What is Electricity Deregulation?

Jen Whitten

Deregulation, in general, has been a hot topic of discussion during election seasons at both regional and local levels. To deregulate is when the government relaxes or removes regulations on an industry in order for the free market to take over, letting supply and demand equilibrium set the market price. Although deregulation was generally considered to be successful in both the airline and banking industries, electricity deregulation has not worked out in quite the same way.

An electrical engineer working.
An electrical engineer working.

Proponents of electricity deregulation hope to break up the unnatural monopolies enjoyed by electric companies. With more power generation companies, they argue, the wholesale rate of purchasing power would drop. At the same time, giving customers more choice in which electric company to use for service would create healthy competition among service providers, thus lowering overall consumer prices.

In the U.S., electricity service providers are subject to government regulations, but they can still sell power on the open market.
In the U.S., electricity service providers are subject to government regulations, but they can still sell power on the open market.

Deregulation detractors like to point out that, unlike the airline industry for example, consumer demand does not fluctuate based on cost. In the middle of a cold winter, people still must heat homes, just as they must cool them in the hot summer months. In essence, demand remains largely fixed, even when supply fluctuates. Without a responsive market, they say, electricity deregulation does not work as it was meant to.

As of 2004, Belgium and England are the only two countries to successfully deregulate the electricity industry completely. The rest of Europe maintains a hybrid of public and private companies in which governments handle the regulation of power to customers while the private sector generates the energy. In Asia, Hong Kong has a proposal to deregulate electricity by 2019, with a 50% deregulation goal by 2014. The plan hopes to rid the area of the electricity monopoly, but may backfire if there are too few private firms. Integration into China's electricity structure may also cause complications and service interruptions.

The United States took the first step towards electricity deregulation in the 1990s. While service providers remain subject to government regulations, those companies that generate power can sell it on the open market. Even after the deregulation of service providers, however, the physical lines carrying power to homes and business remain regulated. In Texas, customers in deregulated areas have been found to pay more for electricity than those in areas still subject to government regulations.

Although electricity deregulation has not work exactly as planned, it is not without some benefit. Discovering a lack of fluctuation in demand has in some cases prompted electric companies to develop a more efficient manner in which to charge for electricity. On the wholesale market, price fluctuations change based on factors such as time of day and weather conditions. In the future, electricity customers may be able to take advantage of these fluctuations by scheduling the bulk of electricity usage to coincide with cheaper prices.

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