The ‘Good Old Days’ of Texas Electricity Weren’t So Good

Just over 20 years ago, Texas decided to shake things up with electricity deregulation, creating a model so inspired that it was used as a blueprint by several other markets. Back then, your power company was a one-stop-shop for everything – generating, delivering, and billing for electricity. Well, not exactly, but it might as well have been that for what difference it made to the average consumer. But was this really the best for consumers? Let’s break it down.

Before deregulation, for most Texans, the power lines that delivered electricity to your home were controlled by a single company. They decided how much to charge based on the total cost of power used. But what went into that cost? Salaries? Bonuses? Shareholder profits? Yep, all of it. And with one company calling all the shots, it was essentially a monopoly – and no one not profiting from a monopoly will say that’s good for consumers.

The idea was to introduce competition into a closed system without draconian regulation. The plan? Gamify the industry. Here’s how it would go down: Instead of generators selling to power companies who would bill the consumers, we would have three separate segments: generation, delivery and billing. The billing part would go to a new segment of businesses called Retail Energy Providers, or REPs. Consumers could buy power from several different companies, each selling multiple different plans, and they would be billed by that company according to the terms of their plan. The delivery companies would set their service billing standards and invoice the customer’s REP, who would pay that invoice whether or not the customer paid them.

Meanwhile, the 500+ power plants in Texas – using natural gas, coal, nuclear, wind, solar, and more – reported their generation capacities to ERCOT (Electric Reliability Council of Texas). ERCOT then coordinated power generation to meet demand in real-time. A REP combines the load of all their customers, and buys chunks of power from the generators ahead of time. If the customers end up using more than that, they’re billed a market rate for the remainder. If they use less, the remainder is sold back at market cost. If it's done well, they could make huge profits. If not, they could lose their shirts.

Consumers are happy because they have a lot more choices for power with fixed rate contracts. Generators are happy because they stand to make more money. Utilities are happy because they are guaranteed payment from REPs. REPs are happy because while they are taking on much of the risk, they also get to make money from a product they don’t make or sell.

Texans got to vote on this new setup. Major cities like Austin and San Antonio, with their municipal power plants, opted out. Remote areas with co-ops stayed as they were. But in 2002, the Texas Electric Choice program went live. Houston Light and Power split into CenterPoint Energy and Reliant Energy. Texas Utilities split into ONCOR and TXU. People who wanted to, signed up for a contract with one of the many newly formed REPs. The ones that didn’t got set up with the Provider Of Last Resort (POLR) for their area.

Pre-deregulation, the average customer paid about 9-10 cents per kWh. Post-deregulation, prices varied. While some providers advertised low rates, they also passed through utility rates, which could end up costing more. But on average, customers were expected to save 5-15% on their bills. Over a year, that adds up.

And for a while, all was well.

Did anyone foresee today’s scenario, where companies worldwide sell plans in Texas and rake in profits? Probably not. But if we had stuck with the old ways, adjusting for inflation, the average customer would be paying 16-18 cents per kWh now. Most folks pay far less today. Also, in case of a major cost because of a storm or some other catastrophe, the cost would be passed on to the consumer over small installments with the old way. With what we have today, the REPs bear all of that risk. You pay the price on your contract, not a penny more, not a penny less. There’s something to be said about having that certainty.

If you bring a shopping cart to a stock exchange, you’re going to have a bad time.

When you fill up your car at a gas station, the price per gallon is the same regardless of how much fuel you buy, so the math is easy. But what if you were charged a fee as soon as you pulled into the gas station, and the price per gallon changed based on how many gallons you filled up? Or if a pump had a fine if you didn’t buy enough gas? Or another pump had a good price but it was only available if you bought at least 20 gallons and you have a 12 gallon fuel tank? And now, what if you had to go inside and speak to the attendant to know what rules that pump had?

Competition creates winners and losers, sure. And when a system is gone unchecked for long it could end up making it so the corporations are the only winners. But the solution isn’t to go back to the “good old days” – because they weren’t all that good. The solution is to adapt to the market.

This is where WiseBolt comes in.