Electrical Utilities: The Balance Between Regulating and Deregulating

By Derek Markham

Electricity is one of those things that we use every single day. It’s something that we willingly pay for, yet something that most of us know little about. Aside from the near-magical nature of electricity itself — it's invisible, powerful, and both useful and dangerous — many of us are also in the dark when it comes to understanding how these electrons are generated, priced and delivered to our homes and offices, other than perhaps the fact that much of it depends on burning fossil fuels.

The infrastructure that brings us electricity includes more than just the physical power plants, transmission lines and electric meters. It is built and maintained, in most cases, by a system of local or regional utility companies. These companies are in turn overseen by national and state energy bodies, and differ in the way they are governed, depending on if the utilities operate in either regulated electricity markets or deregulated markets. Let’s take a look at the differences between the two.

A regulated market

In a regulated electricity market, which is the case in many of the states in the U.S., utility companies are de facto “natural monopolies,” because of the high capital costs of building out electrical generation plants and transmission lines. This system, while perhaps being the most efficient mechanism for supplying electricity for many decades, also kept competition down in those markets. Due to the emerging trend of distributed energy production through modalities such as wind and solar power, the move toward deregulation of electricity markets may actually be a better system for both customers and the grid itself.

In a regulated electricity market, the utility company owns the electric transmission lines and all associated infrastructure, and it generates or purchases the electricity from the supplier and sells it on to the customer. While this system made it cost-efficient for both customer and utility during times of ever-increasing electricity demand, it also kept customers from being able to choose their electricity supplier or the source of that energy.

A deregulated market

In a deregulated electricity market, utilities continue to own and maintain the transmission infrastructure and to distribute the electricity, but other companies are able to compete in that market to supply and sell electricity to the end user. This could lead to lower prices for customers as well as enable the integration of additional generation sources into the grid, such as wind and solar energy.

Deregulation bolsters competition

There are potential benefits to both types of electricity markets, but as renewable and alternative electricity sources become increasingly more cost-efficient, the trend toward deregulation of electricity markets may be a key component of reducing costs for customers, while increasing grid efficiency and cleaning up our electricity system with the addition of low-carbon energy sources.

In a regulated electricity market, the utility company, which has built out the grid infrastructure, can essentially set its own product price. This system made sense during the build-out of much of the nation's grid, but it also keeps customers from being able to have a choice in their electricity supplier (and the rates they have to pay). With a deregulated electricity market, competing electric companies can offer customers a choice of the source of their electricity, and this competition can drive down costs.

Critics of deregulation often point to the potentially critical issues that can arise from the manipulation of these markets, as was seen in California about 15 years ago.

However, deregulation of electricity markets can be a boon for both customers and for the grid itself. It’s in line with the current wave of increased customer choice, as evidenced by the “cord-cutting” trends in television and other media, and the move away from sticking with the default provider of services and goods in favor of shopping around for the best price.

A healthy mix of deregulation and oversight

Deregulation of electricity markets doesn't have to mean that it would be a completely wide open industry, with no oversight or mechanisms for keeping end user prices in check. A certain amount of consumer protection is always necessary in most (or all) markets. With the emergence of an increasing number of alternative energy production methods, ranging from rooftop solar to roofless solar to large-scale wind and solar farms, the optimal scenario for individual energy consumers will most likely be a mix of deregulation and oversight. This may help to green up power grids while allowing for a healthy amount of competition and choice in the market.

Due to the complex nature of our modern energy systems including our electrical infrastructure, there may be no one-size-fits-all model for regulation and oversight. But as we're seeing in the current battle over issues such as solar net metering, it's becoming more important for us to understand the structure of the grid and the players on it, as well as the market influences on both producers and consumers of energy.

Image credit: Pixabay

Derek Markham writes about a variety of clean tech and green living topics. He currently lives in southwestern New Mexico, and his interests include rainwater harvesting, permaculture, and gardening.