From Steep to Cheap: Deregulated Power Prices in Texas

Texans living under retail electric deregulation paid less for electricity than the national average for the two consecutive years ending in 2013, according to a report released on August 12 by the Texas Coalition for Affordable Power (TCAP) – a group of about 160 municipalities that have joined together to purchase electricity affordably and protect regional ratepayer interests.

Specifically, in 2013, Texans in deregulated areas paid, on average, 12.08 cents per kWh for residential electricity, while the nationwide average was 12.22 cents. This marked the second consecutive year that Texans in deregulated areas paid average rates below the nationwide average.

The snapshot report, entitled, “Electricity Prices in Texas,” found that Texans living in deregulated areas now are taking advantage of a growing number of deals that meet or beat the terms of those commonly found in deregulation-exempt areas.

That’s the good news. However, the study established that such bargains were largely unavailable during the years from 2002 to 2011, when deregulation was first being rolled out in the Lone Star State. The report shows a trend of generally higher electric prices for nearly the first decade under electric deregulation — as compared to prices in areas exempt from deregulation. These “lost savings” amount to more than $4,800 for a typical household, the researchers believe.

“Texans living in deregulated areas have paid too much for electricity — and the lost savings [have] been substantial,” said TCAP Executive Director Jay Doegey. “But the deregulated market is improving, and the good news is that, if you shop carefully, you can find good deals. These relatively low-cost deals are more common than they were in previous years.”

Under the Texas electric deregulation law, consumers in Houston, Dallas, Fort Worth, Corpus Christi and surrounding areas – about 85 percent of the state – can choose among retail electric providers. These providers compete for customers by offering different terms of service and prices.

That leaves about 15 percent of the state exempt from this competitive system, including those areas served by municipally-owned utilities (such as in San Antonio and Austin) and those served by electric cooperatives. Also excepted from retail electric deregulation are investor-owned utilities operating outside the area covered by the state’s primary power grid, known as the Electric Reliability Council of Texas (ERCOT).

This bifurcated system — with some Texans receiving service in deregulated areas, and others receiving service in areas exempt from deregulation — provided TCAP with a unique opportunity to compare prices.

While federal data are not available for 2014 and 2015, the report also relied on information made available by the Texas Public Utility Commission (PUCT) – which reveals the existence of numerous competitive deals in deregulated areas that meet or beat prices common in deregulation-exempt areas. Such relatively low-cost competitive offers under retail electric deregulation appear to be more common now than they were in previous years, according to the TCAP analysis.

Why were prices so high during the rollout? According to the report, some observers have suggested that the uptick in residential electricity after deregulation took effect was not related to the law, per se, but rather to an increase in natural gas prices. They point out that natural gas prices are closely linked to wholesale electricity prices – and natural gas prices escalated for many years after deregulation.

However, TCAP notes, “Fluctuations in natural gas prices, alone, cannot explain the historic disparity between average electricity prices inside and outside deregulated areas of Texas. For every year for which data exist — that is, from 2002 to 2013 — average residential prices in deregulated areas of Texas have been higher than average prices in deregulation-exempt areas.”

Possible explanations for the disparity include persistent inefficiencies in the state’s deregulated electricity market, continued customer confusion about rates and service, and relatively high prices charged by the state’s legacy electric providers. These legacy providers — that is, companies associated with the former monopoly providers prior to deregulation — serve millions of Texans under deregulation.

Charges assessed by the major regulated transmission and distribution service providers have increased since 2003 — and at a pace greater than inflation. Although transmission and distribution rates are regulated, these increases nonetheless contribute to higher prices in deregulated areas of the state, the TCAP report asserts.

At this juncture, it remains to be seen whether the downward trend in energy prices that has been documented in deregulated areas of Texas since 2009 will continue. However, some evidence suggests that the price gap between areas of Texas with electric deregulation and deregulation-exempt areas may be narrowing. For instance, TCAP found that, in 2009, residential prices in deregulated areas of the state were, on average 40.5 percent higher than prices in areas of Texas outside of deregulation. In 2013, prices in deregulated areas were 16.5 percent higher than prices outside deregulation – a 24 percentage point differential.

Finally, in related news, another recent snapshot report by TCAP found that the number of electricity-related complaints or inquiries filed with the PUCT in FY 2014 was nearly 30 percent lower than the annual average of 10,842 recorded by the PUCT since the beginning of retail electric deregulation in 2002. However, the FY 2014 number also was more than five times higher than the annual average of 1,315 complaints recorded by the PUCT prior to deregulation.

Complaints quadrupled with the transition to deregulation and have never returned to pre-deregulation levels, the analysis shows. Population growth and the increased use of the Internet to facilitate the complaint process can explain some of the overall increase during the deregulation years — but probably not all of it.

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