A Simple Explanation of Deregulated Energy Markets
The history of regulation within particular industries in the United States is a story of a constant battle between two opposing forces, proponents and opponents of regulation. Some argue that regulations only stifle competition and stunt overall economic growth, while others argue the regulation is necessary to prevent disasters like the stock market crash of 1929 and the Great Recession of the 2008 housing market and subprime mortgage bubble collapse.
Deregulation in the energy sector actually stemmed from a crisis of their own that was created by a sudden increase in petroleum prices coupled with too much government regulation. The energy industry was unable to adapt quickly to the changing geopolitical energy situation and ultimately consumers paid the price.
The deregulation that followed was able to innovate power generation technology and ultimately lower energy costs and put a stop to the hemorrhaging of money that consumers were suffering due to energy costs.
What is deregulation of the energy market?
According to the Environmental Protection Agency (EPA), deregulation of the energy market is when states allow competition in the retail energy market to supply electricity to customers. These utility companies are prohibited from generating electricity and owning transmission lines, however, they are responsible for the distribution, operations, and maintenance from the point of grid interconnection to the meter on someone’s business or residence.
States that are fully regulated differ in that the utility companies in regulated states are vertically integrated and own and control the total flow of electricity from its generation and transmission, to the distribution to your meter at your home or business1.
What is deregulation law in the U.S.?
Deregulation law in the United States is a controversial topic for most, especially in certain industries that are deemed essential or that have a large impact on society and the environment. For example, financial institutions, agriculture, food and drug, and utilities, just to name a few.
Deregulation is the reduction and/or elimination of government influence and oversight in a particular industry2.
One of the main reasons for the support of deregulation is that deregulation creates more competition between private entities in a specific industry. Proponents also argue that overbearing legislation reduces investment opportunities and stunts potential economic growth.
People who support the regulation of specific industries point to historical events that inspired regulatory movements.
For example, the stock market crash of 1929 and the Great Depression that followed, inspired the Franklin D. Roosevelt administration to create the Securities Exchange Acts of 1933 and 1934 along with the Glass-Steagall Act.
Whether or not an individual is an opponent or proponent of regulation, one fact that most can’t deny is that the constant conflict and the shifting influences of regulation and deregulation shape and propel market conditions.
When did deregulation of energy start?
The deregulation of the energy market started with the federal government’s creation of the Federal Energy Regulatory Commission in 1977. The creation of FERC stemmed from the energy crises that wreaked havoc in the United States during the 1970s.
When oil prices surged in the 1970s, utility companies began large construction projects to convert power plants to generate electricity using coal and uranium. The high prices of these construction projects were passed onto the consumer. People were exacerbated by the increase in energy costs as they were already experiencing fuel shortages and outrageous gas prices.
The first step that FERC took to respond to an energy market in crisis was to begin deregulating the energy industry by leaving it up to individual states to decide how to supply energy to consumers. The goal was to introduce competition back into the industry to lower energy costs3.
What states are deregulated for energy?
Most states continue to regulate energy but many have opened up to or are currently in the process of deregulating their energy industries.
The following states are considered deregulated energy states:
District of Columbia
Out of all these states, the largest deregulated energy markets exist in California and Texas.
What are examples of deregulation in other industries?
One major example of deregulation can be found in the airline industry with the Airline Deregulation Act. In the 1960s and ’70s, the Civil Aeronautics Board heavily regulated the airline industry. They managed routes and set fares. In exchange, airlines were guaranteed a 12% profit for any flight that was at least 50% full.
These regulations made air travel extremely expensive. So expensive in fact that by 1977, it was estimated that only 63% of Americans had ever flown. Also, the addition of new routes, the building of new and more advanced aircraft, and any decision took a long time to be approved. There was a strangle on innovation and expansion.
The Airline Deregulation Act of 1978 essentially removed all regulations on the airline industry except for safety. More people were able to fly as ticket prices decreased, but the deregulation also has led to a monopoly in the airline industry as many smaller airlines were acquired by the big four after deregulation allowed for mergers and acquisitions. The big four being American, Delta, United, and Southwest4.
Other examples that illustrate the effects of deregulation can be illustrated in the financial, labor, agricultural, pharmaceutical, and transportation industries.
Is deregulation of electricity good for consumers?
Whether deregulation is good or bad is an opinion that is likely shaped by an individual’s economic and political philosophy. Like everything else, there are pros and cons5.
Here are some of the pros when it comes to the deregulation of electricity:
Increase competition and better service: It is generally accepted that deregulation can promote competition among energy providers which motivates them to provide excellent service and keeps prices lower.
Power to choose: Deregulation gives energy users the power to decide where their energy comes from and to choose plans that are best for their individual energy needs.
Encourages energy efficiency: Deregulation empowers consumers to choose companies that utilize more energy-efficient practices.
Increased energy consciousness: Deregulation helps consumers understand energy costs by evaluating different plans to save and conserve energy.
What are the disadvantages of deregulated energy?
There are some disadvantages of deregulation in the energy industry that should also be addressed.
Here are some of the cons when it comes to the deregulation of electricity6:
The market is less predictable: A regulated energy market will have a consistent price where a deregulated energy market will have variances in energy prices by region, fuel supply, and environmental conditions (like the great Texas energy crisis and power grid failure of February 2021).
Purchasing is complex for consumers: The research that goes into choosing an energy provider and a plan that is suitable for your energy needs takes a lot of work and research. In the end, a consumer could make a wrong decision and be paying way more than they should because they are misinformed.
Risk of monopolies: Deregulation is said to offer options to consumers but when larger companies use their deep pockets to acquire smaller companies, the number of choices will get smaller until there is only one choice anyway.
Is deregulated energy cheaper?
Currently, in 2021, energy costs in regulated states are lower than in deregulated states. Factors that currently play a role in these costs include the price of natural gas, some states use hydropower resources, and some states produce power by burning coal which is cheaper, etc.
Many factors go into determining the average cost of energy by state, but if we are looking straight at the numbers, we have regulated states charging an average of 12.39 cents per kilowatt-hour for residential and 10.61 cents per kilowatt-hour for commercial.
Deregulated states have an average cost of 15.74 cents per kilowatt-hour for residential and 11.67 cents per kilowatt-hour for commercial.
At the moment, it looks like deregulated energy is not cheaper, however, these prices can fluctuate year to year and there is an overall consensus that deregulated energy is the cheaper option in the long run. Most states that have elected to become deregulated already had higher electricity prices. In deregulated markets, there is more competition. As a result it may be easier to find more competitive prices. If you live in an area that has a deregulated market, you should do plenty of research to find competitive energy prices7.
Who does energy deregulation benefit?
The main idea and intent of deregulation is to benefit the individual consumer by encouraging competition in the energy sector which then gives consumers freedom to choose. Companies strive to offer better rates, incentives, and services to attract new customers and to maintain old ones.
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