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Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Texas Electric Meter

Measuring the Effects of Electricity Deregulation

www.TexasPolicy.com

March 2008

Texas Public Policy Foundation

Bill Peacock

Center for Economic Freedom

1 Texas Public Policy Foundation


Texas Electric Meter

Measuring the Effects of Electricity Deregulation

Table of Contents

Deregulation & Consumer Choice ....................................................5

Deregulation & Electricity Rates in Texas ......................................6

Electricity Prices vs. Natural Gas Prices ...........................................7

Electricity Prices in Five Largest States ...........................................8

Comparison of Average Retail Price of Electricity

for Residential Customers by State ...................................................9

Regulated Rates vs. Competitive Rates (Residential)..........10

Price Efficiency of Texas’ Deregulated Market........................11

The State of Competition-Market Share ..................................12

The State of Competition-Residential Consumers ............13

Residential Electricity Rates in States that Rely

Heavily on Natural Gas ..........................................................................14

Investment in the Future .....................................................................15


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

The Texas Electricity Market

Economic analysis and historical experience show that free markets serve consumers and

the economy better than regulated markets. This holds true for the Texas electricity market.

Research in early 2007 consistently showed that the Texas electric market was the most

successful example of deregulation of an electric market in the United States, if not the world.

Despite this overwhelming success, calls for re-regulation of the Texas electric market in 2007

seemed to have won the day. Only procedural roadblocks prevented new regulations from

hindering the operation of the most competitive electricity marketplace in the country.

Now, with two years of full deregulation before the next legislative session—the last retail

price regulations did not expire until December 31, 2006—Texans have the opportunity to get

a clear picture of the effects of deregulation. The following pages are designed to help provide

a better understanding of the current condition of the Texas electricity market.

4 Texas Public Policy Foundation


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Deregulation & Consumer Choice

100

80

60

40

20

0

Average Number of Texas Retail Electric Providers and Plans

PProviders id

When the transition to deregulation began in January 2002, the typical Texas consumer

could choose from about 17 rate plans offered by four retail electric providers. Consumer

choice increased during the transition to deregulation, but exploded since full deregulation

took effect on January 1, 2007. There are now 28 providers on average in each region of the

state offering nearly 100 different rate plans. Of course, providers and plans may consolidate

over time, but it is clear that deregulation has had a beneficial effect on consumer choice

and brought about a highly competitive residential retail environment.

5 Texas Public Policy Foundation

Plans

Sources: Texas Public Utility Commission, “Power to Choose,” http://www.powertochoose.org (February 2008) and Robert

Michaels, “Competition in Texas Electric Markets: What Texas Did Right & What’s Left to Do,” Texas Public Policy Foundation

(March 2007).


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Deregulation & Electricity Rates in Texas

Pre- and Post-Full Deregulation Average Residential Prices (¢ per kWh) in Texas

13.5

13

12.5

12

11.5

11

Source: Energy Information Administration, http://www.eia.doe.gov/fuelelectric.html (February 2008).

With the Price-to-Beat finally out of the way and deregulation fully in place, competition and

stable energy prices have helped lower residential rates in Texas.

6 Texas Public Policy Foundation


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Electricity Prices vs. Natural Gas Prices

Average Residential Prices for Electricity (¢ per kWh) and Natural Gas

($ per 1,000 CF) Since 2001

20

15

10

5

0

Nov.

01

Nov.

02

Nov.

03

Nov.

04

Nov.

05

This graph dispels the myth that electricity prices went up with natural gas prices, but didn’t

come down.

7 Texas Public Policy Foundation

Nov.

06

Nov.

07

Electricity (Texas)

Natural Gas (U.S.)

Source: Energy Information Administration, http://www.eia.doe.gov/fuelelectric.html & http://www.eia.doe.gov/oil_gas/

natural_gas/info_glance/natural_gas.html (February 2008).


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Electricity Prices in the Five Largest States

Electricity prices in Texas compare favorably with America’s other large states.

