Is Energy Deregulation Good? How It Works & What It Means for Businesses

Energy deregulation changes how energy is supplied and sold, giving users more options and flexibility in choosing providers and plans. It encourages competition, which can lead to better pricing, services, and innovative solutions. For businesses and consumers alike, deregulation provides opportunities to make informed energy decisions, manage costs more effectively, and take advantage of customized programs that suit their needs.

What Is Energy Deregulation?

Traditionally, electric companies operated as monopolies. They controlled every part of energy delivery: generation, transmission, distribution, metering, and billing. These companies were heavily regulated by federal and state governments. When a state deregulates its electricity market, these monopolies are broken up. Different companies can now handle different parts of the energy delivery process.

• Private generators compete to sell electricity in the wholesale market.
• Retail Electric Providers (REPs) buy electricity from the wholesale market and resell it to homes and businesses as electricity plans.
• Transmission and Distribution Utilities (TDUs), such as Oncor and CenterPoint, manage the power grid. Each TDU has a designated service area, and their fees are added to all electricity plans.

Think of TDU charges like “shipping costs” for electricity. You buy energy from a retail provider, but the local utility charges a fee to deliver it to your property. The main benefit of energy deregulation is choice. Customers can choose their energy supplier, select pricing plans that fit their needs, and, in many cases, save money. Some states have deregulated electricity, others natural gas, and some both.

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How Power Deregulation Works?

Energy deregulation is complex but important. When federal and state governments broke up utility monopolies, new energy suppliers entered the market. This created competition and gave consumers more choice. In states with electricity or natural gas deregulation, customers can buy their energy supply from a third-party retail provider instead of the local utility. Consumers and businesses may choose a retail supplier for several reasons:

• To get a lower energy rate and save money
• To lock in a long-term rate for price stability
• To choose customized electric or gas plans that fit their needs

Even after choosing a supplier, most parts of the utility bill stay the same. The local utility still handles billing, maintains power lines and pipelines, and responds to outages.

In deregulated markets, retail suppliers buy energy from the wholesale market and resell it to customers. The utility continues to deliver the energy, while the supplier sets the supply rate.

Impacts on the Market

Energy deregulation has had many positive effects on the market. One of the biggest benefits is increased competition. Customers are no longer forced to pay prices set by a single utility company. Instead, they can shop for energy in an open market. This competition has helped lower energy prices and reduce utility bills for many consumers. Deregulation has also supported economic growth. As states passed deregulation laws, many new energy-related businesses were created. These include wholesale energy traders, transmission operators, retail suppliers, and energy brokers. Together, these businesses created jobs and expanded the energy economy.

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How Energy Deregulation Happened?

When Thomas Edison opened the nation’s first commercial power plant in Manhattan in 1882, there were no regulations governing electricity delivery. At the time, electricity was a rare luxury, available only to the wealthiest Americans. As electricity became more widely used, Congress stepped in to regulate the industry. In 1935, the Public Utilities Holding Company Act (PUHCA) was passed to control utility monopolies and ensure fair practices. In 1965, after the Great Northeast Blackout, the North American Electric Reliability Council (NERC) was created. NERC improved grid reliability but also contributed to the rise of powerful local energy monopolies.

The federal government took its first steps toward deregulation in 1978 with the Public Utility Regulatory Policies Act (PURPA). This law aimed to diversify the energy industry, promote competition, and encourage renewable energy development. A major milestone came with the Energy Policy Act of 1992, which gave states more authority to deregulate their energy markets and introduce competition. California led the way, deregulating its electricity market in 1996, followed by more than two dozen states over the years.

Not all states have fully deregulated. Some have deregulated electricity only, others natural gas only, and some both. Businesses and consumers in deregulated states can take advantage of competitive energy markets, while those in regulated states still rely on traditional utility pricing.

What Energy Deregulation Means for Small Businesses?

Energy deregulation gives small businesses more choices and flexibility when it comes to electricity. In deregulated markets, energy suppliers can create customized solutions that meet the specific needs of different businesses. Not all companies use energy the same way. Some may have high energy demand during the day, while others need more power at night. Traditional utility plans often follow a one-size-fits-all approach, which may not suit small businesses well. With deregulation, suppliers compete for business, offering a variety of small business energy options. Companies can select the type of contract, pricing structure, and contract length that best fits their operations. This competition often leads to better rates, tailored services, and more control over energy costs.

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U.S. Energy Deregulation Status (Electricity & Natural Gas)

A Brief History of Energy Deregulation

To understand the potential of a deregulated energy market, it helps to look at the history of energy in the U.S.

A Move Toward Energy Regulation

To fix these problems, the U.S. government passed the Public Utility Holding Company Act (PUHCA) in 1935. PUHCA targeted large utility holding companies that were becoming monopolies. By the early 1930s, three holding companies controlled nearly half of the U.S. utility industry. The Great Northeast Blackout of 1965 prompted another regulatory step. A faulty relay caused a blackout affecting 30 million people for up to 13 hours. In response, the North American Electric Reliability Council (NERC) was created, dividing the U.S. into 10 regions to improve reliability. While NERC improved delivery, it allowed local monopolies to emerge. These monopolies sold energy at regulated prices with little competition, leading to high costs and limited innovation. Energy prices rose further during the 1970s energy crises, when oil price spikes and expensive coal and uranium power plants increased costs for consumers.

Energy in the Early United States

In the early days of electricity and natural gas, energy utilities were unregulated. Companies competed for customers, which helped keep prices low. As demand grew, utilities built larger power plants, which further reduced costs. To stay competitive, utilities improved their production and delivery systems. This created affordable energy for users and supported economic growth. However, rapid expansion caused problems. Different companies produced and delivered energy in various ways. This fragmented system sometimes left users without service. Few utilities performed all three functions generation transmission, and distribution resulting in spotty service and inconsistent prices.

