Deregulation of the Texas electricity market

Electricity deregulation in Texas was the result of the coming into force of Texas Senate Bill 7 on January 1, 2002. According to the law, deregulation is to be phased in over several years.

As a result, most 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 (usually a subsidiary thereof). 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 Glacial Energy, TXU Energy, Kinetic Energy, Reliant Energy, Dynowatt, Texas Power, Ambit Energy , Bounce Energy, MXenergy, Direct Energy, Stream Energy, First Texas Energy Corporation, Gexa Energy, Cirro Energy StarTex Power and Tech Electricity.

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.

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.

Aggregators, brokers, consultants

"Aggregators" are legal entities that join two or more customers to purchase electricity at reduced rates. An example of such company is Ambit Energy.

Organizations such as TEPA [2] represent established and active aggregators, brokers and consultants, which are largely credited with the early and high rate at which residential, commercial and industrial consumers in Texas switched to a competitive REP. These companies act as intermediaries and customer advocates.

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 market, 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 [3].

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

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 (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 [4]. (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 average rate of about 10 cents per kilowatt-hour in the U.S. For those residents that have access to competitors (often more than a dozen), prices are only a little lower than the price to beat. For example, the lowest cost provider in the northern central part of Texas was charging 12.9 cents per kilowatt (as of July 26, 2006, www.powertochoose.org).

However, the price to beat seems to have accomplished its goal of attracting competitors to the market during the period through January 1, 2007. It has 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 [5]. 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. However, just in a few years, large providers lost a big fraction of the market, and, probably due to this, the largest one (TXU) was even sold in 2007 (this was considered the largest buyout in the USA history) and "reconstructed".

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 paying a premium of 29% above the regulated rate in 2006, mostly due to higher rates from "old" large, previously monopolistic electric provides (which were nearly controlling the market and allowed to increase their rates), and slightly less from new retailers. 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 failure.^[1] Many states are now putting their plan to deregulate on hold because lower rates have yet to be achieved in any of the deregulated states.^[2] However, there are investment tradeoffs to these dilemmas (see Competition and entry of new firms above for a discussion of investment tradeoffs).

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 more efficient and 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).

Correlation to 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.^[3]

See also

• California electricity crisis
• Electricity provider switching

References

1. ^ [1]
2. ^ . http://austin.bizjournals.com/austin/othercities/pittsburgh/stories/2006/07/03/story3.html. ^{[dead link]}
3. ^ "Texas Power Companies Still Benefit from Deregulation Over a Decade Later". Texas Power News. http://paylesspower.com/texaspowercompany.html. Retrieved 2010-12-24. 

• http://www.senate.state.tx.us/75r/senate/commit/c850/c850_78.htm
• http://www.puc.state.tx.us/nrelease/2001/120701.cfm

External links

• Electric Reliability Council of Texas (ERCOT)
• Public Utilities Commission of Texas website
• Texas Electricity Ratings and Reviews