Average Retail Price All Sectors (¢ per kWh) of the Five Largest States

18

16

14

12

10

8

6

4

2

0

Jan. 06 Mar. 06 July 06 Nov. 06 Jan. 07 Mar. 07 July 07 Nov. 07

California

8 Texas Public Policy Foundation

Florida

Illinois

New York

Average Residential Retail Price (¢ per kWh) of the Five Largest States

20

18

16

14

12

10

8

6

4

2

0

Jan. 06 Mar. 06 July 06 Nov. 06 Jan. 07 Mar. 07 July 07 Nov. 07

Source: Energy Information Administration, http://www.eia.doe.gov/fuelelectric.html (February 2008).

Texas

California

Fl Florida id

Illinois

New York

Texas


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Comparison of Average Retail Price of Electricity for

Residential Customers by State

Texas electricity prices relative to other states are slightly better today than they were before

deregulation began.

18

16

14

12

10

8

6

4

2

30

25

20

15

10

5

0

-

Average Residential Price (¢ per kWh) of Electricity by State, 2001

KY WA ID WV OR TN ND NE UT WY MT IN MO AL OK MS SD CO MN KS MD SC AR GA DC VA WI LA NC MI AZ OH IA FL DE IL NM TX NV PA NJ CT CA AK RI MA NH VT ME NY HI

Average Residential Price (¢ per kWh) of Electricity by State, December 2007

ID NE WVMO ND KS WY KY WA SD IA UT OK TN VA OR AR GA MT IA AZ NM OH AL CO MN SC NC LA MS IL MI WI PA FL DC TX NV MD DE VT NJ NH CA RI ME MA AK NY CT HI

Sources: Julie Caruthers Parsley, Commissioner, “What Have You Done for Me Lately? A Look at the Competitive Electricity Market,” Public Utility

Commission of Texas (November 29, 2007); and Energy Information Administration, http://www.eia.doe.gov/fuelelectric.html (February 2008).

9 Texas Public Policy Foundation


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Regulated Rates vs. Competitive Rates (Residential)

2001 Regulated Rates vs. January 2008 Competitive Rates (¢ per kWh)

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00

Regulated Rate 2001

Avg. Offer 2008

Lowest Offer 2008

Sources: Texas Public Utility Commission, “Power to Choose,” http://www.powertochoose.org (January 2008); http://puc.

state.tx.us/nrelease/2001/120701.cfm; and Inflationdata.com, http://inflationdata.com/Inflation/Inflation_Calculators/

Inflation_Rate_Calculator.asp#results.

The average competitive offer in Texas in January was only 2.9 percent higher than the

inflation-adjusted regulated rate in 2001. And the average lowest offer is 17.9 percent below

the former regulated rate. Despite the significant increases in natural gas, oil, and gasoline

prices since 2001, most Texas consumers can buy electricity today for less than they could

seven years ago.

10 Texas Public Policy Foundation


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Price Efficiency of Texas’ Deregulated Market

18

16

14

12

10

8

6

4

2

0

Average Residential Electricity Price (¢ per kWh) Since 2001

Nov. 01 Nov. 02 Nov. 03 Nov. 04 Nov. 05 Nov. 06 Nov. 07

Source: Energy Information Administration, http://www.eia.doe.gov/fuelelectric.html (February 2008).

The United States as a whole experienced significant electricity price increases as natural gas

prices spiked in 2005 and 2006. The impact was particularly strong in states and regions—

like Texas and New England—that rely heavily on natural gas. However, deregulation

allowed Texas to more efficiently factor natural gas prices (increases and decreases) into electricity

prices. Market forces in Texas already have electricity prices headed down, while they

continue to rise in states and regions where government regulators are playing catch-up.

11 Texas Public Policy Foundation

Texas

U.S. Avg.

