Deregulation of Electric Utilities

The deregulation of electric utilities -- the removal of government restrictions that mandate certain aspects of the business such as production schedules and consumer prices -- is among the most controversial issues in the energy industry. In the case of the United States, the energy deregulation movement began in California in the 1990s but has since been attempted in various forms in other states, generating mixed and often difficult-to-interpret results and a good deal of controversy.

Before Deregulation

In the case of the United States, most energy policy before deregulation originated in the early 20th century, when national, state and local governments recognized that electricity was a vital public service and moved to expand coverage and guarantee access. Many cities chartered public utility companies or allowed private firms to supply city power under strict government oversight. In exchange, many of these private utility companies were allowed to establish a monopoly over energy generation, distribution and sale, a monopoly that cities and states justified by claiming that electrical infrastructure was so expensive that it did not make sense to promote redundancy and competition and that government regulation could control prices and guarantee safety. In effect, governments argued that the natural business cycle characteristic of free markets would create volatility in prices, encourage speculation and overbuilding and be counterproductive to the goal of ensuring reliable, affordable electricity. Allowing a monopoly, according to the policy, allowed companies to plan for the long term and accept government price controls in exchange for guaranteed future income.

The Idea

By the 1990s, many began to question the logic of the old regulated system. In addition to industry leaders and ideological proponents of free market policies, even some environmentalists questioned energy regulation, arguing that, because utilities were guaranteed a fixed price for the energy they produced, utilities were encouraged to drastically expand generation and had little to no incentive to promote conservation by consumers. As a result, opponents of the regulated system proposed a radical deregulation scheme, breaking up utility monopolies and allowing any company to participate in the market either by building generators, installing power lines or selling power in the retail market. Consumers would be allowed to buy electricity from any of these companies that participated in the industry, leading proponents of deregulation to forecast that these changes would improve efficiency in the energy sector, create price competition and ultimately lower prices for consumers.

Favorable Views

The energy sector is extremely complex, with supply and demand easily affected by global supply chains and even natural disasters. As a result, the results of deregulation are often difficult to interpret and reflect a series of events that may or may not be directly related to energy policy. Therefore, despite the large price increases that have been seen in states like Texas and California after deregulation, proponents of deregulation argue that those price increases are due to increased demand on a global scale. Proponents also claim that, after a period of high prices when new companies had to make large investments in infrastructure, energy prices have begun to stabilize and the benefits of deregulation can finally be seen. Technological advancement in the sector, changes that proponents argue were made possible by increased competition in the industry, have drastically increased the use of smart meters and new, more efficient generation processes. In some cases, renewable energies have also established important positions in the market due to higher prices and consumer demand for green energy.

Opposing Views

In the complex and controversial debate surrounding energy deregulation, opponents mostly point to higher prices as evidence of the failure of deregulation. While politicians and the industry promised lower prices, consumers in Texas, for instance, saw increases of more than 50 percent in the decade following deregulation. In the emblematic case of California, the state faced a series of blackouts and a severe drain on public funds due to an energy crisis in 2001 and a scandal surrounding several illegal transactions in the infamous Enron case, a situation some accredit to a lack of public oversight of the energy industry. Even in states where deregulation was less radical, opponents claim that a free market for electricity creates too much price volatility, destabilizing the economy as many industries are unable to forecast energy costs and not guaranteeing access to energy for consumers on a fixed budget.

References

About the Author

Charly Mercer began writing professionally in 2009, contributing to several online publications. He received his B.A. in literature from Yale University in 2006.

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