The Wall Street Journal recently published an article asserting that Texans in deregulated electric markets had paid $28 billion more for power since 2004 than they would have paid to a traditional utility. The authors made that statement based on a faulty comparison between what consumers in competitive retail markets had paid compared with the energy bills paid by their counterparts served by utilities that did not offer competitive retail supply.
The article further went on to buttress those claims by citing a study from the Texas Coalition for Affordable Power stating that high power prices were to be blamed on deregulation.
There are a number of flaws with the Journal article and its assertions. Since electricity bills are fairly complex, involving multiple cost elements, it may be helpful to address these issues one at a time.
A 2015 Study Including 2013 Data Does Not Add Much Value
First, let’s take the reference to the Texas Coalition for Affordable Power (TCAP) study. That study was published in 2015, based on data that was available only through 2013. That study is not only based on data eight years old, but it also noted that, “There also exists separate evidence that the price gap between deregulated and non-deregulated areas of Texas has narrowed over the last 18 months.” Given the age of that piece, and the pace of change in the evolution of the power grid in recent years, 2013 data is not a very valuable reference point at this juncture. To put that change into context, the grid run by the operator Electric Reliability Council of Texas – ERCOT – has grown from 74,000 MW to 84,000 MW of peak capacity, while installed low-cost wind capacity increased from 10,970 MW in late 2013 to 25,100 MW in early 2021. (1, 2)
A Follow-Up Study Has Gone Missing
Furthermore, a follow-up 2019 report that was not cited by the Journal (which was previously available but can longer be found on the TCAP website) apparently found that the price gap had narrowed, with TCAP executive director Jay Doegey commenting at the time that, “This is an encouraging report for Texans purchasing power from the state’s competitive providers… the gap is the narrowest we’ve seen — by far. Our hope is that this gap disappears altogether in future years.” (3)
The Journal Assertion: Understanding Key Elements of a Competitive Power Market
Aside from citing an outdated study (that has apparently since been superseded), the Journal article itself contains a number of critical errors. In order to understand where it goes astray, it may help to review the two critical elements that make up a consumer’s electric bill in a restructured market: 1) the energy component – the costs of the actual kilowatt hours produced and consumed; 2) the regulated utility wires and poles business that gets that electricity from the generator to your home or business (there are also miscellaneous other charges, such as energy efficiency and renewables surcharges and other fees that show up on various bills and that are difficult to compare across markets and are not included in the data reviewed by the Journal).
Prior to the restructuring of electricity markets, utilities were vertically integrated, so that they owned both the power plants and the delivery infrastructure. With de-regulation (it should properly be called restructuring, as there is more regulation now than there ever has been, with regulation on the wires and poles and competitive markets), utilities sold off their power plants and kept their wires and poles delivery business.
Merchant companies, who bought those generators and built new ones, compete to offer power into the wholesale market at the lowest cost. Texas has long been viewed as a national leader in its historical ability to deliver low prices from a diversity of supply resources, including nuclear, coal, gas, solar, and a growing fleet of wind and now solar as well. Renewables and affordable natural gas generators have helped to create a very low-priced market environment in recent years.
Texas Power Prices have Been Among the Most Competitive in the Country
In fact, a review of recent annual State of the Market Reports from the Independent Market Monitor (4) demonstrates that Texas compares very favorably to other competitive markets in the United States. For example, the prices in ERCOT are, normally less costly than the Mid-Continental ISO, and far less expensive than the Northeastern and California markets. And they are only slightly more expensive than the neighboring Southwest Power Pool. 2019 – with its heat wave – was a recent exception as will the winter of 2021.
