Deregulation of Electricity Markets in Texas Results in Potential Power Shortages and Higher Prices

But If the Facts Contradict the Ideology, Print the Ideology

In the 1990’s and early part of the 21^st century the big movement in public utilities was “deregulation”.  Until this time, electric utilities, for example, were considered natural monopolies, and so private companies were allowed to operate under state regulatory rules that allowed them to earn the same profit that they would have earned in a competitive market.  This resulted in plenty of electricity at reasonable prices, a result everyone should have been happy with.

But Conservatives thought they could do better.  Under deregulation, they argued, we could have lower prices for consumers, more production and higher profits for the industry. Now the logic of that position cannot be supported, lower prices result in lower profits and higher prices result in higher profits.  But deregulation was all the rage, and look how well Enron was doing in a deregulated environment (by lying and cheating as it turned out).  So Texas deregulated,

The Texas legislature deregulated the state's electricity market in 2002, hoping it would unleash innovation and bring lower electricity prices, even though its prices already were below the national average. Mr. Perry, who was a new governor at the time the deregulation took effect, has remained a strong supporter of the move.

 and here are the results.

First of all, Texas shut itself off from national supplies to keep the Federal government out of the picture.

Texas suffers when electricity reserves get thin because it can't import much power from other states. Years ago, utilities severed most electrical connections to other states, at the order of state utility regulators, so the Texas market could escape federal oversight.

And as far as the supply problem is concerned,

Before the deregulation of its energy market took effect in 2002, Texas officials could have told utilities to build more power plants. Now, about all regulators can do is revise market rules at Ercot, the Electric Reliability Council of Texas, which runs a daily energy auction. The goal is to make power production more profitable so generators build more plants.

And how does Ercot plan to make Texas production more profitable?

One proposal under consideration is to create a floor for electricity prices—meaning that electricity will no longer be as inexpensive for the retailers or end-users. Another proposal is to raise a price ceiling. Currently, wholesale prices are capped at $3,000 a megawatt hour; Texas officials are considering lifting it to $6,000. (Outside Texas, federal officials cap prices at $1,000 a megawatt hour.)

That’s right, under de-regulation Texas will put a floor on the price of electricity, so that the markets cannot drive down the price of power for consumers.  Wasn’t driving down the price supposed to be the goal of deregulation?  Yes, it was, well ok, never mind.  And note that the cap on prices is already 3 times the Federal cap, and Texas wants to raise it to six time the Federal cap.

Texas came close to rolling blackouts this summer and had rolling blackouts in February when electricity supplies gave out during a cold snap.

Although Texas has about 73,000 megawatts of installed generating capacity, it has struggled to satisfy demand of 66,000 to 68,000 megawatts, this past summer, because it also has had large numbers of generating plants unavailable or barely limping along, often because of breakdowns. Overall demand in Texas reached levels that weren't expected until 2014, catching officials by surprise.

Texas had low electricity prices, plenty of supply and then Conservatives stepped in to change things.  So deregulation is working out,about the same as most times when Conservatives apply ideology instead of common sense management to economics.