Texas Electricity Deregulation Leads to Highest Prices in the Nation


From today’s Wall Street Journal:

Texas had some of the cheapest power rates in the country when it zapped most of the state’s electric regulations six years ago, convinced that rollicking competition would drive prices even lower.

This summer, electricity there is some of the nation’s priciest.

Power costs are rising in the rest of the U.S., but everything is bigger in Texas: On a hot day in May, wholesale prices rose briefly to more than $4 a kilowatt hour — about 40 times the national average.

Deregulation is was supposed to bring prices down. What happened?
The Journal’s research cites the following:

–Rising fuel costs are part of the problem (power generators use natural gas)
–Texas’ electricity demand is the highest in the nation. Is infrastructure wasn’t designed to accommodate the freewheeling demand, so there are transmission problems

After deregulating its electricity, Texas’ utilities companies saw several changes. A handful of electricity retailers and small businesses collapsed. They transferred customer accounts to bigger, more expensive retailers.

The plan that promised Texans more choices and lower rates has had the opposite effect. Poor planning (even Texas’ newer, more efficient plants still use natural gas), a free economy that created a rash of middlemen, many of them unexperienced, and expensive daily auctions add to the mess.

Question of the day: Can electricity successfully be deregulated? We’re going to face questions like these more and more as various energy industries pop up to replace oil.

I highly recommend reading the entire WSJ article here.

  • Dave

    Deregulation doesn’t work with monopolies!!

  • rat

    If this is anything like California’s “deregulation” it is actually a mixture of deregulating a few visible things while also increasing the regulations in other important areas, resulting in increased prices.

  • matt

    I live in Dallas. I was on a month-to-month plan with Dynowatt. Last month my bill more than doubled to over $25.5 cents per kilowatt hour average. That’s over $250 for 1,000 KWh

    I signed a contract with another provider at $0.124 per KWh.

    The month-to-month plans are especially vulnerable to the spikes in wholesale prices noted above. This is why my bill was so high, and Dynowatt did send multiple notices explaining it. The collapses happen when providers like my new one sign too many contracts at too low a price, then the wholesale prices spike, causing them to be unable to clear their energy payments and go under. This switches you to a provider of last resort, usually at a surcharged rate. If this happens to you make sure you switch providers immediately.

  • Jon

    Sounds exactly like what we went through in California back in 2000 with Enron. Too bad not enough people in Texas noticed that.

  • You Get What You Pay For

    And the widest availability. And the fewest interruptions. With the least downtime. And with better responsiveness to customer requests, including “greener” generation of the electricity.

    Yeah, deregulation has sure messed things up (NOT!)

    You get what you pay for. Always have, always will.

  • Deregulation allows true price

    “Deregulation is supposed to bring prices down.”

    Who told you that? True deregulation allows the market to set the price, which reflects supply and demand. If there is a higher demand, expect higher prices.

    People in Venezeula pay 12 cents ($0.12) per gallon of gas. Why? Because the price is controlled, irrespective of supply and demand.

    That particular price control is bankrupting the country (Venezuela). They have to take loans internationally to subsidize the gasoline.

    Regulation (price controls) work great, until it all falls apart.

  • Dan Cutts

    Texas also has the most wind generation in the US, even green California can’t claim that. I myself can get full wind power for $.17 a kwh. Where else can you do that?

  • TC

    TEXAS: Dude, I have to pay $40/kw

    California: ROTLOL! Is that all?? You noob!

  • Pissed Off

    I live in a suburb of Dallas. My rate with Texas Power went up 55% in two months to 18.5 cents per KWH. I didnt have the hindsight to lock into a fixed plan, so now I am biting the bullet by switching to a fixed 14.5 cent provider (locked in for 3 years). This new rate still blows, but I am betting that 14.5 cents will be a bargain in Texas in the coming months. Also, even though I switched providers, it takes between 30 and 45 days for it to go through. So I am stuck paying 18.5 cents during the worst part of the year. Somebody needs to be hung over this.

  • Vice

    My rate with Amigo (one of the suckiest provider’s in Houston) has gone progressively from 16.9 cents to 20.5 cents to now 24.5 cents. I learned I was on a fixed plan at 16.9 (after a year plus it escaped me being a new homeowner) so then signed up with Reliant who now on July 14th (best I can tell) is providing me electricity at 14.2 cents for 2 mths to then 15.8 for the 2 remaining yrs. It takes forever to switch! The PUC ought to be burned to the ground along with my friends at Amigo -just let me know where & when!

  • Ehh the first two reasons: high fuel costs and high per-capita energy use are the primary reasons for the high costs… not necessarily deregulation. I mean Texas might have had the highest costs in the nation by now if it had not been deregulated… it’s hard to know. Lack of transmission and lack of foresight by the state to encourage efficiency (California being the prime example, with flat per-capita electrical use since the 70s) dooms a state like Texas which faces insanely hot summers.

  • Drea

    Thanks for your comments, folks. Good point about deregulation–it brings prices to market levels, not necessarily down. I meant to indicate that, according to my research, the people behind the deregulation sold it in part because people believed prices would decrease. So I changed “is” to “was,” in that spirit.

