Deregulation of the Texas electricity market

Electricity deregulation in Texas, approved by Texas

Senate Bill 7 on January 1, 2002, calls for the creation
of the Electric Utility Restructuring Legislative Oversight
Committee to oversee implementation of the bill. According to the law, deregulation would be phased in over
several years.

electric prices did rise above the national average immediately after deregulation from 2003 to 2009, but, from
2010 to 2015 have moved signicantly below the national
average price per kWh, with a total cost of $0.0863 per
kWh in Texas in 2015 vs. $0.1042 nationally, or 17 percent lower in Texas. This indicates that competitive markets, if allowed to operate, can work to reduce prices to
[1]
As a result, 85% of Texas power consumers (those
served by a company not owned by a municipality or a consumers.
utility cooperative) can choose their electricity service
from a variety of retail electric providers (REPs), including the incumbent utility. The incumbent utility in the 1 Background
area still owns and maintains the local power lines (and is
the company to call in the event of a power outage) and is Texas has electricity consumption of $24 billion a year,
not subject to deregulation. Customers served by cooper- the highest among the U.S. states. Its annual consumption
atives or municipal utilities can choose an alternate REP is comparable to that of Great Britain and Spain, and if
only if the utility has opted in to deregulation; to date, the state were an independent nation, its electricity maronly the area served by the Nueces Electric Cooperative ket would be the 11th largest in the world. Texas prohas chosen to opt in.
duces the most wind electricity in the U.S., but also has
[5]
Since 2002, approximately 85% of commercial and in- the highest Carbon Dioxide Emissions of any state. As
dustrial consumers have switched power providers at least of 2012, Texas residential electricity rates ranked 31st in
once. Approximately 40% of residential consumers in the United States and average monthly residential electric
[6]
deregulated areas have switched from the former incum- bills in Texas were the 5th highest in the nation.
bent provider to a competitive REP. REPs providing service in the state include NEC Retail Co-op Electricity,
Acacia Energy, Now Power, Snap Energy, Clearview 2 System
Electric, Green Mountain Energy, Iluminar Energy, Conservice Energy, Ambit Energy, Entrust Energy, Bounce The law designated the Electric Reliability Council of
Energy, Champion Energy, Cirro Energy, Direct Energy, Texas (ERCOT) to be the authority to oversee grid reliDynowatt, First Texas Energy Corporation, Gexa Energy, ability and operations so as to ensure no particular buyer
Glacial Energy, Just Energy, Kinetic Energy, Mega En- or seller would gain an unfair advantage in the market.
ergy, APG&E, Adjacent Energy, Spark Energy, StarTex
Power, Stream Energy, Tech Electricity, Texas Power,
TXU Energy, XOOM Energy and 4Change Energy.
2.1 The price to beat
According to a 2014 report[2] by the Texas Coalition
for Aordable Power (TCAP), deregulation cost Texans about $22 billion from 2002 to 2012. And residents
in the deregulated market pay prices that are considerably higher than those who live in parts of the state that
are still regulated. For example, TCAP found that the average consumer living in one of the areas that opted out of
deregulation, such as Austin and San Antonio, paid $288
less in 2012 than consumers in the deregulated areas.

Included within SB7 was the notion of the price to beat

or PTB, an idea of a regulated rate governing the pricing
behavior of the former utilities.
According to a typical economic theory, prices are optimally determined in a fair and transparent market, and
not by a political or academic body. In deregulation of
electricity markets, one immediate concern with pricing
is that incumbent electricity providers would undercut
the prices of new entrants, preventing competition and
perpetuating the existing monopoly of providers. Thus,
the SB7 bill introduced a phase-in period during which
a price oor would be established (for incumbent electricity companies) to prevent this predatory practice, allowing new market entrants to become established. New
market entrants could charge a price below the price to

However, the report concluded that re-regulating the market would not solve the issue. TCAP instead oered a series of reforms designed to increase market eciency.[3]
Rebutting the Texas Coalition for Aordable Power report, the U.S. Energy Information Administration publishes annual state electric prices [4] that show that Texas

RESULTS

beat, but incumbents could not. This period was to last lowest variable rate at 7.19 cents per killowatt for 2,000
from 2002 to January 1, 2007 .
kWh/month while Reliant Energy had the lowest xed
rate at 7.64 cents.[7]
How is the price to beat established?
In order to prompt entry into the market, the price to beat
would have to be high enough to allow for a modest prot
by new entrants. Thus, it had to be above the cost of
inputs such as natural gas and coal. For example, a price
to beat xed at the actual wholesale procurement price
of electricity does not give potential entrants a margin to
compete against incumbent utilities. Second, the price to
beat would have to be reasonably low, to enable as many
customers as possible to continue to consume electricity
during the transition period.

