Deregulation of the Texas electricity market

Electricity deregulation in Texas, approved by Texas Senate Bill 7 on January 1, 2002, calls for the creation of the Electric Utility Restructuring Legislative Oversight Committee to oversee implementation of the bill. According to the law, deregulation would be phased in over several years.

As a result, 85%[1] of Texas power consumers (those served by a company not owned by a municipality or a utility cooperative) can choose their electricity service from a variety of retail electric providers (REPs), including the incumbent utility. The incumbent utility in the area still owns and maintains the local power lines (and is the company to call in the event of a power outage) and is not subject to deregulation. Customers served by cooperatives or municipal utilities can choose an alternate REP only if the utility has "opted in" to deregulation; to date, only the area served by the Nueces Electric Cooperative has chosen to opt in.

Since 2002, approximately 85% of commercial and industrial consumers have switched power providers at least once. Approximately 40% of residential consumers in deregulated areas have switched from the former incumbent provider to a competitive REP. REPs providing service in the state include Acacia Energy, Now Power, Snap Energy, Clearview Electric, Green Mountain Energy, Iluminar Energy, Conservice Energy, Ambit Energy, Bounce Energy, Champion Energy, Cirro Energy, Direct Energy, Dynowatt, First Texas Energy Corporation, Gexa Energy, Glacial Energy, Just Energy, Kinetic Energy, Mega Energy, MXenergy, Adjacent Energy, Spark Energy, StarTex Power, Stream Energy, Tech Electricity, Texas Power, TXU Energy, and XOOM Energy.

According to a 2014 report[2] by the Texas Coalition for Affordable Power (TCAP), "deregulation cost Texans about $22 billion from 2002 to 2012. And residents in the deregulated market pay prices that are considerably higher than those who live in parts of the state that are still regulated. For example, TCAP found that the average consumer living in one of the areas that opted out of deregulation, such as Austin and San Antonio, paid $288 less in 2012 than consumers in the deregulated areas."[3]

Background

Texas has electricity consumption of $24 billion a year, the highest among the U.S. states. Its annual consumption is comparable to that of Great Britain and Spain, and if the state were an independent nation, its electricity market would be the 11th largest in the world. Texas produces the most wind electricity in the U.S., but also has the highest Carbon Dioxide Emissions of any state.[4] As of 2012, Texas residential electricity rates ranked 31st in the United States and average monthly residential electric bills in Texas were the 5th highest in the nation.[5]

System

The law designated the Electric Reliability Council of Texas (ERCOT) to be the authority to oversee grid reliability and operations so as to ensure no particular buyer or seller would gain an unfair advantage in the market.

The "price to beat"

Included within SB7 was the notion of the "price to beat" or PTB, an idea of a regulated rate governing the pricing behavior of the former utilities.

According to a typical economic theory, prices are optimally determined in a fair and transparent market, and not by a political or academic body. In deregulation of electricity markets, one immediate concern with pricing is that incumbent electricity providers would undercut the prices of new entrants, preventing competition and perpetuating the existing monopoly of providers. Thus, the SB7 bill introduced a phase-in period during which a price floor would be established (for incumbent electricity companies) to prevent this predatory practice, allowing new market entrants to become established. New market entrants could charge a price below the price to beat, but incumbents could not. This period was to last from 2002 to January 1, 2007 .

How is the price to beat established?

In order to prompt entry into the market, the price to beat would have to be high enough to allow for a modest profit by new entrants. Thus, it had to be above the cost of inputs such as natural gas and coal. For example, a price to beat fixed at the actual wholesale procurement price of electricity does not give potential entrants a margin to compete against incumbent utilities. Second, the price to beat would have to be reasonably low, to enable as many customers as possible to continue to consume electricity during the transition period.

Results

Electricity prices

One desired effect of the competition is lower electricity rates. In the first few years after the deregulation in 2002, the residential rate for electricity increased seven times, with the price to beat at around 15 cents per kilowatt hour (as of July 26, 2006, www.powertochoose.org) in 2006. However, while prices to customers increased 43% from 2002 to 2004, the costs of inputs rose faster, by 63%, showing that not all increases have been borne by consumers . (See Competition and entry of new firms above for discussion on the relationship between retail prices, inputs, and investment.)

