Are Texans Better Off With Traditional Utilities?
“Immediately after the Texas Blackout, the Wall Street Journal reported on its study that concluded Texans with deregulated power overpaid, however a 2019 study by Rice professors arrived at the opposite conclusion.
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During the aftermath of the Texas blackouts, the question was raised whether the deregulation of the state’s power industry contributed to a fixation on delivering cheap energy at the exclusion of considering the costs associated with hardening the system’s reliability. Two reporters for the Wall Street Journal authored an article based on an analysis of electricity rates charged in the deregulated electricity market that serves 60% of Texans compared to the power cost in traditional utility markets. Their conclusion, presented in a chart, which we recreated below, is that Texans in the deregulated market have overpaid for their electricity to the tune of $28 billion between 2004 and 2019.
Exhibit 1. How Texans Were Hoodwinked Over Power Prices SOURCE: WSJ, PPHB
The reporters supported their conclusion by calculating the difference between the price paid in the two markets – retail versus traditional – for the respective years. Just as in the above chart, which shows how the gap between the average power price in the two markets has narrowed over time (it has widened in past two years), the premium difference in earlier years was wide, but has narrowed since. Surprisingly, in 2017 the premium was less than $200 million, down 75% from the prior year.
Exhibit 2. Electricity Premium For Retail Power Is Lower Now SOURCE: WSJ, PPHB
Obviously, Texans have been hoodwinked into believing a competitive electricity market is good for their pocketbooks, at least according to the Wall Street Journal reporters. However, there may be other explanations that undercut that conclusion. Researchers at the American Institute for Economic Research (AIER) published rebuttals. They based their analyses on a paper published in 2019 by three energy economists at Rice University. Their rigorous econometric study of the Texas retail electricity market for 2002-2016 reached the opposite conclusion of the Wall Street Journal study. In fact, the Rice paper concluded that in the thirteen Texas regions, since electricity deregulation began, average prices have fallen in every competitive market, but they increased in every noncompetitive market. Importantly, the Rice paper concluded that electricity prices in competitive markets became more closely related to the costs of production over time, something that did not happen in noncompetitive markets.
Exhibit 3. Power Prices Fell In Competitive Texas Markets SOURCE: Source: AIER, Harley, Medlock, and Jankovska (2019, p.7, table 1)
How can two studies of the same subject come to diametrically opposite conclusions? Likely due to how the data was analyzed. The Rice professors understand that electricity prices are influenced by costs – wages and wholesale power prices. These costs do vary across Texas. Thus, the Rice analysis, using econometric techniques, controlled for regional wage and wholesale power price differences. As the AIER article concludes:
“Accounting for these factors, the authors find statistically significant decreases in electricity prices in all five competitive markets after 2007. In noncompetitive regions, prices decreased in only one of the eight, were not statistically affected in four regions, and increased in three regions. The evidence shows that deregulation has reduced prices in competitive markets, while prices in noncompetitive markets are mostly the same or higher.” (emphasis in the original)
The Rice paper concluded that electricity costs are highly correlated to the cost of production, and as we have seen that cost decline, evidenced by lower wholesale power prices, the retail price has also fallen. That relationship was not evident in the traditional utility regions. Now, it is important to point out that because of this cost relationship, there is always the potential for wage or wholesale power prices to rise sharply and take retail electricity prices up with them.
What we found surprising was the claim by the Wall Street Journal reporters that “…from 2004 through 2019, the annual rate for electricity from Texas’s traditional utilities was 8% lower, on average, then the nationwide average rate, while the rates of retail providers averaged 13% higher than the nationwide rate…” This conclusion ignores changes in prices over time as deregulation was finally implemented and the lower cost trends of recent years, which their own figures demonstrate. Had they examined the latest data for state electricity rates by sector as reported by the Energy Information Administration, they would have seen that the Texas average electricity price for November 2020 was 8.27 cents per kilowatt-hour (¢/kWh), approximately 2.2 ¢/kWh below the national average. Between November 2019 and the same month in 2020, the Texas price declined by 0.01 cents compared to a 0.22¢/kWh increase in the national average. Moreover, Texas power costs for every market sector for both 2019 and 2020 were well below the national averages. We would have thought this data might have made them reexamine their study to see if their conclusions were influenced by the weighting of historical data.
There is no question that parties with vested interests in the electricity sector will be weighing in on this debate. Using the power price argument of the Wall Street Journal to argue that the uncompetitive retail market is why power generators did not spend on winterization of their plants is spurious. The better study would be to see what role the Production Tax Credit for renewable power generators has played in disrupting the economics of electricity. Subsidized renewables have been undercutting the economics of stable power plants, such as coal, natural gas, and nuclear plants, often causing their retirement. We have much more to sort out from the Texas blackouts before we are prepared to suggest remedies for the future.