Some utility customers in
Texas may have suffered whiplash,
although relief is on the way. In a move that has won plaudits from
skeptical consumer groups, top competitors have reduced their rates in
an attempt to undercut entrenched incumbents. Critics torpedoed
deregulation as a flawed concept that would hurt consumers. Ammunition
abounded on the national level and to some extent in
Texas. Until
recently, competitors' rates hovered closely to those of the incumbents,
providing little incentive to switch. But, now that some providers have
opted to eat rising fuel cost in an attempt to win market share, the
concept is gaining appeal.
The widening price margins "are encouraging," says Tim Morstad,
with Consumers Union in Austin in an interview with The Fort Worth Star
Telegram. "It's a good sign that companies are beginning to compete on
price and not just moving up in lock step." TXU's customers are now
paying 9.7 cents a kWh, or $97 a month for 1,000 kilowatt hours of
electricity-$10 more than before the rate hike. But Reliant
Energy announced last week that it will drop rates to an average
of 8.7 cents a kWh, down from 9.2 cents. And customers that use more
than 1,500 kilowatt hours a month will see their rates drop to 8.4 cents
per kWh. Gexa Energy and Entergy will keep their rates at 8 cents a kWh
and 8.7 cents a kWh, respectively.
It's unknown whether the price differentials will threaten TXU's 90
percent market share in its home territories. The Dallas-based
company says that it can't afford to cut rates, given the current price
of natural gas at around $5 per million BTUs. But, it says
that it competes based on past history: delivering reliable services at
fair prices.
Retail competition, which began in the state on Jan. 1, 2002, is
already fulfilling its promise, says the Texas Public Utility
Commission: Residential rates dropped on average 9 percent from the
fourth quarter of 2001 to the fourth quarter of 2002. About 7.4 percent
of all such customers chose an alternative supplier, or about 361,000
households of the 5.3 million ratepayers. Meanwhile 80,000 small
business and large commercial enterprises have changed suppliers, or
about 10 percent of all such consumers.
Those customers who have remained with incumbents saved $900 million
in 2002, because of six-percent mandatory rate cuts and a decline in the
cost of underlying fuels used to power generators. About 13 different
providers are active in the state. While some may want to compare prices
to where they were before deregulation, proponents say a better
measurement is what they might have been if restructuring had not
occurred.
"We have made significant improvements and we have seen this market
attract a good number of new companies," says Rebecca Klein, chairwoman
of the Texas Public Utility Commission. "There are now real savings."
California Differences
Texas may be a breath of fresh air. Deregulation, of
course, has been bottlenecked nationally, largely because of the
California experience. The Federal Energy Regulatory Commission's staff
just released a provocative report in which it places the blame on a
flawed regulatory structure and the lack of supply that made conditions
ripe for certain power suppliers to manipulate the system.
It's a stark contrast to Texas, which does not import any meaningful
power and has abundant reserves. Altogether, 48 new power plants have
been added since 1995, which has brought the state's total generating
capacity to 85,000 megawatts. By comparison, California didn't build a
single power facility from 1994 to 1998, despite a booming economy and a
growing population.
At the same time, Texas allows its providers to adjust their rates up
to twice a year to reflect changes in the underlying cost of fuel. In
other words, incumbents that have implemented mandatory rate cuts will
never have to sell their electricity for less than what they paid for
it. But that's exactly what happened in California, which froze rates
and subsequently caused Pacific Gas & Electric to declare bankruptcy.
Unlike California, the regulatory framework did not require utilities
to divest of their generation and then to buy power from a proprietary
exchange, which is a centralized market that sells power the hour or day
before it is needed. In Texas, by being able to purchase long-term power
contracts, utilities have locked in prices and avoided any "gaming" that
could cause rates to spike.
"Texas law recognizes that many financial intermediaries exist who
would be willing to broker transactions," says Lynne Kiesling, director
of economic policy for the Reason Foundation in Chicago. "Texas
has not placed restrictions on the terms of contracts, but instead
leaves it up to both buyers and sellers to determine mutually beneficial
terms."
Rough Spots
Deregulation in Texas has been tested. About one percent of customers
have received erroneous bills. Congestion along the wires has been
higher than expected. And, wholesale prices have been volatile, which
raised suspicions in February that market manipulation might be at play.
As a result, the public utility commission says that Texans have
filed more than 8,500 complaints in 2002. That's compared to
approximately 2,100 in 2001. About 38 percent were billing related while
five percent were for deceptive trade practices and 12 percent were for
slamming, or switching customers over without their consent.
Consumer groups are concerned about high-pressure and misleading
sales tactics. The state, however, says that the confusion is tied to a
new regulatory structure in which more providers are competing for
market share-tantamount to the problems that surfaced when the telecom
sector first deregulated. The answer is uncertain, says Kiesling, adding
that regulators must work hard to ensure that it does not stifle
customer choice.
"It's not clear how much of that is just system implementation and
how much of that is the unwillingness of the incumbent utilities to
share information in a way that is convenient for competitive suppliers
and the customers they serve," she says. Texas may be 5-7 years away
from perfecting its system, which is a realistic expectation for any new
business model, say proponents. Deregulation does not guarantee lower
prices-only that consumers will pay the market price for electricity.
Success, however, will ultimately be measured by whether consumers
have more options, stable markets and better services. Texas has the
nation's attention. The widening price margins have advanced the cause
of deregulation but it's still too soon to declare victory. If the
trouble spots are properly managed, other states might get off the fence
and implement choice for all customers.
By Ken Silverstein, Director, Energy Industry Analysis
