Electricity Deregulation

Deregulation breaks up a vertical monopoly on electricity long held by utility companies. Specifically, it separates three stages of the electricity market: generation, transmission, and distribution. Utility companies retain control over the distribution phase because it’s still efficient for one company to handle the physical wires. Deregulation takes advantage of the fact that other companies can easily handle generation and intermediate transmission—and maybe do a better job, to boot. All of a sudden the monopoly is a competitive market.

In a deregulated market, consumers can choose what service providers they want to supply them with electricity. That company then arranges to transmit the electricity to their local utility, who ultimately delivers it to homes and businesses as before.

Why You Should Care

There’s an open debate about whether deregulation benefits a state’s electricity market. Those arguing in favor believe that the free competition will drive down prices. Those against it believe that utility companies need a monopoly over electricity to handle it effectively and avoid scarcity.

Whatever the effects on deregulation on a larger scale, it’s clear that you can profit from deregulation if you live in an area where changing providers is allowed. Alternative companies can guarantee that you’ll save money by switching over to their service, simply by connecting their rate to a publicly determined price, often called the Price to Beat. Since the Price to Beat is determined on the basis of the utility companies, beating the Price to Beat automatically means you’re saving money.

Deregulation also has benefits for small businesses , which can now negotiate directly with different providers to see which of them can offer a better rate. Unlike large corporations able to provide for their own electricity or negotiate with large companies, small businesses were at the mercy of utilities until deregulation allowed them to reach out and take bids on a good deal.

A Short History of Deregulated Electricity in the U.S.

Deregulation, also known as restructuring, resulted from a long string of federal policies easing restrictions on local electricity markets. These began with the Energy Policy Act of 1992 and culminated in two Orders by the Federal Energy Regulatory Commission allowing states to make their own decisions about deregulation. Almost half of the U.S. states responded by taking steps towards deregulation, a process which has had concrete effects in breaking up generation monopolies and increasing effectiveness of delivery.

Not every state kept its market deregulated, and you can see for yourself how the map now stands: Electricity Restructuring by State

Pennsylvania and Texas have become success stories of deregulation, perhaps in part because they contain their own growing energy industries. Deregulation has opened up space for small- and medium-sized companies to flourish in markets where consumers can actively decide where they want to buy electricity.Pennsylvania in particular has had real successes in reducing electricity prices through competition.

Other deregulated markets include Illinois, Michigan, Ohio, Maine, New Hampshire, Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Delaware, Maryland, Oregon, and Washington, D.C.