energy usage

Deregulation: How We Got to Where We Are Now

May 8, 2023

During the late 1990’s and early 2000’s, the process of deregulating electric and natural gas retail markets began and we were off like a herd of turtles.

Your energy bill is made up of two components; supply and distribution.  The distribution portion of the bill is for the pipes and wires that deliver electricity and gas to your meters and is owned by a regulated utility that is a monopoly in its service area.  The supply portion covers generation of the energy commodity and its transmission (or transportation for gas) to the utility that distributes it to you.  This is the portion of your service that was deregulated.  It did not go well.

Deregulation of natural gas was a relatively simple process because all of the necessary components and management entities already existed and there were essentially no major changes in infrastructure required.

Deregulation of electricity was not a matter of flipping a switch; it was a long and arduous process.  This was made necessary because in a regulated world, each utility was required to maintain sufficient generation assets to serve the power needs of its entire service area.  Due to varying ages and efficiencies of these generators, utilities were left with excess generating capacity that would not be competitive in an open marketplace.  This left regulated utilities with stranded assets that were essentially unusable.

Over a period of time, that in most areas lasted for years, utilities were compensated for these stranded assets by including a recovery charge billed to customers, thus making competitive supply less economical.  The cynics among us believed that some utilities, with the compliance of regulators, transferred generation cost to recovery fees in order to maintain their supply monopoly.  I, of course, personally never believed such a thing.  These charges slowly disappeared and markets that deregulated are open now.  Most utilities maintain generating capacity, often using deregulated merchant spin off companies.

And that’s where we are.  Except where we’re not.  Having been in the northeast epicenter of deregulation for so long, it is shocking to me the slow pace of deregulation in most of the rest of the continental U.S.  There is of course a natural monopoly for distribution of electricity and natural gas by serving utilities.  Why, however, would so much of the country satisfy themselves with a monopolized supply market when free market alternatives are available?  Utility monopolies are good at defending their turf and they are well equipped and funded.  They can be defeated by people willing to fight a long and difficult fight.  It’s been done and it works.  If you are in a fully regulated market and think you could do better, it’s on you.