Deregulation = more competition and lower prices. Or does it?

What is deregulation?

Until a few years ago, the power market in Texas was a monopoly, and consumers had no choice about the provider supplying their electricity needs: one utility managed the transmission, distribution and sales of electricity to consumers. On January 1, 2002, the Texas Senate passed Bill 7 (SB7), which was to phase in deregulation of the electricity market in the state over several years. Since then, Texans living in deregulated areas have had the choice of remaining with their existing Retail Electric Provider (REP) or switching to one which can offer them a better deal. Regardless of the REP you may choose, the reliability of your service will not change: While REPs sell you the power, the incumbent utility in your area prior to deregulation still owns and maintains the local power lines, maintains the transmission and distribution of your electricity, and is not subject to deregulation. The Public Utility Commission of Texas (PUCT) is the state agency charged with regulating and overseeing public utilities in the state, and is responsible for certifying REPs. The PUCT also ensures that the safety and reliability of your delivery of electricity remains constant, regardless of the REP you choose to supply your energy needs.

So if deregulation brought about more competition, why am I not paying less than I was before?

Deregulation was supposed to do for the power industry what it did in the airline and telecommunications industries: bring consumers lower prices and more competition. Electricity market deregulation has unfortunately not yet produced such clearcut positive results for consumers, at least as far as the price they pay for their electricity is concerned. In Texas's deregulation, one concern with setting prices in the market right away was that incumbent electricity providers would undercut the prices of new entrants, preventing enough competition and creating a continuation of the existing monopoly of providers. Thus, the SB7 bill introduced a phase-in period during which a price floor (the "Price to Beat", or PTB) would be established (for incumbent electricity companies) to prevent such practice from occurring, and thereby allowing new market entrants to become established. New market entrants could charge a price below the PTB, but incumbents could not.

Are increased power costs due to deregulation, or to a general increase in the cost of electricity? And who is paying for this?

Electricity costs have increased significantly over the last decade in the United States, both in regulated and deregulated areas. That said, it is of relevance to note that while electricity prices to customers in Texas increased 43% from 2002 to 2004, the costs of inputs (e.g. natural gas) rose even faster - by 63% - showing that not all increases have been borne by consumers.

Has anything good come out of deregulation?

The competition created as a result of deregulation has resulted in a number of improvements in the power market as a whole (e.g. increase in the market share of "green" energy, such as that produced by wind). The competition brought about by deregulation also encouraged power-plant owners to modernize, resulting in newer plants being about a third more efficient than the ones they replaced. What has not changed much, however, is the composition of fuels used to make electricity: Natural gas still accounts for about half of Texas's power generation, compared with about 20% for the country as a whole. It seemed logical at the time to keep this fuel composition ratio, as Texas has copious amounts of natural gas, which burns more cleanly than coal. However, between 2002 and 2008, natural gas prices rose about five times. When natural gas prices rise, the increase is felt instantly in power prices across the state, as wholesale electricity prices are pegged to the cost of natural gas: even electricity generated from wind, nuclear fission or coal is priced as if it were coming from natural gas because of its dominant position in the Texas marketplace.

Why do energy rates sometimes increase significantly for certain providers?

REPs purchase energy wholesale from power generators, and then sell the energy to consumers. Most energy retailers try to sign long-term deals with power generators to get the power they need, in order to keep their energy purchasing costs down. However, at times, demand surges, and retailers need to buy extra power on the state's daily spot market - a daily exchange where power is bought and sold. Natural gas plants that produce more power to meet excess demand on hot days charge high prices that all generators - even low-cost coal plants - receive, resulting in prices that can sometimes reach $4 a kilowatt hour (i.e. about 40 times the national average!). In turn, such high spot market prices can also affect rates for long-term contracts (by contrast, regulated utilities must charge customers the average cost of all their generation). Some retailers report they've had difficulty finding suppliers willing to sign long-term deals to sell them power, raising suspicions that generating companies may be intentionally forcing retailers to get supplies through the expensive daily auction.

High spot market prices have at times resulted in the failure of REPs. When REPs go under, customers' accounts are automatically switched to "Providers Of Last Resort" (POLR) - who nearly always charge higher rates (sometimes very significantly so). Many customers don't find out about it until their next bill.

What can I do to make sure I'm paying the most reasonable prices possible?

BestPowerDeal.com was created to help energy consumers in Texas make the state's competitive energy markets work to their advantage, and is the ONLY site which provides you with a COMPLETE overview of the REP choices available. You will be able to compare the costs offered by all of the REPs in your area, choose the one most appropriate to you, and in just a few clicks, make the switch from your current provider - and begin saving!