You probably know the name of your energy utility — essentially, the company who’s sending you an electric bill every month. But if you’re like most people, you probably don’t know much more about how the utility operates.
There’s one distinction, however, that you should probably get familiar with: Whether you live in a regulated or deregulated utility market. The difference between the two models has big 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 company both supplies power, by running power plants, and delivers 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 power company. For you, this means you get one bill from a company that will handle 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 power. “That gives the consumer the power to choose who they want to supply the natural gas or the electricity supply for their house, for their building,” said Christine Ciavardini, a client relationship manager at MD Energy Advisors, an energy consulting firm. “They have no choice who delivers it, that’s always going to be the utility.”
The state plays less of a role here, but still monitors the private energy market to some degree and sets rules for how it can operate. “There is no way to avoid that. Each one is governed by regulations,” said Ed Hirs, a lecturer in the department of economics at the University of Houston.
How does energy deregulation work?
In the states that have chosen to deregulate, independent power providers have entered the market to compete with the public utility. This means consumers can choose from an array of power companies, all with different rate structures, to supply their power.
But the private companies don’t operate entirely without oversight. State and federal regulations still exist to provide guardrails. “These are so-called ‘deregulated markets,’ but they’re not. It’s managed by governments,” according to Hirs.
The idea is that creating competition among power companies lowers prices for consumers, and drives innovation. But some critics, including Hirs, argue that this setup leads power suppliers to neglect investing in their facilities — because their low rates don’t generate enough revenue — which can make the electrical grid more fragile.
“If you don’t allow for a return on capital, no one on Wall Street is going to build you a new power plant to take care of growing demand,” Hirs said.
The pros and cons of a deregulated ‘retail choice’ electricity market?
When you live in a state with a deregulated market, it’s important to understand the advantages and disadvantages of the system.
“If you are in a deregulated market, you have options,” Ciavardini said. “When you have increased competition, you get better pricing.”
Along with potentially lower prices, some energy providers also offer different contract setups, like a long-term contract with the rate locked in, making it easier to manage a household budget. Plus, residents can opt for a company that generates renewable energy rather than relying on fossil fuels.
But there are downsides, too. Private energy suppliers are not always fully transparent with rate and contract terms, according to Ciavardini. “There’s a lot of maybe not-so-honest characters out there,” she said.
Hirs goes a step further, arguing that the lower prices promised by deregulation haven’t fully materialized, citing climbing rates in deregulated states like California and Texas this summer. According to The New York Times, “On average, residents living in a deregulated market pay $40 more per month for electricity than those in the states that let individual utilities control most or all parts of the grid. Deregulated areas have had higher prices as far back as 1998.”
- Customers have a choice in energy providers
- Ability to opt into renewable energy sources
- Long-term rates can stabilize utility bills
- Deregulation doesn’t always yield lower energy rates
- Some energy suppliers have tricky contracts or hidden fees
The pros and cons of a regulated electricity market?
In contrast to the model of retail choice in deregulated markets, regulated utilities are much simpler to understand. In regulated states, typically a publicly owned utility manages both the generation and distribution of energy. This has several benefits, according to Hirs and Ciavardini.
“It’s safe. It’s a public utility. It’s governed by a public utility commission, so their rates are without markup,” Ciavardini said. “In a regulated market, you always have that safety that you’re in that governed-type environment.”
It’s also just easier: As a consumer, you don’t have to spend time researching energy suppliers and wading through contracts before you sign up.
On the other hand, you are somewhat at the mercy of the public utility. “The rate is what it is, and you don’t know what that’s going to be,” Ciavardini said, underscoring the volatile rate changes that have become common this year. “There’s really no way to budget for that.”
- Public utilities are usually stable and reliable
- Rates are charged without markup
- Customers don’t need to make complicated decisions about suppliers
- Customers lack choice of energy providers
- Utility rates are subject to change on a quarterly or even monthly basis
How to navigate a deregulated energy market
If you do have the option to choose in a deregulated energy market, Ciavardini recommends starting with your state’s public utility commission website, making sure the site ends in “.gov.” These websites have information on approved and licensed suppliers in your state, and can also give you information about rates and contract terms.
Ciavardini also advises reading the fine print before you sign up with any supplier. Make sure there’s no hidden rate changes or introductory rate schemes where, “all the sudden your sweetheart deal turns into double the rate with the expiration. You don’t want that,” she said.
And at the end of the day, apply common sense: “If it looks too good to be true, it probably is. [The rate] should be competitive.”
States with deregulated energy markets
Thirteen states (and the District of Columbia) have fully deregulated or restructured electricity utilities, according to the US Environmental Protection Agency:
Another five states have partially deregulated or restructured environments:
A brief history of energy deregulation
Deregulated energy markets are a relatively new construction. They were allowed by federal policy beginning in 1978, according to Ciavardini. The legislation allowed states to choose how they wanted 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 sometimes known as “retail choice.”) The shift was seen as a reaction to the 1973 oil crisis, which prompted the US to prioritize alternative sources of energy.
Some states chose to go ahead and deregulate, but most remain regulated to this day. The results have varied by state, with some deregulated markets fielding heavy criticism, and others receiving praise.