Thinking Economically: The Texas PUC and ObamaCare

Musings on Economic Freedom from the Texas Public Policy Foundation’s

Center for Economic Freedom

 

The Public Utility Commission of Texas (PUC) will meet this morning as it continues its efforts to impose ObamaCare-style regulation on the Texas electricity market.

 

This may be surprising news to the average Texan, who might generally associate government control over entire sectors of the economy and large tax increases with California, New York, and Washington, D.C.

 

But it is happening right here in Texas before our very eyes.

 

While the details are still to be worked out, in a nutshell the PUC’s idea is to re-regulate Texas’ competitive electricity market by replacing it with a capacity market. The capacity market would pay generating companies for their generating plants on top of any electricity consumers purchased. These capacity payments, or corporate subsidies, would be paid for by a $4 billion or so annual electricity tax on Texas consumers.

 

What does this mean? Here are some of the impacts:

• Consumer choice: greatly reduced
• Prices: increased
• Risk: shifted from generators to consumers
• Taxes on residential electricity bills: increased, by $150 or more per year
• Competition: greatly reduced

It doesn’t have to be this way. A majority of the PUC’s commissioners, appointed by the governor, have announced their support for a capacity market out of the mistaken belief we are running out of electricity. But this simply isn’t the case.

 

Texas’ electricity market is the most competitive, successful electricity market in the world. No state or nation can compare. It has supplied with us more than adequate supplies of electricity to make it through the hottest days of summer for several years to come.

 

One simple way to see this is that electricity prices today are low; and low prices are indicative of the fact that supplies exceed demand. As demand starts to increase relative to demand, prices will increase. Those higher prices will then generate new investment in generation to power our future electricity needs. That’s the way a market works, and how it is working in Texas.

 

The myth that Texas is running out of electricity is fueled by three things:

• Generators’ claims that they can’t turn a profit
• Inaccurate forecasts of future reserves
• Studies by consultants claiming the free market won’t work when it comes to electricity

Our research has debunked the claim that generators generally cannot turn a profit. Of course, there may be some generators that may not be able to do so. But that happens every day in every market. There is no reason that consumers should be asked to guarantee revenue for generators. But that is what would happen under a capacity market.

 

We’ve also shown that official projections of future shortages are based on inaccurate methodology. Past forecasts have overstated future demand and understated future supply. There is no reason to believe that current forecasts are any different. In fact, the methodology is undergoing revision at this very moment, and the upcoming December forecast is expected to show higher future reserves. Why can’t the PUC wait to see the updated forecast before taking the extraordinary step of regulating a major sector of the Texas economy?

 

This brings me to my last point. The entire effort to impose a capacity market on Texans is ultimately based on the belief that free markets do not work. That belief is essentially what a study commissioned by the PUC last year was based on when it claimed that future reserves would fall below 10 percent.

 

Never mind that past reserves have never dipped that low. Never mind that reserves would still be well above expected demand. Never mind that generators have poured tens of billions of dollars into new generation in Texas.

 

The same message is also being sent by the generators and the regulators at the PUC, “If you do not want to run out of electricity, you better let us handle it.”

 

Yet, are we really to believe in the midst of the ObamaCare debacle that centralized, government control of the economy is the way to solve our economic problems?

 

Government control of the real estate market led to the Great Recession. Here in Texas, government control of the banking industry in the 1980s led to the collapse of the Texas economy and the savings and loan crises. A government takeover of the economy will never solve our problems.

 

In fact, the challenges we do face in the Texas electricity market today stem from too much—not too little—government intervention.

 

For instance, Texas has a “market monitor” that combines with the PUC’s regulatory efforts to severely hamper price competition in the wholesale market. It is funny—though not amusing—that at the same time the PUC is about to take over the market because prices are too low it is also suppressing prices through its existing regulatory efforts.

 

Additionally, state and federal subsidies for renewable energy are significantly distorting the market and decreasing the incentives for generators to build new plants.

 

Misguided regulation of ancillary markets and transmission congestion has also disrupted competition and reduced wholesale prices at the very time they needed to increase in order to resolve shortages.

