Texas Electricity Deregulation Hasn't Aided Small Power Users By REBECCA SMITH Staff Reporter of THE WALL STREET JOURNAL
A Texas law that largely deregulated the selling of retail electricity and was meant to lower power prices may not be working out so well for small consumers, according to an analysis of electricity prices in the nation's second-most populous state.
The study by Jay Zarnikau, a visiting professor of applied statistics at the University of Texas, finds that former utilities in the state are using a provision of the state's 1999 restructuring law to impose big price increases on residential and small-business customers.
As a result, rates shot up an average of 43% from January 2002 to October 2004, for customers still getting power from their one-time, now-deregulated utilities, versus a 17% jump in prices for customers of utilities still charging traditional cost-based rates. Prices at rural electric cooperatives rose just 9%.
Nationally, states still are debating whether deregulation is the best method for delivering low prices for consumers. The big increases show how difficult it is for states to provide some price stability for small consumers with little bargaining leverage, while still protecting suppliers against rising fuel costs.
The Texas law was supposed to generate price competition among power suppliers by allowing consumers to choose from a number of sources, rather than a monopoly provider like a traditional utility. But fewer residential and small business consumers than hoped have switched to new providers, and the deregulated utilities are pushing through big rate increases.
Deregulated power companies operating in their former monopoly territories were forced to continue offering quasi-regulated prices -- the so-called "price to beat" -- until 2007, even as competitors could come onto their turf and offer lower prices. Still, state regulators gave them the ability to peg the price of the electricity they sell to their traditional customers to the price of natural gas, which has been rising sharply. Mr. Zarnikau says the formula actually exaggerates the effect of gas prices, though. The reason: gas is used to generate about half the electricity produced in Texas, but the formula treats it as if it were the sole source.
TXU Energy Retail Co., a unit of TXU Corp., the state's biggest utility company, has raised its regulated "price to beat" rate six times since early 2002, with the increases totaling 46%. The most recent increase -- a 9.9% rise granted last week -- pushed the price of electricity to 12.07 cents a kilowatt hour for residential users in its traditional home turf of North Texas, based on a gas price of $7.82 per thousand cubic feet.
Prices at Reliant Energy Inc., the second-biggest supplier, jumped 41% from 2002, to 12.8 cents a kilowatt hour in its traditional Houston territory. "We buy all our power from the market and the price of electricity correlates to the gas price," says Charles Griffey, senior vice president at Reliant.
Critics say utilities are reaping an undeserved profit. In first-quarter results, TXU said a lower sales volume was "partially offset by $140 million in higher average pricing due to increased price-to-beat rates" that didn't include its most recent price increase, its second biggest ever.
The utilities covered by the deregulation law are allowed two rate adjustments a year and they aren't required to cut rates later if gas prices drop. The economic rationale is that noncompetitive rates eventually will cause companies to lose so many customers that they will lower their prices to win them back. So far, however, that hasn't happened.
To be sure, the regulated "price to beat" never was intended to be the lowest price available. It was designed to be just high enough to let competing suppliers undercut established providers, providing room for a competitive market to flourish.
Large energy users have switched suppliers in droves, but small consumers have had fewer choices and only one in five residential consumers has changed providers. The rising "price to beat" also gives competitors room to increase their prices. Consumer advocates believe the fuel adjustment is unfair but "we've been unsuccessful in the courts so far," says Clarence Johnson, director of regulatory analysis for the Office of Public Utility Counsel in Austin. Now they are pushing for a state law that would make it easier for small consumers to band together and buy bulk power; TXU is fighting them.