What Is Energy Deregulation?

In a fully regulated energy market, a government body oversees all aspects of energy product prices and processes. This means that only the local utility can sell directly to consumers, and the regulating body establishes prices for electricity and natural gas. Additionally, the government dictates distribution and transportation costs, leaving consumers with no choice about their energy provider.

The process of deregulation returns control to the consumer, allowing competitive energy suppliers to emerge. With a wider variety of providers and choices, prices tend to become more competitive. Suppliers must set themselves apart from competitors through innovative features and attractive options. In addition to innovation and pricing improvements, deregulated markets lend themselves to more emphasis on renewable energy sources. Energy suppliers can introduce renewables to the electricity grid.

Over the past several decades, multiple US states and Canadian provinces have undergone the deregulation process. As a result, consumers in these areas can freely choose their suppliers, just as they would a particular Internet provider or cell phone carrier. Although the government does not regulate energy prices, marketing is still subject to regulation.

In 1978 the US Congress passed the Public Utilities Regulatory Policies Act (PURPA), which aimed to promote alternate energy sources, decrease dependence on foreign oil, and diversify the American electric power grid.

The biggest change came in 1992. The Energy Policy Act gave residential and business customers the right to choose their electricity supplier. This landmark case determined that energy utilities and energy suppliers must be separate entities. Over the next decade, more than a dozen states became deregulated and allowed competitive energy companies to develop. Utilities, however, continue to be regulated because of their position as monopolies.

The state of Texas, for example, regulated electric power in 2002. In the new electricity market, consumers can compare plans and rates to choose their electric companies. If they wish to change plans, various online tools allow them to browse rates and new contract terms. While they may pay a termination fee with their previous companies, they have the right to switch plans whenever they wish.

Generally, Texas consumers can choose between a fixed-rate plan, which keeps the price constant for the contract’s duration regardless of market volatility or weather, or a variable rate plan. With a variable rate, consumers pay a different price each month depending on market factors.

One disadvantage of a deregulated energy market is that consumers bear more personal responsibility. When faced with dozens of choices, they should research suppliers and compare rates. Furthermore, they should fully understand all contractual obligations before signing up.

Consumers will typically save substantially by shopping around. Because energy rates fluctuate daily, consumers should compare them on multiple occasions, in addition to talking to more than one company. According to the Small Business Administration, many businesses are paying hundreds and even thousands of dollars more than they should on energy. Similarly, individuals pay an average of 20 percent more than they should.

A deregulated energy market offers consumers more flexibility than a regulated market. For example, consumers can change their providers when their life circumstances change. The birth of a baby or new home purchase will affect energy consumption. A deregulated market ensures that consumers can select a new plan that aligns with their current energy needs. Many suppliers offer a variety of plans, including two-year or four-year plans. For consumers with unpredictable usage, a supplier with a fixed-rate payment plan may make sense.