TPPF COMMENTARY: Texas Consumers Benefit from Competitive Electricity Market

As summer draws near, it is a sure bet that temperatures in Texas will increase—with electricity prices following right along.

In the past, increases in electricity prices have prompted calls for more regulation of the Texas electricity market. While we might hear those refrains again this summer, a recent review of the market reveals that Texas has benefitted by freeing buyers and sellers of electricity from government interference in their transactions.

In Texas Electric Meter: Measuring the Effects of Electricity Deregulation, the Texas Public Policy Foundation puts numbers to work in a debate that has been dominated by rhetoric.

Our research establishes conclusively that last year’s critics of the Texas electricity market spoke too soon. Using data from the still-regulated 2006 market, they claimed that deregulation wasn’t working.

The same pattern held true across the country. For instance, deregulation was widely blamed for causing California’s power crisis several years ago. However, the California electricity market, in fact, was never deregulated. A poorly designed set of wholesale regulations combined with retail price controls led to that market’s collapse when natural gas prices skyrocketed.

Back in Texas, the only things that have skyrocketed since full deregulation took effect in January 2007 are consumer choice and competition.

In September 2006, the average Texas consumer in an area open to electric competition had access to about 17 retail electric providers offering about 36 different rate plans. Today, those same consumers can choose from 28 providers (on average) and nearly 100 rate plans.

Consumers can lock in today’s rate for the long term or let it float month-to-month. They can pick providers and rate plans based on their fuel sources. They can even choose electric providers that will give them a commission for each household they recruit to the company.

This explosion in consumer choice is rooted in the highly competitive nature of the retail electricity market.

Since competition began, the five former monopoly electric providers have lost between 53 and 78 percent of their market share. The percentage of residential customers who chose competitive rate plans more than doubled during 2006 and2007 as the state completed the transition into full deregulation.

As of December, 72 percent of residential consumers had chosen a competitive rate plan, and 80 percent had made an observable choice of providers. And, of course, the remaining 20 percent of the market can choose (or not choose) a new plan at any time.

Competition in the wholesale market has led to the construction of more than $20 billion in new generation facilities in Texas since wholesale deregulation began in the 1990s. An additional $25 billion is currently under construction or planned.

As much as anything, the reliability resulting from these massive investments testifies to the success of deregulation. Texans have been spared the repeated rolling blackouts that have afflicted California and New York.

Deregulation produced these gains in competition and reliability while providing more efficient and (often) better prices.

Prior to deregulation, Texas had the 14th highest average electricity rates in the country; as of December, we had slightly improved to 15th. The average competitive offer in January was only 2.9 percent higher than the inflation-adjusted regulated rates of 2001, but consumers could select rate plans almost 18 percent below the former regulated rate.

Yes, prices climbed higher in 2005 and 2006, but this was clearly influenced by the vestiges of regulation and higher natural gas prices. Once the Price-to-Beat expired and deregulation was fully implemented last year, the average price in Texas declined by more than five percent even while U.S prices were on the rise.

The temperature will increase in the coming months and it looks like natural gas prices might do the same. This is a formula for higher electricity prices, especially in states—like Texas—that depend heavily on natural gas for its electricity generation.

However, the higher prices won’t be just in Texas, or due to deregulation. The facts clearly show that Texans benefited from deregulation in 2007 and will continue to do so in the future.

Bill Peacock is the Director for the Center for Economic Freedom with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin.

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