3.2 New Competition

The price to beat seemed to accomplish its goal of attracting competitors to the market during the period through
January 1, 2007. It allowed competitors to enter the market without allowing the incumbents to undercut them in
price. It has also given energy consumers the ability to
compare energy rates oered by dierent providers . The
less-regulated providers undercut the price to beat by only
a small margin given that they must balance lower prices
(to attract customers and build market share) with higher
prices (needed to reinvest in new power plants). Due to
3 Results
the small dierence in competing prices and slow (yearly
or so) buying process, price decrease due to competi3.1 Electricity prices
tion was very slow, and it took a few years to oset the
original increase by traditional electric providers and
One desired eect of the competition is lower electricity move to lower rates.
rates. In the rst few years after the deregulation in 2002,
One of the benchmarks of a successful free market is the
the residential rate for electricity increased seven times,
range of choice provided to customers. Choice can be
with the price to beat at around 15 cents per kilowatt hour
viewed both in terms of the number of rms active in
(as of July 26, 2006, www.powertochoose.org) in 2006.
the market as well as the variety of products those rms
However, while prices to customers increased 43% from
oer to consumers. In the rst decade of retail electric
2002 to 2004, the costs of inputs rose faster, by 63%,
deregulation in Texas, the market experienced dramatic
showing that not all increases have been borne by conchanges in both metrics. In 2002, residential customers in
sumers . (See Competition and entry of new rms above
the Dallas-Fort area could choose between 10 retail elecfor discussion on the relationship between retail prices,
tric providers oers a total of 11 price plans. By the end
inputs, and investment.)
of 2012, there were 45 retail electric providers oering
The deregulation permitted a few regions to retain regu- 258 dierent price plans to residential customers in that
lated rates, such as in Austin. In these areas, the electric- market.[8] Similar increases in the number of retail elecity rate has stayed closer to the U.S. average rate of about tric providers and available plans have been realized in
10 cents per kilowatt-hour. For those residents that had other deregulated electricity market areas with the state.
access to competitors (often more than a dozen), prices
were only a little lower than the price to beat. For example, the lowest cost provider in central part of Texas was 3.3 Environmental Impact
charging 6.8 cents per kilowatt (as of December 7, 2011,
www.powertochoose.org).
In environmental impact, results are mixed. With the
Using the rate of 10 cents per kilowatt-hour (c/kWh) in ability to invest prots to satisfy further energy demand,
Austin, Texas as a benchmark of still-regulated pricing, producers like TXU are proposing eleven new coal-red
Texans in deregulated markets were receiving a discount powerplants. Coal powerplants are cheaper than natural
of 32% below the regulated rate in 2011, mostly due to gas-red powerplants, but produce more pollution. When
higher rates from old large, monopolistic Austin En- the private equity rms Kohlberg Kravis Roberts and the
ergy. Switching to a new provider is slow on the electric Texas Pacic Group announced the take-over of TXU,
market, but in 2010 xed long-term (one year) market the company which was known for charging the highest
rates from many retailers became lower than 10 c/kW, rates in the state and were losing customers, they called
and less than 9 c/kWh for shorter terms even in expen- o plans for eight of the coal plants. TXU had invested
sive electric markets (large cities) in Texas. During those more heavily in the other three. A few weeks later the
transitional years some have regarded the unmet expecta- buyers announced plans for two cleaner IGCC coal plants.
tion of lower rates promised by deregulation as a success. There are positive environmental impacts from retail
To compare current rates, the Public Utility Commission (PUC) of Texas creates monthly PDFs featuring the
most popular rates and plans of approximately a dozen
REPs. As of December 2015, First Choice Power had the

price deregulation as well. The protable and growing

Texas electricity market has drawn considerable investment by wind-turbine companies. In July 2006, Texas
surpassed California in wind energy production.

3
Another positive environmental impact is the eect of
higher energy prices on consumer choices, similar to the
US market trend toward more fuel-ecient cars. As electric bills have risen, residents are reducing their electrical usage by using more moderate thermostat settings, installing insulation, installing solar screens, and other such
activities. Texas utilities (such as Austin Energy) are also
installing advanced electricity meters that may one day
enable variable pricing based on the time of day. This
would permit energy customers to save money by further
tailoring their consumption based on whether it occurred
during the peak demand period (high cost/high pollution)
or the o-peak (night time).

Eect on Renewable Energy

Due to the increased usage of natural gas immediately after deregulation, new-era energy tools such as wind power
and smart-grid technology were greatly aided. Texas rst
renewable portfolio standard or requirement that the
states utilities get a certain amount of their power from
renewable energy like wind was signed into law in
1999, as part of the same legislation that deregulated the
electric market.

See also
California electricity crisis
Electricity provider switching
Law of Texas
Oncor Electric Delivery
Federal Energy Regulatory Commission (FERC)

References

[1] Explore Energy Rates in Texas. SaveOnEnergy.com.

Retrieved 15 October 2013.
[2] Dyer, R. A. (2014), Deregulated Electricity in Texas
(PDF), Texas Coalition for Aordable Power
[3] Stey, Loren (March 2014), The Generation Gap, Texas
Monthly
[4] Monthly Electric Utility Sales and Revenue Report with
State Distributions (Form EIA-826), U.S. Energy Information Administration, February 2016
[5] 2013 State Energy Facts - Texas (PDF). SaveOnEnergy.com. Retrieved 15 October 2013.
[6] Texas Electricity Rates. Electricity Local. Retrieved
2014-03-31.

[7] Texas, Public Utility Commission of. Rate Comparison for Residential Electric Service. www.puc.texas.gov.
Retrieved 2016-02-12.
[8] Scope of Competition in Electric Markets in Texas
(PDF). Public Utility Commission of Texas. Retrieved 11
February 2015.

http://www.senate.state.tx.us/75r/senate/commit/
c850/c850_78.htm
http://www.puc.state.tx.us/nrelease/2001/120701.
cfm

7 External links
PowerToChoose.org Marketplace Operated by the
Public Utilities Commission of Texas
Electric Reliability Council of Texas (ERCOT)
Public Utilities Commission of Texas website
Texas Electricity Ratings and Reviews
Video Resource on Deregulation of the Texas Electricity Market
Texas Chamber of Commerce Energy Association
Electric Rate Comparison for Texas vs. States with
Regulated Energy Markets

8 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

Text and image sources, contributors, and licenses

8.1

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Deregulation of the Texas electricity market Source: https://en.wikipedia.org/wiki/Deregulation_of_the_Texas_electricity_market?

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