Texas Electricity Market Deregulation – Verdict – Yea Or Nay?May 5, 2023
The energy market in Texas was a monopoly until just a few years ago, meaning that consumers did not have the power they have today to choose the provider supplying their electricity needs: in any given area, one single utility managed the transmission, distribution, and sale of electricity to consumers. All that changed on January 1, 2002, when Bill 7 (SB7) was passed by the Texas Senate, initiating the phasing in over several years of the deregulation of the electricity market in the state. Since then, Texans living in deregulated areas have had the right to choose their Retail Electric Provider (REP) — they could decide to remain with the one they had (the incumbent utility), or alternatively, to switch to whichever REP may be offering a better deal. Consumers were reassured that the reliability of service would not change regardless of the REP one chose: while REPs sell you the electricity, the incumbent utility in one’s area prior to deregulation continues to own and maintain the local power lines as well as the transmission and distribution of electricity, and is not subject to deregulation. It is the responsibility of the Public Utility Commission of Texas (PUCT) — the state agency charged with regulating and overseeing public utilities in the state and with certifying REPs — to ensure that the safety and reliability of the delivery of electricity remains constant, regardless of the REP supplying consumers’ Reliant Energy needs.
Deregulation was supposed to do for the power industry what it did in the telecommunications and airline industries: bring consumers lower prices and more competition. When then-Texas Gov. George W. Bush signed the state’s deregulation bill in 1999, he assured denizens that “competition in the electric industry will benefit Texans by reducing monthly rates and offering consumers more choices.” Instead, to the chagrin of many, utility bills rose sharply for residents in many states that implemented deregulation. While average prices rose 21% in regulated states from 2002 to 2006, they increased significantly higher — by 36% — in deregulated states where rate caps expired, according to a study by Ken Rose (senior fellow at the Institute of Public Utilities at Michigan State University).
Thus, with regard to the anticipated reduction of prices, electricity market deregulation has regrettably not yet resulted in such a clearcut positive outcome for consumers. One item which contributed to this in Texas’s deregulation resulted from a concern that incumbent electricity providers would undercut the prices of new players in the market, thereby preventing competition and protracting the existing monopolies. In order to preempt such a move, the SB7 bill defined a phase-in period during which a price floor (the “Price to Beat”, or PTB) would be established for incumbent electricity companies only — new market entrants could charge a price below the PTB — thereby allowing the new players to firmly establish themselves.
While this may seem to paint a bleak picture of the outlook for deregulation, there are in fact a number of other parameters which are of relevance and must be considered. Indeed, consumers are more than aware that electricity costs have increased significantly over the last decade in the United States, be it in regulated or deregulated areas; however, while electricity prices to consumers in Texas increased 43% from 2002 to 2004, the costs of inputs (e.g. natural gas) rose even faster — by 63% — showing that not all increases have been borne by consumers.
What’s more, the competition created as a result of deregulation has resulted in a number of improvements in the power market as a whole — not least of all by significantly increasing the market share of “green” (renewable) energy, such as that produced by wind or by solar technologies. The competition brought about by deregulation also encouraged power-plant owners to modernize, resulting in newer plants being about a third more efficient than the ones they replaced.
So for the moment, the jury’s still out on deregulation. It is incontestable that it has brought about some very positive and significant changes in the Texas energy market; it remains to be seen whether natural market forces and the increased competition between Retail Energy Providers can finally realize Bush’s promise to significantly reduce Texans’ monthly electricity rates.