Why Power Prices Are Rising Faster in Deregulated States

The Unfulfilled Promise of Electricity Deregulation

In the late 20th century, a wave of economic liberalization swept through the United States, advocating for deregulation and privatization across key sectors. The electricity industry was a prime target, with the theory positing that introducing competition would mirror the perceived successes in transportation, natural gas, and telecommunications. This movement gained traction predominantly in states already grappling with elevated electricity costs, while others opted to maintain their existing regulated frameworks. The core belief was that competition and market restructuring would slash generation expenses, spur essential transmission development, empower consumers with choice, and foster innovation. The anticipated outcome was a convergence of electricity prices, with deregulated areas catching up to or even surpassing the affordability seen in their regulated counterparts.

However, recent data paints a starkly different picture. Instead of narrowing, the price differential between deregulated and regulated electricity markets has demonstrably widened over the past few years. This divergence challenges the fundamental premise upon which deregulation was built, leaving consumers in these regions facing unexpectedly higher bills.

Market Mechanics Fueling the Price Disparity

The crux of the issue lies in how electricity is priced in many deregulated markets. The wholesale price is typically dictated by the bid of the last power generator required to meet the hourly demand. Often, this marginal supplier is a natural gas plant. Consequently, the fluctuating cost of natural gas directly translates into the price of electricity for all consumers during that hour, regardless of the energy source used by other, potentially cheaper, generators operating concurrently. This creates a scenario where a significant portion of electricity might be produced from lower-cost sources, yet all consumers pay a price heavily influenced by the marginal cost of natural gas.

Industry observers note that the widening gap between regulated and deregulated electricity prices appears closely correlated with peaks in natural gas pricing. While this gap tends to shrink as gas prices fall, the reduction may occur at a slower pace. After nearly three decades, the price disparity is now at its widest point, directly contradicting the initial aims of deregulation, which sought to lower costs, particularly in areas that were already expensive.

The Energy Information Administration (EIA), alongside the American Public Power Association (APPA), provides data illustrating this trend from 1997 through estimated figures for 2025. These figures track the weighted average price of electricity in regulated, deregulated, and all US states, alongside the price of natural gas per million British thermal units (mmBtu) used in power generation. This historical data clearly shows the escalating cost divergence.

Policy Levers and Future Trajectories

Current policy discussions, including proposals aimed at boosting natural gas exports and reducing reliance on renewable energy sources, could exacerbate this situation. Such policies might increase domestic demand for natural gas, potentially driving up prices and introducing greater volatility linked to global commodity markets. This, in turn, would likely amplify electricity price hikes in deregulated markets, given their inherent structural sensitivity to gas costs.

Some political leaders in deregulated states have voiced concerns over rising electric bills and utility executive compensation, sometimes attributing these costs to green energy initiatives. However, experts suggest a more fundamental approach is needed. To shield consumers from escalating and unpredictable prices, these regions may need to pivot towards encouraging renewable generation and addressing the systemic flaws within their electricity markets, particularly the overreliance on natural gas as a price setter.

For consumers in these areas, especially those anticipating significant new demand from data centers or AI infrastructure, proactive measures like installing rooftop solar and battery storage could offer a hedge against future price shocks and political inaction. The escalating power prices in deregulated states have become a significant political talking point.

The Road Ahead for US Utilities

If deregulated states continue to expand their natural gas generation capacity, electricity prices are poised for further increases and heightened volatility. The trajectory in regulated states will depend on whether they also significantly increase their reliance on gas-fired power plants. In contrast, China is actively scaling back construction of gas plants while the US is expanding them. This surge in gas plant construction is viewed by some as a strategic error that could eventually challenge existing utility business models.

By overlooking the potential of renewables, which offer stable, lower-cost energy, the industry may be engaging in significant financial self-sabotage. The evolving landscape, where technology firms are becoming major energy consumers, could trigger a substantial restructuring of the utility sector. These tech giants often prioritize raw energy needs, potentially viewing traditional utility services as less critical. This dynamic might shift as companies recognize the potential for energy consumption patterns to be influenced by algorithmic strategies, particularly in markets already characterized by high and volatile prices.

Reading Between the Lines

The persistent and widening gap between electricity prices in regulated versus deregulated US states, largely driven by natural gas costs, presents a critical challenge to the foundational promises of market liberalization. The current market structure, where the marginal cost of natural gas dictates the price for all power sold, creates inherent price volatility and disadvantages consumers, especially in regions where this model is dominant. Policy decisions that favor increased natural gas production and export, without a parallel emphasis on renewable energy deployment and market reform, risk further amplifying these price pressures.

This situation creates a complex interplay of factors for investors and traders. The direct link between natural gas prices and electricity costs in deregulated markets highlights the importance of monitoring the Henry Hub natural gas futures. Fluctuations in this benchmark can provide early signals for shifts in electricity prices across affected states. Furthermore, the growing demand for power from data centers and AI initiatives, coupled with a potential policy push towards renewables, suggests opportunities in companies involved in grid modernization, energy storage solutions, and renewable energy development. Traders should also keep an eye on the US Dollar Index (DXY), as energy prices and currency strength often exhibit an inverse relationship, and on utility stocks, particularly those operating in regulated versus deregulated environments, to gauge differential performance.