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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Dark days ahead?

Here is the latest post on "Speaking Freely," the news commentary feature at www.TexasPolicy.com. (For those you who are more blog-savvy, we have added an RSS feed to that.)

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Reuters reports that “a drop in wind generation late on Tuesday, coupled with colder weather, triggered an electric emergency that caused the Texas grid operator to cut service to some large customers.” ERCOT, which operates the state’s power grid, moved directly to a stage 2 emergency.

Over the course of three hours, the megawatts of electricity coming from West Texas wind farms dropped from 1700 to 300. Other power suppliers fell short of their scheduled production.

Texas is now the nation’s leading generator of electricity from wind power, and the amount of wind generation is increasing. Consider what a problem this would be the next time if it were to happen on a hot summer evening when electricity use hits its peak. The more wind energy on the power grid, the more unreliability becomes a problem.

The cost of building those lines so far away from where the electricity is needed will almost certainly be borne by Texas consumers, while the wind energy investors, landowners, and West Texas taxing entities reap the financial benefits.

Wind energy has its place in the generation mix, but there is a problem with the state mandating the use of an unreliable resource and forcing consumers to subsidize it.

- Bill Peacock

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TPPF COMMENTARY: Consumer Sovereignty

Government has a hard time letting go of certain decisions. Over the last several years, regulators and policymakers have shown support for allowing consumers to exercise more choice regarding the products they purchase -- at least until they don't like the choice those consumers make. In this week's commentary, Bill Peacock, Director of the Foundation's Center for Economic Freedom, looks at recent events in the Texas insurance and electricity markets and articulates why government needs to trust consumers and leave well enough alone.

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Consumer Sovereignty

Time to Bring Consumer Regulation into the 21^st Century

By Bill Peacock

“Many people want the government to protect the consumer,” said the late economist Milton Friedman. “A much more urgent problem is to protect the consumer from the government.”

Friedman’s words particularly ring true regarding the Texas insurance industry.

Since World War II, regulation of insurance has been justified in the name of ensuring “affordable” prices. Experience, however, shows that regulation has led to wild swings in prices and availability.

States like Illinois and South Carolina have proven that a modernized regulatory approach focusing on fairness (ensuring that the cost to a policyholder reflects his level of risk) and solvency (ensuring that companies have the financial resources to pay claims) in lines such as auto and homeowners’ insurance creates a more stable and healthier industry. Since their reforms, both states have seen more companies enter the market, stable rates, and smaller residual markets.

A study that compared Illinois’ auto insurance market to other comparable states found Illinois to have more predictable “rate levels, lower consumer prices, the highest number of insurance carriers in the nation, and a low number of uninsured drivers.”

Texas insurance regulators, however, operate as though none of this has taken place.

This summer, the Texas Department of Insurance rejected or threatened to reject three rate filings by two different insurers. And this week, they are preparing to “crack down” on affiliated business arrangements—where one company owns or controls another and is in a position to refer business to the controlled business—in title insurance, ignoring the obvious efficiencies gained by such arrangements.

This approach to regulation turns on the notion that without government oversight, insurance companies will take advantage of consumers. They make this assumption based on the fact that a few insurers tend to serve the majority of the homeowners’ market, and thus can exercise “market power” over consumers.

If competition was working in the homeowners’ market, critics contend, more people would have left the larger providers and chosen providers that offered lower prices. They claim the existence of consumers sticking with higher prices is proof that consumer choice is not readily available; thus consumers need protection from the larger companies who are profiting at their expense. Of course, no standard is ever offered for how much business the large firms should lose before competition is considered optimal.

This was the same rationale that drove the debate on electric re-regulation during the last legislative session. Market opponents said the market share of TXU in conjunction with higher prices was proof of their anti-competitive behavior.

But it has only been recently that the attempts of a company to take market share from its competitors have been deemed anti-competitive. In more lucid times, companies increasing their market share were seen as being aggressive, and consumers who stuck with such companies were given credit for being sophisticated buyers.

Research examining online “consumer stickiness” shows consumers sticking with one provider in the presence of lower prices elsewhere can be an indicator of a healthy, highly-competitive marketplace. While the Internet allows consumers to search and frequently switch to alternative providers, “branding, awareness, and trust” make consumers willing to pay higher prices to retailers that they have previously dealt with.

Consumers reign supreme in the marketplace. Nobody forces consumers to buy electricity, insurance, or cell phones from a particular provider—unless it’s the government restricting availability via regulation, as it has done with telephone and electric service in recent times.

Every time consumers buy insurance or pay their electric bill, they signal that they have made an affirmative choice that satisfies their individual preferences. If the price and product is good enough for consumers, it ought to be good enough for the government as well.

Bill Peacock is Director for the Center for Economic Freedom with the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at bpeacock@texaspolicy.com.

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