How much would you pay for electricity? How high would prices have to go before you’d voluntarily live in the dark? If you own a small business, would you ever consider going without electricity?
The truth is we’ll pay almost anything to keep the lights on. Unlike many commodities, electricity is absolutely essential for modern life. And it is this one crucial fact that should make you care deeply about an ongoing debate in Austin. At issue are two interconnected questions: 1) will Texas have enough power to meet its future needs? and 2) should the rules be changed to favor big generation companies over Texas consumers?
The first question came to the public’s attention in a very big way after last year’s energy emergencies. Texas, already a very hot state, endured the most brutal summer in its history. The heat stressed the electricity system, which, in turn, prompted the state’s grid operator to call several emergency alerts. Texans had already suffered blackouts in February and braced for more in August. Suddenly concerns over the Texas power supply seemed very real.
But the situation might not be quite as dire as you think. While it’s true, for instance, that the state’s power reserves have dwindled during the deregulated era, it’s also true that the state’s official targets for reserve power have increased. This change was made only recently, at the urging of generators and other industry officials. Texas should be well above both the old and new targets this year. Also keep in mind that last year’s weather was an anomaly. You have to go all the way back to 1789 to find evidence of a more terrible drought. Presumably next year will be milder, especially given the expected arrival of wet weather from El Nino. And as last year’s outages proved, even healthy generation reserves cannot completely protect us against blackouts.
So this brings us to question No. 2, which is really all about how we should go about fixing the problem, such as it is. The solution offered by some in Austin is to implement new rules — rules that by their very design will increase prices. I’ll say it again. There’s an important policy debate going on about how we can make electricity more expensive. Generation companies say that want more profits so they’ll have the economic incentive to build more power plants. But they also offer no guarantees. All we have is the hope that by throwing money at generation companies, that they somehow will make our reliability challenges go away.
What are some of the most troubling proposals? Under one, regulators would raise or eliminate existing price offer caps for wholesale energy. Like other states, Texas currently enforces these caps to protect the public against Enron-style price gouging, and to ensure the wholesale power market does not go haywire. These caps do not exist to stifle competition, but rather to ensure that prices do not shoot beyond what we would expect to find in a healthy market. If Texas adopts higher price offer caps, it won’t be long before the wholesale market hits them. This will lead to higher electricity prices at home. The situation could be much worse for consumers if there’s no cap at all.
In other proposals — proposals that go to the other extreme —the offer caps under certain circumstances would also become price floors. That is, generators want new rules that would bar them, in certain instances, from offering to sell their wholesale energy at prices below the cap. Texas already enforces the highest wholesale energy cap in the nation, one that allows generators to receive payments 60 to 100 times above those typically seen in the market. Generators want mandates that would require them, under certain circumstances, to offer their power only at this astronomically high level.
Generators have argued that these changes are needed because they believe that certain actions taken by the grid operator to prevent blackouts also has had the effect of reducing the frequency of price spikes. They say they need more price spikes to incentivize new investment. But it’s not as if Texas has not already endured these high prices. Every time the energy cap has been raised, wholesale prices have hit it. What the generators argue is that they need more price spikes — and the spikes should be higher. This will have an impact, sooner or later, on what we all pay for electricity.
These proposals also raise issues of basic fairness. Generators strenuously resisted regulatory intervention when electricity prices were high, but now eagerly seek intervention as prices have declined. Remember: these regulatory proposals, by their very design, would lead to higher wholesale energy prices and higher company profits. In essence, generators are offering us “a heads I win, tails you lose” vision of deregulation.
But that’s not to say that we should ignore the challenges ahead. It’s true that our energy reserves have constricted under our deregulation law. There’s no denying it. But what’s required is a measured response. One possibility would be to create emergency programs whereby residential customers can agree to have power curtailed in exchange for some sort of rate relief. Penalties also should be enhanced for rule violations by generators — including those that threaten grid reliability. And of course improving conservation policy should be part of the solution.
But any response that puts an especially heavy burden on consumers should be avoided. Texans have paid higher-than-average electricity prices for many years under the state’s electric deregulation law. It’s wrong that now — with average prices finally back below the national average — that big electric companies want to change the rules to push them back up again. That’s why we’re urging our policymakers to proceed with caution. You should too.
R.A. Dyer, editor of the Recharge Ratepayer Report, is a policy analyst for the Texas Coalition for Affordable Power, an organization of more than 160 cities and political subdivisions that purchases power in the deregulated market.