Last Updated on April 7, 2021 by Mary Pressler
Average Electricity Costs & The Effect of Energy Deregulation
The History of Deregulated Electricity in the United States
Electricity companies have operated as regulated monopolies for most of their history, with control over generation, transmission and distribution. However, the Energy Policy Act of 1992 introduced electricity deregulation, which changed the rules of the game and impacted the average electricity costs by state:
- Individual states could now create competitive energy markets, where private generating companies can participate and sell electricity though the local power grid.
- New companies called energy retailers were created in the electricity sector. They purchase energy in the wholesale market and resell it to residential and business users.
Transmission and distribution remain as a regulated monopoly, where each region is served by a single utility company. Deregulating this area of the supply chain would not be viable, since competing electric companies would need to have redundant power networks.
What Is the Purpose of Deregulated Energy in the United States?
The goal of deregulation is increasing the efficiency of the electricity sector. The optimal combination is achieved as follows:
- Allowing customer choice in the consumption side.
- Creating a competitive market for power generation.
- Leaving only grid infrastructure as a regulated monopoly.
Under this operating scheme, electricity consumers can choose their provider, and a delivery tariff is added to the kWh price to cover network costs.
The concept of energy deregulation is not exclusive for electricity, and a similar approach has been implemented for natural gas. There are states where both services are already deregulated, and states where one or both remain regulated.
When a state deregulates its electricity sector, electric companies normally split into separate business units. The regulated utility company continues operating the power network, while generation assets are now managed separately. However, deregulation laws forbid utility companies from offering benefits to the generation units previously owned by them, and all power producers compete under equal conditions.
According to the US Energy Information Administration, competitive electricity sales increased from 11% to 21% between 2005 and 2016, while sales from regulated utility companies decreased from 62% to 52%. This indicates a slow but steady transition from regulated to deregulated utilities.
Which States Have Deregulated Their Electricity Sector?
As of 2018, electricity deregulation has been implemented in Washington D.C. and 16 states: California, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Texas and Virginia.
It is important to note that deregulation has not been applied with 100% coverage in any state so far. The greatest progress has been achieved in Texas, where 85% of the population can choose electricity providers.
Although California is technically deregulated, it is a special case: Electric choice exists, but only through a lottery system called DirectAccess. California originally attempted a full deregulation, but their scheme was susceptible to kWh price manipulation. Virginia is another special case, since deregulation exists but the options for residential users are very limited.
Some states are considering deregulation but have not implemented it yet, while others started the process but reverted to a regulated market:
- Arizona and Arkansas started working towards deregulation. However, Arkansas reverted its energy deregulation laws in 2003, and Arizona placed them on hold in 2004.
- There is a campaign to deregulate energy in Nevada, but no legislation has been approved yet.
- In 2001, Oklahoma signed a bill to study the feasibility of deregulation, but there is no further progress yet.
What Is the Average Cost of Electricity per kwh?
Between 2017 and 2018, some states experienced an increase in electricity prices, while others saw a tariff reduction. The following table indicates the average cost of electricity per kwh for each state:
| State | Deregulated Electric Sector? |
Energy Price by State July 2017 (Cents/kWh) | Energy Price by State 2018 (Cents/kWh) | Change |
| Alabama | No | 12.53 | 12.28 | -2.0% |
| Alaska | No | 22.30 | 23.43 | 5.1% |
| Arizona | No | 12.74 | 12.92 | 1.4% |
| Arkansas | No | 10.67 | 9.98 | -6.5% |
| California | Yes | 18.85 | 19.65 | 4.2% |
| Colorado | No | 12.45 | 12.67 | 1.8% |
| Connecticut | Yes | 20.23 | 20.88 | 3.2% |
