Energy & Utilities Café serves as a platform to incite casual conversations about Energy and the Utilities Industry. The content here is meant to strike curiosity and to encourage discussions on the topic for everyone, even if you are not an expert in the field – because energy matters to all.

Previously, we discussed how a utility makes money and their various business structures. Now, let’s talk about competition. 

“Why do some people get to choose their electricity provider and others do not? If you do not get to choose one, how do you know if you are getting the best prices and service? “

Great questions, let’s start our casual conversation.

Join me in this journey to learn more about Electric Utilities. Let’s have a Casual Conversation.

Whether you can choose your electric provider or not has to do with market competition being allowed in your region. This varies depending on the state you live in. However, it is related to something called market regulation and deregulation. Before we discuss deregulation, let us explain that a regulated market, for the most part, defines an electric utility that is vertically integrated. This means it owns everything from generation to distribution, including sales [see previous post]. In a deregulated market, the utility is responsible for distribution, maintenance, and some sales functions such as invoicing but an entity called a Retail Electric Provider delivers the electricity to you ¹.

Electric retail suppliers set electricity prices for you. Their job is to have your best interest in mind since you can swap them out if you don’t like their service. Some suppliers provide tailor-made programs that fit your needs, others provide great visibility to your energy consumption, education to help you save, or even offer renewable energy as a source of power ². Deregulation allows investors to build their own generation and to sell it to the wholesale energy market. As a result, it’s possible to have more renewable energy projects under deregulation.

“Ok, so better prices, better service, more renewable energy projects – it sounds like competition is great. So you’re saying regulation is bad and deregulation is good, right?”. 

Well, not quite. We need to avoid a good vs. evil categorization here since it is a bit more complex than that. Let us explain through a lesson learned in California in the early 2000’s [yes, California; I know].

California became one of the first states to venture into deregulation in the late 1990s. In fact, it saw success leading to hundreds of electric retail suppliers competing in the early 2000s ³.However, in 2001, the state suffered from something called market manipulation, in which some energy wholesalers took advantage of the guidelines in place and they drove the price of electricity more than 20 times its normal value. It made utility companies unable to afford electricity resulting in rolling blackouts throughout the state. This stunt cost about $40 Billion dollars ³. As a result, most states decided to second guess deregulation, and some delayed or abandoned their deregulation ambitions altogether.  

“So, deregulation can lead to people taking advantage of the rules and to increased prices, hurting everyone. But if we make more strict rules, that just takes us back to regulation. I am confused- what should we do?”.

What to do is up to you. People like you have the power to call for change by contacting your elected officials. Do not cast judgement on the regulated market just yet, though; let’s talk about it a bit more.

Not all regulation is bad. In some industries like healthcare, it provides safety guidelines and best practices. Imagine if anyone could build medical equipment, a plane, or a car, and sell it to the public without any oversight. Similarly, a long time ago, the electric industry was unchartered territory. It was filled with controversy. People imagined distribution lines from different companies crossing the streets, falling and killing people (no, seriously). Also, very few investors would even consider building an electric grid because it was too risky. Who knew a century later this would become a necessity?¹ In a nutshell, imagine electricity and its industry being as complex and controversial as the Digital Currency market is now. Weird to think, right?

The federal government stepped in to give the electric industry some guidelines which consequently legitimized it as a business. This led to more investors participating in building what we know now as the electric industry. As part of regulation, the government gave investors rules and guarantees, such as a regulated monopoly for their service territory, obligation to serve everyone, and guaranteed return on their investment; but it still restrained their purchases to avoid ‘gaming the system’¹. All in all, regulation was great and necessary.

“So it seems that some regulation is good, but competition is also good.”

Exactly.

After a few decades, the rules that regulation set in place came with some negative consequences. Regulation created the building blocks for our electric grid. However, it also stagnated innovation, did not encourage efficient operations, and didn’t support incorporating the newest technology ⁴. In a world where Walmart is advertising their Sustainable Fleet and Amazon Air will have drones delivering packages, why do our utilities still need you to report an outage to their service center so they can send a truck out? That process has not changed for the better part of a century. Nonetheless, before we get all worked up about the utilities, it is not all their fault. Their actions were led by the policy and incentives available to them.

“Okay. So what should I take away from all of this?”

To conclude, neither regulation or deregulation are bad things. They were both needed at different times, but it is our job to mold the future of our electric grid. Depending on where you live, the Federal Energy Regulation Commission [FERC] through a state Public Utility Commission [PUC] dictates the rules in your service territory. If your territory is served by a municipal utility, local leaders dictate the rules; these are people who you get to vote for. These entities, organizations, and individuals ensure the business best practices and that you get fair prices. Please search for your state’s PUC or local energy entity to find out if you are getting the best bang for your buck.

With other industries taking advantage of the development in their fields, imagine an electric grid with the latest technology, cleaner operations, and more efficient systems. What would that even look like? We’ll take a look at it in our Smart Grid series. See you then!

We encourage you to find out more about this topic. Start by checking the following references:

• [1] Philipson, L., & Willis, H. L. (2006). Regulation and Deregulation. In Understanding electric utilities and de-regulation (pp. 261-301). Boca Raton, FL: CRC/Taylor & Francis.
• [2] Shop for Energy. (2012). Retrieved November 12, 2020, from https://www.resausa.org/shop-energy/benefits-retail-energy
• [3] 2000–01 California electricity crisis. (2020, November 12). Retrieved November 15, 2020, from https://en.wikipedia.org/wiki/2000%E2%80%9301_California_electricity_crisis
• [4] Warwick, W. (2002). A Primer on Electric Utilities, Deregulation, and Restructuring of U.S. Electricity Markets (pp. 45-58, Rep.). Richland, WA: Pacific Northwest National Laboratory.