Energy Deregulation: A Guide to What It Is and How It Works

In much of the United States, you have one choice for where you get your electricity or gas: your local utility company. But in other places, you have a choice. While your utility company may deliver the electricity or gas, where you buy that energy is up to you. That choice can open the door for competitive companies to offer lower prices, but it can also open the door to confusion.

Here’s what you need to know.

What Is Energy Deregulation?

Energy deregulation introduces choice to electricity and natural gas consumers. Instead of paying the rate dictated by their local utility company, customers can instead choose the retail energy provider (REP) they like. Each competing company buys and sells energy from the deregulated energy markets. Depending on the plan they choose, a customer might pay less (or more) than they would with their incumbent utility. Deregulation creates competition in the energy industry, which could lower prices, improve customer service, and provide more options for payment and energy type (i.e. fossil fuels vs. renewable energy).

How Does Energy Deregulation Work?

The difference between regulated and deregulated energy boils down to whether customers have a choice over who sells them the electricity and natural gas they need for their homes.

National grids and private utilities

After deregulation, large, multi-state electric grids are now operated by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) under the regulation of the Federal Energy Regulatory Commission.

RTOs and ISOs use wholesale markets (energy markets, capacity markets, or ancillary services markets) to set prices for deregulated retail utilities, who purchase electricity from RTOs and ISOs at market-determined wholesale prices and sell electricity to customers at market-determined retail prices.

There are nine ISOs/RTOs operating in North America:

• Alberta Electric System Operator (AESO) - ISO
• California Independent System Operator (CAISO) - ISO
• Electric Reliability Council of Texas (ERCOT) - ISO
• Midcontinent Independent System Operator, Inc. (MISO) - RTO
• ISO New England (ISO-NE) - RTO
• New York Independent System Operator (NYISO) - ISO
• Ontario Independent Electricity System Operator (IESO) - ISO
• PJM Interconnection (PJM) - RTO
• Southwest Power Pool (SPP) - RTO

Many people are surprised to learn there is not a single national electrical grid for the United States. Instead, the US energy industry is split into three sections: the Eastern Grid, the Western Grid, and the Electric Reliability Council of Texas (ERCOT) Grid.

1. Eastern Grid: Covers the largest part of the country, and spans from the Atlantic coast to the Great Plains (excluding most of Texas).
2. Western Grid: Covers the Rocky Mountains to the Pacific coast.
3. ERCOT Grid: Covers most of Texas.

Nearly the entire US grid is privately owned. This means private companies own the generation plants and/or own the transmission lines and distribution infrastructure.

Deregulation at the local level

In deregulated energy markets, there can be many companies competing for customers. Often, energy providers will work across regions and states. Competition can lead to lower energy rates, or additional benefits as companies try to gain and retain customers. However, no matter what retail energy company you work with, you will receive electricity and/or natural gas through your local utility company.

The retail electric provider

One of the unique creations of deregulated electricity is the retail electric provider (REP). Also known by a variety of terms, including competitive retail electric service (CRES) providers, these third-party companies provide customers with more choice over what they will pay for electricity.

In regulated states, the utility company controls all elements of the relationship between the customer and their electricity:

• The utility buys the electricity from the generators, also known as the supply.
• The utility is responsible for the transmission and distribution of electricity via the lines, poles, and meters in their service area.

In a deregulated energy environment, the REP takes the supply and pricing part of the equation away from the utility, while the customer enjoys more control over their electricity.

The Benefits of Energy Deregulation

No energy system is perfect, but energy deregulation has quite a few benefits:

• Choice: You choose where you are getting your energy from, and can choose the best plan for your circumstances.
• Competition: In deregulated states, retail energy providers must compete with each other to gain customers.
• Service: Competition means consumers can end up with better rates, perks, benefits, and customer care.
• Conservation: Looking at different energy plans can help you understand how your home consumes energy, which can encourage you to reduce your usage.

The Drawbacks of Energy Deregulation

Even with all of the positives to deregulation, some drawbacks exist:

• Complexity: Choosing between companies and plans can be complex.
• Pricing: No one regulates prices set by retail energy providers, so they can set them to be whatever they want and rates can change over the course of some contracts.

What States Have Deregulated Energy?

Several states in the US enjoy the benefits of energy choice. Some are deregulated only for electricity or natural gas. Others are deregulated for both.

Electricity only

• Delaware: Constellation, NRG Energy, and PSEG Services
• Connecticut: United Illuminating (UI) and Eversource
• Maine: Central Maine Power (CMP) and Emera Maine
• Texas: Texas-New Mexico Power (TNMP), American Electric Power (AEP) Central, American Electric Power (AEP) North, CenterPoint, Sharyland, and Oncor
• New Hampshire: Eversource, Liberty Utilities, Unitil, and the New Hampshire Electric Cooperative, Inc. (NHEC)

Natural gas only

• Georgia: Atlanta Gas Light Company (AGLC)
• Florida: Florida Public Utilities (FPU), Central Florida Gas (CFG), Florida Natural Gas (FNG), TECO Peoples Gas System, and Florida City Gas
• Kentucky: Columbia Gas of Kentucky, Atmos Energy, and Louisville Gas and Electric
• Virginia: Appalachian Natural Gas Distribution Company (ANG), Atmos Energy, Washington Gas Light Company (WGL), Columbia Gas Services (CGS)

Electricity and natural gas

• Illinois: Electricity: Commonwealth Edison Company and Ameren. Natural Gas: North Shore, Nicor, and People’s Gas.
• Maryland: Electricity: A&N Electric Cooperative, Baltimore Gas and Electric (BGE). Natural Gas: Washington Gas Light.
• New York: Electricity and Gas (Combined): Consolidated Edison, National Grid.

A Brief History of Energy Deregulation in the US

• 1935: The Public Utility Holding Company Act (PUHCA) is passed.
• 1977: The Federal Energy Regulatory Commission (FERC) was created, and it deregulated energy and left it up to each state to determine how they supplied energy.
• 2001: Deregulation was shown to not always work when Enron declared bankruptcy.

How Does Energy Deregulation Impact Solar Power?

When you go solar, your electric rate affects your savings. Some energy plans, like Palmetto’s offerings in retail choice areas of Texas, are specifically designed for people with home solar panels.

Frequently Asked Questions

How many states have deregulated energy? Twenty one states have some level of deregulated gas and/or electricity for residential customers.

What is electric company deregulation? With electric company deregulation, customers choose from multiple retail electric providers.

What are the pros and cons of energy deregulation? Lower energy rates, more plans for consumers to pick from, and better service due to competition are some of the positives of energy deregulation.