The deregulation permitted a few regions to retain regulated rates, such as in Austin. In these areas, the electricity rate has stayed closer to the U.S. average rate of about 10 cents per kilowatt-hour. For those residents that had access to competitors (often more than a dozen), prices were only a little lower than the price to beat. For example, the lowest cost provider in central part of Texas was charging 6.8 cents per kilowatt (as of December 7, 2011, www.powertochoose.org).

Using the rate of 10 cents per kilowatt-hour (c/kWh) in Austin, Texas as a benchmark of still-regulated pricing, Texans in deregulated markets were receiving a discount of 32% below the regulated rate in 2011, mostly due to higher rates from "old" large, monopolistic Austin Energy. Switching to a new provider is slow on the electric market, but in 2010 fixed long-term (one year) market rates from many retailers became lower than 10 c/kW, and less than 9 c/kWh for shorter terms even in "expensive" electric markets (large cities) in Texas. During those transitional years some have regarded the unmet expectation of lower rates promised by deregulation as a success.

New Competition

The price to beat seemed to accomplish its goal of attracting competitors to the market during the period through January 1, 2007. It allowed competitors to enter the market without allowing the incumbents to undercut them in price. It has also given energy consumers the ability to compare energy rates offered by different providers . The less-regulated providers undercut the price to beat by only a small margin given that they must balance lower prices (to attract customers and build market share) with higher prices (needed to reinvest in new power plants). Due to the small difference in competing prices and slow (yearly or so) "buying" process, price decrease due to competition was very slow, and it took a few years to offset the original increase by "traditional" electric providers and move to lower rates.

One of the benchmarks of a successful free market is the range of choice provided to customers. Choice can be viewed both in terms of the number of firms active in the market as well as the variety of products those firms offer to consumers. In the first decade of retail electric deregulation in Texas, the market experienced dramatic changes in both metrics. In 2002, residential customers in the Dallas-Fort area could choose between 10 retail electric providers offers a total of 11 price plans. By the end of 2012, there were 45 retail electric providers offering 258 different price plans to residential customers in that market.[6] Similar increases in the number of retail electric providers and available plans have been realized in other deregulated electricity market areas with the state.

Environmental Impact

In environmental impact, results are mixed. With the ability to invest profits to satisfy further energy demand, producers like TXU are proposing eleven new coal-fired powerplants. Coal powerplants are cheaper than natural gas-fired powerplants, but produce more pollution. When the private equity firms Kohlberg Kravis Roberts and the Texas Pacific Group announced the take-over of TXU, the company which was known for charging the highest rates in the state and were losing customers, they called off plans for eight of the coal plants. TXU had invested more heavily in the other three. A few weeks later the buyers announced plans for two cleaner IGCC coal plants.

There are positive environmental impacts from retail price deregulation as well. The profitable and growing Texas electricity market has drawn considerable investment by wind-turbine companies. In July 2006, Texas surpassed California in wind energy production.

Another positive environmental impact is the effect of higher energy prices on consumer choices, similar to the US market trend toward more fuel-efficient cars. As electric bills have risen, residents are reducing their electrical usage by using more moderate thermostat settings, installing insulation, installing solar screens, and other such activities. Texas utilities (such as Austin Energy) are also installing advanced electricity meters that may one day enable variable pricing based on the time of day. This would permit energy customers to save money by further tailoring their consumption based on whether it occurred during the peak demand period (high cost/high pollution) or the off-peak (night time).

Effect on Renewable Energy

Due to the increased usage of natural gas immediately after deregulation, new-era energy tools such as wind power and smart-grid technology were greatly aided. Texas' first "renewable portfolio standard" — or requirement that the state's utilities get a certain amount of their power from renewable energy like wind — was signed into law in 1999, as part of the same legislation that deregulated the electric market.

See also

References

  1. ↑ "Explore Energy Rates in Texas". SaveOnEnergy.com. Retrieved 15 October 2013.
  2. ↑ Dyer, R. A. (2014), Deregulated Electricity in Texas, Texas Coalition for Affordable Power
  3. ↑ Steffy, Loren (March 2014), The Generation Gap, Texas Monthly
  4. ↑ "2013 State Energy Facts - Texas". SaveOnEnergy.com. Retrieved 15 October 2013.
  5. ↑ "Texas Electricity Rates". Electricity Local. Retrieved 2014-03-31.
  6. ↑ "Proliferation of Texas Retail Electric Offers". ElectricityMatch.com. Retrieved 10 November 2014.

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