The power of choice is a wonderful thing. And depending on where you live, you may be able to choose your energy provider.
It’s called energy deregulation, and about 40 percent of US states have it. Commonly known as retail choice, in deregulated states residents have a say in where they get their energy. In these states, public utilities function like any other business: Competitors provide options, and residents choose how to spend their money.
In regulated markets, however, electricity comes from a designated utility provider and you don’t have a choice. Regulated energy markets create a form of monopoly, meaning no competitors to choose from or switch to, but in which the public utility is still controlled by the state government.
Which method is most beneficial for the people? Which states have it right? “It’s a question of whether you believe that a free-market environment is best for consumers or that a regulated monopoly is best for consumers,” Joshua Basseches, an assistant professor of public policy and environmental studies at Tulane University, told CNET.
Here’s what you need to know about energy deregulation, how it works, and whether your state offers you the option to choose.
For more information on deregulated energy rates and companies, check out CNET partner site ChooseEnergy.com, which, like CNET, is owned by Red Ventures.
What is energy deregulation and how does it work?
Energy deregulation refers to a utility system of retail choice, where different companies other than the existing energy utility are able to offer different packages of deals, giving customers a choice of who they purchase energy from.
In states without a deregulated utility environment, governing bodies manage a regulated monopoly, where one company provides the utility across the state, with rates and prices controlled by the government.
Whether a state is deregulated or not, that particular state’s utilities are managed by its public utility commission, or PUC, a governing body that regulates public utility rates and services. Different public utility commissions operate in different ways, but their ultimate goal is to represent citizens’ interests when determining utility policies.
Even in deregulated states, that regulation still exists. That’s why Basseches refers to deregulation as a misnomer — instead, he prefers to use the term “restructured.”
“What’s often referred to as deregulation is the difference between what’s known as a vertically integrated utility monopoly enterprise — where the utility company generates, transmits and distributes electricity — and a deregulated or restructured environment, where various aspects of that supply chain are opened up to competition and only parts of the cost are regulated by the commissions,” he said.
A brief history of energy deregulation
Beginning in the early 1900s during the early days of electricity commercialization, companies began approaching state legislators to set up a regulatory compact, which became the regulated utilities we know today. That system largely stayed the same until, beginning with The Public Utility Regulatory Policies Act of 1978 (PURPA) and continuing on through the 1990s, a series of legislation allowed states the authority to deregulate or restructure.
But not every state decided to do so, and decisions were made based on each state’s belief as to what would most benefit residents. Today, about 20 states have some form of deregulated or restructured system, with the majority of states still working with regulated monopolies.
Deregulated vs. regulated energy markets: the pros and cons
Unfortunately, there’s no easy answer as to whether regulation or deregulation provides a better outcome for the everyday resident. Even for Basseches, an expert who’s spent the last six years on a book project about state-level renewable energy policy, the issue is too complicated to come down on one side or the other.
He says it’s unclear, on a systematic level, whether deregulation has led to decreases in electricity rates. Factors from weather to the war in Ukraine can affect those rates, and even for experts, it’s too difficult to say definitively that one method is the right one.
“You can look at electricity prices over time and see that they’ve gone up and down, but it’s hard to attribute that,” he said. “They’ve gone up and down both in restructured and traditionally regulated jurisdictions. So in cases where costs went down, it’s hard to say that it’s because of restructuring. But what is clear is that restructuring gives consumers more choice and more direct say in what kind of electricity they want and how much they’ll pay for it.”
Pros of energy deregulation
Basseches and other industry experts say deregulation proponents point to examples like the following as pros of deregulated energy:
- Deregulated markets give power of choice to the consumer.
- Competition should even the playing field against the power of a utility monopoly.
- Utility monopolies are less focused on the consumer’s best interest.
- Deregulated markets tend to be more open to changes like clean energy adoption and technology improvements.
The biggest and most obvious benefit of a deregulated environment is that it gives choice to the people. In an ideal world, PUCs would be trusted to provide the best option for all. But that isn’t always the case, and it isn’t always easy for the consumer to tell. For Basseches, that’s what makes it a worthwhile change.