The Federal Energy Regulatory Commission (FERC) and Deregulation

Many utilities struggled to fund new power plants and asked regulators for higher rates. By 1977, the Federal Energy Regulatory Commission (FERC) was established. FERC introduced energy deregulation, letting individual states decide how to supply energy.

In deregulated states, utilities still own the delivery infrastructure, but consumers can now choose their retail energy provider. This competition gives users options to select plans that fit their needs and budgets, aiming to lower costs and encourage innovation.

Benefits of Energy Deregulation for Consumers

Energy deregulation offers several advantages for consumers, especially commercial and industrial businesses. Beyond potential cost savings, deregulation creates more flexibility and control over energy purchasing decisions. There are many other advantages to energy deregulation:

Customized Energy Solutions

In deregulated energy markets, suppliers are not limited to one standard pricing model. Instead, they can offer customized energy solutions designed to meet the specific needs of each business. These options may include hybrid pricing that blends fixed and variable rates, renewable or green energy plans, and flexible contract terms ranging from short-term contracts to multi-year agreements. This flexibility allows businesses to align their energy plans with usage patterns, operating hours, and risk tolerance. For example, a company with stable energy usage may prefer a fixed-rate plan for budget certainty, while a business with seasonal demand may benefit from a more flexible structure.

Energy Efficiency & Technology

Energy deregulation has helped expand the energy industry in many ways. It has led to the growth of new companies focused on energy efficiency and advanced technology. Because consumers now have more choice in how they buy electricity, these companies can also offer solutions that help reduce energy use. One example is energy demand response, a program that pays customers to lower energy usage during peak hours. In addition, many energy suppliers now provide financing for energy efficiency projects. They may cover the cost of lighting upgrades or other improvements in exchange for an electricity supply contract.

Custom Energy Supply Options

Deregulated markets also allow businesses to buy custom energy products. Regulated utilities must follow strict, government-set rate structures, so they cannot offer flexible contracts.

Energy suppliers in deregulated markets can create custom deals. For example, a business that uses more power at night when prices are lower can purchase energy at reduced rates during those hours. Energy deregulation gives both suppliers and customers the freedom to design energy plans that better match usage patterns and lower overall costs.

Budget Planning

Businesses in regulated states must buy energy from their local utility. They have no choice and must pay whatever rate the utility sets. When energy prices rise, their bills increase right away. In deregulated states, businesses have more control. They can choose their energy supplier and lock in fixed rates through long-term contracts. With help from a commercial energy consultant, businesses can secure favorable pricing at the right time. This allows them to better manage costs and plan energy budgets up to five years in advance.

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Improved Transparency

Energy deregulation increases transparency by encouraging competition among suppliers. With multiple companies competing for customers, pricing structures, contract terms, and fees are more clearly defined. Businesses can compare offers side by side and better understand how rates are calculated, what charges apply, and how long pricing is locked in. This level of transparency helps reduce surprises on utility bills and empowers customers to make informed energy purchasing decisions.

Innovation and Service Improvements

Competition in deregulated markets drives innovation across the energy industry. Suppliers invest in better technology, advanced billing platforms, and improved customer service to stand out from competitors. Many now offer online dashboards, real-time usage tracking, and energy management tools that help businesses monitor and reduce consumption. Over time, this competition leads to more efficient services, smarter energy solutions, and greater value for consumers.

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U.S. States Without Competitive Energy Markets (2026)

The following states do not have any form of energy deregulation.

Conclusion

Energy efficiency has made many positive impacts on the market for both energy companies and consumers alike. Not only has this new economic structure allowed for competition in the markets, but it has also given birth to many new companies, solutions, and technologies in an essential industry. If you own a business in a deregulated state and are looking for ways to reduce costs or take advantage of energy deregulation, contact one of our energy experts today.

Energy Deregulation FAQs

1. Does energy deregulation make energy more affordable?

Yes. Deregulated energy markets introduce competition among retail providers, which helps drive prices down. Companies offer competitive rates and innovative plans tailored to customer needs. This efficiency can reduce costs while still allowing providers to remain profitable.

2. Can businesses choose a custom energy plan in deregulated markets?

Absolutely. Businesses in deregulated states can select energy plans that match their usage patterns, such as time-of-use rates, hybrid pricing, or green energy options. This flexibility allows companies to optimize energy costs and manage risk more effectively.

3. What happens to the delivery of electricity or gas in deregulated states?

Even in deregulated markets, local utilities continue to own and maintain the infrastructure, such as power lines and pipelines. Retail energy suppliers only sell and deliver the energy itself. This means the reliability and maintenance of the grid remain consistent, while the supplier competition determines your energy price.

4. Are all states in the U.S. deregulated for electricity and natural gas?

No. Some states have fully deregulated energy markets, some partially, and others remain fully regulated. For example, Texas and Ohio have open electricity markets, while Alabama, Hawaii, and Utah are fully regulated. Businesses must check local regulations to understand their energy options.

5. How does deregulation impact small businesses?

Small businesses benefit from energy deregulation by having access to a variety of energy suppliers and contract options. They can lock in favorable rates, select contract lengths that match operational needs, and take advantage of specialized plans like energy efficiency programs or off-peak pricing.

6. Are there risks associated with energy deregulation?

Yes. While deregulation encourages competition and can lower costs, businesses must carefully review contracts to avoid hidden fees or auto-renewal clauses. Market volatility and price fluctuations are possible, so partnering with a knowledgeable energy broker or consultant can help mitigate risks.