Electricity Deregulation Blog

Texas’ retail electric rates significantly higher than neighboring states’

Critics of Texas’ deregulated electricity market often raise this question: Why are the state’s retail electric rates so much higher than those in neighboring Louisiana, Oklahoma, Arkansas and New Mexico, which all rely on traditional rate regulation by public commissions?

The primary reason for Texas’ higher rates “is deregulation,” insists Tom “Smitty” Smith, Texas director of Public Citizen, an environmental and consumer watchdog organization. “The ultimate problem is that the market is designed to maximize profits for the power companies, and it’s costing consumers more money,” he said.

John Johnson III of Arlington, a small-business owner who has analyzed Texas’ deregulated system, contends the Lone Star State’s rates are higher because of rules governing the wholesale power market overseen by the Electric Reliability Council of Texas, the operator of the power grid for a huge area that encompasses most of Texas’ population and electricity demand.

Johnson hews to a view he expressed in a 2008 op-ed article published in the Star-Telegram. He complained that the ERCOT wholesale market “pays all electricity generators the marginal — or highest — price for electricity regardless of how much it costs to generate. Three-cent [per kilowatt hour] electricity from coal and nuclear power plants gets sold for natural gas prices — 9 cents.”

As a result, “electricity generators are big winners,” but “consumers are the big losers,” he wrote.

Deregulation supporters, however, say the wholesale market is competitive and note that retail electric providers now offer an array of attractively priced variable-rate and fixed-rate plans.

On Friday, there were 14 plans offered at 8 to 8.9 cents per kilowatt-hour, 30 plans at 9 to 9.9 cents and 37 at 10 to 10.9 cents on www.powertochoose.org, overseen by the Texas Public Utility Commission. There were 51 more plans priced at 11 to 14.2 cents.

Rates have plunged sharply since mid-2008 as a result of a steep decline in prices for natural gas, which is burned to generate much of the electricity produced in Texas and heavily influences power prices during peak consumption periods.

Texas rates higher

Nevertheless, U.S. Energy Information Administration figures for August, the most recent month for which nationwide data are available, show that Texas’ average residential electric rate was 12.43 cents per kilowatt-hour, far higher than the averages for neighboring states.

Texas’ 12.43-cent rate ranked 34th among the states (ranked lowest to highest, with West Virginia the lowest, at 7.92 cents, and Hawaii the highest, at 25.13 cents). Texas’ average was higher than the national residential average of 12.05 cents in August. The state had lower-than-average rates before initiating deregulation in 2002.

Texas’ overall average electric rate in August — a figure that includes residential, commercial and industrial rates — was 10.19 cents per kwh, placing it an unimpressive 33rd, but slightly below the U.S. average overall rate of 10.40 cents. Texas’ overall rate was far higher than its neighbors as well.

Deregulation providing choice

John Fainter, CEO of the Association of Electric Companies of Texas, said deregulation is giving consumers the right to choose their retail electric provider and tailored rate plans that meet their particular wants and needs. An industry survey shows that, as of June 30, more than 2.5 million electricity customers, or 46 percent of the more than 5.5 million customers with access to Texas’ deregulated market, had switched away from their historical “legacy” electricity provider.

About 35 percent more, or nearly 2 million, had chosen a specific rate plan with their legacy provider. That means more than 80 percent have exercised a choice as a result of deregulation, Fainter said.

Star-Telegram conversations with numerous electricity consumers this year indicate, however, that many persons in deregulated markets are still paying considerably higher rates than necessary. Some routinely pay electric bills without even knowing their rates. Some consumers, especially senior citizens, lack basic computer skills necessary to examine rate offers on powertochoose.com. Others switched to fixed-rate plans with terms of two to three years in summer or early fall 2008, when rates were higher, and are now reluctant to switch to a lower-cost plan because they could face cancellation fees of $200 to $350.

Some consumers acknowledge not making any effort to shop for better rates, either because they find it too much trouble or simply abhor dealing with change.

“There are still some people using black rotary dial telephones,” Fainter said.

Heavy power investments

Deregulation supporters also note that fast-growing Texas has pumped huge sums of money into added generation and transmission capacity, far more than its smaller, slower-growing neighbors.

Texas’ population mushroomed by 16.7 percent, to 24.3 million, from Apri1 1, 2000, to July 1, 2008 — more than double the national growth rate. New Mexico gained 9.1 percent; Arkansas, 6.8 percent; and Oklahoma, 5.6 percent. Hurricane-battered Louisiana lost 1.3 percent.

Since 1999, more than 41,000 megawatts of generation capacity, costing $36.5 billion, and more than 6,000 miles of transmission lines, costing $5.8 billion, have been added in Texas, the electric companies group said. In addition, about $8 billion more is forecast to be spent on transmission lines during the next four years, with $5 billion devoted to building big, high-voltage lines carrying wind power from West Texas to Dallas-Fort Worth and other population centers.

Texas’ heavy investment in new power facilities is “definitely” a factor in raising its electricity rates, said Tyler Hodge, an economist who analyzes power markets for the Energy Information Administration.

Natural gas a factor

Texas has higher rates in part because of its heavy reliance on natural gas as a power-generation fuel, especially during peak consumption periods such as hot summer days when wholesale electricity rates tend to rise.

