A History of US Energy Deregulation

While deregulated energy markets now exist in several states across the country, electricity deregulation in the US is still an arduous process.

What is Energy Deregulation?

Energy deregulation is a term that describes the removal of government controls over the electricity market. Instead of vesting all regional power into a sole utility company responsible for generating, transmitting, and delivering electricity, the government has allowed companies to purchase electricity from utilities and sell them to the consumers. These companies are known as Retail Electricity Providers, or REPs. These companies are not responsible for generating or transmitting electricity, only delivering the product of electricity to the consumer at varying rates and volumes.

The idea behind deregulation is that competition between REPs will result in lower prices and a fairer market for electric rates. In some cases, this is true, but unfortunately, many companies find loopholes in order to continue taking advantage of consumers through teaser rates and other exploits.

Currently, most deregulated energy markets force utilities to open their energy supply up to competitive electric providers to compete on the market. Most service areas still rely on one utility, but this is hidden in part by the many REPs that have popped up over the decades. These retail providers buy up electricity from the utility and distribute it to you, the consumer. By splitting up the distribution and generation aspects of the electricity market, singular companies have less influence over prices, conditions, and consumer options.

Deregulation of Public Utilities: Why It Matters

Deregulation of the electric market is very important and is a good thing. The previous system granted singular companies too much power and monopolized regional markets. When a group has control over all aspects of a market, it tends to be completely unhealthy for the market. Without competition, utilities don’t have much incentive to improve their product -- such as conducting research into more efficient infrastructure, offer better rates, or invest in alternative energy sources.

With deregulation, consumers also have choices to make. REPs compete with each other to offer a variety of different rates, and consumers can use the information at their disposal to choose the fairest, or best, electricity plan for their home or business. This is commonly referred to as the “Power to Choose”.

Before Deregulation

September 1882: Edison launches the first central power plant in America (The Pearl Street Station). 1892: Samuel Insull begins building the first power grid in Chicago. -This innovation caused prices to drop from over $4/kWh to under $1/kWh 1907: Wisconsin and New York begin regulating electricity rates. -From 1907 to 1914, 43 states followed this example and created regulations on electric utilities. 1920: The Federal Power Commission (now replaced by the Federal Energy Regulatory Commission) is founded with the mission to oversee hydroelectric licensing. -Soon, the role of the FPC expanded into the entire power market, creating strict regulatory frameworks and establishing regional utility monopolies. 1935: The Federal Power Act is passed.

Before the modern deregulation movement began in the 1990s, singular utility companies were responsible for the energy being generated, transmitted, and delivered by the same company to each consumer within a specific region - essentially a monopoly granted by the government to a major utility in the region.

You might be asking -- why would the government create a monopoly in every area? The answer lies behind the complexity of generating energy and delivering it to customers. In the early stages of the electric market, the main focus was on creating infrastructure. The many different utilities all competed to create their own separate power lines, sub-stations, and other equipment, resulting in a very inefficient power grid. High inefficiency turned into high costs, and high costs turned into outrageously high electrical prices, as well as intermittent service outages. In order to combat this, the government consolidated all regional infrastructures into one utility company that created and maintained electrical equipment.

Concluding Thoughts

Currently, only 16 states are considered ‘deregulated’ states. Texas is the largest hub for REPs in the nation, but California, New York, Pennsylvania and other states also offer citizens a chance to participate in the deregulated electricity market.

Deregulated energy markets are still not a completely free market; however, they create a good balance between a competitive free market and the previous ‘regulated’ system.