Has privatization failed Texas utility customers?

Privatizers use the one-size-fits-all economic theory of “retail choice-free market competition” to promote the deregulation of Texas electric utilities. Privatizers promise that lower electricity prices and higher system reliability will follow electric utility deregulation. Privatizers’ sloganeering convinces on-the-take politicians and the unsuspecting electorate to approve their lobbyist-written deregulation rules and laws.

Privatizers say the deregulation of Texas electric utilities is successful and other states should follow suit. This is misinformation. Relative electricity prices have increased dramatically, and dangerously lower electrical system reliability is the result of Texas electric utility deregulation in 2002.

My published academic research paper “Deregulation & Privatization: Texas Electric Power Market Evidence” is the basis for this article, which uses means testing of U.S. Energy Information Administration (EIA) data from 1970 to 2011 to statistically analyze electricity prices in Texas, pre-and-post deregulation, relative to U.S. electricity prices.

Electric power prices in Texas and the U.S. change yearly. To determine when prices are increasing fastest in Texas, relative price changes are calculated. U.S. electricity prices are subtracted from Texas electricity prices (1970-2011). The comparison of relative electric power price sample means for the U.S. and Texas — before-and-after Texas deregulation — determines if Texas electricity prices are increasing faster during privatization and deregulation compared with the U.S.

Relative to U.S. electricity prices, Texas electricity prices during the deregulation and privatization period (2002-2011) rise four times faster than increases in Texas electricity prices before deregulation (1970-2001). The Texas electricity market is much less efficient now as a result of deregulation. Higher relative electricity prices after deregulation are a liability for Texas residential electricity consumers and put Texas at a competitive disadvantage compared with regulated electric utility states when attempting to attract new industry and jobs.

Adverse cost results because of privatization are not unique to Texas. Worldwide, similar experiences occur when electric utilities deregulate. Percentage increases in residential electricity prices from 2000 to 2010, as a result of deregulation and privatization of electric utilities, in the following countries are:

Chile, +166 percent; Canada, +72 percent; Czech Republic, +133 percent; Ireland, +100 percent; Hungary, +117 percent; Norway, +106 percent; New Zealand, +203 percent; Sweden, +88 percent; U.S., +42 percent; and the U.K., +86 percent. Electricity price increases globally after deregulation far exceed general price and wage gains, making the general population poorer but power generators and retailers richer.

Cold weather during February 2011 and ineffective weatherization that did not protect the plants caused many Texas electric power plants to shut down. Electricity prices spiked much higher, and Texas experienced prolonged and frequent rolling blackouts that primarily affected residential customers.

During another Texas cold snap in January 2014, two large power plants unexpectedly closed down because of incomplete weatherization, which resulted in the danger of rolling blackouts. As a result, Texas wholesale electricity market prices spiked higher—from a usual $30 to $100 per megawatt-hour to more than $4,500 per megawatt-hour. Under existing rules, all generators receive the same $4,500 per megawatt-hour regardless of their average costs.

The current incentives in electricity markets harm residential electricity consumers. Texas electricity generators, with multiple plants on the interconnection grid, receive much more money if they do not weatherize a few of their plants properly. As a consequence, these poorly weatherized plants must shut down during cold weather. All generating plants that remain online receive the spiking electricity prices, and the generating company makes much more money than if all their plants were operating properly. This is only one way privatizers are gaming the Texas electricity market: using laws and rules set up by their lobbyists.

Seven years ago at the top of the most recent credit bubble, it was believed that electricity prices would rise dramatically. Consequently, privatizers overpaid when purchasing electric utilities. Instead, U.S. natural gas prices unexpectedly dropped—a result of the nationwide shale gas fracking boom — and pushed many privatized Texas electricity generating companies into bankruptcy.

Houston-based Dynegy Inc. filed for bankruptcy protection in July 2012. Edison Mission Energy, which operated electric generating plants in 12 states, filed for bankruptcy protection in December 2012 and exited Chapter 11 in March 2014, when the company sold for $2.64 billion to NRG Energy, which has operations headquarters in Houston. Texas electricity generating company Optim Energy LLC — which is owned by ECJV Holdings LLC, which is owned by Cascade Investment LLC, a Bill Gates investment company — filed for Chapter 11 bankruptcy protection in February 2014.

Kohlberg Kravis Roberts & Co., Texas Pacific Group and Goldman Sachs Capital Partners took TXU — at that time, the main electricity supplier in Texas — private in 2007 in the largest private equity leveraged buyout (LBO) on record and renamed the new company Energy Future Holdings Corp. (EFHC), headquartered in Dallas. In one of the largest nonfinancial bankruptcies in history, EFHC filed a prepackaged Chapter 11 bankruptcy in April 2014.

Although these generating companies are dealing with bankruptcies, they cannot plan for and invest in new power plants to meet expected electricity demand in Texas. This results in below-standard reserve margins, which threaten Texas electricity supply and system reliability.

The North American Electric Reliability Corp.’s (NERC’s) goal is to safeguard North America’s electric power system reliability. The nonprofit reports on insufficient electrical power level capacity during peak load periods. Energy emergency alerts indicate electrical capacity shortfalls and are a leading indicator of inadequate system reliability. Texas is under increasing stress and has had three NERC Energy Emergency Alert 2 incidents and two more serious NERC Energy Emergency Alert 3 incidents since 2006.

The Electric Reliability Council of Texas’ (ERCOT’s) reserve margin forecasts for 2014-2023 are used as an indicator of Texas’ electrical system reliability. ERCOT’s forecast reserve margins show that Texas will fall significantly below the NERC reference reserve margin standard of 13.75 percent beginning in 2015 and continuing through 2023. New electric power plants are not being built fast enough to keep up with growing electricity demand in Texas because of the deregulation and privatization of Texas electric utilities. NERC and ERCOT predict the increased probability of brownouts and rolling blackouts in Texas.

Vertically integrated public electric utilities worked well more than 100 years and were off limits to corporate revenue. Not content with simply financing industry, financiers’ new strategy is to supply the capital and control business operations; thus the need for new laws to help financiers expand their reach. Deregulation and privatization of electric utilities is not about retail choice and free market competition. Instead, it is a scheme for rent-seeking extraction of additional profits from new markets.

The benefits of deregulated free market competition in the electric power industry are only from financiers’ and corporations’ viewpoint; not from the standpoint of lowering residential electricity consumers’ monthly bills or increasing reliability. The Texas electric power market is not really deregulated — political code for “lower costs.” On the contrary, electric utilities have been reconfigured and reregulated so corporations win and residential consumers lose.

Special technical characteristics’ restricting the decentralization of the electrical industry are well-known. Deregulation and privatization makes what should be vertically integrated electric utilities more difficult and expensive to manage, reducing synergy and lessening the economies of scale and scope.

ERCOT administers the Texas Interconnection as the independent system operator. Its mission is “to ensure a reliable electric grid and efficient electricity market.” ERCOT is failing in its mission. Relative costs are increasing faster and system reliability is decreasing in Texas, as a result of privatization and deregulation of the state’s electric utilities. U.S. energy policy should discourage additional states from deregulating their electric utilities.

Author: Eric L. Prentis is on the Cameron School of Business faculty at the University of St. Thomas in Houston. Reach him at eric.prentis@gmail.com.

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