What is Energy Deregulation?

Today, energy users have the power to choose where their energy comes from, but that wasn’t always the case. Energy deregulation is the restructuring of the existing energy market, and seeks to prevent energy monopolies by increasing competition.

This growing movement allows energy users to choose from multiple energy providers based on rates that suit their needs and specialized product offerings.

How does energy deregulation work?

Energy deregulation works through reverse auction, where each company offers to sell its energy at the lowest possible rate. Independent agencies purchase the energy needed to suit the demand they predict, and then set the best rate for their customers.

Energy is thus delivered through the existing utility infrastructure. The utility companies that own the infrastructure are responsible for transmitting energy, but not for setting the rate energy users pay. This process allows energy users to receive the same service, but at a rate that fits their needs.

Energy in the early United States

In the early days of electricity and natural gas usage, energy utilities were not regulated. Utilities competed for customers, which kept prices down. Purdue University notes that as nationwide demand for energy increased, power companies responded by building larger power plants, which further reduced energy costs.

In order to stay competitive, utility companies sought to improve the efficiency of their energy production and delivery systems. This resulted in a win-win for utilities and energy users alike, with affordable energy and brisk economic growth.

Unfortunately, rapid expansion and poor management had a negative effect on infrastructure. Different companies produced and transmitted energy, and handled distribution in different ways. Without a uniform way to deliver energy, energy users often fell through the cracks, and some were even left without service.

Additionally, while utilities were meant to generate, transmit and distribute energy, few utility companies of the time performed all three functions. This resulted in a fractured infrastructure with spotty service and widely fluctuating prices.

A move toward energy regulation

To resolve these issues and provide dependable service to energy users, the US government passed the Public Utility Holding Company Act (often referred to as “PUHCA”) in 1935. PUCHA was a response to the unsatisfactory business practices favored by large utility holding companies, which were becoming energy monopolies. For instance, by the early 1930s, three such holding companies controlled almost half the utility industry in the United States.

The next significant step toward energy regulation came after the Great Northeast Blackout of 1965, when a faulty protective relay on a transmission line tripped, leaving 30 million people in the United States and parts of Canada without electricity for up to 13 hours.

The energy industry’s response to that widespread blackout was to create the North American Electric Reliability Council (NERC). NERC split the United States into 10 energy regions, with each region assuming responsibility for controlling energy and improving the reliability of energy delivery. NERC had its desired effect—the process of energy delivery improved tremendously. Unfortunately, NERC also made it possible for local energy monopolies to emerge, which sold energy at prices set by NERC regulators, resulting in a lack of competition and overcharged energy users.

Prices rose even further during the energy crises that dominated the 1970s, when spikes in oil prices increased energy costs. In response to high gas prices, utility companies began expensive construction projects as they switched to plants that generated electricity using coal or uranium. The cost of these mammoth projects was passed onto energy users, who had no choice but to pay what the utility companies demanded.

The FERC and energy deregulation

Even with higher prices, many utility companies were unable to afford the costs from building their new power plants. Many teetered on the verge of bankruptcy, while others asked NERC regulators to approve even higher price hikes. It became apparent that the energy system was again in crisis, this time thanks to the very regulatory actions designed to monitor it.

In 1977, the federal government responded with the Federal Energy Regulatory Commission (FERC). FERC took the bold step of deregulating the energy industry, leaving it up to individual states to decide how to supply energy to energy users. With a now-standard energy infrastructure, it was possible to introduce market competition back into the industry with the goal of lowering energy costs.

In deregulated energy states, the utility companies continue to own the delivery infrastructure, but energy users can now make their own energy choices by selecting which provider generates or purchases the energy delivered to them. This allows individuals to select the energy plan that’s best suited for their needs.

The benefits of energy deregulation

The deregulation of the energy industry brought multiple benefits to the energy user, and includes the following:

Power to choose. Deregulation allows energy users to choose where their energy comes from, and allows them to choose plans that are best for them.
Increased competition and better service. Deregulation promotes competition among energy firms, and motivates providers to offer excellent service to their customers.
Encouraged energy efficiency. Deregulation empowers users to be more energy efficient by choosing companies with more energy-efficient practices.
Improved energy consciousness. Energy deregulation helps energy users understand energy costs by evaluating different plans, and providers often help their customers to save and conserve energy.
New and enhanced services. By diversifying, competitive energy suppliers often offer additional services and benefits to their energy users that would otherwise have been unavailable.

Deregulated energy states

The majority of U.S. states continue to regulate energy, but many states are opening up to deregulation. At present, states and districts with the power to choose include the following:

All in all, energy deregulation is a positive movement that boosts the power of energy users and improves customer service. Now that you understand the history of energy deregulation, you can read more about the importance of energy choice and why it matters for you and your home or business.