The primary role of government in a market economy is to create and maintain a stable framework in which firms can compete. When the rules are predictable and certain, consumers benefit and corporate decisions can be made with confidence. When they are not, serious dislocations can occur. This basic premise can easily be applied to the newly competitive electricity market in Texas.
In 1995, the Legislature passed laws and the Texas Public Utility Commission (PUC) adopted rules that allowed competition in the electric industry’s wholesale market. These rules have remained constant, and the generating companies have responded to this stability and certainty by constructing 16,200 megawatts of capacity—more than doubling the need expected through 2004. As a result, Texas has a comfortable supply of electricity. By contrast, years of uncertainty in the California market have discouraged development, and the state has only about one-fourth of its projected needs for new capacity.
In 1999, the Legislature adopted the Texas Electric Choice Act, opening the market to retail competition as of January 1, 2002. Again, the law and PUC rules were carefully thought out, and provided the certainty needed for many new competitors to enter the electric market. Although the market is still in its infancy and has had a few growing pains, dozens of new competitors are vying for consumers’ business, and the consumer is better off through having choice and lower prices. I quantified these savings and benefits a few months back, and they already had stimulated the Texas economy to the tune of over $700 million in spending and 5,000 jobs.
Unfortunately, the PUC recently acted to remove some certainty and stability from this emerging market, a practice which could have adverse consequences. In 2001, the PUC adopted a “Price to Beat” rule which would assure small consumers a lower price in the electric market and assure room in the market for robust competition. The rule—adopted after a lengthy (some would say excruciating) hearing process, including full participation by all parties—is intended to ensure that competition develops in the Texas electric market and to prevent conditions that developed in California.
In adopting the rule, the Commissioners concluded that flexibility to adjust the Price to Beat to accommodate rising gas fuel prices would be essential to creating and preserving competition—and they were right! As in any market, if big competitors are forced to hold their prices low during the time of rising production costs, new and smaller competitors cannot enter the market.
Recently, rising natural gas prices prompted many of the traditional electricity providers to apply to the PUC for an increase in the Price to Beat. They complied strictly with the Price to Beat rule, and the State’s Office of Administrative Hearings judge recommended approval. Unfortunately, the PUC chose to disregard its own rule. Rather than continue to assure stability and certainty to the new electric market, the Commissioners sent the request back for additional study, thereby indefinitely delaying a decision and putting providers in the position of being unable to adjust for the effects of market price changes.
This action plunged the market into uncertainty and threatens the very viability of retail electric competition. Because of the delay, the large traditional providers are being forced to sustain artificially low prices and the smaller non-traditional energy firms cannot compete effectively.
As in any market, if the electricity market is to survive and offer benefits to consumers in Texas, rules must be established and followed to give the market participants and customers needed certainty and stability. The current stock market situation clearly reminds us what uncertainty can do to public confidence.
The PUC needs to help stabilize the market by staying with the rules it established. Understandably, the PUC is concerned that consumers will see higher prices if the Price to Beat is increased. By keeping prices artificially lower in the short-run for uneconomic reasons, however, competitors are discouraged from entering, and prices are thus higher in the long-run. It is easy to forget that, in the regulated market, prices increased and decreased with changes in the fuel costs, without providing customers with choice. In fact, it is precisely this practice of forcing retail prices to remain consistent as costs rose which created much of the crisis in California.
It is unfortunate for consumers that fuel prices went up, but they did. We can’t afford to allow the normal functioning of one market to disrupt the basic framework of another. Simply stated, let’s play by the rules.