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

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.

While RTOs and ISOs are similar, an ISO usually manages a single state (though it can sometimes manage multiple states) while RTOs perform a similar function but cover a larger geographic area, and as a result, have a greater responsibility for the transmission network.

There are nine ISOs/RTOs operating in North America:

Credit: ferc.gov

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.

Credit: energy.gov

  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.

The utility company is responsible for transmitting and distributing electricity to the homes it services. Generally, there is only one utility company in a given area, but it can buy electricity from multiple generation facilities.

FERC regulates the grid (except in Texas) to ensure private companies are delivering safe and reliable service to residents. However, FERC does not regulate how much those companies charge.

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.

Compare that to areas with regulated electrical energy, where you do not choose who you get your energy from. There is one designated company for your electrical energy — typically the utility company — and you pay the utility rate it charges.

If your area has energy deregulation, you can choose the company, plan, and rate you want. Your local utility company will provide you with electricity at the rate dictated by the retail provider.

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.

REPs compete with each other to attract electricity customers using various rates and term lengths.

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

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:

The Drawbacks of Energy Deregulation

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

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

The following states are deregulated for electrical power. The following companies are deregulated electricity suppliers. For official information in your state and area, check with providers and utilities in your area.

Natural gas only

These states are deregulated for natural gas only. The following companies are deregulated gas suppliers. For official information in your state and area, check with providers and utilities in your area.

Electricity and natural gas

In these states, consumers can choose a retail provider for both electricity and natural gas if they live within the service area of the listed utilities. Again, for more complete information, check with provider companies and utilities in your state and area.

A Brief History of Energy Deregulation in the US

We arrived at the current state of energy industry deregulation over many years. Here’s a simplified timeline:

How Does Energy Deregulation Impact Solar Power?

When you go solar, your electric rate affects your savings, and your net metering policy does too. That means you have more to consider when choosing a retail energy provider.

Often, Palmetto recommends that people with solar panels stick with their incumbent utility provider, and not a third-party supplier. Your supplier determines how you are credited for your excess solar production.

Some energy plans, like Palmetto’s offerings in retail choice areas of Texas, are specifically designed for people with home solar panels and batteries.

If you're ready to see what solar can do for you, get started with our free solar savings calculator to see how much you could save on your energy bills.

Frequently Asked Questions

How many states have deregulated energy?

Twenty one states have some level of deregulated gas and/or electricity for residential customers. In some states, deregulation covers the whole state. In some, there’s a deregulated market only with some companies or in some parts of the state.

What is electric company deregulation?

With electric company deregulation, customers choose from multiple retail electric providers. A marketplace with more options for consumers is meant to lead to lower prices, more plan options, and competition between companies.

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. Drawbacks include confusion about different companies and plans. In some cases, deregulation has led to price volatility or unexpected price increases.