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!

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.