The PUC should let competition work in the Texas electricity market

By Bill Peacock. He is the vice president of research at the Texas Public Policy Foundation. Excerpts:

"Before Texas began its transition to a competitive electric market in January 2002, Dallas ratepayers were forced to buy their electricity from one electric utility at one price — about 14 cents per kilowatt- hour in 2018 dollars.

 

Today, Dallas consumers can choose from more than 80 plans offered by about 30 retail electric providers at an average price of about 10 cents per kWh, with fixed plans as low as 7 cents. That’s half the price of electricity 17 years ago."

"The push for less competition started back in 2012 with generators, and their Wall Street bankers, pointing to less-than-satisfactory profit margins as the cause of lower reserve margins. The reserve margin measures the cushion of extra generating capacity during times of peak electricity demand. The PUC commissioners appear concerned the reserves are insufficient, even though, after seven years, no problems have occurred."

"Generators don’t trust the Texas market because they are not sure they can compete well enough to earn a profit; in other states power generation companies can go to the government to get money. Regulators have a hard time trusting markets because they can’t control them, and if the lights go out regulators will get blamed, even though it is might not be their fault.

How might this lack of trust undermine the Texas market?

Texas has the most competitive, successful electricity market in the world. What sets it apart is that market participants — not the government — determine how much generation is built using market prices to guide them. Texas consumers pay only for the energy they use, unlike in other markets where consumers pay for both the electricity and the generation capacity to produce it.

However, the generators’ distrust of their ability to earn sufficient profits has led to hints that if the commissioners don’t intervene in the market by forcing prices higher — as much as $4 billion a year — power generation companies may decide not to build enough new generation to keep the lights on.
A $4 billion price hike would mean an increase in electricity costs of about 13 percent. The way the PUC would achieve this is by abandoning market pricing at key times in order to boost reserve levels. Which means Texas’ “energy-only” market would cease to exist, or would exist in name only. In its place we essentially would have a capacity market, where consumers pay generators just to stay in business."

"The change PUC commissioners are considering, implemented through something called the operating reserve demand curve, or ORDC . . . Whatever the market price is for electricity, when certain conditions are met the ORDC would kick in and automatically increase the price that consumers pay generators. All in the hope (not guaranteed) that the generators will use the money to build new generation capacity, i.e., plants. If consumers wind up needing the electricity, though, they will have to pay for it again in their electricity bills.

The Texas electricity market is not a failure; reserves are projected to be 8 percent this summer, rising to more than 12 percent within two years. Price increases over the last year resulted in hundreds of millions of dollars in additional revenue to generators last summer, signaling that returns on investment are improving."