What exactly is deregulation and how does it apply to the energy market as a whole and you as a consumer? There’s a lot to unpack, but that doesn’t mean it’s impossible to understand. In this guide, we’ll review the basics of energy deregulation and why it matters to you.
What Is Deregulation?
The definition of deregulation is the removal of regulations or restrictions, often in the economic sphere and within particular industries. Deregulation is in direct opposition to government regulations. As such, it’s the repeal of these regulations that affect the economy, for better or for worse.
Deregulation comes with several advantages, such as economic growth, lower prices on goods and services, and a boon to small businesses. However, it also comes with disadvantages, such as lower quality control, the possibility of monopolies forming, and the threat of market failure.
Why Is Deregulation Important?
Deregulation is important because it allows the market to sort out the best options for businesses and consumers. It allows the economy to open up and creates a flow not only of money, products, and services but also ideas and competitive businesses.
Markets and economies still function well with regulations in place, and some regulations are certainly needed. But deregulation is important because it opens up more avenues for products and services to be offered, and provides more competitive prices for customers.
Examples of Deregulation
There are many examples of deregulation in a wide range of industries. The following industries are examples of deregulation in action:
- Long-distance telecommunications
- Trucking and shipping
- Mail delivery and package delivery services
- Energy markets
Deregulation in the energy industry is complicated and deserves a deeper look into how it operates.
What Is Deregulation of Energy?
Energy deregulation involves eliminating regulations surrounding energy markets and how power is delivered to customers. Energy was regulated across the United States until the very end of the 20th century. Some people referred to the regulated energy system as the last large government-sanctioned monopoly. State-controlled utility companies were the sole energy suppliers of both electricity and natural gas within regional boundaries.
However, energy eventually became too important for daily life and too financially important to remain fully regulated by the government. That, along with an increasing energy supply in the form of renewable energy, led to deregulation — and a restructuring that created a whole lot more energy companies, energy providers, and power producers.
How Does Energy Deregulation Work?
Energy deregulation works in a similar way to deregulation in other industries. It began with governments reforming laws to allow the market to dictate energy prices rather than the government setting them. Independent suppliers, such as Tara Energy and other providers, were given the right to sell energy on the open market alongside traditional utility companies.
Utility companies opened access to transmission lines and pipelines used to transport energy to customers. This was done mainly because it would be impractical and wasteful for new, redundant transmission routes to be built alongside pre-existing routes.
What’s an Example of a Deregulated Energy Market?
Texas is perhaps the best example of a deregulated energy market. It was one of six states to first adopt deregulation in 1999, along with California, Rhode Island, New York, Pennsylvania, and Massachusetts. It’s also the most deregulated market of all. California, for example, is only a partly deregulated market with limited electricity choice. Texas comes the closest to full deregulation out of any state in the United States of America.
What President Started Energy Deregulation?
President Jimmy Carter ushered in the deregulation of energy in 1977 as a solution to the energy crisis of the 1970s. His five-part National Energy Act was signed into law in 1978. It paved the way to reorganize the energy industry from that point on.
What Did Deregulation in the 1980s Lead To?
Energy deregulation in the 1980s served as the harbinger of the National Energy Policy Act of 1992. This act created a new type of energy producer known as the Exempt Wholesale Generator (EWG), which became the bedrock on which a competitive wholesale electricity generation market would be built. It allowed for private market competition within the energy sector and paved the way for full-scale energy deregulation in several states.
A direct excerpt from the National Energy Policy Act reads: “Agencies are authorized and encouraged to participate in programs to increase energy efficiency and for water conservation or the management of electricity demand conducted by gas, water, or electric utilities and generally available to customers of such utilities.”
However, it was not until 1996 with Order 888 that utilities were required to allow full open access, non-discriminatory energy transmission services. This was key because it allowed for transmission services to separate from power generation plants, which was necessary for the deregulated market to function, at least in the beginning.
What Was the Result of Deregulation of the Electric Power Industry?
The deregulation of the electric power industry led to more power providers and overall lower prices. It also led to some lower-quality electrical services and electricity generation. However, these substandard offerings did not last long as the functioning market led to the success of higher-quality services.
What Are the Deregulated Energy States?
The following states have deregulated energy markets:
- California (though it’s minimally deregulated as electric choice is limited)
- Massachusetts (early adopter)
- New Hampshire
- New Jersey
- New York (early adopter)
- Pennsylvania (early adopter)
- Rhode Island (early adopter)
- Texas (early adopter and most deregulated market of all)
- Washington, D.C.
There are other states that have some form of partial energy deregulation, but they do not qualify as having a deregulated market because they still have a fully regulated segment of their energy systems, such as electricity or natural gas. While no state is entirely deregulated, Texas comes the closest with the least regulated market out of every state listed above.
It’s also worth noting that 24 states don’t offer energy deregulation at all, including:
- North Dakota
- South Carolina
How To Find the Best Electricity Provider in a Deregulated Market
While regulated energy markets only have one provider and prices may be higher than deregulated markets, it also takes away the choice from consumers — and ensures you’re not paying more than your neighbor for the same electrical services. People in deregulated energy markets have more choices, which is often a good thing — but sometimes it can be hard to find companies that have the best services and prices.
Companies like Tara Energy are committed to providing services in line with standards of regulated markets with pricing that fits the needs of consumers in deregulated areas. Learn more to see if you are in a region that can benefit from our services and expertise.
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