In fact, from 2012 from through 2018, one could argue that wholesale prices may have even been too low. As can be seen in the below chart from the Independent Market Monitor, in most years generators have not netted enough revenue to justify investment in a new combined cycle gas plant (referred as the Cost of New Entry). (5)
Other research conducted on the topic comes up with similar findings. For example, a 2020 report to the Texas Public Utilities Commission notes that, “Since 2002, rates in the ERCOT competitive market have decreased by 31% when adjusted for inflation.” The analysis further observed that prices for August 2020 ranged from 9.89 to 11.52 cents, comparing favorably to a national average of just over 13 cents. (6) Other analysis, such as a 2019 review of Texas markets in the journal Energy Economics, reports similar findings. (7)
“Non-Traditional Utilities” and Elements in the Power Bill
It should be noted that some of the “traditional utilities” that the TCAP study (and apparently the Journal) refers to are the Texas IOUs outside of ERCOT, such as El Paso Electric Company and Entergy Texas. However, much of the state is also served by electric cooperatives and municipal utilities, such as The City of Austin’s Austin Energy, the Brazos Electric Power Cooperative, San Antonio’s CMP, or Pedernales Electric Cooperative, which presumably fall under that “traditional utility” rubric (they clearly do in the TCPAS report cited by the Journal).
Many of these entities own some of their own generating assets, but they also buy from (and sometimes sell to) the ERCOT wholesale market (one need only look to the Brazos bankruptcy or Austin Energy’s windfall from the recent winter event to demonstrate how closely tied these entities are to the ERCOT market). As one can see from the map below, municipal and cooperative utilities – representing 72 cities – blanket a large portion of Texas, (8) although 85% of Texans live in markets with retail choice. (9) So there’s a blurring of lines here between those who buy electricity generated on wholesale markets and sold by competitive retailers and those who indirectly buy on wholesale markets that are served by municipals and coops.
It’s important to look at the delivery charges as well, since they can easily make up half the bill. Municipals and cooperatives don’t have the same profit motive as investor-owned utilities. Municipal utilities are owned by local cities and towns, and their job is simply to deliver electricity reliably at the lowest cost. By contrast, cooperatives are owned by members, but they have a similar approach to offering low cost services. Neither municipal utility or cooperative has profit as a motive.
Thus, if there is a difference in overall prices paid, it may well be attributable not to the existence of – or reliance on wholesale markets – but rather to the delivery charges, and the type of utility serving the customer, attributes that were not examined by the Wall Street Journal.
An Additional Critical Distinction: The Misleading Notion of Remaining with the Utility
The Journal makes one other very critical oversight, commenting, “In other states that allow retail competition for electricity, customers have the option of getting their power from a regulated utility. The absence of an incumbent utility in parts of Texas that allow retail competition makes it difficult for consumers to know if they are paying too much for power…”
In Texas where retail markets exist, consumers must buy electricity from a retail supplier or – if their supplier goes out of business (as many just did) from a so-called “Provider of Last Resort,” or POLR. POLRs are simply designated retail providers to which a customer gets assigned. These customers get charged a competitive rate, but it’s typically higher since the supplier is taking on more risk with customers constantly moving in and out of their pool of load to be served.
The POLR approach is actually quite similar to what occurs in other retail markets, such as those in New England, New York, and mid-Atlantic (PJM). In those areas, customers that do not choose a retail supplier continue to be served as a group and billed by the utility under a service that may be called Standard Offer, Basic Service, Default Service, or a similar term. (10)
In reality that so-called option of buying from a regulated utility is not such an option at all. Those customers who don’t choose an electric retailer remain in a pool of aggregated load that is supplied by – guess who? – a supplier that buys that electricity on the wholesale market and offers all customers in that pool the same price. The electricity is generated by merchant generators, and purchased on the wholesale market by suppliers to serve that aggregated load for a fixed duration. The only key difference is there is no retailer’s name on the bill.
At the end of the day, electricity is a very complex market with numerous variables and nuances that must be taken into account. It’s shoddy analysis to make a comparison based to some degree on outdated data, incomplete information, and a less-than-complete understanding of how these markets are structured. The Wall Street Journal has offered some exceptional and informative reporting on the electricity sector in the past. It missed the mark on this one though. If it aspires to keep its reputation, it can and should do better.
1. http://www.ercot.com/
2. http://www.ercot.com/
3. https://www.businesswire.
4. https://www.
https://www.potomaceconomics.
https://www.potomaceconomics.
5. https://www.
6. http://interchange.puc.
7. https://www.sciencedirect.
8. http://www.gosolartexas.
9. https://quickelectricity.
10. https://www.psc.state.md.
