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Regulated vs. Deregulated Energy Markets

5 minutes
A photograph of electric poles and lines. The bright lights of a city illuminate the distance. There is an illustration of connected lines and dots crisscrossing the photo.

The U.S. Energy Information Administration (EIA), notes that the nation’s power grid is fed by some 7,300 power plants. Some 160,000 miles of high-voltage power lines transmit electricity across the grid. Today, about 40% of the nation’s electricity is generated from natural gas. Coal, nuclear, and renewables account for roughly 20% each.

The amount of control you have over your energy supplier varies from state to state and depends largely on if the state has deregulated its gas market, electricity market, or both. Let’s take a closer look at regulated vs. deregulated energy markets.

What are Regulated Energy Markets?

In the majority of states, energy delivery still occurs via regulated monopolies. As the EPA notes, “regulated markets feature vertically integrated utilities that own or control the total flow of electricity from generation to meter.”

In regulated markets, a single utility is responsible for generation (electric) or production (natural gas). It is also responsible for transmission and distribution. A report from Purdue University notes that there are more than 3,200 utilities in the country. They operate as monopolies regulated by state public utility commissions. However, they frequently rely on other entities to help with these basic functions.

In the early days, it was a bit of a free-for-all in the energy marketplace. Some competing utilities even built their own distribution systems. Such duplication was inefficient and therefore costly for energy consumers. An era of consolidation followed. By 1932, eight companies controlled about three-fourths of the investor-owned electric industry. To better regulate energy delivery, Congress passed the Public Utilities Holding Company Act (PUHCA) in 1935.

On November 9, 1965, an electrical blackout impacted the northeastern United States and parts of Ontario, Canada. The 13-hour disaster led to the creation of a voluntary, utility-managed organization, the North American Electric Reliability Corporation (NERC), who still coordinates energy generation and transmission today. In the majority of states, this energy arrives at homes and businesses via regulated utilities.

What are Deregulated Energy Markets?

In deregulated markets, competing residential energy providers (REPs) handle distribution, operations, maintenance, and billing. In such markets, consumers have a right to choose their energy provider. Today, 13 deregulated electricity states offer this right to choose. Five more states offer electricity choice in some areas. Eleven states have deregulated natural gas, although some limit choice to commercial customers.

The 1978 Public Utility Regulatory Policies Act (PURPA) gave states the authority to deregulate energy. In the late 1990s, several states restructured their electricity sectors. They replaced vertically integrated utilities with competing suppliers. This occurred at both the wholesale and retail levels. By 2012, more than 20 states had deregulated energy to some degree.

A traditional public utility is a vertically integrated monopoly. It operates under state and federal regulation. The utility exercises control over every aspect of energy delivery. This includes generation, transmission, distribution, metering, and billing. Deregulation breaks this monopoly down into component parts. Different companies play vital roles in the process, including:

  • Private generators who compete to sell their electricity in the wholesale market.
  • Transmission and distribution utilities (TDUs), who are responsible for the electric grid. TDU costs appear as fees on all electricity plans.
  • Retail electric providers (REPs) who purchase this energy and resell it.

Advantages of deregulated markets

In deregulated markets, consumers may pocket savings as REPs compete for their business. The American Coalition of Competitive Energy Suppliers identifies all the states with deregulated electricity.

Ideally, competition also drives innovation and new technologies. As multiple suppliers compete for the same customers, they are forced to stand out with competitive pricing or a focus on renewable energy. Competition may also multiply the renewable incentives available to consumers.

A map of the United States showing the breakdown of states with no deregulation, deregulated gas only, deregulated electric and gas, and deregulated electricity only

Disadvantages of deregulated markets

Deregulation also comes with potential disadvantages. For example, state public utility commissions (PUCs) vary in how well they monitor energy suppliers. There is concern that deregulation may open the door to predatory sales practices. In extreme instances, it may lead to market manipulation. The California Energy Crisis of 2001 is one example.

Key Differences Between Regulated and Deregulated Markets

A key difference between regulated and deregulated markets lies in who delivers the energy to their home or business. In the former, it is a single public utility regulated by the state public utility commission (PUC). In the latter, it is one of a number of competing energy providers.

In a regulated market, a single utility (and those it contracts with) generates, transmits, and delivers the electricity. In a deregulated market, a utility remains responsible for electricity generation. However, competing suppliers purchase this power in the wholesale market. They then deliver it to their residential and commercial customers.

Some utilities offer the potential for energy bill savings or perks like complimentary smart thermostats. Reduce your carbon footprint by selecting a provider focused on delivering renewable electricity. As the U.S. Environmental Protection Agency (EPA) notes, “in states with retail choice, customers can opt to purchase electricity from a supplier that offers electricity products generated from a larger proportion of emissions-free, renewable electricity than other local suppliers.”

An infographic showing regulated energy markets vs deregulated energy markets. Regulated markets bypass retail suppliers and the utility company itself produces or purchases the energy which is then sold to the customer.

The Future of Energy Markets

Energy markets are moving away from fossil fuels and toward renewable energy. The renewables share of U.S. electricity generation hit 10% in 2009. By 2022, it more than doubled, to 22.5%. By 2050, the EIA projects renewables will comprise 42% of the market.

The future of renewable energy is bright. First, the cost to generate solar and wind power has rapidly decreased. New energy storage technologies address the problem of inconsistent production of solar and wind power. For example, the cost of utility-grade solar installations has dropped 82% since 2010.

However, rapid increases in renewables will test the electric grid. This is because many solar installations and wind farms are in remote locations far from existing power plants. New transmission lines will be needed to get all this renewable energy to the marketplace.

Making an Informed Choice: Which is Better for You?

Consumers in regulated and deregulated markets have one thing in common. They can reduce costs by reducing energy consumption.

Tips for regulated markets

In regulated markets, consumers should look for a plan that aligns with their usage. For example, can you divert a fair amount of your usage to off-peak hours? If so, opt for a plan offering bigger off-peak discounts. Also, look for incentives that reward upgrades to more energy-efficient appliances. Take advantage of federal tax credits for things like insulation, electric stoves, and heat pumps.

Tips for deregulated markets

In deregulated electricity states, consumers can compare the fixed-rate and variable-rate electric plans offered by competing REPs. Decide whether your situation merits a commitment to a longer electric contract. Always compare reputations and customer service histories of competing energy providers.

How Price to Compare Can Help

It is important to stay informed in such a dynamic, ever-changing energy environment. Knowledgeable consumers can make the best energy decisions for their needs. Price to Compare is one company that helps consumers by monitoring energy markets. Want to find the most competitive energy rates near you? Use Price To Compare’s online comparison tool today!