reducing trade barriers: Lowering or eliminating trade barriers, such as import caps and tariffs, can introduce more foreign imports into an underserved market in the U.S. This can result in lowered prices and increased innovation.
- Subsidy elimination: Subsidies can help some industries, such as electric cars or solar panels. However, they can also result in unfair competitive advantages and squeeze out other, more innovative competitors. By eliminating these subsidies in deregulation, the government can level the playing field, giving all competitors equal opportunity.
Save on Electricity by Leveraging Texas’ Deregulated Market
Energy deregulation isn’t a fix-all solution for energy savings, but it’s a great place to start. With Texas’ open energy market, you can choose whichever energy supplier you prefer. Whether you’re focused on cost per kilowatt, a green solution offering energy efficiency, or a combination of several preferences, there’s an option for you.
Wading through all the energy provider options in Texas can be overwhelming, and this is where Energy Savings can help. As an energy broker, we simplify the process by sharing some of the top plans that you can choose from to suit your needs. Find an electric service provider that works for your home or business.
Brought to you by energysavings.com
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