Competition is a very good thing for consumers and the economy. As firms strive to gain market share, the result is innovation, lower prices, increased efficiency, and myriad other improvements. Introducing competition has led to enormous benefits for consumers in the areas of airlines, trucking, and natural gas.
The Texas market for retail electric power opened to competition as of January 1, 2002, and by any standard, the move to competition has been a resounding success. In fact, the pace has far exceeded that in other industries, such as telecommunications, over the same timeframe.
The state economy has clearly benefited, with competition presently linked to the creation of more than 28,900 jobs in the state. There is also compelling evidence that competition is flourishing.
New providers continue to enter the market, offering customers cost savings and a variety of options. As of October 2004, residential customers had between seven and 12 provider choices. Moreover, surveys indicate that virtually every customer is aware of the fact that they have a choice and most can even name one or more competing firms.
More than 1.5 million requests to switch providers have been processed, and 18% of residential customers receive service from non-affiliated providers. Savings have been realized and continue to grow, with competitors offering significant savings of 15 to 20% from the mandated Price to Beat rates.
Commercial and industrial customers have switched in large numbers, with over 50% of the megawatt-hours sold to small commercial customers and almost 70% of the megawatt-hours sold to large commercial and industrial customers consisting of service through non-affiliated retail electric providers. The availability of less costly power has improved the competitive position of Texas businesses and aided in economic development.
In short, Texas is widely recognized as the healthiest and most successful market for retail electricity in the US and, in fact, one of the best in the world. Competition has led to cost savings, more innovation among providers, greater choice for customers, and additional capacity to ensure sufficient power in the future.
Even with these extremely positive outcomes, however, proposals have surfaced which threaten to derail progress in the marketplace.
One of these involves municipal opt-out aggregation. Texas law already allows for opt-in aggregation, which means that political subdivisions such as cities or counties can negotiate and purchase energy on behalf of their citizens if the citizens request to be included in such groups.
By contrast, opt-out aggregation essentially forces citizens to buy power from the company of the municipality’s choosing unless you, the customer, specifically ask to be excluded.
In effect, this opt-out approach represents a reduction in consumer choice, the very essence of competition. It also discourages retail providers from aggressively pursuing businesses in these areas, thus slowing the progress of the past three years and limiting opportunities for lower prices and innovations.
These actions also introduce uncertainty into the marketplace --affecting investment levels and the return on investment and adversely affecting the entire process of providing power to Texas consumers and businesses.
In particular, municipal opt-out aggregation can lead to sudden and substantial loss of customers to existing retail providers. Recent empirical analysis by my firm reveals that such restrictions risk substantial losses to the economy that far outweigh any measured short-term gains.
In short, significantly changing the rules at this stage creates arbitrary losses for some, arbitrary gains for others, and greater instability for all -- all at a greater cost to consumers.
Moreover, municipal opt-out initiatives stand to reverse the very promising directions of the industry—toward greater choice and lower prices.
The Texas system is working remarkably well by any measurement. But, ill-conceived notions -- such as implementing municipal opt-out aggregation -- could slow or stop progress to the detriment of all Texans.
The Texas Legislature got electric competition right the first time around; now is the time to stay the course.