 

There is no need to panic. Texas is not on the verge of running out of electricity. The problems we do have can be addressed by improving and reducing government intervention in the market.

 

At this point, however, this is not the path we are taking. And won’t be. Unless Texans contact their elected officials and the PUC’s chairman and commissioners to let them know that they do not want more regulation, higher prices, and higher taxes.

 

Surely, if Americans are making progress in turning back ObamaCare, Texans can do even better here by completely turning back Obama-style regulation of the Texas electricity market.

 

Bill

 

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Bill Peacock
Vice President of Research

Director, Center for Economic Freedom

Texas Public Policy Foundation

bpeacock@texaspolicy.com

Thinking Economically: PUC Ready to Re-regulate Texas’ Electricity Market, and more

Musings on Economic Freedom from the Texas Public Policy Foundation’s

Center for Economic Freedom

 

PUC Ready to Re-regulate Texas’ Electricity Market

The discussion at the most recent PUC open meeting made it clear that a majority of the commissioners are ready to re-regulate Texas’ world-class electricity market, replacing competition with a capacity market fueled by a de facto electricity tax, collected though consumers’ bills, projected to run from $3 to $5 billion a year. The statements in support of a mandatory reserve margin will lead to a regulated system that takes decisions out of the hands of Texas consumers—and puts them into the hands of the PUC.

 

Rather than addressing Texas’ reliability concerns through a free and functioning market, the Lone Star State is instead moving toward a system of corporate subsidies and centralized control. This is the beginning of the end of the world’s most competitive electricity market and one of the great examples of deregulation in the United States. It sends an unfortunate signal that Texas is ready to run its electricity market much like Washington, D.C., is running our health care system.

Here’s our entire lineup on the Texas electricity market.

Farmers' Settlement Highlights Years of Excessive Homeowners Insurance Regulation

The proposed $117.5 million settlement between the Texas Department of Insurance (TDI) and Farmers Insurance is a reminder of the problems caused by years of excessive regulation and litigation by TDI.

For instance, in  Geeslin v. State Farm Lloyds, the courts declared TDI’s actions void and unenforceable, finding the statute unconstitutional and that TDI had denied State Farm due process. In  TDI v. Allstate, TDI’s effort to make the company pay claims not included in its policies was found to be an unenforceable interference of the freedom to contract. Finally, in  TDI v. State Farm the courts declared a rate supervision order from TDI to be arbitrary and capricious. … continue reading

There and Back Again: The High Transition Costs of Electricity Regulation
Just as Texas consumers are beginning to see some slight relief from paying off the $9.5 billion price tag for transitioning to today’s competitive electricity market, the PUC is deliberating whether to add another $3 to $5 billion in annual payments in order to move back toward regulation. ... continue reading

PUC should make the right call

Any championship football coach can tell you that successfully converting a fourth and long does not depend on making a quick decision; it depends on making the right decision. Considering that a bad call could add upwards of $ 4 billion dollars per year to Texans’ electricity bills, the Public Utility Commission of Texas (PUC) should heed that Sunday-night wisdom when deciding the fate of Texas’ competitive electricity market. … continue reading

A Capacity Market by Any Other Name Still Smells Like Big Government

The Public Utility Commission of Texas is now referring to a proposed capacity market as a reliability market. No doubt this name change is because capacity markets are getting a well-deserved bad name in Texas. For instance, in its first five years PJM’s capacity market cost consumers over $50 billion in capacity payments to generators. In Texas, the cost could reach $5 billion a year.

When the PUC commissioners vote to adopt a reliability market or a mandatory reserve margin, they will in fact be voting to adopt a capacity market. Calling a capacity market a reliability market won’t hide these facts. … continue reading

You Can't Make This Stuff Up

The city of Seattle is forcing a 103-year-old Spokane woman to sell her parking lot in Seattle to make way for, well, a parking lot. … continue reading

How to Reduce the Cost of Homeowners Insurance

A Texas state senator recently asked, “How might we offer something to consumers that at least gives them the opportunity, albeit for less coverage, to be able to pay less price” for homeowners insurance? That’s a good question.

