How Texas Electric Deregulation Has Helped Texas Businesses and Consumers

The Choose Energy Team
By The Choose Energy Team May 11th, 2015
For business

Wednesday, August 05, 2009

Texas Electric deregulation in Texas came into effect as of January 1, 2002. The deregulation itself is going to be phased in over several years, but the result of the deregulation itself is that most Texas power customers can choose where they get their electricity from, from a number of what are called “retail electric providers,” or REPs. The so-called “incumbent utility” in an area still maintains and owns the powerlines, and it’s the one you call if there is a power outage. That particular company is not subject to deregulation. To date roughly 85% percent of industrial and commercial customers have taken advantage of deregulation by switching providers at least on one occasion. Over 50% residential customers have taken advantage of the deregulation to switch to a competitive REP. What’s so special about deregulation? Deregulation ensures that no single buyer or seller is going to have an unfair advantage in the market, basically a sort of “anti-monopolization” movement that helps ensure competitive pricing on Texas electricity.

Within deregulation was a concept known as the “price to beat,” or PTB, a regulated rate concept that determined the pricing behavior of ex-utility providers. Typically, prices would have been determined by a transparent market and in fair fashion, not by an academic or political body. However, this wasn’t quite going to work in Texas’ deregulation, because incumbent electric companies could instantly cut their own prices to beat those of new deregulation entries, therefore in effect preventing competition and continuing in the monopoly. To that end, the deregulation in Texas also had a phase-in period whereby a price floor was established for incumbent electricity companies so that this sort of continued monopolization could not occur and new competitors could become established themselves. This was to last until January 1 of 2007.

Benefits to businesses: No bottlenecking, no loss of profits by being “down”Deregulation helps ensure that “bottlenecking” won’t occur such as happened in the 2003 North American blackout and in California’s electric crisis. And of course, this benefits businesses because they don’t lose profits by going “down,” as is inevitable during the times of these types of outages. With the Texas electric market deregulated, new firms have been able to enter into the marketplace, thus helping ensure an end to bottlenecking. Specifically, more than 60 startup firms have been established to date, nearly equally split among firms that are almost entirely focused on commercial usage and those that are focused on residential usage. In addition, deregulation has been of benefit to consumers because aggregators have advocated for consumers to negotiate low rates on the markets; these lower cost than get passed on to consumers with lower pricing.

With last summer price rises, is deregulation still a good deal? Spikes in Texas’ electricity prices lst summer caused many to question deregulation’s impact in a positive sense. However, even though previous assertions that deregulation would lower prices for businesses and consumers, more competition has probably meant that prices themselves HAVE indeed remained lower than they would had deregulation not been instituted. It should also be noted that wholesale electricity prices actually took a drop between 2005 and 2006, several years after the inception and implementation of the deregulation. In addition, even though some electricity comes from (currently cheaper) coal plants, Texas electric companies have to set their prices at the higher natural gas production level, because natural gas power plants are needed to supply growing demand. And again, as demand grows, natural gas is going to become an increasingly important supplier of electricity.

What cost savings has this had for consumers and businesses? When deregulation was implemented, prices are still somewhat less than they would have been had deregulation not occured. In addition, it should be noted that electric companies are still absorbing some of the price increases, since prices went up for customers an average of 43% between the years of 2002 to 2004, even though input costs, such as those from natural gas, rose by 63%. Therefore, you can see that some of these costs have been borne by the electric companies and not consumers, because of the increased competition. With the Price to Beat Program enforced through January 1, 2007, new competitors could enter the market safely without fear that incumbents would undercut them in price. This has also controlled prices and increased competition. And of course, that benefits both businesses and consumers because with lower Texas electric prices to pay, businesses can keep their own overhead costs low, and pass the savings on to consumers.

Environmental impacts: Deregulation has also allowed businesses and consumers to begin to take advantage of more environmentally friendly electricity suppliers, such as the wind turbine companies that have begun to jump on board. What this means, of course, is that these businesses have impacted the environment favorably — but have been able to participate entirely because of the deregulation, which they may not have been able to do had it not happened. As of 2006, Texas surpassed California in its use of clean electricity generated from wind turbines. Other alternative energy sources are also in development, including solar and hydropower, biomass, and landfill gas.

Less electric consumption altogether – As electric prices have risen (even though, as stated previously, they would have arguably risen more in a market dominated by incumbents with no competition), consumers and businesses alike have jumped fully into conservation mode. This is something that may not have happened were electric prices not to have risen so substantially. And with businesses modeling this type of good behavior to consumers, this is truly responsible behavior that can only bring about good overall.

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