Free market, less regulation key to Texas energy future

By Bill Peacock

Texas consumers are being offered a false choice: either pay for subsidies to electricity generators or run the risk of rolling blackouts.

On top of that, they are told that prices will increase no matter what they choose. Policymakers are being told the same thing at recent hearings in Austin.

The truth is very different; Texans can continue to enjoy a reliable, competitively priced supply of electricity without turning to a “capacity market,” i.e., a system that guarantees revenues to generators by imposing higher costs on consumers.

A bit of background. Texas transitioned from monopoly to competitive electricity markets from 1995-2007. A key decision during that time was that Texas was going to operate an energy-only market in which prices were set in the market rather than by government.

The results have been nothing short of spectacular. Texas has the most successful, competitive electricity market in the world. Most Texas consumers can now choose from more than a hundred plans at lower prices than when retail choice began in 2002. Billions of dollars of investment have led to an abundant, reliable supply of electricity.

This being the case, why are consumers being threatened with rolling blackouts?

The answer begins with the fact that investment in new generation has slowed because the low electricity prices that are benefiting consumers are also reducing profits for generators.

This has led some regulators, investors and consultants to claim that a flawed market has led to prices that are so low they will lead to inadequate supplies as early as 2015.

But this is not the case. Prices are low and new investment has slowed in large part because of a basic economic law: the current supply of electricity greatly exceeds demand.

Moving forward, despite official projections, the same could well be true. Current generation plus new generation and mothballed units means that supply could well exceed demand with a healthy margin of safety through 2018.

This doesn’t mean that we should stand pat; reliability is not guaranteed. More investment is needed. But the path forward is through a more efficient energy-only market, not through capacity payments where costs are shifted from generators to consumers.

The first step toward efficiency is to reduce excessive government intervention.

For instance, renewable subsidies — which in Texas will cost about $6.9 billion for the ten years through 2015 — cause significant market distortions. If we eliminated the federal production tax credit and Texas’ Renewable Portfolio Standard, taxpayers, consumers, and generators would all be better off.

We should also eliminate the price cap on wholesale electricity sales. The Public Utility Commission of Texas has raised the cap recently, but it should be eliminated completely. The effect this will have on retail prices will be minimal compared to a capacity market.

The Texas Legislature should also reduce excessive regulations at the PUC to decrease regulatory risk and increase profit margins without increasing prices.

Finally, we should reduce or eliminate involuntary rolling blackouts — which in today’s competitive markets with state-of-the-art technology should be ancient history rather than standard operating procedure.

Fear is driving much of the debate in Austin. Politicians don’t want to be blamed for electricity shortages that lead to blackouts; investors don’t want to lose their money. But fear need not drive us toward bigger government; free markets and an affordable and reliable supply of electricity are not mutually exclusive.

Texans do have a choice to make, though not the one being offered. And what we choose will make a difference in the price of electricity.

We can choose to increase prices by creating a new government-controlled market or to keep electricity affordable and reliable through a competitive market that will help power new jobs and a stronger Texas economy.

Note: This article originally appeared at the Texas Public Policy Foundation on November 6, 2012.

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