Energy Deregulation: What Does it Mean for You?

Posted by: Anna | 02/23/2016 at 05:12 PM

How Consumers Win with Energy Deregulation

Do you spend time thinking about your electricity? The short answer is probably not—at least not much further than your monthly electric bill when it’s high from air conditioning or heating costs. And, there’s a good reason you don’t think much about it—electricity is all the same. It’s not like clothing, with different colors, styles and sizes, where you can understand why you might pay more for better quality or fit. The electricity that you use, your neighbor also uses and so does the President of the United States. No matter how much it costs or how it’s generated—whether it’s wind, nuclear, solar energy or electricity from coal—electricity that powers every house and business in the nation produces the same result.

Electricity Costs

But you might consider why the cost of energy rates vary? How could your neighbor pay half the rate that you do? Both of these questions lead to another question, what is energy deregulation? Ambit Energy has heard complaints of how hard the concept is to understand, so we’re going to break it down for you.

First, we should probably explain why electricity was regulated in the first place. It will then be easier to understand the benefits of deregulation. Please note, everything we explain here about electricity also applies to deregulation of natural gas, but they are not mutually exclusive. A state that allows for deregulated electricity may not offer deregulated natural gas, and vice versa.

Electricity Regulation

There were two primary reasons for electricity regulation in the history of the United States. First, at the turn of the 20th century, after light bulbs and other uses for electricity had begun to transform people’s lives, it became apparent that electricity had become an essential service for U.S. citizens. And, as such, much like other utilities including water and natural gas services (and even fire and police protection), it was important for local governments to ensure that electricity was available to everyone and that it was reliable. And because of the potential dangers of electricity, it was also important to have strict safety regulations at all stages.

Second, whereas many other essential services, like groceries, home construction, clothing retailers, could operate better in a fully competitive environment, resources like energy utilities had some unique “barriers to entry” that made competition much more difficult. Those barriers all had one thing in common, cost. Building infrastructure and commodities were very expensive. Just think of the logistics and cost of building and connecting transmission lines from power plants to every home and business in the U.S., plus all of the facilities to manage and maintain the system.

Duplication of all of these elements by competing electricity companies would not only cost about twice as much, but having two (or more) sets of power lines to each home and office would be pretty ridiculous. So, electricity providers were for a long time—and in some cases still are—thought of as “natural monopolies.” That means there were more benefits to consumers from having one provider, than there would be from a free market, which is otherwise a principle of American capitalism.

The Downside of Energy Regulation

Given all of that, why does it make sense to deregulate energy and open it up to free market competition? For one, monopolies are usually banned for one reason—without competition, a company can inflate prices and consumers have no choice but to pay.

In a regulated environment, the government has to set price caps to avoid that situation with a natural monopoly. That usually means the utility can charge enough to cover costs plus a fixed percentage above that for profit. However, without actual competition, a utility monopoly has no incentive to innovate and keep costs as low as possible.

So what was the result? Over time, the cost of electricity plus the percentage of profit ended up costing customers more and more. Likewise, with no competition, companies had no incentive to treat customers fairly.

How Deregulation Works

Now that we’ve provided historical context, you can understand why people wanted a choice in electricity providers to ensure competitive prices and better service. But, why did some states and territories deregulate without duplicating the infrastructure used to create and transmit electricity? The answer goes back to where we started—all electricity is the same.

In a deregulated environment, the three steps in the commodity purchasing, transmission and distribution system are unlinked. Now, you have producers, transmitters (the powerline systems) and retail energy suppliers (who sells you power). Electricity providers, like Ambit Energy, now buy electricity from producers, pay a fee to the transmitters so they can use the lines, and bill it all to consumers who can choose the provider they want.

Retail energy providers are responsible for setting competitive rates and plans, providing good customer service, and differentiating themselves from competitors to remain in business. Energy producers have to keep costs low and innovate because providers can buy energy from many different sources—wind farms, solar farms, natural gas plants. They can buy green energy for environmentally conscious customers, even if they have to charge a little more for it. But, that’s all part of the power of choice.

And, finally, the transmission lines stay regulated because there is no need for the infrastructure to be duplicated. All of the electricity comes in from different providers, goes out to consumers as needed, and, in most cases, is billed by retail energy providers, who include required fees to cover transmission costs. But, no matter what provider handles the electricity, it’s all the same, so it can be transmitted with the same equipment.

With energy deregulation, as a customer, you win. You’re paying for the same product, but you get to choose different plans based on the best price, energy source, or in the case of Ambit’s Independent Consultants, the opportunity to earn free energy and even earn a living. Ambit Energy thoroughly reviews the companies that produce the electricity we sell to make sure we’re getting the best wholesale costs. And, we provide options to many of our Customers to buy Green-e certified energy and even solar services. Because at Ambit, it’s our mission to be the finest and most-respected retail energy provider in the United States. So delivering on the value that deregulation offers—competitive rates, better service and above all, choice—is paramount for us to provide to Customers in the markets we serve.

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