Did You Know?
California was the first state in the U.S. to adopt energy deregulation in 1996.
Energy is one of the most essential elements of modern-day living. Electricity is almost a basic need today. Does deregulating its use and distribution help? By energy deregulation, we mean that its distribution is not under the restrictions and purview of the government. It implies that there are private suppliers in the market and the processes and prices are not
regulated by the government. In restricted or reduced regulation of energy, the consumers are free to choose energy suppliers.
While many states in the U.S. have adopted energy deregulation, some still follow the conventional method of monopoly in the electricity market i.e., the process and the pricing policy is completely under government regulation. Traditionally, energy has mostly been a sector monopolized by the government. However, since the past two decades, there have been growing signs of energy deregulation. While energy deregulation is beneficial in many ways, it has its disadvantages too.
Let's look at the pros and cons of energy deregulation, the overall impact it has, and what consumers prefer and why.
Benefits the Consumers
Healthy competition is always beneficial for any market, since the suppliers vie for consumers' attention which leads to higher quality and competitive prices. Consumers can choose from a plethora of options according to their needs and as per their choice and budget. True to the Latin phrase, Caveat venditor (let the sellers beware), the suppliers have to be on their toes to survive the competition. Consumers benefit from the increased quality of service and reduced prices.
With increased competition, the energy suppliers try to explore newer sources of energy. Many natural resources are on the verge of extinction, and it is the need of the hour to consider alternative energy sources. The idea of harnessing these sources is encouraged, as suppliers are free to adopt innovative ways and because consumers have the right to choose the suppliers.
Deregulation reduces the need to adhere to statutory requirements, thereby reducing the investment of time in the approval process. Thus, suppliers can concentrate more on satisfying the customers.
Increased Customer Awareness
In a regulated market, pricing policies are fixed by the government and the consumer has no say in it. Hence, most consumers do not care about the rates and usage. In case of energy deregulation however, consumers choose their suppliers. This naturally leads to their taking more interest in energy use and pricing strategies. Thus, consumers become more aware of the process involved.
It is true that competition results in benefiting the consumers as the quest to buy more customer loyalty motivates the suppliers to deliver better. Yet, when the increased competition takes an unhealthy turn, it proves to be detrimental to the consumers as well as the economy. Suppliers may resort to the wrong means to grab a larger customer base.
The suppliers may form a syndicate to create official scarcity leading to increased prices and oppression of the consumers. A tab of the government is necessary since electricity and natural gas are vital to everyday living. Furthermore, small consumers may lose to the bigger, commercial consumers who might be favored by private suppliers.
Hindrance in Planning
In the energy sector, it is necessary that the supply and demand are kept a check on. It requires detailed planning and too many suppliers may cause a problem. It is difficult to predict the supply requirements with different companies having different processes. Electricity and natural gas are sensitive commodities, greatly in demand, and even a slight scarcity may result in huge losses for the consumers.
Electricity Crisis in California
In 2001, there was a major fiasco in the electricity supply in California, one of the states to encourage deregulation of energy. Efforts towards reducing regulatory control on energy had begun since 1996. By May 2000, energy prices increased. There were cuts in electricity supply and millions of customers were affected due to blackouts. A state of emergency was declared. Enron was caught in the public eye. Claims were made suggesting that the company was involved in manipulating the market. Enron eventually filed for bankruptcy.
Popularly known as the 'California Electricity Crisis', it has become a subject of study for many economists and research experts since then. Many claim that deregulation was not the only reason for the blackouts in California, since the situation was coupled with increasing demand for electricity, and a drought in the recent past had reduced the state's capacity to generate electricity. However, many lessons were learned from the debacle that occurred in California.
Energy deregulation is a revolutionary change, as against the conservative policy of government monopoly. While experts are trying to weigh the pros and cons of both, their eyes are centered on analyzing whether it will benefit in the long run. However, without government regulation, there are chances of unauthorized practices seeping in. Deregulation has its own set of problems that have to be considered and weighed against the benefits that the consumers may reap from it. While every state law has adapted to this in a different way, there are mixed reviews about the advantages and disadvantages of energy deregulation.
Though the California crisis defaced the concept of energy deregulation, experts claim that a good model can make deregulation successful. Meanwhile, many economists, industry experts, and journalists are keeping a tab on the developments and changes in the energy market and the debate still continues.