  • John Johnson

    If electricity deregulation is so good for me, why don’t I feel any better?

    I’m tired of hearing our elected officials tell us that electricity deregulation is working. It kills me to see that the Star-Telegram’s Mitch Schnurman is now buying into it. The rates I am paying rank me right up there with New York and New Jersey. Something is wrong. It is not working for me. How about you?

    The most recent Fortune Small Business magazine states that the national average for electricity is 8.9 cents per kwh. I’m currently paying 14.4 cents here in Arlington. The last time I checked, neither New York nor New Jersey had a nuclear power plant, and neither was sitting over any coal or natural gas. Something isn’t right.

    All the politicians who gave the power generating companies everything they asked for last legislative session, and, now, Mr. Schnurnam, say, “Yeah, we’re paying more, but look at all the positive things that are happening. We’re going to get new state of the art meters (we will be asked to pay more for them). New transmission lines are being built to handle wind generated electricity (we are being asked to pay for them). We’re pushing for more energy efficient appliances, and ONCOR has programs to help you improve your home’s energy efficiency (we pay for these upgrades and improvements).” We will use less electricity per household, but we will be paying about twice what we were for it before deregulation came to pass. Please show me your definition of “good”, Mr. Schnurnam. Good for who?

    One consultant quoted in Mr. Schnurnam’s piece says that Texas can meet future energy needs without building new generating plants if we fully implement all the efficiency programs available to us and continue to develop wind and solar options.

    This is just the opposite of what Rep. Phil King, head of our Regulated Industries Committee, recently conveyed to me. In his letter, he states that the current method of pricing is based on marginal fuel costs; a costing structure which allows the generating companies to not only cover expenses and build in a standard profit margin, but is “now designed so that private investors take the risk of investment on new power plants…and recover their much higher capital costs.” He is saying that the windfall profits going into the generating entities’ pockets is pre-paying for new power plants. If we’re not going to need many more of these expensive plants, are they going to send this money back to us?

    I bet that most of you have never even heard of the “marginal fuel equation”. This is the real culprit, and it is hardly ever discussed when the “why are my rates so high?” question is asked. Here’s what I know.

    Our elected “deal makers”, and our appointed Public Utilities Commission, allow the generating companies to charge all the energy they produce at whatever the cost is for the fuel that is the most expensive. For instance, ONCOR (the old TXU) generates electricity using three different types of fuel – natural gas, coal and nuclear. Coal and nuclear generated electricity is much, much cheaper to produce, yet they are allowed, under marginal fuel guidelines, to charge all at the much higher natural gas prices. ONCOR electricity is mostly generated using coal and nuclear power. There is no averaging.

    This would be similar to my taking off on a five day business trip. One night I stay in Temple and pay $75 for a motel room. The next two nights, I am in Waco and pay $100 per night. The last two, I am in Houston and pay $200 per night. This totals $675 for the week. When I get back, I turn in my expense report to the company for $1,000, showing that each night cost me $200. I stick the balance in my pocket. This is illegal. I call this stealing. Our “guardians” make it legal for ONCOR and others to do it.

    Do you see why the venture capitalist group that bought TXU was so willing to participate in the largest leveraged buyout ever? Why they were so anxious to “gamble” on the Texas market being lucrative and assume so much debt? It was a no-brainer! Literally billions of windfall profit dollars have gone into their pockets these last few months. All yanked directly from my pocket and yours.

    As far as I know, it is not mandated anywhere that this windfall go into any sort of escrow account designated for building new plants. I also know that this type of pricing is foreign to any other type of free enterprise business operation I am aware of, and I would suspect that ONCOR and others all have some sort of capital equipment/facilities recovery already build into their basic pricing structure, as is the norm.

    Mr. Schnurman does us all a great disservice when he pats the pirates on the back for anything included in the deregulation package. Number one, we are paying approximately 40% more than we should be for electricity. Number two, all the great little things he mentions in his article, we are going to pay “over and above for”. The energy companies aren’t “giving” us anything. We will have paid for all the research and development of these new technologies and we will have paid for the entire infrastructure related to their implementation. ONCOR will still be tucking away 40% more than they should be. Our rates will still be about twice what Oklahoma is paying.

    This is the root of the problem. This is reducing the situation to its lowest denominator. No one brings it up. No one wants to talk about it. I don’t even know if our elected officials understand it. If they do, they certainly don’t want to address it. We should all be trying to find out why.

  • captainK

    Yes, deregulation is a rip off of the Texas consumers. The Texas legislators put the kick back in their pockets. Now they passed legislation in Houston to charge an extra $3.24 per month FOR 12 YEARS to each customer to pay the T&D companies (Centerpoint) for installing “smart meters” Ripped off again. Why are Texas voters putting these people into office at the Texas PUC? The only one benefitting from the smart meters are the T&D companies, they lay off meter readers and get to charge customers additional fees for electricity management.(just to “see” how fast your bill is rising”) WTF are the voters doing? The solution is to kick the Texas PUC administrators out (done by getting rid of the people who appointed them to office), and REREGULATE.