There are two main ways to address this and reduce homeowners insurance prices in Texas. First, change the law to eliminate rate and content regulation.  Second, we have to reduce the excessive regulatory structure at TDI. … continue reading

Texas PolicyCast: A discussion on Competition in the Energy Market

Listen to our latest Texas Policycast discussing electricity regulation

Bill

Click here to subscribe to Thinking Economically.

Bill Peacock

Vice President of Research

Director, Center for Economic Freedom

Texas Public Policy Foundation

bpeacock@texaspolicy.com

 

Thinking Economically: Will Higher Taxes Provide Texans with More Electricity?

Musings on Economic Freedom from the Texas Public Policy Foundation’s

Center for Economic Freedom

 

 

Capacity Markets Represent a Bad Bargain for Texas Consumers

In our latest research paper, Kathleen Hunker finds that capacity markets will not improve ERCOT’s capacity or reliability; a capacity market’s inherent inefficiencies and artificial incentives cannot compete with the energy-only market, making it a bad bargain for Texas ratepayers.

 

Will Higher Taxes Provide Texans with More Electricity?

Is Texas running out of electricity? Are rolling blackouts just around the corner? Has the competitive market failed to provide meet the needs of Texas electricity consumers? Are billions of dollars in subsidies to generators the only way to avoid Armageddon?

 

These questions are at the center of a debate in Austin that may wind up costing Texas consumers $4 billion a year through a new electricity “tax.”

 

The answer to all these questions—which is no—is discernible through a straightforward examination of the facts. Yet the Public Utility Commission of Texas (PUC) is moving forward with a process to replace competition in Texas’ electricity market with centralized government planning and corporate subsidies.

 

It doesn’t need to be this way.

 

In the 18 years since Texas began its transition to a competitive electricity market, Texas has been blessed with an abundant, affordable supply of electricity. Prices are lower today in real dollars than they were in 2001. The market provided enough electricity to make it through 2011’s record drought and heat wave.

 

This history hasn’t stopped many regulators and generators from claiming that we will soon be running out of electricity because prices are too low to incentivize new generation. The PUC recently held a workshop to examine these claims and discuss what remedies should be adopted to increase generation capacity.

 

The evidence for this claim, however, is not based on experience—the competitive market in Texas has never run out of electricity because of inadequate investment in new generation. Just the opposite—prices are low today in part because we have too much generation.

 

Because reality won’t cooperate, advocates for moving toward what is known as a capacity market—which allegedly would guarantee more investment by imposing fees, i.e., taxes, on consumers—are using projections from reports as the foundation for their claim.

 

One report by Texas regulators claims to show that there is “missing money” in the system, that there is simply not enough money in the market for generators to earn a profit on new investments.

 

However, two energy economists who have done research on this issue for the Texas Public Policy Foundation discovered that this report didn’t count all the sources of revenue that is available to generators. After a careful analysis of the data, they found that new investment in generation can indeed be profitable.

 

Another report by regulators claims that we won’t have enough generation resources in the coming years to meeting future demand. Yet our recent paper shows that past versions of this report overestimate future demand at least 79 percent of the time and consistently underestimate future supply.

 

Correcting for these factors shows that Texas has enough existing and planned generation to meet demand for at least the next five or six years.

 

Confirming these findings are the actions of the market itself. While claiming the market isn’t profitable, generators and investors have announced at least 5,731 MW worth of new generation for Texas. Some of these new projects are quite recent, having been announced since the PUC’s move to increase the wholesale price caps made profits even more accessible.

 

All this doesn’t mean the market is in perfect shape. It’s not, and it could be improved. But the main problem is not the competitive market; it is excessive government intervention in the market. There are three main challenges: 1) renewable energy subsidies, 2) excessive regulation of the wholesale market, and 3) the regulatory uncertainty created by the PUC’s willingness to entertain a move to a capacity market.

 

The chorus from Austin is nearly unanimous in proclaiming the failure of Texas’ competitive electricity market. But that is simply not the case. While there are challenges in the market, it is working. If something doesn’t change, however, Texans might soon be about $4 billion poorer.

 

Bill

 

Click here to subscribe to Thinking Economically.

