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Energy Deregulation: A Guide

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Energy deregulation in the United States has been around for several decades, but how it works remains a mystery for many people. If you live in a deregulated state—meaning you can pick your retail energy provider—it could mean the difference between saving or wasting hundreds of dollars every year. While energy deregulation gives you the freedom to choose, you still need to understand the details of how it works so you can make the right choice for your needs.

If you've ever been frustrated with your electricity provider, you'll be happy to know that there is often something you can do about it. Read this guide to learn about energy deregulation, the options you have for your electrical provider, and what you need to know about energy deregulation if you're considering installing a solar panel system.

What is Energy Deregulation?

Energy deregulation is when the government changes old laws and passes new laws that control who can produce, deliver, and sell energy, giving customers the power to choose where their energy comes from, based on rates, plans, and product offerings that match their needs.

In other words, energy deregulation entails moving the power from a single authority and spreading that power between various for-profit businesses. This includes the generation, transmission, and sale of electricity and natural gas.

The goal of deregulation is to create competition in the energy industry, which in theory should lower energy prices, improve customer service, and provide more options for payment, price, and energy type (i.e. fossil fuels vs renewable energy).

Instead of paying the rate dictated by their local utility company, customers can instead choose the Retail Energy Provider (REP) they like the most. Each competing company buys and sells energy from the deregulated energy markets, so customers can pay lower or higher energy rates depending on what the business decides.

A Brief History of Energy Deregulation in the U.S.

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

  • 1935: The Public Utility Holding Company Act (PUHCA) is passed, which allows the government to regulate and control public utility companies. The hope was that the act would prevent utility companies from grossly overcharging people, and ensure they provided proper service.
  • 1965: The Great Northeast Blackout left 30 million people in the U.S. and Canada without electricity for up to 13 hours. The blackout caused the U.S. government to realize that the responsibility for distributing electricity needed to be broken down into smaller regions.
  • 1968: The North American Electric Reliability Council (NERC) was formed, splitting the U.S. into 10 energy regions responsible for controlling energy and improving energy delivery's reliability.
  • 1970s: The price of oil went up drastically, causing energy companies to create new plants using different resources, and the cost of building that infrastructure was passed onto the consumers.
  • 1977: The Federal Energy Regulatory Commission (FERC) was created, and they deregulated energy and left it up to each state to determine how they would supply energy. FERC regulates companies to ensure they are delivering safe and reliable service, but they do not regulate the sale price of electricity.
  • 1978: The Public Utility Regulatory Policies Act (PURPA) was enacted to help promote energy conservation (reduce demand) and greater use of domestic and renewable energy (increase supply).
  • 1992: The Energy Policy Act was passed by Congress, creating an outline for what a competitive wholesale electricity generation market should look like.
  • 2001: Deregulation was shown to not always work when Enron declared bankruptcy and it was discovered that they were intentionally withholding electricity to create artificial shortages and increase the cost of power, selling energy to California's utilities at over-inflated rates.
  • 2021: A historically bad winter storm ripped through Texas, a deregulated energy state, resulting in many people losing power. Electrical companies had to make up for lost costs, and those costs were passed onto consumers.

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 coordinated, controlled, monitored, and operated by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) under the regulation of the Federal Energy Regulatory Commission (FERC).

RTOs and ISOs use wholesale markets (either 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 currently 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 that 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 Great Plains (excluding most of Texas) over to the Atlantic coast.
  2. Western Grid: Covers the area west of the Rocky Mountains, all the way to the Pacific coast.
  3. ERCOT Grid: Covers most of Texas.

Nearly the entire U.S. 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 they service. Generally, there is only one utility company in a given area, but they can buy electricity from multiple generation facilities.

FERC regulates the grid (except in Texas) to ensure that 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, these energy providers will work across many regions, and may even cross state lines.

The competition can lead to lower energy rates, or additional benefits in hopes of gaining and retaining customers. However, no matter what retail energy company you work with, you will receive your electricity and/or natural gas through your local utility company.

Compare that to areas that have 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 have to pay whatever utility rates they charge.

If your area enjoys energy deregulation, you can choose the company, plan, and rate you want, based upon the individual energy needs of your home. Your local utility company will then provide you with electricity at the rate dictated by the retail provider you chose.