  • virtuoso

    Deregulation is not what has caused massive electricity bills, it is the fact that the U.S. economy is failing! We should feel lucky to be in Texas where our economy is doing much better than a lot of other states (example that many people have already used: California) If inflation were to slow and America were to stimulate the economy (and I do not mean publicized stimulus packages while we spend another 3 bil. on a “war on terror”). I am glad to be in Texas and glad that it is deregulated… I wish that it would be more truthfully deregulated since there are definitely some developing(used lightly) monopolies but overall Texas will do better as a non-socialist state.

  • Sherman

    Evidently, extorsion is the ‘new’ business ethic in the
    generation and billing for electricity, and where govenment
    officials can manadate and manipulate laws to siphon money
    away from people, the order of the day is to exploit wherever opportunities lie–and then blame the problem on
    some aspect of the economy that no one has any control over.
    This excuses the real bandits and profiteers who perpetuate
    this extorsionary process so that no one, anywhere,ever
    becomes visisbly accountable. Problems? Do what politicians and other officials have always done–point their crooked little fingers somewhere else, at someone
    else. And that’s how the American public gets duped and
    fleeced on a daily basis–it must, by now, be some new
    American tradition. After all, if there’s money to be made,
    the people who support deregulation must be awfully happy
    now–and awfully rich. At our expense . . . .

  • John

    The “standard profit” we talk about above is what a utility can charge over its actual cost of procurement (deregulated) or generation (regulated). In a regulated market, there really isn’t procurement since the utility generates its own electricity. So it could use any resource and generate the electricity that it needs to supply to its constituents. In a deregulated scenario the utility would have to purchase from the open market since it is not allowed to generate and pay the market price to acquire the necessary amount of power. So in a regulated scenario the standard profit is placed on top of a utilities actual generation costs and in a deregulated scenario it’s placed on top of its procurement cost. The deregulated procurement price can be higher than the generation costs if there are only a few players and majority of electricity produced is utilized. However, it can be lower and more competitive if there is enough excess capacity in the market and plenty of players.
    Where do you think the most innovative/efficient generation will take place in the long run? Which market is it easier to introduce new initiative (i.e. green energy) most effectively? In a regulated market where there is really no incentive to become more efficient or in deregulated market where you can dictate you terms (you want 10% wind energy, etc)? Innovation comes at a cost – but has lasting benefits. Reaping these rewards can take a very long time as electricity markets require major investments today (we pay more) that rely on long term returns (we benefit and generated electricity is more efficient).

    Simple Example
    Regulated- cost of generating is let’s say = $.10 Kwh and we end up using 100% of capacity currently available/produce by regulated utility (very simple example to prove a point)
    Utility adds maybe its standard 10% and charges us $.11. The utility can continue to operate under status quo without worries as all costs are passed through to us. May never make necessary investments….
    Under the same scenario
    Deregulated- cost of generating is still = $.10 Kwh and we again end up using 100% of capacity (very simple example to prove a point). It’s just now generated by the market and not the utility.
    What do you think will happen next in this deregulated scenario?
    The procurement costs for the utility will be def. be more than $.10 as the market sees that anything it offers will be procured as the utility needs all of the available capacity. The price let’s say ends up being $.40. The deregulated utility would now add its 10% and we would pay $.44. Yes that’s ridiculously high – but would do you think happens next?
    Additional players enter the market as they see tremendous profits here. They may bring innovative (expensive at first) generation capacity which in the long term is cheaper and more efficient/cleaner. This is economics – higher prices will bring more suppliers and only the most efficient will eventually survive. The prices in deregulated markets will eventually be lower; will use better/newer equipment and processes.
    Regulations/Regulators need to be consistent for an extended period of time so that participants can be confident that their investments are worth the risk. Unpredictability = risk, which we end up paying for. If you’re going to deregulate to it right (which can take time) and stick to it.

    Change takes time!

  • Well, I don’t believe that deregulation is the reason why oil prices are up. Deregulation is supposed to even out the playing field among the Texas Electric Companies by offering the cheapest price possible. It will cause great competition for the other companies and a wider range of choices for the consumers. It’s just a matter of choosing which of the Texas Electric Companies you will prefer.

  • My wife and I prefer to sign up for a year contract during the winter. Rates are usually lower at this time and you can lock the lower rate in until the same time the next year. We have been using Ambit Energy for the past 3+ years and are very satisfied. We sign up for the 100% green plan which only uses electricity produced from wind power.

  • I too agree with many of the posters above. I dont think you can attribute the deregulation of energy to the prices rising. In Pennsylvania it’s actually doing the opposite and providing some much appreciated relief to many residents.

  • It is a fact of life. People will continue to use more and more electricity. Alternate means of electricity production is the key. Wind and solar are our two main “free” sources and we are learning to harness these better every day. All it takes is for everyone to help out just a little bit.

  • John Johnson

    Reducing this subject to its lowest denominator … we pay more for a kwh of electricity than either Oklahoma or Louisiana, and we have all the resources …coal, nuclear, gas fired, wind and solar production. Oklahoma has gas and coal; Louisiana has gas, coal and nuclear. What is the difference? Big Utitlies’ control over our legislature and Public Utility Commission. This is the bottomline.