What Is Energy Deregulation?

Traditionally, electric companies have been vertical organizations who have control over all stages of the energy delivery process: generation, transmission, distribution, metering and billing. In other words, they have operated as monopolies under federal and state regulation.

When a state deregulates its electric sector, these monopolies are broken down and different companies participate in the energy delivery process.

• Private generators compete to sell their electricity output in a wholesale market.
• Retail electric providers (REP) purchase wholesale energy, and resell it to homes and businesses in the form of electricity plans.
• Transmission and distribution utilities (TDU) such as Oncor and CenterPoint are in charge of the grid. Each TDU is assigned a service territory, and their fees are added to all electricity plans.
• TDU charges can be described as “shipping costs” in the electric power industry. You purchase energy from a retail electric provider, but the local utility company charges a fee to bring that energy to your property.

The main advantage of having a deregulated energy sector is being able to choose your provider. Some states have deregulated electricity, others have deregulated natural gas, and others have deregulated both services.

Electricity Deregulation in the United States

On November 9, 1965, there was a massive blackout that affected the northeastern USA and southeastern Ontario in Canada. The incident left 30 million people without electricity for 13 hours, and the National Electric Reliability Council (NERC) was created to prevent similar blackouts in the future.

NERC divided the US electricity grid into 10 regions, which were managed separately to improve reliability. However, this also meant that a single company was in charge of the power supply for each region, creating monopolies. The goal of electric deregulation has been to create competition in the power industry, lowering electricity prices, but it must be managed correctly:

Some states have transitioned to a deregulated electric sector with success, while others have faced significant challenges in the process. When done right, deregulation leads to a wide selection of electricity plans for consumers, letting them choose the best option according to their consumption. Deregulation offers the following benefits:

• Power bill savings, if you choose the right electricity plan and a provider you can trust.
• You can select electricity plans according to your preferences. For example, you can look for a provider that uses 100% renewable energy.
• Some electricity plans come with perks, such as smart thermostats or incentives for solar panel owners.

Consider that deregulation only applies for electricity generation and retail sales. Transmission and distribution are still a regulated monopoly – in a given area, a single company manages the power lines, transmission towers, utility poles, transformers, substations, etc. In other words, generation companies compete to sell their electricity, while retailers compete to resell that power to you. However, they all use the same power grid – having competing networks would result in redundant power lines, and it would represent a waste of infrastructure.

When electricity is deregulated, the wholesale market operates like a reverse auction. Just like the highest bidder wins in a normal auction, the seller with the lowest price wins in a reverse auction.

US States with Deregulated Electricity Only

The following table summarizes the states with a deregulated electric sector, with their average kilowatt-hour prices for residential and commercial consumers, based on the latest data from the US EIA. The table also provides the specific transmission and distribution utilities (TDU) with deregulation in their territory, per state:

*For comparison, the US average electricity prices are 12.80 ¢ / kWh in the residential sector, and 10.48 ¢ / kWh in the commercial sector.

Connecticut is characterized by its low-energy-intensive economy, in terms of energy usage per dollar of state GDP. Deregulation laws were adopted in 1998, requiring two electric utilities and the Department of Public Utility Control (DPUC) to create a competitive market. Generation was separated from transmission and distribution by 1999, and utility companies auctioned their power plants. Electric choice was implemented between January and July 2000.

Delaware enacted deregulation laws in 1999, and implementation started in March 2000. The state is characterized by having the lowest electricity production in the US, and its consumption is 100 times higher than its production. As a result, Delaware depends on power imports.

Maine has the cheapest electricity of the New England states, and is also the wind power leader of the region, with over 900 MW of capacity. In 1997, the Maine legislature published an act to deregulate the electric industry.

Massachusetts is characterized by its dependence on natural gas, which produces around two-thirds of the state’s electricity. However, the state has been actively working to reduce coal-fired generation, and the rest of its electricity comes mostly from renewables and nuclear power. Legislation to deregulate the power sector was enacted in 1998, and the process had been completed by 2005. This included the Energy Switch Massachusetts program.

New Hampshire is strongly dependent on nuclear power, and the Seabrook plant produces around 60% of the state’s electricity. However, the state has also been investing in wind power, which surpassed coal generation in 2016. New Hampshire enacted deregulation laws in 1996, and utility companies were restructured between 1998 and 2003.