The Retail Electric Provider

One of the unique creations of deregulated electricity is the existence of 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 the electricity they use.

REPs compete with each other to attract electricity customers using various rates and term lengths. Instead of being stuck paying whatever electricity rate the utility company dictates, the customers can sign up with the REP and rate they like most.

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 (T&D) of that electricity via the lines, poles, and meters in their service area.
  • Customers have to pay what the electric utility charges them, and the price per kilowatt-hour can change every single bill.

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:

  • Each REP purchases the electricity they need for their customers from the generators.
  • The utility company (sometimes referred to as a Transmission Distribution Utility, or TDU) still ensures that electricity gets to the customers in its service area, including all necessary maintenance of the lines, poles, and meters.
  • Because they control the supply, each REP creates a range of plans and electricity rates to compete with each other over customers.
  • These plans can be designed to target very specific types of homeowners. For example, one plan might charge slightly higher rates during the day, but significantly lower rates at night, for customers who want to shift their energy consumption and save when charging an electric vehicle overnight.
  • Customers choose the REP they want from the available plans and rates. They can then switch to another REP when the term for their plan ends.

The Benefits of Energy Deregulation

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

  • Choice: You get to 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. When several retail electric companies are allowed to form, it stops one company from taking over everything and becoming a monopoly.
  • 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 do exist:

  • Coordination: The more people involved in a process, the more places there are for mistakes to be made. Poor communication among the various companies can result in you not getting electricity when you need it most.
  • Focus: With all the competition between retail companies, they can often concentrate on new customer acquisition, rather than addressing existing customer concerns.
  • Pricing: No one regulates the prices set by the various retail energy providers, so they can set them to be whatever they want. If something happens and a company needs to recoup losses, they often pass those losses onto customers in the form of higher rates.

What Are the Deregulated Energy States in the U.S.?

Several states in the U.S. enjoy the benefits of energy choice. While some are deregulated only for electricity or natural gas, others are fully deregulated for both electricity and gas.

Electricity Only

The following states are deregulated for electrical power, complete with a list of the utility companies operating in that state:

  • Delaware: Delmarva Power
  • Connecticut: United Illuminating (UI) and Eversource (formerly Connecticut Power & Light)
  • Maine: Central Maine Power 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

These states are deregulated for natural gas only, including a list of the utility companies operating in that state:

  • Georgia: Atlanta Gas Light Company (AGLC) and Liberty Utilities
  • Florida: Florida Public Utilities (FPU)
  • Kentucky: Columbia Gas of Kentucky
  • Indiana: Citizens Energy Group, Indiana Natural Gas Corporation, Midwest Natural Gas Corporation, Northern Indiana Public Service Company (NIPSCO), Ohio Valley Gas Corporation, and Sycamore Gas Company
  • Montana: Energy West Montana (EWM), Montana-Dakota Utility Company (MDU), Big Sky Gas (BSG), and Northwestern Energy (NWE)
  • Michigan: DTE Energy, Consumers Energy, SEMCO Energy Gas Company, and Michigan Gas Utilities
  • Wyoming: Black Hills Energy (formerly SourceGas), Frannie Deaver (FDU), Lower Valley Energy (LVE), Montana-Dakota Utility Company (MDU), Pinedale Natural Gas (PNG), Questar Gas Company (QGC), Town of Walden (TOW), and Wyoming Gas Company (WGC)
  • Virginia: Appalachian Natural Gas Distribution Company (ANG), Atmos Energy, Washington Gas Light Company (WGL), Columbia Gas Services (CGS), Roanoke Gas Company, Southwestern Virginia Gas Company, and Virginia Natural Gas (VNG)

Both 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.