 

Bill Peacock
Vice President of Research

Director, Center for Economic Freedom

Texas Public Policy Foundation

bpeacock@texaspolicy.com

Thinking Economically: Resource Adequacy Hype Doesn't Fit the Facts

Musings on Economic Freedom from the Texas Public Policy Foundation’s

Center for Economic Freedom

 

The big question in the Texas electricity market today—at least in the region of the market known as ERCOT (Electric Reliability Council of Texas)—is if we are going to run out electricity. More precisely, the debate is over whether or not prices are high enough to incent enough new generation to keep the lights on and the air conditioners running during the heat of the summer.

 

The Foundation’s answer to this question can be found in a series of paper we have released this year examining the subject. In particular,a paper by economists Robert Michaels and Andrew Kleit and a new paper we released today, The Reliable Texas Electricity Market: Resource Adequacy Hype Doesn’t Fit the Facts, offer the answer that the market has enough existing and planned generation to power Texas’ growing economy well into the future.

 

The answer comes in two parts. First, Michaels and Kleit do some groundbreaking work on evaluating the current generally accepted calculations on peaker net margin and show that the potential for profitability is much greater than seen in the standard calculations. As they put it, “Computations that assume an ancillary services option and rational bidding behavior cast new light on the viability of ERCOT’s energy-only market.” They contend, based on a careful analysis of the data, that new investment in generation can indeed be profitable.

 

The second part of the answer comes from evaluating the soundness of their academic findings by observing the market. If the findings by professors Michaels and Kleit are accurate, then we will find that there is in fact sufficient investment in generation taking place to maintain future resource adequacy and reliability. If their findings are inaccurate, then we won’t.

 

In our new paper, we examine the estimates of peak load in forecasts of demand from 2006 through 2013 and find a significant bias toward overestimation throughout the forecasts. About 79 percent of the forecasts for 2008-13 overestimated the load. If the record peak load caused by the record heat and drought of 2011 is adjusted for, the rate of overestimation rises to 87 percent.

 

Taking this bias into account results in the reserve margin forecasts that show sound reserve margins through 2019:

 

May 2013 Reserve Margin Forecast Adjusted for Overestimation of Load
	2014	2015	2016	2017	2018	2019
May 2013 Forecast	13.8%	11.6%	10.4%	10.5%	9.4%	7.4%
Adjusted	14.02%	12.64%	12.85%	13.81%	13.99%	12.14%
Adjusted w/o 2011	15.15%	13.83%	13.58%	14.14%	14.48%	13.06%

 

Our paper also  looked at the resource side of the past forecasts. This essentially involved looking at new announced generation that is likely to occur but hasn’t been added to the forecasts. Adjusting the Resource forecast for this again results in sound future reserve margins:

 

ERCOT Reserve Margins 2014-18
	2014	2015	2016	2017	2018
Oct. 2012 Forecast	12.1%	9.7%	9.9%	9.8%	10.4%
Oct. 2012 Forecast Plus	17.77%	15.59%	16.06%	15.37%	14.29%

 

It looks like Texas has adequate reserves of electricity for the next five to six years. 

The market itself has actually affirmed this conclusion with recent announcements of 5,731 MW of new generation. While not all of the projects may come online, the level of new investment makes it obvious that companies themselves see opportunities for profit in the market—especially since the increases in the offer price cap.

 

All this doesn’t mean the market is in perfect shape. It’s not, and it could be improved. But the main problem is not the competitive market; it is excessive government intervention in the market. There are three main challenges: 1) renewable energy subsidies, 2) excessive regulation of the wholesale market, and 3) the regulatory uncertainty created by the PUC’s willingness to entertain a move to a capacity market.

 

The competitive market is forever pushing for increased efficiency. So while there are challenges in the Texas market, the market is addressing them. We should let it do its work.

 

Bill

 

Click here to subscribe to Thinking Economically.

 

Bill Peacock

Vice President of Research

Director, Center for Economic Freedom

Texas Public Policy Foundation

bpeacock@texaspolicy.com

 

Thinking Economically: The Push for Subsidies through a Texas Capacity Market

Musings on Economic Freedom from the Texas Public Policy Foundation’s

Center for Economic Freedom

 

Next week, Tuesday, October 8, the Public Utility Commission of Texas (PUC) will hold a workshop examining issues related to maintaining reliability in the Texas electricity market. The Foundation’s Center for Economic Freedom has steadily maintained that free markets are the best way to achieve this. 

