Energy deregulation,
explained.

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What is energy
deregulation?

In the U.S., energy deregulation is the process of removing governmental restrictions and allowing energy consumers to choose where their electricity or natural gas comes from. This process creates greater competition among suppliers, which can lower prices and encourage innovation within the energy industry.

How many states are
deregulated for energy?

Currently, 30 states are deregulated for energy at some level.

14 states are deregulated for both electricity and natural gas, 21 states are deregulated for electricity alone and 24 states are deregulated for deregulated for natural gas alone.

How does energy
deregulation work?

To understand the deregulation of energy markets, it’s important to understand how energy is delivered to you.

Getting electricity and natural gas into your home is a three-step process.

  • Generation or production:

    An energy supplier must generate or produce your electricity or natural gas.

  • Transmission:

    The energy must then be stored or sent to your local utility or distribution company. If your state is regulated, the transmission stage is handled by your utility company; if it is deregulated, it is handled by Independent System Operators (ISOs) or Regional Transmission Organizations (RTOs).

  • Distribution:

    Your local utility or distribution company then must deliver your energy to you. They are responsible for the infrastructure that delivers electricity and/or natural gas to your home, including wires, gas pipelines, meters, electricity poles and more.


  • In states that have regulated energy markets,

    utility companies own and control all three steps of this process. While there are benefits to regulated markets, they do not allow customers the freedom to choose where their energy comes from.

    Additionally, because they are technically monopolies, regulated markets do not encourage suppliers to compete and improve on their technologies.

  • In states with deregulated energy markets,

    utility companies are prohibited from owning the generation and transmission stages, and are only responsible for the distribution stage.

    This allows the customers to choose the supplier that handles the generation and transmission of their energy, and shop for the best rates in their area.


Why is energy choice
important?

Because deregulated markets put the power of energy choice into the consumers’ hands, suppliers must win over their customers.

This rivalry among suppliers can lead them to offer more competitive pricing and improved energy technologies (including renewable technologies) in order to earn the business of energy shoppers.


The history of energy
deregulation

The full story of energy deregulation is a long and complicated one, beginning all the way back in the mid-to-late 1800s during the dawn of the first centralized utility companies.

But to understand energy deregulation, it’s important to understand how and why the energy industry was regulated in the first place.

In the early 1900s, electricity and gas suppliers faced little-to-no regulation, and unethical business practices began to crop up, costing consumers a fortune in energy bills. To combat these practices, regulations were introduced to put price caps on electricity and natural gas.

These price caps served consumers well in the short term. However, the 1973 OPEC oil crisis forced the U.S. to reconsider both its electricity and natural gas markets in a major way – one that would pave the way to allowing energy deregulation at the federal level.


  • Electricity deregulation

    In the 1960s, oil had overtaken coal as the number one energy fuel source in the United States. Due to this shift, many electric utilities had become reliant on oil to fuel their plants because it burned more cleanly than coal.

    However, when petroleum costs skyrocketed during the oil crisis 10 years later, electricity rates did too. The average cost per kWh more than doubled during this time, devastating many of the country’s manufacturing industries in the process.

    This increase in electricity prices posed major issues, both for electricity consumers and the economy as a whole. But one thing was clear: the country needed to reduce its dependence on foreign oil by improving its own energy generation processes

    The Public Utility Regulatory Policy Act

    In response to the growing energy crisis, the Public Utility Regulatory Policy Act was passed with the goal of creating a market for alternative, non-utility power suppliers. This act laid the groundwork for providing energy choice within the electricity sector, and was also a major driver of the concept of renewable energy.

    The Energy Policy Act of 1992

    In the decades after the oil crisis, the push to reduce the country’s dependence on foreign oil continued.

    This, coupled with the rise in awareness around fossil fuel emissions, led the country to explore alternative fuels, as well as renewable and efficient energy generation methods. Thus, the Energy Policy Act of 1992 was penned and passed in October of that year.

    The act incentivized business owners to take part in energy efficiency programs, created efficiency standards for home appliances, encouraged the exploration of alternative fuels like methanol and ethanol, and authorized tax incentives to produce renewable energy technologies, among many other things.

    In addition to these measures, it also opened the competitive market even further to new electricity suppliers.

    This act has contributed to many major leaps in efficient and renewable electricity generation methods, and allowed consumers to make decisions about where their electricity comes from.


  • Natural gas deregulation

    The natural gas industry was also majorly impacted by the oil crisis. Energy consumers, desperate for a more affordable energy option than electricity or petroleum, turned en masse to natural gas. This sudden shift caused major shortages in natural gas markets across the country.

    Eventually, the Natural Gas Policy Act of 1978, which was introduced to combat these shortages. The act removed federal price regulations that had prevented the industry from expanding and innovating, and consolidated smaller, local gas markets to achieve economies of scale. This change motivated industry players to improve their existing infrastructures and production methods, and helped balance natural gas supply with its increased demand.

    This partial deregulation of natural gas rates helped to lessen the strain on the market and propel the country’s natural gas technology and policies forward in a big way.

    The Final Restructuring Rule

    Several other important orders and policies, including the Federal Energy Regulatory Commission’s (FERC) Order No. 436 and the Natural Gas Wellhead Decontrol Act, would further set the stage for natural gas deregulation at the federal level. But the final push would come in 1992 with FERC Order No. 636 – also known as the Final Restructuring Rule.

    This order required natural gas pipelines – who had traditionally charged customers for the production, transmission and distribution of natural gas – to unbundle their services to allow consumers to choose their own suppliers.

    Because of this order, homeowners who live in states deregulated for natural gas can shop for their own natural gas suppliers.


The power of
energy choice
is in your hands.

If you live in a deregulated state, find your energy rate options today

Not sure where to begin?

Talk to an energy consultant today.

energyteam@pricetocompare.com