What is Deregulation

What is deregulation?

Efficiency, renewable energy, and deregulation are among the most pressing concerns for utility customers across the country.

Although energy efficiency and using renewable electricity sources are well-understood concepts, electricity deregulation is still cloaked in a great deal of mystery despite having its modern roots in legislation from the early 1990s.

When people talk about electricity deregulation, what they’re really discussing is a process where the electricity generator and the electricity distributor are uncoupled and customers are given the power to choose their own electricity providers. Your local utility will always be the same, even in a deregulated area, but your electricity provider can be anyone certified by your state who offers electricity plans to your city or town.

A Brief History of Electricity Deregulation

Electricity providers weren’t always regulated.

In fact, when the earliest companies started bringing indoor lighting to homes there were often several competing companies in the same area, each running their own sets of wires. The Roaring 20s and the Great Depression both contributed to the consolidation of utility companies and the eventual formation of localized monopolies, where customers no longer had any choice in who would provide their electricity service. By 1932, approximately 73 percent of the investor-owned electricity industry was controlled by just eight utility holding companies in the United States.

Obviously, this was a major problem since those companies could and did charge whatever they felt like for electricity. In 1935, the first attempt to regulate electricity came about in the form of the Public Utilities Holding Company Act (PUHCA), also known as the Wheeler-Rayburn Act. Among other things, PUHCA prevented utility companies from artificially raising cost-based regulated electricity rates. The PUHCA was repealed 70 years later when the Energy Policy Act of 2005 was signed into law. It included sweeping measures that included incentives for utilities to invest in renewable energy sources and improved energy management measures.

In the 1970s the Energy Crisis struck, resulting in a number of efforts to increase energy efficiency on a national scale, as well as the creation of the US Department of Energy. Fast forward to the 1990s, when electricity deregulation really got a massive kickstart with the Energy Policy Act of 1992 (EPACT) and Order 888, which laid the groundwork for full deregulation. Many states began work to allow deregulation in 1996, the year Order 888 was signed.

Is your state deregulated? See our post on the current status of electricity and natural gas deregulation by state.

How Deregulation Works

For electricity customers in deregulated areas, buying electricity is a little more complicated than it is in areas where utilities are still strictly regulated. Instead of everything being under the control of one company, many smaller companies have hands in the kilowatt-hours flowing into each home or business.

Deregulation split old-school regulated electric utilities into three distinct functions: generation, transmission, and distribution.

Generation

Somewhere on the grid, electricity is being produced. Whether that’s by burning coal, using natural gas, catching the sun’s rays, or harnessing the wind or the power of water, the electricity that you use is produced by an electricity generator. These generators sell electricity in large volumes on the wholesale market to electricity providers who then re-sell it at retail to the general public in the form of electricity plans. How your electricity is produced and who you buy it from is now a decision you can make as an electricity plan customer.

Transmission

Electricity travels from the electricity generation point to its destination over a grid of wires and transformers, otherwise known as transmission. When it arrives at neighborhood-level substations, this significant surge of power is stepped down to a level of electricity suitable for household and commercial consumption. In a state with deregulated electricity, either utility or transmission companies, or a combination of both, own the transmission lines. The scheduling of transmission across the electric grid is managed by an independent system operator (ISO) or a regional transmission organization (RTO). Your local utility may also participate in the ownership or management of the energy grid in specific areas of a state.

Distribution

From the substation, your power finds its way to your home, on demand. Your local electric utility company is responsible for the distribution, or delivery, of electricity to your home or business. Your utility company records how much electricity you use from your meter and sends this information back to your electricity provider so your electric bill is accurate. In some states, however, the local utility administers your electric bill and then remits the supply portion to your electricity provider. The distribution piece of the electricity bundle is still regulated by your state’s public utility commission. The rates charged for delivery are approved and updated at least twice a year and are subject to emergency price adjustments for significant weather events or other unforeseen circumstances, if necessary.

To see a more in-depth explanation of these roles, see our post on the differences between an electricity provider and an electric utility.

Deregulation Today

It’s important to remember that although electricity deregulation usually sounds like it will be a great deal, the types of deregulation and it’s adoption vary by state. In some states, there has been a problem with increasing operating costs for older electricity generation facilities. Increased operating costs increase the cost of wholesale electricity from a particular facility. Since electricity providers have the ability to purchase wholesale electricity on the open market, these older facilities may be hard pressed to compete.

In other states, deregulation has been modeled in such a way that it is confusing to customers and this can cause hesitation when faced with the option to go with a new electricity provider or stay with what they’ve always known. Even so, states like Nevada are considering joining the other deregulated markets along side states such as Texas, Ohio, Connecticut, Illinois, Pennsylvania, and New York by making the switch to give their residents the power to choose when it comes to electricity plans.