05/23/2002: "The Truth About Electric Competition in Texas"
As of January 1, 2002, a substantial portion of the Texas electric utility industry was opened to retail competition, the result of the implementation of the Texas Electric Choice Act (Senate Bill 7). The ensuing few months have seen seemingly unceasing headlines about the demise of Enron, allegations regarding possible market manipulation in California, constant calls for investigations out of Washington, and a healthy dose of banter in Texas politics about utility costs and policy. All of this fog can hide the most critical questions about electric competition in Texas: is it working? and are we benefiting from it? The answer to both of the queries is unambiguous and unequivocal—Yes! and Yes!
Although only a few months have passed, we are already seeing the benefits of freeing the market for electricity. The 6% savings mandated by law for residential and small commercial customers is just the tip of the iceberg of potential benefits of opening the power purchases to the workings of supply and demand. Additional rate reductions have been experienced by many customers who have switched to alternative providers. In fact, approximately 10% of the eligible load has already been converted, with those taking advantage of the ability to shop for a retail electricity provider ranging from the state’s largest power users to governmental units to individual residential customers. The development of wind power and generating plants with enhanced environmental properties has also been markedly accelerated.
Power costs are somewhat higher than they have been at points in the past for one simple reason: fuel costs are higher. That would be the case with or without competition. The real issue, despite all the campaign rhetoric, is simply that electric bills are lower today than they would be in the absence of competition. And, although the market will fluctuate with supply and demand, overall prices will remain lower on an average basis.
In order to assess the magnitude of these gains, I estimated the total savings by category (residential, commercial, industrial, and public sector). These savings are typically spent for other types of goods and services, which in turn generates additional economic activity. Similarly, industrial users and public entities are able to deploy additional reserves to increase production and provide needed services. My firm has evaluated the initial benefits of electric competition in great detail, and results for all major categories of customers are being released this week. For now, I will just hit the high points.
The total economic impact of savings to residential, commercial, industrial, and public sector customers are estimated to include $716.3 million in annual total expenditures and more than 5,280 permanent jobs. These economic effects will continue to grow over time.
The construction of generation facilities generates encouraged by deregulation also sparks a substantial amount of business activity in the state. During the four-month period of January through April alone, the ongoing construction led to overall economic effects totaling $2.9 billion dollars in total spending and 25,562 person-years of employment. Since Senate Bill 7 became a reality in mid 1999, the overall benefits from power plant development have been $32.4 billion in total spending and more than 285,000 person-years of work for Texas employees. Construction benefits will continue to accrue to the state economy on an ongoing basis in response to growing demand.
Like anything new and different, electric competition is subject to substantial scrutiny. There have, of course, been some transitional problems. This is not uncommon, or even unexpected, given the magnitude of the industry restructuring. The experience of the electric utility industry has generally been less disruptive than that of other industries, and, in fact, has been far smoother than that of other states. The problems experienced to date have been isolated, transitory issues have been (or soon will be) resolved. I’m not trying to minimize the matters in any way; by the same token, they shouldn’t be blown out of proportion at the expense of the gains to the economy and the environment that are piling up every day.
Because competition in Texas was birthed in the midst of an historic corporate demise and a rancorous political season, the real story is often lost in a sea of extraneous information. But the bottom line is quite simple: competition is working. Period!