OK, LA, NM

New England


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

The State of Competition—Market Share

Percent of Megawatt Hours Sold by Status of Retail Electric Providers, September 2007

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

CenterPoint Oncor AEP-Central AEP-North TNMP

Incumbent Competitive

Source: Texas Public Utility Commission, Market Share Data, http://www.puc.state.tx.us/electric/reports/rptcard/market_share_data.xls.

Competition has lowered the market share of the five affiliate (or incumbent) retail electric

providers by between 53 percent and 78 percent in their home territories.

12 Texas Public Policy Foundation


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

The State of Competition—Residential Consumers

Percent of Residential Electricity Customers Choosing a Competitive Rate Plan

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

34.6%

41.5%

50.7%

58.5%

63.5%

66.5% 69.4% 72.0%

Source: Bret J. Slocum, “Fourth Quarter Data Concerning Customers Exercising Choice,” letter to the Public Utility Commission

of Texas (January 16, 2008).

Another myth regarding deregulation is that it has only helped commercial and industrial

customers, that residential customers have been left out in the cold. However, almost threequarters

of residential consumers have actively chosen a new, competitive rate plan since

the transition to deregulation began. Add in those who have chosen a new price-to-beat

rate plan, and 80 percent of Texas residential consumers have made an observable choice.

Texas residential consumers are full participants in—and beneficiaries ofthe competitive

electricity market.

13 Texas Public Policy Foundation


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Residential Electricity Rates in States that Rely Heavily on Natural Gas

16

14

12

10

8

6

4

2

0

Average November Residential Rates (¢ per kWh)

MA ME AK CA RI NV TX FL LA

Source: Energy Information Administration, http://www.eia.doe.gov/fuelelectric.html (February 2008).

Texas rates remain in the low end of the range of states that rely heavily on natural gas for

electricity generation.

14 Texas Public Policy Foundation

2001

2007


Texas Electric Meter: Measuring the Effects of Electricity Deregulation March 2008

Investment in the Future

Billions of Dollars Invested in New Electricity Generation Capacity in Texas

$30

$25

$20

$15

$10

$5

$0

Completed Since Wholesale

Deregulation

Under Construction/Announced

Source: Julie Caruthers Parsley, Commissioner, “What Have You Done for Me Lately? A Look at the Competitive Electricity

Market,” Public Utility Commission of Texas (November 29, 2007).

Unlike Californians and New Yorkers, Texans have experienced reliable energy supplies

since deregulation began in the 1990s. That is because Texas did it right, and consequently

attracted more than $20 billion of investment in new generation—with at least another $25

billion on its way. All with no guarantee by consumers—they pay for it only if they use it.

15 Texas Public Policy Foundation


About the Author

Bill Peacock is the vice president of administration and director of the Texas Public Policy Foundation’s

Center for Economic Freedom. He has been with the Foundation since February 2005.

Bill has extensive experience in Texas government and policy on a variety of issues, including

economic and regulatory policy, natural resources, public finance and public education.

His work has focused on identifying and reducing the harmful effects of regulations on the

economy, businesses, and consumers.

About the Texas Public Policy Foundation

The Texas Public Policy Foundation is a 501(c)3 non-profit, non-partisan

research institute guided by the core principles of individual liberty, personal responsibility, private

property rights, free markets, and limited government. The Foundation’s mission is to lead

the nation in public policy issues by using Texas as a model for reform. We seek to improve

Texas by generating academically sound research and data on state issues, and recommending

the findings to policymakers, opinion leaders, the media, and general public.

The work of the Foundation is primarily conducted by staff analysts under the auspices of

issue-based policy centers. Their work is supplemented by academics from across Texas and

the nation. Funded by hundreds of individuals, foundations, and corporations, the Foundation

does not accept government funds or contributions to influence the outcomes of its research.

The public is demanding a different direction for their government, and the Texas Public Policy

Foundation is providing the ideas that enable policymakers to chart that new course.

900 Congress Ave., Ste. 400 | Austin, TX 78701 | 512.472.2700 phone | 512.472.2728 fax

www.texaspolicy.com

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