What is a Regulated vs. Deregulated Utility?

You may have heard the terms “regulated” or “deregulated” used to describe the particular utility market in which you live, work, learn, or play. I started to learn about the difference between regulated and deregulated markets when I moved from Arizona (a regulated market) to Illinois (a deregulated market); I am still learning about their differences.

As a note, for this article, I am generally writing about electricity markets, although some states have chosen to deregulate their natural gas markets as well.

At a very high level, the general difference between the two is that a deregulated market allows for competition within the electricity supply, whereas in a regulated state, utilities can hold monopolies on the electric system. In regulated states, one power company can be responsible for how electricity is generated, the transmission lines that carry the power from the generation source, and the distribution lines that then bring electricity to consumers’ buildings (homes, offices, schools, etc.). In deregulated states, generation is separate from distribution and transmission, and consumers can choose to buy their power from different companies (although a main utility is still responsible for delivering the power through the transmission and distribution lines).

Deregulated markets, also called choice markets, are often most beneficial for larger commercial and industrial customers. Being able to shop around for their electricity and sign contracts for particular rates can help companies negotiate lower costs and more easily predict annual utility budgets. Residential customers tend not to see significant benefits between a regulated and a deregulated market. There’s also concern that dishonest companies will take advantage of homeowners and use “predatory” practices to price-gauge. Deregulation can, however, push suppliers to introduce new, innovative technologies to the market to stay competitive based on what consumers want, such as providing renewable energy options. In a regulated market with just one utility, some make the argument that there isn’t an incentive to innovate or provide more efficient options.

States and citizens can help decide on whether to deregulate, or restructure, the electric power supply. This process started in the 1990s, and even over the past few years, states like Nevada, Virginia, and Arizona have discussed whether to eliminate utility monopolies and open up the market to multiple electricity service providers. There have been many arguments made for and against deregulation though which shows that there’s a lot to consider (see the Nevada article linked above as well as this earlier article about the sides to Nevada’s Question 3, and this piece in the Wall Street Journal sharing opinions for and against deregulation).

The energy markets are complicated, and a short article like this only touches the surface of all the background, history, and details that make up regulated and deregulated utility markets. Check out this online course from Penn State University if you’d like to learn more about electric markets, their regulation, and various descriptions of deregulation considerations. If you have questions about your electricity rate or would like help understanding your utility bill, reach out to the team at Fusebox!

Check out Laurel’s other blog posts!