Has Electric Deregulation Helped or Hurt Texans?

Sunrise after a night of thunderstorms on June 19, 2010, in Alpine, Texas.
Sunrise after a night of thunderstorms on June 19, 2010, in Alpine, Texas.

Since 1999, when then-Gov. George Bush signed a law that deregulated the Texas electricity market, a debate has raged about whether and how much the move has benefited ordinary Texans.

Deregulation aimed to introduce market competition as a way to increase options to consumers and force down prices. Clearly, the ramifications hardly have broken down so simply, and some believe the industry and large industrial customers have benefited more than the workaday electric consumer — who generally pays rates higher than the national average. Last week, the Legislature's Sunset Advisory Commission, which is currently evaluating the Public Utility Commission and ERCOT, the grid operator, recommended several important changes, including making it easier for Texas ratepayers to lodge complaints against electric companies.

The broader questions about the merits of deregulation remain a wonkish but important dispute. Conservative groups assert that deregulation has allowed consumers to choose lower electricity prices, caused old plants to be replaced with efficient new ones and encouraged renewable energy. Some ratepayer groups argue that deregulation has caused rates for ordinary Texans to be higher than they would have been otherwise.

"It's a very, very difficult question," says Steve Minick, the vice president for governmental affairs at the Texas Association of Business. Many factors, especially the price of natural gas — which has fluctuated widely in the past 10 years — determine the cost of electricity. His group, which represents both electric companies and large users of electricity like manufacturers, favors competition and thinks that deregulation has worked, but also acknowledges the "growing pains" of the market.

In the fog of conflicting figures and agendas, this much seems clear: Deregulation is here to stay. Texas manufacturers, who are big users of electricity, cheer the onset of competition, presumably because they employ people savvy enough to aggressively shop for lower electricity rates in a confusing market. Texas consumers, for their part, can in theory also choose plans with low rates. But in reality, few people spend their days scouring for the best deal, and therefore some of the proclaimed benefits of deregulation may be overstated. Comparison shopping for electricity sits low on the household to-do list, and so they may exert less pressure on the market than advocates had hoped. 

 

Just over half of all Texans live in "competitive areas"; electric cooperatives and municipal utilities, like those in Austin and San Antonio, as well as electric cooperatives, are not subject to deregulation. In Texas, the giant utilities got split into three parts: the generator (producer of the power, such as a coal plant), the operators of the wires for transmitting and distributing electricity, and the company that actually sells it to the customer. In theory, the companies that sell power should compete for consumers on the basis of price and services. A nifty website, powertochoose.org, allows Texans to type in their ZIP code, and up will pop a list of providers and their proffered rates.

"Competition in the electric industry will benefit Texans by reducing monthly rates and offering consumers more choices about the power they use," Gov. Bush said at the time.

Offers lower "prices" — but real costs rise

Of course, deregulation, while it implies the busting up of monopolies, does not necessarily mean a switch to an unfettered free for all. Consumers can still complain, and the Public Utility Commission and ERCOT will still flag unfair practices if they see them. But electric providers are essentially free to offer whatever rates they choose, and change their offers at will, whereas before they would have had to beg the Public Utility Commission for permission. 

Including Texas and the District of Columbia, 15 states have deregulated their electricity markets; most of these are in the Northeast, where electricity rates are high, and state officials wanted to try new measures to bring them down. Seven other states, including California (in the wake of its energy crisis 10 years ago), have suspended deregulation programs.

So has deregulation caused the cost of electricity to go up or down for ordinary Texans? That answer is complicated by the fact that no one knows how rates might have increased without it. "Most Texans can easily buy electricity today below 2001 regulated prices," asserts the conservative Texas Public Policy Foundation, in a recent paper. With inflation adjustments, the group says, "the average competitive price today is 9.46 percent lower than regulated prices in Texas in 2001."

That depends on your definition of "price": In this study, it's not what consumers actually pay, according to Bill Peacock, the group's vice president of research. Rather, it reflects the offers available at powertochoose.org. "We don't know what choices customers made," Peacock acknowledges. The "offers" the foundation tracked do not necessarily translate into customers — an important distinction in the literature on deregulation. In other words, how many people will take up tantalizingly low offers — some of which may be here one day and gone tomorrow — is unclear. 

