Musings on Economic Freedom from the Texas Public Policy Foundation’s
Advocates of big government often criticize the free market approach as being simplistic—the answer is always the same, less regulation.
While it is the case the Foundation has determined there is no need for the current provision in HB 1600 granting the Public Utility Commission of Texas (PUC) emergency cease and desist authority in the Texas electricity market, I hope to be able to demonstrate here that we have built a solid case for our finding.
Anytime Congress, a state legislature, or a federal or state agency is proposing a new regulation, there are three questions that should be asked and answered to help determine whether or not the regulations are needed: 1) Are the regulations needed to address specific problems in the market?, 2) Are the problems a consequence of inherent market dysfunction or of previous interventions in the market?, and 3) Will the proposed regulations have harmful unintended consequences?
Below, we’ll take these one at a time when it comes to the emergency cease and desist authority in HB 1600. Meanwhile, for more on HB 1600 and the emergency cease and desist authority provision in contains, please take a look at our HB 1600 bill analysis.
Are the regulations needed to address specific problems in the market?
The recommendation to grant emergency cease and desist authority to the PUC came from the Texas Sunset Advisory Commissions’ Staff Report on the Public Utility Commission, so this should be a good place to start our search for problems in the market.
The Sunset Staff Report cites two types of problems as areas where the PUC needs the emergency cease and desist authority: electric reliability and action that could cause an immediate harm to consumers, such as disconnecting consumers during a summer disconnect moratorium. But the Staff Report gives no examples of actual problems that have occurred in the market. In fact, the staff report spends all of two paragraphs building its case for emergency cease and desist authority and nowhere mentions a single example of an actual problem in the market.
Next, we’ll move on to Potomac Economics, the Independent Market Monitor for the ERCOT Wholesale Market. The Market Monitor watches the market very closely and has for many years made recommendations on how the operation of the market could be improved. It in latest annual report, the Market Monitor “find[s] that the ERCOT nodal wholesale market performed competitively in 2011.”
Finally, in neither the bill analysis or fiscal note associated with HB 1600 is there any mention of problems in the market that need addressing. And given that the Legislative Budget Board says there is “No significant fiscal implication to the State is anticipated” by HB 1600, it can’t have determined that the new authority would be used very often. The Sunset Staff Report confirms this when it notes the “PUC has issued
only one cease-and-desist order using its current authority since fiscal year 2007.”
Are the problems a consequence of inherent market dysfunction or of previous interventions in the market?
We might stop after determining there are no problems in the market to be addressed by the proposed cease and desist authority, but let’s keep going for the sake of completeness. There is one problem in the Texas electricity market that has everyone’s attention right now: resource adequacy. Out of this also comes concerns about reliability, which is one of the issues mentioned by the Staff Report. But the problems of reliability are driven mostly by government intervention in the market place.
Josiah Neeley and I have documented how renewable energy subsidies have harmed the reliability of the Texas electric market. I have also shown the regulatory creep that has taken place in the last decade as policymakers have not been able to let go of their ability to control the outcomes of the market—this includes the ability to disgorge revenues, increasing the state’s energy efficiency goals, and requiring PUC approval of mergers and acquisitions. Both of these have contributed to the current problems we have in the market today. Solving our reliability concerns involves lessening regulation, not increasing it.
Will the proposed regulations have harmful unintended consequences?
This brings us to the last question. The years of regulatory creep and increasing intervention in the Texas electricity market place at both the state and federal level have had the unintended consequences mentioned above—reducing the reliability of the Texas electricity market.
However, there are more unintended consequences than this.
Because Texas is already the most competitive electricity market in the world, it has more market risk than anywhere else, including our neighboring states with which we are competing with for dollars to build new generation. This would be fine if it stopped there. More risk means more opportunity for reward, and businesses are generally used to that.
Along with the regulatory creep we have seen, though, has also come more regulatory risk. And because higher market risk provides the opportunity for both higher returns and higher losses, the regulatory risk has a multiplier effect here and thus could be even higher in Texas than in other, more regulated states.
This means that the capital needed to build new generation capacity in Texas may well be headed elsewhere. Why should a generator take more risk in Texas to earn a higher return if regulators can simply take that return away from him? Loss of capital invested in Texas means fewer power plants, less reliability, and higher prices.
There is absolutely no need for the PUC to have emergency cease and desist authority. No one, in the more than three years this issue has been studied, has pointed to a single instance where it could have been employed to improve an outcome in the market.
The cease and desist provision in HB 1600 is regulatory overreach that will harm the competitiveness of the Texas electricity market and increase the cost of electricity for Texas consumers. It should be removed from the bill.
You can find this and all of the ThinkingEconomically posts on the Foundation’s website and at www.thinkingeconomically.net. We will be adding automatic subscribe and unsubscribe functionality to this email. In the meantime, if you’d like to do either, please send an email to bpeacock@texaspolicy.com.
Bill Peacock
Vice President of Research
Director, Center for Economic Freedom
Texas Public Policy Foundation
o: (512) 472-2700
c: (512) 965-6476
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