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