“What I like about competition is that, in the absence of transparency, you can have some faith that there’s some check on the power of the utility monopoly by virtue of competition and market forces,” he said.
A deregulated or restructured system also takes power away from long-standing monopolies. Often, providers have been in place for decades, and critics say they’re focused less on what’s best for consumers and more on maintaining the status quo.
“What you have to worry about with a regulated monopoly is that it will be best for the monopoly company and not the consumers,” Basseches said.
Public utilities are usually behemoths that are resistant to change. Basseches says a restructured (deregulated) state can create an environment where companies are able to be more nimble and able to change. That means quicker adoption of new technology, more alternatives and even better options for clean energy.
“For those who care about climate change and environmental issues, it’s been much easier for renewable energy to penetrate the market in deregulated environments,” he said. “If wind and solar are the cheapest resource and you no longer have utilities owning all the generation, they’re not going to be fighting regulators to hold on to things that are no longer economical but that they’ve invested in.”
Cons of energy deregulation
- Responsibility lies with the consumer.
- Energy shopping experience can be complicated.
- Consumer education is needed to navigate.
- Competition and deregulated market creates opportunity for bad actors or scams.
In a deregulated or restructured environment, the choice is with the consumers — but so is the responsibility. Most people don’t know much about public utilities or energy policy, so they’re required to be more informed in order to make good decisions in a deregulated system. That can lead to wasting or not fully realizing the benefits that choice provides.
“Usually, if consumers don’t choose an alternative, they’re given the default service provider, which is typically the local utility,” Basseches said. “So it does require the consumer to be more educated.”
Just because a state is deregulated doesn’t mean that state’s PUC is any less important. In fact, in a deregulated state, that commission is the only thing standing in the way of bad actors, which means people and states can be taken advantage of.
“It really just depends on the vigilance of these public utility commissions,” Basseches said. “One thing I always tell people is to pay attention to public utility commissions. If they’re doing their jobs effectively, they provide a safeguard against exploitation.”
What US states are deregulated for electricity or natural gas?
Most states still have regulated utility providers. Just 18 states (and the District of Columbia) have deregulated markets.
According to the US Environmental Protection Agency, 13 states (and the District of Columbia) have fully deregulated or restructured electricity utilities:
- New Hampshire.
- New Jersey.
- New York.
- Rhode Island.
Another five states have partially deregulated or restructured environments:
How to find the best electricity provider in Texas
Basseches said Texas is “a poster child for a fully restructured electricity sector” and called it “extremely restructured.”
“Restructuring is a continuum and it’s very complex and multilayered,” Basseches said. “Restructuring isn’t just a switch, there are different degrees. And Texas is the most restructured.”
Texas has a wider selection of providers than anywhere else in the country, which is why Basseches advises residents to be as informed as possible when making their choices in “this system on steroids.” Texas residents are likely to receive more solicitations from different suppliers, and the choice can be overwhelming. His advice is simply to seek as much information as possible.
“Talk to your neighbors,” he said. “The same way you’d make a choice about purchasing a new car, talk to your neighbors, talk to people you trust, and know that the public utility commission works for you and your tax dollars. Don’t be afraid to ask them for help.”
For more information, here’s the Texas PUC Facts and FAQs page and the state’s government-run comparison website: Powertochoose.org. When shopping for electricity plans on any website, before enrolling, make sure to read through the electricity facts label (EFL) or “fact sheet” to learn about the details of each plan.
How to find the best electricity provider in other states
For Basseches, the best first step in any state is to start with the public utility commissions, or PUCs, whose websites should have information on competitive suppliers, options and more.
Before making a choice, be sure to read up on options, understand the dynamics of the different companies involved and educate yourself on lingo, pricing and more.
“Just like investing in the stock market, there’s going to be some risk,” Basseches said. “But the public utility commission does work for the people and they do have the most knowledge because companies have to register with them. So my advice is to get to know your public utility commission, read things carefully and know that everyone is vying for your business. Just like anything else, you have to pay attention.”