From 2002 to mid-2009, 86 percent of customers made at least one observable switch, whether between providers or to a different plan offered by the same provider, according to a report by Bret Slocum of Clark, Thomas & Winters, who serves as legal counsel to several retail electric companies. But Tom "Smitty" Smith, the director of Public Citizen Texas, a consumer and environmental advocacy group, says that deregulation has been "a disaster for the average consumer" — partly because people don't have time to shop around, and also because it is hard to evaluate the offers.

 

"It's almost impossible to compare Offer A to Offer B and determine who's got the better deal for you," he says.

Jake Dyer, a policy analyst with Lloyd Gosselink Rochelle & Townsend, a law firm that represents a coalition of cities who are customers in the deregulated markets, says that between 2002 and 2008, the actual cost of electricity offered to residents by almost every company in competitive areas was higher on average than the cost of electricity nationally. 

Rates in Texas, he says, were consistently below average for the 10 years before deregulation. (Dyer says that 2001, a year often cited by deregulation advocates, has an anomalous spike caused partly by the run-up to deregulation; Peacock of the Texas Public Policy Foundation counters that natural gas prices were a big factor in the spike.)

Last year, residential electricity rates for all of Texas — including both regulated and deregulated areas — were 17 percent above the national average.

Meanwhile, Texas manufacturers, which buy huge quantities of power and presumably command commensurate stroke in the market, say they are happy with deregulation. "The fact is that current power prices in the Texas electric market compare favorably to anywhere else in the country," said Luke Bellsnyder, the executive director of the Texas Association of Manufacturers, in a statement.

The natural gas factor

Both sides acknowledge that natural gas prices are a key factor in electricity rates; they soared in 2008, sending five electricity retailers out of business. Since then, gas prices have fallen by about two-thirds. Texas, where 42 percent of generation comes from natural gas (compared with 23 percent in the nation as a whole), has been in for an especially wild ride.

John Fainter, the president of the Association of Electric Companies of Texas, believes Texas should be compared to other gas-reliant states; New Mexico and Oklahoma, which have lower electricity rates than Texas, are both more coal-reliant, he says.

Argues Dyer: "Natural gas certainly explains some of the fluctuations we've seen in electricity prices in this state, as in other states — but it does not explain why our rates in Texas seem to be consistently higher."

Another way to examine the question is to compare Texas electric providers to "un-deregulated" municipal utilities, like Austin and San Antonio. Electricity industry groups such as AECT like to note that it's always possible to find a lower rate on offer in a deregulated area. A document from the group, for example, argues that the municipal utilities often "have prices that are above what are being offered in the competitive market today." And in every competitive area, the group says, there are prices available that are below the national average.

Dyer, however, notes that for March 2010, the cost of electricity in Austin, San Antonio and San Marcos (measured per 1000 kilowatt-hours, the industry standard) is below the overall Texas average — which includes competitive areas (9.7 cents per kilowatt hour in San Antonio, against 11.88 cents per kilowatt-hour across Texas). Asked about this, AECT responded that municipal utilities tend to be more dependent on coal and nuclear power and said, "What is clear is that since gas prices have dropped — their price advantage over the rest of the state has also dropped."  

Deregulation boosts renewable energy

Leaving aside the eternal cost debate, has deregulation aided new-era energy tools, like wind power and smart-grid technology? "Deregulation was great for wind," says Andy Bowman, the founder and president of Pioneer Green Energy, a renewable energy development company. That's because the system encouraged greater use of natural gas immediately after deregulation; then, when gas prices soared several years ago, wind power became competitive. 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.

Lisa Singleton, a spokeswoman for Energy Future Holdings, whose companies include TXU Energy, argues that deregulation has also encouraged the development of smart-grid technologies. Without it, "I don't think we would have seen the same investment or deployment of smart-grid technologies," she says. (It bears noting, however, that California utilities — which do not operate in a deregulated environment — are also moving quickly toward smart-grid additions.)

At any rate, the interests surrounding electric deregulation likely will be fighting about its effects for years to come — because a re-regulation movement is not in the offing. Richard Sedano, a director of the Regulatory Assistance Project, a Vermont-based nonprofit that studies the environmental and economic issues associated with the power sector, notes that deregulation in many parts of the country, including Texas, was done in the late 1990s. Nowadays, no states are seriously considering switching their status, either to become deregulated or, conversely, suspending deregulation programs. In Texas, not even critics like Dyer are in favor of abandoning the system. "We are not advocating in any way, shape or form re-regulation," Dyer says. Rather, he adds, "We want the system to work the best it can work."

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