Gas-fired generation generally poses significantly higher fuel costs than coal or nuclear power. Federal data for January through October of this year show that Texas generated 44.3 percent of its power using natural gas, almost double the national average of 23.2 percent and considerably higher than neighboring Louisiana (34.6 percent), Arkansas (23.0) and New Mexico (22.6), but less than Oklahoma (48.8).

New Mexico had the highest percentage of electricity generated from coal (72.7). Other coal percentages were Oklahoma (44.4), Arkansas (42.3), Texas (37.4) and Louisiana (33.2).

Louisiana and Arkansas had by far the biggest nuclear generation percentages (27.9 and 27.0, respectively), while Texas was at 11.9 percent.

Grid isolation issue

Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University in Dallas, said Texas’ extensive use of gas-fired power plants contributes to the state having higher electric rates. But “the other main factor is that we’re not hooked into the national [electric power] grid,” other than some “minor interconnects,” he said.

“Because of that we have to maintain a lot more excess capacity to meet peak demand” in the summer, Weinstein said. “Most of the time we have a lot of capacity sitting idle.”

If Texas were linked with the national grid, “theoretically, we could be selling power to other parts of the country” during low demand periods, he said, while “in the summer we could be buying power and we wouldn’t need as much excess capacity. In the winter, our utilities could be making money by selling power to the grid.”

Andrew Tevington, deputy director of the Public Utility Division of the Oklahoma Corporation Commission, expressed similar sentiments.

“The big problem you’ve got [in Texas] is that it’s so isolated from the rest of the country,” he said. If ERCOT were fully linked to the national grid, Texas “could shop elsewhere for lower electric rates.”

Tevington also cited Texas’ deregulated market as a contributor to higher rates. “If you look around the country, to where states have gone to unregulated electricity markets, they are paying higher prices.  . . . I think that’s because the so-called free market has not become efficient in controlling prices for that commodity,” he said.

Deregulated markets require consumers to become more sophisticated about assessing retail electric rates, but many “don’t keep up with it,” Tevington said.

Fainter said however, that the electric companies group would be “very opposed” to hooking Texas up to the national grid, not only because of the considerable expense of building interconnections with other states, but also because it would put ERCOT under the jurisdiction of the Federal Energy Regulatory Commission.

“We feel the benefits of not having to deal with FERC are tremendous,” he said, including a relatively streamlined state regulatory process for launching capital projects such as building new power plants or transmission lines.

Neighbors’ rates low

Texas’ electric rates compare especially unfavorably with its neighbors, in part because they generally have lower rates than most of the nation.

Louisiana has the fifth-lowest overall rate and second-lowest residential rate among the 50 states, while Oklahoma has the 13th-lowest overall rate and sixth-lowest residential rate. Arkansas is 15th in overall rate and 16th in residential, while New Mexico is 22nd overall and 26th in residential.

Texas’ deregulation critics often zero in on the spot wholesale market overseen by ERCOT. Because electricity cannot be economically stored, ERCOT — as well as grid operators elsewhere in the country — must continually balance supply and demand through the so-called “balancing energy market.” Power generators submit bids at 15-minute intervals, saying how much electricity they are willing to sell and at what price.

ERCOT begins by taking the lowest bids and goes to higher bids until there is enough power purchased to meet demand. All the generators whose bids are accepted are paid the so-called market clearing price, the price of the last, highest bid accepted to meet demand.

Tim Morstad, associate state director of the Texas AARP, said the system allows power generators “to sell their power on the wholesale market for much more than it costs them to generate it.”

Wholesale prices fall

In 2008, when natural gas prices skyrocketed and Texas’ transmission system experienced major congestion problems that caused price spikes for wholesale electricity, the average ERCOT wholesale price was $65.64 per megawatt-hour. That was well above the average of $53.21 in the Southwest Power Pool, a regional transmission organization that serves seven states plus portions of Texas outside ERCOT, or $48.04 for the Midwest Independent Transmission System Operator, which oversees high-voltage transmission lines in the Midwest, according to Dan Jones of Potomac Economics. Jones is the Texas Public Utility Commission’s designated independent market monitor of ERCOT.

While ERCOT wholesale rates were high in much of 2008, they began declining along with natural gas prices in the fall of that year and have continued at lower levels. In October, the average ERCOT wholesale price was $28.74 per megawatt hour, compared with $29.91 in the Southwest Power Pool and $27.81 in the Midwest system, Jones said.

Jones said Potomac Economics has concluded that Texas has a competitive wholesale power market. He defended the market clearing price function of the ERCOT system, saying that it results in a more-efficient dispatch of electric power. Further improvements in ERCOT operation of the power grid next year should make the system more efficient, he said.

‘The cheapest way’

Smith, of Public Citizen, said Texas should “re-regulate the electric utility industry.” But he added that “the cheapest way to provide for our growing needs for electricity is through energy efficiency.

“On average, you could save 20 to 30 percent of the energy consumed in the home or office at a fraction of the cost of buying electricity in the market,” he said.

Johnson, the Arlington man who has persistently criticized Texas’ deregulated market, forecasts that electricity consumers can expect another painful jolt to their wallets in the future because of how the balancing energy market awards the highest “market clearing price” to all the successful bidders.

“When the price of natural gas goes up again, and we all know it will,” the market clearing price mechanism “will once again become a massive weapon which the large generating companies will use in another billion-dollar heist,” Johnson warned.

JACK Z. SMITH, 817-390-7724

Technorati Tags: electricity deregulation, Texas