For many years, outside opposition to free markets came mainly from left-leaning groups seeking increased government intervention through higher levels of regulation. More recently, the opposition to free markets has come mainly from corporate interests seeking increased government intervention through higher levels of subsidies. Which brings us to the intervention du jour: capacity markets and payments. The Foundation has released two papers in the last week examining capacity markets and if they would work in Texas. 

Last week we released  A Texas Capacity Market: The Push for Subsidies, an Energy Perspective by Kathleen Hunker, policy analyst with the Foundation’s Center for Economic Freedom, examining the potential shift from Texas’ energy-only electricity market into a capacity market. Kathleen explained the problems with the proposed move: “Capacity markets are a redistribution scheme that wastes billions of dollars through corporate subsidies. They offer Texas nothing that it couldn’t get from an energy-only market at a cheaper, more efficient price.”

Kathleen goes on to point out that, “Capacity markets rely on taxes, subsidies, and penalties to recreate the incentives naturally found in an energy-only market. Past experience shows that capacity markets, at best, have a threadbare track record at boosting energy investment. And as recent events on the East Coast have shown, neither will they fulfill the promise of increased reliability that some are touting.” 

Today, we released another Energy Perspective,  Does Competitive Electricity Require Capacity Markets? The Texas Experience: A Summary. This paper, authored by economists Andrew N. Kleit and Robert J. Michaels, senior fellows at the Foundation’s Center for Economic Freedom, examines whether reliability concerns justify the introduction of a capacity market into Texas’ electricity market. It is a summary of an earlier study published in February. 

“Our examination of ERCOT’s history and operation brings a conclusion that the costs of instituting capacity markets in its territory will almost surely exceed any benefits they might bring,” said Dr. Michaels, professor of economics at California State University, Fullerton. “Shifting to a capacity market is unnecessary and would in reality be a source of inefficiency and a barrier to competition that would likely increase the cost of electricity for consumers. 

Dr. Kleit, professor of energy and environmental economics at Pennsylvania State University, added, “We find the economic theory behind capacity markets to be deeply flawed, both in general and when applied to ERCOT. Many of its arguments depend on oversimplified assumptions that are at variance with reality, particularly those that are necessary to produce the ‘missing money’ phenomenon.  Other possible market failures including the inefficiencies of nonprice rationing during shortages are becoming less relevant as markets develop, more users see prices based on marginal cost, and demand management becomes more widespread. The theoretical case for capacity markets is weak at best.” 

Markets work because they represent the collective wisdom of millions or even billions of market participants garnered through billions or trillions of decisions. Government intervention never works as well because it substitutes the opinions of a few policymakers, regulators, and special interests for the consumers and producers in the marketplace. Yet too often the special interests win—often because they are able to build a winning narrative. 

Our series of papers on the electricity market is designed to tell the story of the success of Texas’ world-class electricity market—and the problems of government intervention—through an examination of the facts. The facts show that, despite claims to the contrary, the Texas electricity market is reliable and has adequate supplies well into the future. The reliability of the current market will be the subject of our next paper. The following paper will debunk the claim that a capacity market would provide greater reliability that Texas’ current energy-only market. 

I’m writing this note while attending a conference on the Texas electricity market. As it concludes, the one thing that really stood out for me here is that the people involved in this market are innovating constantly, seeking to overcome any challenges that get in their way. There is no need to radically increase government intervention in the market here. We just need to let competition work. 

Bill 

Click here to subscribe to Thinking Economically.

Bill Peacock 
Vice President of Research
Director, Center for Economic Freedom
Texas Public Policy Foundation
bpeacock@texaspolicy.com

Thinking Economically: Are East Coast-Style Rolling Blackouts Heading for Texas?

Musings on Economic Freedom from the Texas Public Policy Foundation’s
Center for Economic Freedom

 

 

Policy Primer: The Future of Renewable Energy in Texas

Please register now  for the Foundation’s October 16 policy primer, The Future of Renewable Energy in Texas, with Rep. Scott Sanford, Jeff Clark – Executive Director of the Wind Coalition, and Robert Bradley – CEO and Founder of the Institute for Energy Research.

