Deregulation of the electric industry has proven effective in many states at creating greater competition and lowering prices for consumers. Nowhere is this more true than in Texas. Texas has by far the largest electric market in the United States; if it were a sovereign nation Texas’ electricity market would be the 11th largest in the world. This large consumer base creates both unique problems and the opportunity for vibrant private competition in the electricity market. However new proposals currently up for vote in the Texas Sunset Advisory Commission could add new regulations which could harm both Texas’ strong electricity market and individual consumers.
The deregulation of Texas’ electric market has been a gradual transition which began when Texas Senate Bill 7 came into force on January 1, 2002. Texas consumers can now choose from a variety of electric providers, which are deregulated, or their incumbent utility, which owns the power lines and remains regulated. The only exception to this rule are the consumers served by a municipal power service or utility cooperative; these consumers can only choose an alternate power company if their provider opts into deregulation. Currently only one company, Nueces Electric Cooperative, has chosen to do so.
The competition created by the new private electricity providers has been highly successful. According to ShopTexasElectricity, a website designed to help consumers and businesses compare and shop electricity plans in Texas, since 2002 approximately 85% of commercial and industrial consumers have switched power providers at least once. In addition, the site found that many consumers have chosen to move away from their incumbent carrier to a competitive provider: approximately 40% of residential consumers in deregulated areas have made the transition.
The creation of competition in the electricity market has led to billions of dollars of new investment in new power generation, the development of which has only recently begun to slow down. This slowdown along with strong backlash from a February 2011 rolling blackout caused by extreme cold has led some critics of electric deregulation to argue that current rates are unsustainably low and that stricter regulations on the electric providers are needed.
This week, the Texas Sunset Advisory Commission is considering including several regulatory changes that would create several new powers that the state can use to influence the electric industry. These proposed regulations were drawn from a Staff Report submitted by the Public Utility Commission. Two in particular could have strong negative effect on the electricity market in Texas and represent a significant intrusion into a market that has enjoyed considerable success.
The two recommendations are as follows:
Sunset Recommendation 1.1 Increase PUC’s administrative penalty authority to $100,000 per violation per day for electric industry participants’ violations of ERCOT’s reliability protocols or PUC’s wholesale reliability rules.
Sunset Recommendation 1.2 In limited circumstances, authorize PUC to issue emergency cease-and-desist orders to electric industry participants.
The Texas Public Policy Foundation has argued that the proposed regulations are seeking to solve a problem that does not exist. In a January 2013 paper analyzing the proposed regulations, the TPPF found that the Staff Report that made the recommendations failed to demonstrate that any of the behavior the regulations were designed to prevent was actually occurring. In addition, the report contends that the new regulations would circumvent due process for the electric companies.
Many of the problems that critics are attempting to blame on a flawed system are in fact based on simple economics. In an article from the Austin American-Statesman, Bill Peacock, vice president for research and director for the Center for Economic Freedom at the Texas Public Policy Foundation has argued that the slowdown in the production of new power generation did not emerge due to problems with the current system, but came about as a result of the forces of supply and demand:
“The answer begins with the fact that investment in new generation has slowed because the low electricity prices that are benefiting consumers are also reducing profits for generators.
This has led some regulators, investors and consultants to claim that a flawed market has led to prices that are so low they will lead to inadequate supplies as early as 2015.
But this is not the case. Prices are low and new investment has slowed in large part because of a basic economic law: the current supply of electricity greatly exceeds demand.”
The new regulations would slow down what has been one of the most successful efforts to deregulate a state electricity market and create real competition. While there is still a way to go before the Texas market fully adapts to a deregulated system, the Sunset Advisory Commission should consider the effect that the proposed regulations will have on the substantial progress the state has made so far.