Electricity Deregulation Texas Style
Here’s the lead sentence from an article appearing earlier this week in the Wall Street Journal:
"The electricity market in Texas, deregulated a decade ago, is flunking the most basic test of effectiveness: producing enough electricity."
It’s an interesting dilemma and one you wouldn’t necessarily expect arising in a market that’s been deregulated. After all, isn’t the point of deregulation to enable the captains of capitalism the ability to exploit market opportunities in their quest to maximize profits without government interference. But, like the California energy debacle of 2000-2001, the current situation in Texas demonstrates how difficult it is to “deregulate” an industry as complex and capital-intensive as the electricity industry.
Since the mid-1990s, state regulators have been experimenting with ways to open electricity markets to competition at both the wholesale and retail levels. California was an early adopter of competition, having implemented its initial competitive scheme in 1996. Within a few years, though, energy providers like Enron figured out how to manipulate California’s competitive energy market. Electricity prices went through the roof and sitting politicians were sent packing. We all know how badly that story ended – for Californians, for Enron, and for other energy providers.
Arizona started down its own competitive path in 1996, not wanting to lose out to the huge California market for competitive power. By the early 2000s, however, it was apparent that California’s effort was an abysmal failure. Arizona throttled-back its transition to competition as state regulators wisely reversed a previous decision to require the regulated providers like APS to divest ownership of their power plants. Arizona courts also stalled Arizona’s entrée into retail electricity competition by declaring aspects of Arizona’s retail competition rules constitutionally deficient.
Texas has been heralded by many, including the Arizona-based Goldwater Institute, as a competitive power success story. Business and residential customers have been able to choose among electricity providers for retail service and rates have risen only moderately since deregulation was implemented.
So, what happened, and why is electricity in Texas in short-supply?
The simple answer is that the electricity market is one that is not easily deregulated.
California’s disaster was caused by high prices for wholesale power resulting from market manipulation by providers. Texas’ problem is the opposite. Low natural gas prices have caused wholesale prices for electricity to plummet (Texas fuels about 40 percent of its power generation by burning natural gas). These low wholesale prices are insufficient to induce investment in new power plants by providers. And, Texas has only limited interconnection with other states for importing power.
So, now Texas regulators are looking for ways to increase wholesale prices in its deregulated market by establishing a price floor or increasing the price ceiling of the daily energy auction run by the Electric Reliability Council of Texas (Ercot). Any rise in wholesale rates will eventually be felt by residential, business and industrial consumers.
In Texas, how do you define progress?
"Before deregulation took effect in 2002, Texas officials could have told the utilities to build more power plants. Now about all regulators can do is revise market rules at Ercot. . ."
And hope the market responds.
