Term: Energy Deregulation

Energy Deregulation

Energy deregulation is a restructuring of the energy market to prevent energy monopolies from forming by increasing competition. When a state deregulates its energy it essentially is giving permission to energy users to choose from multiple energy providers based on plans and rates that meet their individual needs.

How Deregulation Works

Energy deregulation works through a reverse auction process. Each energy company offers to sell its customers electricity at the lowest possible rate. Independent agencies then purchase this electricity in amounts equal to what they predict will be needed and sell it at their best rate to the end-users. The electricity is delivered through the existing utility’s infrastructure who is responsible for maintaining the poles and wires as well as responding to emergencies.

History of Deregulation

In the early days, utility companies were not regulated. They competed with each other which kept energy prices in check. As demand for energy increased across the US power companies built more plants and sharpened their competitiveness by improving both their production methods and delivery systems. This led to economic growth and competitive pricing for customers. However, the industry lacked uniformity and was poorly managed which resulted in failing infrastructure, mismanaged customers, unreliable service, and widely fluctuating prices. To counter these problems a movement toward deregulation began. In 1935 the US government passed the Public Utility Holding Company Act in an effort to break up large holding companies that were monopolizing the market while engaging in poor business practices.

 

The next step toward deregulation came after the Great Northeast Blackout in 1965 when a faulty relay left 30 million customers in the dark for over 13 hours. This blackout resulted in the formation of the North American Reliability Council which divided the US into ten separate energy regions. These regions were each responsible for controlling energy and improving delivery but opened the door for monopolies to form and resulted in higher energy prices.

 

Prices increased even more during the 1970s when oil prices skyrocketed due to Yom-Kippur War of 1973 and the Iranian Revolution of 1979. Shortages sparked utilities to build expensive coal and uranium plants to produce electricity and this cost was passed onto already over-burdened customers. The government reacted with the Federal Energy Regulatory Commission and deregulated the energy industry leaving individual states to decide how to supply energy to end-users.

Benefits of Deregulation

While the utility still owns and operates the infrastructure which delivers the electricity, customers can now choose an energy provider who purchases the electricity on their behalf.  The customer benefits since they have many plans from which to choose and can match plans to their specific needs. This increases competition amongst suppliers which leads to better services for the consumer. It also increases customer awareness regarding the energy market and teaches consumers ways to save money and conserve energy.

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