Texas Electric Bills Were $28 Billion Higher Under Deregulation

Competition in the electricity-supply business promised reliable power at a more affordable cost

wsj.com Feb. 24, 2021

Texas’s deregulated electricity market, which was supposed to provide reliable power at a lower price, left millions in the dark last week. For two decades, its customers have paid more for electricity than state residents who are served by traditional utilities, a Wall Street Journal analysis has found.

Nearly 20 years ago, Texas shifted from using full-service regulated utilities to generate power and deliver it to consumers. The state deregulated power generation, creating the system that failed last week. And it required nearly 60% of consumers to buy their electricity from one of many retail power companies, rather than a local utility.

Those deregulated Texas residential consumers paid $28 billion more for their power since 2004 than they would have paid at the rates charged to the customers of the state’s traditional utilities, according to the Journal’s analysis of data from the federal Energy Information Administration.

The crisis last week was driven by the power producers. Now that power has largely been restored, attention has turned to retail electric companies, a few of which are hitting consumers with steep bills. Power prices surged to the market price cap of $9,000 a megawatt hour for several days during the crisis, a feature of the state’s system designed to incentivize power plants to supply more juice. Some consumers who chose variable rate power plans from retail power companies are seeing the big bills.

None of this was supposed to happen under deregulation. Backers of competition in the electricity-supply business promised it would lower prices for consumers who could shop around for the best deals, just as they do for cellphone service. The system would be an improvement over monopoly utilities, which have little incentive to innovate and provide better service to customers, supporters of deregulation said.

“If all consumers don’t benefit from this, we will have wasted our time and failed our constituency,” then-state Sen. David Sibley, a key author of the bill to deregulate the market, said when the switch was first unveiled in 1999. “Competition in the electric industry will benefit Texans by reducing monthly rates,” then-Gov. George W. Bush said later that year.

The EIA data shows how much electricity each utility or retail provider sold to residents in a given year and how much customers paid for it. The Journal calculated separate annual statewide rates for utilities and retailers by adding up all of the revenue each type of provider received and dividing it by the kilowatt-hours of electricity it sold.

From 2004 through 2019, the annual rate for electricity from Texas’s traditional utilities was 8% lower, on average, than the nationwide average rate, while the rates of retail providers averaged 13% higher than the nationwide rate, according to the Journal’s analysis.

The Texas Coalition for Affordable Power, a group that buys electricity for local government use, produced similar findings in a study of the state’s power markets and concluded that high statewide prices relative to the national average “must be attributed to the deregulated sector of Texas.”

In other states that allow retail competition for electricity, customers have the option of getting their power from a regulated utility. The absence of an incumbent utility in parts of Texas that allow retail competition makes it difficult for consumers to know if they are paying too much for power, critics say.

The push to deregulate the electricity-supply market in Texas and elsewhere in the U.S. began in the 1990s amid similar efforts in airlines, natural gas and phone services. Leading the charge was Enron, the Houston energy company and champion of free markets that went bankrupt in 2001 amid revelations of widespread fraud.

For power generators, the laissez-faire market design rewarded companies that could sell electricity inexpensively and still recover their capital costs. But it provided little incentive for companies to spend cash on infrastructure that could protect power plants during sporadic severe cold snaps.

Catherine Webking, general counsel for the Texas Energy Association for Marketers, an industry trade group, said retail providers give customers access to more choices than many standard utilities, such as renewable-energy products. Customers also typically have the option to switch plans, she said. If customers “don’t feel it’s the best thing for them they can find a different provider,” she said.

On the retail power side, dozens of competitors emerged after deregulation. But recently, competition in Texas has been declining amid a wave or mergers in the industry.

Texas is home to the two of the nation’s largest retail-energy providers, Vistra Corp. VST +2.22% and NRG Energy Inc. NRG +0.18% Marketers now owned by the two companies accounted for three quarters of the retail electricity sold in Texas in 2019.

In January, NRG completed its $3.6 billion purchase of retail-energy provider Direct Energy, which doubled the number of NRG’s retail customers to six million and boosted its workforce from about 4,500 to 7,500. About half of its retail customers are in Texas.

Vistra’s largest Texas retail subsidiary, TXU Energy, and NRG have said their customers wouldn’t be hit by spiking prices due to the blackouts because their electricity plans aren’t tied to short-term price swings in the wholesale electricity market.

Tim Morstad, associate state director of AARP Texas and a critic of retail-energy suppliers, said he expects many retail customers to suffer increases in their rates in the near future as the companies price in sky-high power rates seen during the winter blast. Most vulnerable, he said, would be customers of retail energy providers who have signed up for variable-rate plans that rise and fall every month amid fluctuations in market rates.

“The prices are definitely going to increase,” he said. “For those on variable contracts, they’ll feel the pinch sooner.”

Some retail-energy providers enter long-term contracts for the electricity they sell to consumers, potentially shielding them from the dramatic surge in the wholesale market seen last week, said Kenneth Rose, an independent consultant at Michigan State University who has studied the retail-energy industry.

The Texas Public Utility Commission said it has “strongly urged” retail electric providers to delay billing residential and small commercial customers.