The Cost of Deregulation (Gwen Moritz Editor’s Note)

By now you are probably aware of the Wall Street Journal’s analysis of electricity costs in Texas since that state deregulated its electric utilities almost 20 years ago. If not, here’s the nut:

Since 2004, nearly 60% of Texans have been required to buy electricity for their homes from one of many competing retail power companies, rather than a local utility. And by 2019, those Texans had paid billions more for their power than they would have paid at the rates charged to the customers of the state’s traditional utilities.

Now, the Journal’s headline made a point of just how many extra billions — 28, to be precise. But $28 billion divided across millions of households and across 16 years ciphers out to tens of dollars a month per residential customer.

There were definitely years of my life when an extra $20 or $30 a month on my electric bill would have been painful, but I think the most telling detail in the Journal’s report was this: There wasn’t a single year when deregulated, free-market, competitive electricity was cheaper for Texas residential customers than buying from a traditional local utility. And in only one year, 2017, was the price essentially equal. In every other year, Texans who chose from a menu of companies paid more on average for a kilowatt-hour of juice than Texans who were served by traditional utilities. And the difference could be 35% or 40% or even 50%.

The Wall Street Journal did not analyze the difference between rates charged to commercial and industrial customers. That’s where some of the savings went, although I doubt that would provide much comfort for Texans getting hit with five-figure monthly bills because they were paying variable market rates during a massive power shortage. (CPS Energy of San Antonio tweeted last week that it was “working diligently to find ways to spread those costs to 10 years or longer to make it more affordable.” Let that sink in.)

Another curious factoid: Texas adopted its deregulation plan in 2002. After California. After Enron. After Arkansas saw what Enron did to California in 2001 and sent the Electric Consumer Choice Act that Gov. Mike Huckabee had signed in 1999 down the memory hole so fast I’ll bet half of the people reading this column have forgotten or never knew we dodged that bullet.

I know I sound like a broken record, but we need to stop treating regulation like a bad word. Regulations are a way that our society, through our elected government, levels out playing fields, creates transparency and protects the weak from abuse by the strong. And every regulation is a response to an identified problem.

Like anything else with a noble goal — law, education, religion, journalism, science, art — regulation can be poorly crafted and can have unintended consequences. And it can outlive its usefulness. But unless Texas set out to raise the cost of electricity for its residents while leaving them vulnerable to massive power failures, it’s clear that deregulation can also be poorly crafted and have unintended consequences.

And I won’t be surprised if February 2021 persuades Texans that electric deregulation has also outlived its usefulness.

While the Wall Street Journal did not do the same kind of multiyear analysis of deregulated vs. traditional utility prices for commercial and industrial customers in Texas that it did for residential rates, the U.S. Energy Information Administration’s state profile does give us an idea where the savings has been directed.

In 2019, the most recent year for which the EIA has published a full profile, Texas consumers of all kinds paid less than the national average for electricity. Residential customers — both those buying from a local utility and those who chose from deregulated providers — paid an average of 8.6% less than the national average. Lower rates for industrial and commercial users are standard across the industry, but Texas has been especially kind to businesses. In 2019, industrial customers paid 23.5% less than the national average for similar users, while commercial customers paid 25% less.

In Arkansas, where rates must be approved by the Public Service Commission, residential consumers paid 13% less on average than residential users in Texas (10.59 cents per kWh vs. 12.2 cents). And Arkansas’ residential average was almost 21% less than the national average.

Meanwhile, businesses in Arkansas paid, on average, more than businesses in Texas — almost 9% more for commercial customers and 12.5% more for industrial users. How the scramble to buy electricity in last month’s winter weather disaster changes those ratios will be interesting to track.

While they were higher than in Texas, Arkansas’ commercial and industrial rates in 2019 were 18.5% and almost 14% below the national average, respectively.

Gwen Moritz is the editor of Arkansas Business.