What is Utility Deregulation?

John Lister
John Lister
Businessman with a briefcase
Businessman with a briefcase
Businessman with a briefcase

Utility deregulation is the process of allowing private firms to supply products such as gas, electricity, water and telephone services rather than restricting this to government-run agencies. The main theory for doing so is that it will create competition and benefits consumers with lower bills. However, there is some debate over whether this actually happens.

With some utilities, even though there are rival suppliers in a market, the physical supply will still be controlled and maintained by a single organization. Suppliers will simply pay a fee per customer to this organization, and then use a combination of competitive pricing and lowering their own administrative costs to attract customers while making a profit. This means that, unlike many competitive markets, many customers will not be choosing between firms based on the quality of their product; with utilities this is the same regardless of the supplier. Instead, they choose based on price and the service they receive in terms of administration and dealing with problems.

Utility deregulation has led to a growth in the popularity of price comparison websites. These aim to make it easier to choose between different suppliers of a utility. Such sites automate the process of working out how much a particular customer will pay with each firm based on the amount of the utility which they use. This can be a complex process as different firms offer a wide range of pricing schemes based on differing patterns of use.

In most places where utility deregulation has taken place an official organization, either a government agency or an independent agency, will regulate the market. This regulation may include checking that firms are meeting minimum standards for maintaining supplies, or that they are being honest in their advertising. If the regulator believes firms are colluding to keep prices artificially high, they may either take action themselves or refer the case to a competition commission, depending on the local set-up.

Those supporting utility deregulation argue that it brings the power of a competitive market to bear on prices, meaning consumers get better value. They also argue that it encourages firms to produce more flexible pricing to meet the needs of particular types of customer. Another argument for utility deregulation is that it reduces the need for government funding of inefficient state-run utility suppliers, which could in turn lower taxes.

Opponents say prices are not always lower than when the supply was controlled by a public company. They also argue that prices are more stable with a publicly owned utility supplier as their larger size means they can afford to base their pricing on long-term averages rather than react immediately to changes in the wholesale price of, for example, gas. Another argument against utility deregulation is that it means government has less control over how utility suppliers behave on environmental issues.

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