Energy Deregulation: Why It Matters, and How It Benefits Energy Consumers
Most residential and small business consumers have had the same experience with energy over the past 80 or so years. They sign a contract with the local utility company, they pay their bill every month, and their lights and electrical outlets keep working. Usually, there’s very little choice involved — if any.
In this scenario, the majority of areas are controlled by monopolies, meaning you only have one option for an energy provider. Price competition is non-existent, meaning you’re forced to pay a certain amount that gets dictated by the energy company.
That was the way things were until one huge, fairly recent development happened: deregulation.
Energy deregulation not only busted up monopolies but also introduced a range of choices to consumers. Energy companies that could previously get away with charging whatever they wanted and treating customers however they wanted now have competition.
There is no overstating the impact this change has had. With energy deregulation, consumers are now free to make a choice in their energy supplier, and suppliers now have to compete on price, customer service, and other critical brand differentiators.
Energy, as we know it, has been changed forever.
What Is Energy Deregulation?
In the past, a single utility company was the only option for both electric and gas supply for all properties. The government authorities devise a plan with local utility companies to enable standardized power and energy transmission to home and business owners.
For regulated areas, a single utility company provides nearly all the required power and energy, which includes:
- Generation: Producing electricity or refined gas
- Transmission: Moving the electricity or gas from plants to substations
- Distribution: Ensuring the delivery of electricity or gas from the substation to homes and offices
In these areas, energy prices are set by regulated policies. The government and utility company set the price of energy commodities (electricity and gas), and the utility usually adds the cost of service delivery, support, and distribution. There is no competition, and consumers have no choice in energy providers, forcing them to rely on the sole available utility company.
In the late 1990s, public utility commissions and state legislatures started the process of deregulating electricity and natural gas distribution. Legislation passed in California, Texas, New York, Pennsylvania, Massachusetts, and Rhode Island allowed for the creation of a new type of energy company: a retail electric service provider, or REP. It was the first time that consumers had the right to choose their energy supply and energy provider.
Other states soon followed suit. By the year 2012, 16 states allowed consumers to make a choice in their electrical energy and/or gas provider. These included: Oregon, Texas, Rhode Island, Montana, Pennsylvania, New York, New Jersey, Ohio, Connecticut, Michigan, Illinois, Massachusetts, Maryland, and Washington D.C.
How Does Energy Deregulation Work?
In most regions, “energy deregulation” means that supplying energy to consumers is separated from the energy’s generation, transmission and distribution.
Even when a market is “deregulated,” energy is still generated by a power plant and then sold to the energy supplier. The supplier can then sell this energy directly to consumers.
Through a reverse auction arrangement, independent energy supply companies purchase energy that suits the demand they have predicted. Then, they set the best rate price for their customers that they can and seek out contracts to provide energy to consumers in their area.
Your utility company still has the control of delivering electricity (through wires) and gas (through pipelines) to homes and businesses. The utility company will take care of maintenance and emergencies. They will also manage the transmission and distribution of power and ensure safety.
This arrangement ensures that you receive the same energy as the rest of the consumers but pay for a rate that fits your needs. It also allows governments and regulatory bodies to still have oversight while introducing competition and market forces to the industry.
The result? Consumers win because they get better prices, better service, and better perks than a monopoly would ever be able to offer. Best of all, if they’re not happy with their energy supplier, they can get another one!
Benefits of Energy Deregulation
New energy legislation and deregulated agreements keep the basic means of transmission and distribution of power the same, but it allows the different suppliers to enter the market and offer services to consumers. The main purpose of energy deregulation is to restructure the existing energy market, increase competition, and prevent monopolies.
Deregulation has given energy suppliers the opportunity to differentiate their products from past monopolistic utilities and their current competitors by introducing unique features, pricing plans, and green energy products.
Major benefits to consumers include:
- Freedom and power to choose electricity and gas provider (variety of products, simple terms, and affordable prices)
- The prices are fixed for a specific period of time so there is relief from any price hikes and the rising cost of consumption
- The transmission and distribution are monitored and regulated by the PUC (Public Utility Commissions)
- Consumers understand the energy cost and evaluate different plans and know the value of conserving energy and using energy-efficient equipment and devices
- The energy suppliers are motivated to offer better affordability, reliability, and other value-added services
Overall, energy deregulation has injected a much-needed dose of competition — and, dare we say, excitement! — to the retail energy market. Consumers get to choose from among energy supply brands just like they have a choice in groceries, gasoline, clothing, and other necessities. Monopolies can no longer force consumers to accept sub-par service, and local governments have more flexibility to set their own energy-related policies without the monopolies’ total control.
With energy deregulation, companies and the energy market as a whole seek to make sure that consumers like you can come away feeling like a winner. And when they can’t, you always have the option to go with someone who can do a better job! That’s the power of choice, and it’s making a difference in people’s lives — and in their energy bill — every single day.