Electricity restructuring in the U.S. aims to create competition, improve efficiency, and lower prices for consumers.
Restructured states often introduce deregulation to generation, and allow competition in the wholesale and the retail market.
The separation between traditionally regulated and restructured markets is ambiguous.
Electricity deregulation and restructuring are often used interchangeably, but they refer to different processes (Chen 2019). Deregulation involves reducing or eliminating certain regulations in an industry (Energy Information Administration (EIA) a). Restructuring changes the market from a monopoly to multiple competing sellers, allowing customers to choose their power provider (EIA b).
States began to break apart electricity monopolies through restructuring starting in the mid-1990s (Borenstein & Bushnell 2015; EIA 1998). The goal was to create a competitive market where different companies could generate and sell electricity to improve efficiency and reduce costs for consumers (Joskow 2000; Hill 2023).
In electricity restructuring, the industry is separated into four distinct components: generation, transmission, distribution, and retailing (Borenstein & Bushnell 2000; Joskow 1997). In regulated states, electricity is provided by large utility companies that control each of these components from generation to retailing (Bowen et al. 2023; Federal Energy Regulatory Commission (FERC) 2020; Hill 2023).
In regulated states, Public Utility Commissions regulate utility services and pricing (National Conference of State Legislatures (NCSL) 2022; National Governors Association (NGA)). In restructured states, generation and retail are often deregulated. Deregulation of generation allows independent electricity plants to compete to sell electricity (Borenstein & Bushnell 2015 ;Chen 2019). Restructuring of generation is considered the most economically impactful aspect of restructuring the electricity market. Since the majority of costs are incurred in generation, changes in this sector can significantly affect electricity prices (Borenstein & Bushnell 2015).
In both restructured and traditionally regulated states, transmission is federally regulated for market access and reliability (Figure 1). Local distribution remains a regulated natural monopoly (Borenstein & Bushnell 2000); typically, a single utility serves a specific geographic area in both markets( Joskow 1997; NGA; NCSL 2022).
Figure 1. Restructured electricity market structure. Delaware's electricity market structure with its wholesale and retail components and regulations in the supply chain. Delaware is a restructured state. Adapted from Chen 2019 p. 27.
The wholesale and the retail market. Electricity markets have wholesale and retail components, and they are found in both restructured and regulated states (NGA).
In the wholesale market, electricity is bought and sold before it reaches consumers. In regulated markets, utilities handle system operations and management, and often supply power to end-users (FERC 2023). In restructured markets, power plants compete to sell their electricity, and prices are determined by supply and demand in a reverse auction: the seller with the lowest price wins the sale. Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs), regulated by the Federal Energy Regulation Commission (FERC), manage the competitive wholesale market and coordinate the flow of electricity on the transmission grid, ensuring that supply meets demand (Borenstein & Bushnell 2000; FERC 2023). Some regulated states, such as KS and OK, participate in wholesale markets operated by ISO/RTO, but do not offer retail choice (NCSL 2022), benefiting from the wholesale competition.
In the retail market, electricity is sold to consumers. In regulated retail markets, customers can only buy electricity from one regulated utility company (Joskow 1997). In a restructured retail market, consumers can choose their electricity supplier from a range of companies that compete on price and services offered (EPA 2024). Some states allow electricity choice without engaging in a wholesale market. GA and OR allow retail choice for non-residential customers (National Renewable Energy Laboratory 2017).
MO takes part in the wholesale electricity market through the Southwest Power Pool (SPP) and the Midcontinent Independent System Operator (MISO). However, it is not a restructured state and does not currently offer retail choice to consumers.
While some states have active restructuring policies, others suspended or reversed their restructuring efforts after the Enron crisis (CA, NV, AR, AZ, NM, MT, AR and VA) (Brockway 2007). However, there is not a clear separation between markets in regulated states and more competitive markets in restructured states (NGA). For example, AZ, OR, and VA allow retail choice for some customers, and GA, marked as regulated, offers retail choice to some nonresidential customers.
Figure 2. Map of state-level restructuring policies. States with active restructuring policies, reversals or hybrid, and regulated states. Information from Brockway 2007; Harrison & Welton 2021; NGA; and Rose et al. 2024.
References
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