Texas started deregulating its electric sector in 2002, a few years after the New England states discussed above. However, over 26 million Texans can now choose their electricity provider. The power supply is managed by the Electric Reliability Council of Texas (ERCOT), and there are six major utilities with electric choice in their service territory.

Read more about electricity deregulation in Texas.

US States with Deregulated Electricity and Gas

The following states have deregulated both of their energy services – electricity and gas. The following tables summarize their electricity and gas prices according to the US EIA, and the utilities with deregulated territories:

*For comparison, the US average electricity prices are 12.80 ¢ / kWh in the residential sector, and 10.48 ¢ / kWh in the commercial sector.

The following table summarizes average gas prices for each state, and the utility companies with deregulated territories:

*For comparison, the US average gas prices are $9.73 per MCF in the residential sector, and $7.42 per MCF in the commercial sector.

Illinois is the top nuclear power state: Over 50% of its electricity comes from this source, and the state’s nuclear plants produced over 8.4 billion kWh in 2020 alone. Renewable sources are also used, but they only account for 10% of the state’s power mix. Energy deregulation was enacted in 1997, and implemented between 1999 and 2007. Regulated electricity prices were locked by 10 years to simplify the transition.

Maryland produces around five times the energy it consumes, making it a major exporter. The state also has an ambitious Renewable Portfolio Standard (RPS), with a goal of 50% renewable generation by 2030. Energy deregulation was enacted in 1999, and it had been applied by 2004.

New Jersey is dependent on nuclear power and natural gas, which provide over 90% of the state’s electricity. However, the NJ Renewable Portfolio Standard aims for 35% renewable energy by 2025, and 50% by 2030. Natural gas was deregulated in 1997, and electricity was deregulated in 2001.

New York is a renewable energy leader, with a Clean Energy Standard that aims for 100% carbon-free electricity by 2040. According to the latest data from the US EIA, the state already gets over 29% of its energy from renewables, and is the third-largest producer of hydropower in the US.  Energy deregulation laws were enacted in 1998.

Ohio is a major user of coal and natural gas, and eight investor-owned utilities controlled the state’s electric supply before deregulation. The state enacted laws for energy choice in 1999, and they have been applied since 2001. Regulated electricity rates were reduced by 5% and frozen for five years during the process.

Pennsylvania provides an example of a highly successful deregulation process, according to the Center for the Advancement of Energy Markets. Energy choice legislation was enacted in 1996 for electricity, and in 1999 for natural gas. The deregulation process was completed between 1999 and 2001.

Rhode Island enacted the Utility Restructuring Act in 1996, making it the first state to take steps towards a competitive energy market. Rhode Island was also the first state to build an offshore wind farm. Natural gas current provides over 90% of electricity, and the rest comes mostly from renewables. National Grid is the main electricity and gas utility, serving 99% of the state.

Michigan is a major user of coal, natural gas and nuclear power. Deregulation laws were enacted since 2000, but their application in the power sector has been very limited. Only 10% of the electric market was deregulated, which means there is a long waiting list to switch providers.

Virginia is another special case. Full deregulation was attempted in 1999, but the state decided to regulate its electric industry again in 2007. As mentioned above, you can only switch to a provider that sells 100% renewable energy, but this is not available everywhere, and your utility company can return you to the regulated service if they have renewables as well. Electric choice is also available for large consumers with a demand of over 5MW, but the switching process takes three years.

US States with Deregulated Gas Only

The following states have only deregulated their gas sector. Some have a wide range of gas providers to choose from, while others have limited options:

*For comparison, the US average gas prices are $9.73 per MCF in the residential sector, and $7.42 per MCF in the commercial sector.

US States Without a Competitive Energy Market 

The following states do not have any form of energy deregulation.

•  Alabama
•  Alaska
•  Arizona
•  Arkansas 
•  Colorado
•  Hawaii
•  Idaho
•  Iowa
•  Louisiana
•  Minnesota
•  Mississippi
•  Missouri
•  Nevada
•  North Carolina
•  North Dakota
•  Oklahoma
•  Oregon
•  South Carolina
•  South Dakota
•  Tennessee
•  Utah
•  Vermont
•  Washington
•  Wisconsin