New Report: Texas’ Competitive Market v. Rolling Blackouts—East Coast-Style

Last week students attending classes at Pennsylvania’s Kutztown University felt the heat from unseasonably warm weather—even indoors. One student said, "It was like 90 degrees outside and they decided to turn off the air-conditioning.”

The same day, Indiana Michigan Power was forced to turn off power to 3,300 customers in Ft. Wayne.

These weren’t the only places that faced problems. Last week’s “unusual, extreme heat”—with highs in the 90s—led to curtailments or rolling blackouts in Indiana, Michigan, Ohio and Pennsylvania.

All of this took place in the service territory of PJM Interconnect, a regional transmission organization that is charged with ensuring the reliable transmission and distribution of electricity through “all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.”

A PJM spokesman said 154 megawatts were curtailed, with customers losing power from about 90 minutes to as much as 8 hours.

For Texans, the important thing to note is that the electricity market operated by PJM is a capacity market, most notable for its centralized government control and $54 billion of subsidies to generators since 2007, which is being held up as the model for Texas in our effort to make sure our electricity grid is reliable.

This begs the question; do we really want to run the risk of importing East Coast-style regulatory policies and rolling blackouts in our world-class, competitive electricity market? Texas’ outstanding success in creating jobs—more than twice as many jobs than the rest of the country combined—and sustained economic growth over the last 15 years has come about by rejecting these very same policies. By rejecting competition in favor of a capacity market, not only would we increase the risk of rolling blackouts, but also the risk of economic decline.

Texas did come close to experiencing reliability problems in the summer of 2011 when record breaking temperatures approaching 110 pushed the Texas electricity grid to its limit. However, relying mostly on competitive forces Texas’ electricity market came through unscathed.

Yet, as the Foundation’s Executive Director Arlene Wohlgemuth notes in her commentary this week in the Austin American-Statesman , “Though we survived 2011 without any interruptions in service, the thin reserve margins that summer opened the door for generators to begin the push for subsidies in the form of a capacity market, where generators get paid for generating capacity—regardless of whether consumers need it.”

Proponents of changing to a capacity market fear that the competitive market can’t maintain adequate supplies of electricity to ensure a reliable system—either because they place more faith in government intervention than markets, they don’t believe that it is political feasible to eliminate the intervention, or because it is easier to guarantee future profits in a less competitive market.

Whatever their reasons, there is no evidence that existing capacity markets operating throughout the U.S. are any more reliable than Texas’ energy-only market; in fact, as witnessed by last week’s rolling blackouts the evidence takes us in the opposite direction. There is plenty of evidence, however, that capacity markets make electricity more expensive and will result in billions of dollars a year in subsidies for generators.

The Center for Economic Freedom’s new paper, Competition is Working in the Texas Electricity Market , examines how competition is faring in the Texas electricity market. There are three markers that can help determine how well competition is working: consumer choice, prices, and reliability. This paper examines the first two: a future paper will examine the issue of reliability. We conclude that concerns about the competitive market are unfounded in these two areas. Competition is working.

Texans are paying less for electricity today in real dollars than they did in 2001, even though U.S. consumers are paying more. Additionally, Texans in the competitive region of the state (ERCOT) have choice in the marketplace previously undreamed of in electricity markets. Competition in Texas’ energy-only market is the one factor that sets Texas apart from the rest of the country that would make these benefits possible.

The Public Utility Commission of Texas is considering multiple ways of increasing government intervention in the Texas electricity market place, including a capacity market and an operating reserve demand curve. This effort is taking us in the wrong direction. The answer to increasing the reliability of the Texas electricity market is less intervention—not more.

Our next paper, by CEF policy analyst Kathleen Hunker, will examine the problems inherent in capacity markets. A future paper in this series will provide recommendations to increase reliability by decreasing intervention so the free market can work and provide Texans with an affordable, reliable supply of electricity.

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Bill Peacock
Vice President of Research

Director, Center for Economic Freedom

Texas Public Policy Foundation

bpeacock@texaspolicy.com