Deregulation of the Texas electricity market

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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 NEC Retail Co-op Electricity, Acacia Energy, Now Power, Snap Energy, Clearview Electric, Green Mountain Energy, Iluminar Energy, Conservice Energy, Ambit Energy, Entrust Energy, Bounce Energy, Champion Energy, Cirro Energy, Direct Energy, Dynowatt, First Texas Energy Corporation, Gexa Energy, Glacial Energy, Just Energy, Kinetic Energy, Mega Energy, APG&E, Adjacent Energy, Spark Energy, StarTex Power, Stream Energy, Tech Electricity, Texas Power, TXU Energy, XOOM Energy and 4Change 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."

However, the report concluded that re-regulating the market would not solve the issue. TCAP instead offered a series of reforms designed to increase market efficiency.[3]

Background[edit]

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[edit]

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"[edit]

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 [1].

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[edit]

Electricity prices[edit]

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 [2]. (See Competition and entry of new firms above for discussion on the relationship between retail prices, inputs, and investment.)

In June 2016 the Texas Coalition for Affordable Power found that Texan living in areas with retail electric deregulation consistently paid higher average electric rates than Texans living in deregulation-exempt areas. This trend had held for every year from 2002, the very first year of retail electric deregulation, through 2014. TCAP did not conduct a analysis for 2015 and 2016 because the necessary underlying data had not yet been released by the United States Energy Information Administration. However, the TCAP report did identify dozens of competitive deals during 2016 with prices meeting or beating those common in deregulation-exempt areas. It found that the number of those comparatively affordable deals in deregulated areas had increased in recent years. TCAP likewise found that the gap between average deregulated and non-deregulated residential prices in Texas had narrowed substantially in recent years. [6]

Compared to the rest of the nation, data from the U.S. Energy Information Administration which publishes annual state electric prices [7] that show that Texas' electric prices did rise above the national average immediately after deregulation from 2003 to 2009, but, from 2010 to 2015 have moved significantly below the national average price per kWh, with a total cost of $0.0863 per kWh in Texas in 2015 vs. $0.1042 nationally, or 17 percent lower in Texas.

New Competition[edit]

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 [3]. 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.[8] 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[edit]

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[edit]

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[edit]

References[edit]

  1. ^ "Explore Energy Rates in Texas". SaveOnEnergy.com. Retrieved 15 October 2013. 
  2. ^ Dyer, R. A. (2014), Deregulated Electricity in Texas (PDF), Texas Coalition for Affordable Power 
  3. ^ Steffy, Loren (March 2014), The Generation Gap, Texas Monthly 
  4. ^ "2013 State Energy Facts - Texas" (PDF). SaveOnEnergy.com. Retrieved 15 October 2013. 
  5. ^ "Texas Electricity Rates". Electricity Local. Retrieved 2014-03-31. 
  6. ^ Dyer, R.A (2016), Snapshot Report: Electricity Prices in Texas, Texas Coalition for Affordable Power
  7. ^ Monthly Electric Utility Sales and Revenue Report with State Distributions (Form EIA-826), U.S. Energy Information Administration, February 2016 
  8. ^ "Scope of Competition in Electric Markets in Texas" (PDF). Public Utility Commission of Texas. Retrieved 11 February 2015. 

External links[edit]