01/17/2003: "Electric Competition: A Year in Review"
About a year ago, a substantial portion of the Texas electric utility industry was opened to retail competition. Looking back at progress thus far leaves little doubt that this initiative has already been a very good thing, with the promise of much greater benefits in the future.
Independent observers and analysts have given high marks to the Texas process. The Center for Advancement of Energy Markets recently ranked Texas number one among all states in terms of attributes the Center identifies as fundamental to a successful move to competition. Xenergy, an energy consulting firm, recently released a report indicating that both competitive energy sellers and consumers are better off in the state’s competitive market. Although there were inevitable transitional difficulties, they are now diminishing. Other industry observers concur that the Texas transition has been less problematic than that in other states.
Electric competition has resulted in significant gains in business activity. As market forces have come into play, cost reductions have exceeded the legislative mandate of 6% in many areas. Customers have more freedom to negotiate with power providers, in some cases banding together through aggregation to save even more than they could individually. These cost savings have freed up dollars for other purposes—saving, investing, and spending. The Texas economy has benefited; a recent study by The Perryman Group quantifies those positive effects.
A major source of economic gains linked to electric competition is the facility construction encouraged by freeing the market. Even given conservative assumptions, the economic impact of facility construction since the onset of competition includes a notable $37.441 billion in total expenditures and 302,075 person-years of employment. The impact of facility construction in 2002 alone includes 67,703 person-years of employment. This stimulus, while already notable, can be expected to increase in the years to come as the economy gains momentum.
A second area of benefit from retail competition stems from cost savings to customers. These savings are typically spent for other types of goods and services, in turn generating additional economic activity. Similarly, industrial users and public entities are able to deploy substantial resources to increased production and the provision of needed services. Texas residential electric customers will see direct benefits of more than $300 million for 2002. In some areas, a household using an average of 1,000 kilowatt hours per month can save as much as $166 per year by switching to the lowest cost provider. If all eligible customers switched to lowest cost offers, savings could rise another $636 million.
One key source of savings to households stems from the low-income rate discount program. Concerted efforts involving the Public Utility Commission, Texas Department of Human Services, and other entities have led to rising enrollment of low-income customers and savings of an additional $68 million through October 2002, an average of $136 per customer.
Many commercial and industrial customers, as well as political subdivisions, have taken advantage of aggregation programs to pool purchasing power and achieve more favorable rates. Such purchasing methods have led to estimated savings of $123 million over the price to beat ($134 million over 2001 rates). The Texas Association of School Boards (with more than 190 school district members) estimates it will save $15 million through a collective contract; other municipal purchasing groups are expecting to save significantly as well. Texas Instruments signed an agreement involving provision of power to 24 facilities, with expected savings of about 20%.
The total residential impacts from cost savings (excluding direct fuel costs and surcharge savings of $677 million) include $603.8 million in annual spending and 4,176 permanent jobs. As noted, only a fraction of households eligible to switch have done so thus far; therefore, the benefits to customers in this category are projected to rise markedly over time. In the small commercial segment, the impact of cost savings includes $419.6 million in annual expenditures and 2,708 jobs. Cost savings to industrial customers contributes further stimulus of $554.8 million in yearly outlays as well as 1,063 permanent jobs. Public sector entities such as cities, counties, and school districts are also saving millions of dollars, bringing an overall injection of another $406.8 million in annual outlays and 3,421 permanent jobs.
The economy of Texas is better off for the introduction of competition to the electric utility industry. When the savings to all customer classes are combined, the direct cost reductions total nearly $815.0 million. These savings lead to a notable economic stimulus of $1.98 billion in spending each year and 11,368 permanent jobs. Furthermore, Texas is now in a more favorable position in the competition for quality corporate locations. Over time, innovations and options will increase markedly. Electric competition has also led to benefits in the areas of renewable energy and emissions reductions. In short, one year into the process, it is clear that opening the retail electric market was a well-conceived and highly effective public policy decision.