| Delaware | Yes | 12.71 | 12.02 | -5.4% |
| Florida | No | 11.93 | 11.29 | -5.4% |
| Georgia | No | 12.59 | 12.28 | -2.5% |
| Hawaii | No | 29.25 | 33.45 | 14.4% |
| Idaho | No | 10.58 | 10.46 | -1.1% |
| Illinois | Yes | 12.07 | 11.76 | -2.6% |
| Indiana | No | 11.85 | 12.05 | 1.7% |
| Iowa | No | 14.60 | 14.47 | -0.9% |
| Kansas | No | 13.61 | 12.34 | -9.3% |
| Kentucky | No | 10.64 | 10.35 | -2.7% |
| Louisiana | No | 9.99 | 9.68 | -3.1% |
| Maine | Yes | 15.96 | 16.31 | 2.2% |
| Maryland | Yes | 13.59 | 13.46 | -1.0% |
| Massachusetts | Yes | 19.88 | 20.63 | 3.8% |
| Michigan | Yes | 15.69 | 15.98 | 1.8% |
| Minnesota | No | 14.02 | 14.22 | 1.4% |
| Mississippi | No | 11.10 | 10.96 | -1.3% |
| Missouri | No | 13.16 | 13.12 | -0.3% |
| Montana | No | 11.59 | 11.72 | 1.1% |
| Nebraska | No | 12.00 | 11.89 | -0.9% |
| Nevada | No | 11.64 | 11.34 | -2.6% |
| New Hampshire | Yes | 18.98 | 18.88 | -0.5% |
| New Jersey | Yes | 16.02 | 15.50 | -3.2% |
| New Mexico | No | 13.57 | 13.37 | -1.5% |
| New York | Yes | 18.82 | 19.38 | 3.0% |
| North Carolina | No | 11.20 | 11.43 | 2.1% |
| North Dakota | No | 11.70 | 11.86 | 1.4% |
| Ohio | Yes | 12.59 | 12.70 | 0.9% |
| Oklahoma | No | 10.29 | 10.32 | 0.3% |
| Oregon | Yes | 10.94 | 11.25 | 2.8% |
| Pennsylvania | Yes | 14.31 | 13.96 | -2.4% |
| Rhode Island | Yes | 17.91 | 18.23 | 1.8% |
| South Carolina | No | 12.79 | 12.96 | 1.3% |
| South Dakota | No | 12.48 | 12.42 | -0.5% |
| Tennessee | No | 10.83 | 10.68 | -1.4% |
| Texas | Yes | 11.04 | 11.25 | 1.9% |
| Utah | No | 11.91 | 10.94 | -8.1% |
| Vermont | No | 17.74 | 17.86 | 0.7% |
| Virginia | Yes | 12.41 | 12.33 | -0.6% |
| Washington | No | 9.87 | 9.74 | -1.3% |
| Washington DC | Yes | 12.23 | 12.00 | -1.9% |
| West Virginia | No | 11.60 | 11.42 | -1.6% |
| Wisconsin | No | 14.65 | 14.28 | -2.5% |
| Wyoming | No | 12.15 | 12.01 | -1.2% |
Is the Average Cost of Electricity More Expensive in Deregulated States?
As of mid-2018, the average cost of electricity was 15.34 cents/kWh for deregulated states and 13.04 cents/kWh for regulated states. This can give the impression that deregulation makes electricity more expensive, but researchers from Cornwell University have reached the opposite conclusion:
- Electricity prices were already higher in many states that adopted deregulation. In other words, expensive electricity has been a reason to deregulate, not a consequence.
- In recent years, the price volatility of natural gas has been the main cause of electricity price fluctuations in the US.
- The transition from a regulated to a deregulated power sector comes with many costs, and price reductions do not occur immediately.
- Not all states have the same resources, and this affects electricity prices. States with abundant hydropower or coal-fired generation can achieve lower kWh prices.
Which States Have the Cheapest Electricity Prices?
As of 2018, only three states have an electricity tariff below 10 cents/kWh: Louisiana, Washington and Arkansas. After them, there are six states where the average cost of electricity is between 10 and 11 cents/kWh: Oklahoma, Kentucky, Idaho, Tennessee, Utah and Mississippi.
Texas Deregulated Electricity
The Texas electricity sector has had deregulated utilities since January 1, 2002, and local electric utilities were forced to split into three types of business units:
Retailers (sell energy to the end customer)
Generators (generate energy for the wholesale market)
Utilities (responsible for energy transmission and distribution–still regulated)
Between 2000 and 2010 there were several natural gas price spikes, which limited the potential benefits of deregulation for Texas. Gas prices had been low before 2000, and many generation companies in Texas decided to invest on that energy source in the newly deregulated market. However, natural gas prices have been much more stable after 2010, and Texas energy generators have been able to reduce their rates accordingly: deregulated electricity prices in Texas remained under the national average for six years in a row between 2010 and 2015.
The Future for States With Deregulated Energy Markets
Electric deregulation brings provider choice to consumers, but there are two important requirements to achieve the full benefits of deregulation. State authorities must design measures that prevent kilowatt-hour price manipulation, like in the case of California. In addition, power consumers must learn about electricity plans, and become active shoppers to make sure they are always getting the best deal available.