You probably know the name of your utility company, essentially the company that sends you an electric bill every month. But if you’re like most people, you probably don’t remember much about how the tool works.
However, there is one distinction you should probably become familiar with: whether you live in a regulated or deregulated utility market. The difference between the two models has major implications for how you get your electricity and, most importantly, how much it costs.
Here’s what experts have to say and what you need to know about regulated versus deregulated utilities, and how to navigate both.
Regulated vs. Deregulated Utility Market: What’s the Difference?
Regulated utility markets are probably what you think of when you think of a utility. In this traditional mode, a single utility both supplies power, by running power plants, and supplies it by maintaining transmission lines.
In regulated markets, the state government oversees a single utility that manages both the generation and delivery of power – essentially a state-granted monopoly for the utility. For you, this means that you will receive one invoice from a company that takes care of the entire process of getting electricity or natural gas to your home.
In a deregulated utility market, the state decouples the supply and delivery of electricity. “That gives the consumer the power to choose who they want to provide natural gas or electricity for their home and building,” said Christine Ciavardini, customer relationship manager at MD Energy Advisors, an energy consulting firm. “They have no choice about who supplies it, it will always be the utility company.”
The state plays a less important role here, but still monitors the private energy market to a certain extent and sets rules for how it can function. “There’s no way to avoid that. Each one is governed by regulations,” said Ed Hirs, a lecturer at the University of Houston’s economics department.
How does energy deregulation work?
In the states that have chosen to deregulate, independent energy suppliers have entered the market to compete with the public utility. This means consumers can choose from a range of energy companies, all with different tariff structures, to supply their electricity.
But the private companies do not operate completely without supervision. State and federal regulations still exist to provide guardrails. “These are so-called ‘deregulated markets’, but they are not. They are managed by governments,” said Hirs.
The idea is that creating competition between energy companies lowers prices for consumers and stimulates innovation. But some critics, including Hirs, argue that this setup leads energy suppliers to neglect investments in their facilities – because their low rates do not generate enough revenue – which could make the electricity grid more vulnerable.
“If you don’t allow returns on capital, no one on Wall Street will build you a new power plant to meet growing demand,” Hirs said.
The pros and cons of a deregulated ‘retail choice’ electricity market?
If you live in a state with a deregulated market, it is important to understand the pros and cons of the system.
“If you’re in a deregulated market, you have options,” Ciavardini said. “If you have more competition, you get better prices.”
In addition to potentially lower prices, some energy suppliers also offer different contract types, such as a long-term contract where the rate is fixed, making it easier to manage a household budget. In addition, residents can choose a company that generates renewable energy instead of depending on fossil fuels.
But there are also disadvantages. According to Ciavardini, private energy suppliers are not always completely transparent about rates and contract conditions. “There are a lot of maybe not so honest characters,” she said.
Hirs goes a step further and argues that the lower prices promised by deregulation have not yet been fully realized, citing rising rates in deregulated states like California and Texas this summer. According to The New York Times, “Residents in a deregulated market pay an average of $40 more per month for electricity than residents of states that let individual utilities control most or all parts of the power grid. Deregulated areas have had higher prices so far. ” back like 1998.”
Positives
- Customers have a choice of energy suppliers
- Possibility to choose renewable energy sources
- Long-term interest rates can stabilize utility bills
Cons
- Deregulation does not always lead to lower energy rates
- Some energy suppliers have difficult contracts or hidden costs
The advantages and disadvantages of a regulated electricity market?
Unlike the model of retail choice in deregulated markets, regulated utilities are much easier to understand. In regulated states, a public utility typically manages both the generation and distribution of energy. According to Hirs and Ciavardini, this has several advantages.
“It’s safe. It’s a public utility. It’s managed by a public utility commission, so their rates are without a mark-up,” Ciavardini said. “In a regulated market you always have the certainty that you are in a regulated environment.”
It’s also just simpler: as a consumer you don’t have to spend time researching energy suppliers and going through contracts before signing up.
On the other hand, you are somewhat at the mercy of the public good. “The interest rate is what it is, and you don’t know what it’s going to be,” Ciavardini said, underscoring the volatile interest rate changes that have become common this year. “No budget can really be made available for that.”
Positives
- Public utilities tend to be stable and reliable
- Rates are calculated without surcharge
- Customers don’t have to make complicated decisions about suppliers
Cons
- Customers have no choice of energy suppliers
- Utility rates can change on a quarterly or even monthly basis
How do you navigate a deregulated energy market?
If you have a choice in a deregulated energy market, Ciavardini recommends starting with your state’s public utilities commission website, and making sure the site ends in “.gov.” These websites contain information about approved and licensed suppliers in your country, and can also provide you with information about rates and contract terms.
Ciavardini also recommends reading the fine print before signing up with a supplier. Make sure there are no hidden rate changes or introductory rate schemes where “your beloved deal suddenly becomes double the rate at expiration. You don’t want that,” she said.
And ultimately, use common sense: ‘If it seems too good to be true, it probably is. [The rate] must be competitive.”
Shop and compare rates, plans and providers at ChooseEnergy.com, which, like CNET, is owned by Red Ventures. Your monthly consumption helps determine which energy plan suits you best.
States with deregulated energy markets
According to the U.S. Environmental Protection Agency, thirteen states (and the District of Columbia) have completely deregulated or restructured electric utilities:
1. Connecticut
2. Delaware
3. DC
4. Illinois
5. Maine
6. Maryland
7. Massachusetts
8. New Hampshire
9. New Jersey
10. New York
11. Ohio
12. Pennsylvania
13. Rhode Island
14. Texas
Another five states have partially deregulated or restructured their environments:
1. California
2. Georgia
3Michigan
4. Oregon
5. Virginia
If you live in a deregulated state, you may be able to choose your electricity supplier.
A brief history of energy deregulation
Deregulated energy markets are a relatively new construction. According to Ciavardini, they were allowed by federal policy starting in 1978. The legislation allowed states to choose how to structure their energy markets: they could keep the existing regulated model, or they could ‘deregulate’ and allow customers to choose a private energy supplier (this model is also called ‘retail choice’). “) The shift was seen as a response to the 1973 oil crisis, which prompted the US to prioritize alternative energy sources.
Some states chose to go ahead and deregulate, but most remain regulated to this day. The results varied by state, with some deregulated markets receiving heavy criticism while others received praise.
Frequently Asked Questions
What are the disadvantages of deregulated energy markets?
Deregulated markets do not always deliver lower energy rates, and customers can often be duped into hidden charges by dishonest brokers.
Is the energy sector a monopoly?
In states with regulated energy markets, the utility essentially functions as a monopoly without competition.
What does a deregulated energy market mean?
A deregulated market refers to a state in which private energy companies compete for business from residential customers, who can choose where their energy comes from.