  • Illinois: Electricity: Commonwealth Edison Company and Ameren. Natural Gas: North Shore, Nicor, and People’s Gas.
  • Maryland: Electricity: A&N Electric Cooperative, Choptank Electric Cooperative, Baltimore Gas and Electric (BGE), Easton Utilities Commission, Potomac Edison, Delmarva Power and Light, Potomac Electric Power Company (PEPCO), and Southern Maryland Electric Cooperative (SMECO). Natural Gas: Washington Gas Light, Baltimore Gas and Electric (BGE), Chesapeake Utilities Corporation, Columbia Gas of Maryland, Elkton Gas, Central Penn Gas.
  • Massachusetts: National Grid, Eversource, Municipal Light Plant, and Unitil (formerly Fitchburg Gas & Electric)
  • New Jersey: Electricity: Jersey Central Power & Light, Atlantic City Electric, Orange and Rockland Electric, and PSE&G. Natural Gas: New Jersey Natural Gas, Elizabethtown Gas, South Jersey Gas, and PSE&G.
  • New York: Electricity and Gas (Combined): Consolidated Edison, National Grid, Central Hudson Gas & Electric, New York State Electric & Gas, Rochester Gas & Electric, and Orange & Rockland. Natural Gas (Only): National Fuel Gas Distribution, Corning Natural Gas, and St. Lawrence Natural Gas.
  • Ohio: Electricity: AEP Ohio, American Transmission Systems Inc., Dayton Power & Light, Duke Energy Ohio, FirstEnergy companies (Ohio Edison, The Illuminating Company, Toledo Edison), Ohio Power Company, and Ohio Valley Electric Company. Natural Gas: Dominion Energy, Columbia Gas of Ohio, Duke Energy, and Vectren.
  • Pennsylvania: Electricity: Citizens' Electric, Duquesne, Pennsylvania Power Company (Penn Power), Metropolitan Edison Company (Met-Ed), Pennsylvania Electric Company (Penelec), PPL Electric Utilities, PECO Energy Company, Pike County Light & Power, UGI Utilities, Wellsboro Electric, and West Penn Power. Natural Gas: Columbia Gas of Pennsylvania, Leatherstocking Gas Company, PECO Gas, Peoples Natural Gas Company, National Fuel Gas, Peoples Gas, Philadelphia Gas Works (PGW), Pike County Light & Power, UGI Utilities, and Valley Energy.
  • Rhode Island: Electricity and Gas (Combined): National Grid.

How Does Energy Deregulation Impact Solar Power?

In simplified terms, investor-owned utilities (IOUs) cover their costs and make a profit based on the price per kWh of energy that they sell to retail customers, known as “volumetric rates”. The more energy they can sell, the more revenue they can collect, and the more profit they can make.

When a home goes solar, that solar energy reduces the amount of energy that the home needs to purchase from the utility. At the same time, it also reduces the amount of energy that the utility needs to provide, which reduces their costs as well. As a result, the relationship between solar-powered homes and utilities is a tricky one, and the situation is made even more complicated in deregulated areas.

In general, Palmetto’s recommendation for homeowners in deregulated areas is to make sure your electricity supply and delivery are coming from your incumbent utility provider, and not a 3rd party supplier. Your supplier determines how you are credited for your excess solar production, which may vary drastically depending on whether you receive supply services from your local utility or a 3rd party.

If no change is made, this could lower your solar savings potential unnecessarily, so we often recommend that customers break their supply contract with a third-party retailer in order to switch back to their incumbent energy suppliers.

In Texas, there isn’t a statewide net metering policy requiring utilities to credit solar owners when sending extra energy to the grid. Instead, Palmetto has created a partnership with MP2 Energy (a Retail Energy Provider from Shell Energy Company) that provides competitive supply and solar credits for customers of Oncor, Centerpoint, AEP, and TNMP.

For TX customers served by cooperatives and municipal utilities, they typically offer fair solar net metering programs, so no REP change is needed. You can read more about going solar in the deregulated state of Texas in our Guide to Solar Panels in Texas.

Energy Deregulation Summary

The goal of energy deregulation is to give more power to consumers, rather than monopolistic utility companies. Retail Energy Providers must compete for customers, so they often offer a range of rates, plans, and additional services to attract people.

Living in a deregulated area also opens up the possibility of switching to a different electricity company if the one you are using no longer meets your needs. As a result of the competition, you are more likely to have a positive experience, because your current company knows you can switch in the future.

While deregulation has helped many people enjoy those benefits, it is not an option across the country. The U.S. government leaves it up to each state to determine how electricity and natural gas are distributed.

If you're ready to match solar panels on your home with the rate offered by a local energy company in your deregulated state, contact Palmetto today. You can get started with our Free Solar Design and Savings Estimate tool to see how much you could save on your energy bills.

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