Utility Monopoly vs. Deregulated Energy: Which Is Better for You?

You’re probably familiar with your electric utility, the company that sends you the monthly bill. However, you may not know much about how the service works.

One important distinction you should be aware of is whether you live in a regulated or unregulated market. This difference has a significant impact on how you receive your electricity and how much it costs.

Here’s what experts say and what you need to know about regulated and unregulated markets, and how to navigate both.

Regulated and Unregulated Electricity Markets: What’s the Difference?

In regulated markets, a single utility company is responsible for generating and delivering power. This means they oversee the production, transmission, and delivery of electricity.

In regulated markets, the government controls a single utility company that handles the entire process. So you receive one bill from the company that takes care of everything related to electricity or gas for your home.

In a deregulated energy market, the government no longer controls the distribution and transmission of energy. “This gives consumers the power to choose who supplies their home with gas or electricity,” said Christine Ciavardini, client relations manager at MD Energy Advisors, an energy consulting firm. “They don’t get to choose who they give it to, so it’s always going to be beneficial for them.”

The government still plays a limited role in regulating the local electricity market and how it can be used. “Everyone is bound by the rules,” said Ed Hirs, a professor in the University of Houston’s economics department.

How Does Deregulated Energy Work?

In states with deregulated energy markets, independent energy providers enter the market to compete with public utilities. This means consumers have the option to choose from different energy companies, each offering different prices, to supply their energy.

However, these companies are not completely without oversight. State and federal laws still exist to provide consumer protection. “It is what’s called a ‘regulated market’ but it’s not. It’s regulated by the government,” according to Hirs.

The idea behind creating competition among energy companies is to lower prices for consumers and drive innovation. However, critics, including Hirs, argue that this implementation may discourage electricity suppliers from investing in their facilities because their low prices may not generate enough profit, which could make the electricity grid less reliable.

“If you don’t allow for profitable returns, no one on Wall Street is going to build new electricity infrastructure to meet the growing demand,” Hirs said.

Pros and Cons of Deregulated Energy Markets

If you live in an area with a deregulated energy market, it’s important to understand the advantages and disadvantages of the system.

“If you’re in an unregulated market, you have options,” Ciavardini said. “With increased competition, you can get better prices.”

In addition to potentially lower prices, some energy providers offer different contract options, such as long-term contracts and fixed rates, making it easier to manage your family’s budget. Plus, residents can choose a company that produces renewable energy instead of relying on fossil fuels.

However, there are downsides as well. Some energy providers may not always be transparent with prices and contracts, according to Ciavardini. “There are a lot of characters that are probably not very honest,” she said.

Hirs goes even further, arguing that the promised low prices in deregulated markets have not been achieved, citing high electricity costs in states with regulations such as California and Texas. According to The New York Times, “On average, people living in regulated markets pay $40 more per month for electricity compared to those in states where electricity dominates most or all of the grid” since 1998.

Pros:

• Customers have a choice of energy providers
• Ability to opt for renewable energy sources
• Long-term costs can offset utility bills

Cons:

• Energy consumption reduction is not always achieved
• Some electricity suppliers have fraudulent contracts or hidden fees

Pros and Cons of Regulated Electricity Markets

Unlike the option of choosing providers in unregulated markets, regulated markets are easier to understand. In regulated markets, the public sector usually handles the production and distribution of energy. This comes with several advantages, according to Hirs and Ciavardini.

“It’s safe. It’s a public service. It’s managed by a public entity, so their prices are not marked up,” Ciavardini said. “In a regulated market, you always have the security of being in a regulated environment.”

It’s also convenient for consumers. With regulated markets, you don’t have to spend time researching energy providers and going through contracts before signing up.

On the other hand, you are at the mercy of the public. “The rate is what it is, and you never know how it’s going to be,” said Ciavardini, highlighting the consistent changes that have been common this year. “There is no way to budget for this.”

Pros:

• Public utilities are usually stable and reliable
• Prices are set without markup
• Customers do not need to make difficult decisions about suppliers

Cons:

• Customers do not have a choice of energy provider
• Rates may change quarterly or monthly

How to Navigate an Unregulated Energy Market

If you have the option to choose an unregulated energy market, Ciavardini recommends starting with your state’s government commission website and making sure it ends in “.gov.” These websites provide information about authorized and licensed dealers in your area, as well as details about prices and contracts.

Ciavardini also advises reading the fine print before signing up with any vendor. Make sure there are no hidden fees or sudden plan changes that could catch you off guard. “You don’t want to suddenly have your best rate double and disappear. You don’t want that,” she said.

And at the end of the day, use common sense: “If it seems too good to be true, it probably is. The rate should make sense.”

Countries with Regulated Energy Markets

Thirteen states and the District of Columbia have deregulated electricity markets, according to the US Environmental Protection Agency:

1. Connecticut
2. Delaware
3. DC
4. Illinois
5. Maine
6. Maryland
7. Massachusetts
8. New Hampshire
9. New Jersey
10. New York
11. Ohio
12. Pennsylvania
13. Rhode Island
14. Texas

Five other states have made slight changes or restructuring:

1. California
2. Georgia
3. Michigan
4. Oregon
5. Virginia

A Brief History of Deregulation

Deregulated energy markets are a relatively recent trend. They have been legalized by state laws since 1978, according to Ciavardini. The laws allowed states to decide how they wanted to structure their electricity markets: they could maintain the existing model or “disrupt” it and allow customers to choose their energy supplier (sometimes known as “retail choice”). This change was influenced by the 1973 oil crisis, which prompted the US to prioritize alternative energy sources.

While some states chose to move ahead and deregulate, many remain regulated to this day. The results have varied from state to state, with some deregulated markets receiving criticism while others are praised.

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