Unplug "Deregulation" in Texas? CAEM's Response
CAEM has submitted a reply to an article published by Howard W. Horne, Sr., in the Opinion section of the Houston Chronicle on August 4, 2002 (“Unplug Deregulation in Texas”). Our reply was written by Nat Treadway, a Houston resident and Senior Fellow with the Center.

 Horne's Argument
In the article, Horne suggests that, after Enron, we should conclude that deregulation of the electric industry is a bad idea for Texas and the nation. He says that re-regulation of the state’s electric industry is vital to Texas’ continued prosperity, citing the “failed history of telephone deregulation” as proving “the wisdom of leaving a good thing alone.” 

Horne states that there never were any cost savings to be gained from deregulation because under regulation the cost was already as low as possible. And he says that deregulation is not about serving customers; rather, it’s about which company can get the most money from customers in a deregulated market while operating free of regulatory scrutiny.

Horne says there was no profit from electricity sale or trading before deregulation. Utilities borrowed or purchased supply at cost if needed. But Enron and other independent power producers saw potential for profit in this practice, in becoming middle men and taking a share of the transaction costs, a practice, he says, that increases costs to consumers. 

Commercial users who he says “routinely have been able to obtain their electricity at 3 to 4 cents per kilowatt hour while the residential customer was still paying 9 to 10 cents” were already effectively deregulated because Enron and other independent producers were allowed to charge commercial users competitive rates. Thus residential customers paid more than their fair share of the cost of services, transmission lines, and other facilities. According to Horne, Enron and other independent producers based their desire for deregulation on the concept that using the transmission lines of regulated utilities would allow them to provide power at lower cost, knowing they would be spared the expense of building their own lines. 

Advising us to look toward California’s current re-regulation as a lesson for Texas, Horne states that “utility monopoly is not a bad thing for consumers—as long as there is a regulatory body overseeing it.” Under regulation, he says, the salaries and other expenses of regulated companies are scrutinized carefully by a utility commission; with deregulation there is no such review.


 CAEM's Response
Howard W. Horne, Sr., opines that deregulation of electricity in Texas is a bad idea. (“Unplug Deregulation in Texas,” August 4, 2002.) From his opening title to concluding sentence his remarks are mislabeled and misguided. Mr. Horne and the Chronicle provide a great service, however, because the changes in the electric industry deserve greater visibility in Houston, the Energy Capital of the World. 

First and foremost, no “deregulation of electricity” has yet to occur in Texas. A “restructuring” of the industry has occurred, but the electric transmission (high voltage) and distribution (low voltage) wires are more regulated that ever. Senate Bill 7, which passed in 1999, and brought customer choice in 2002, increased the Public Utility Commission’s authority over electric utilities to ensure open grid access to businesses and to improve power reliability. While retail customers in Houston were switched on January 1, 2002, to an affiliate of the utility, rate regulation has been maintained during a transition period. 

Second, raising the specter of “post-Enron facts” highlights another confusion in the public debate. A huge power marketer filed for bankruptcy and the power markets hardly flinched. How is this evidence against competitive markets? That’s a cause for celebrating the resiliency of markets. On the other hand, the foul play of Enron and other corporations highlights accounting malfeasance and 401(k) manipulations. That’s terrible, but it is not an electric restructuring problem; it’s a worldwide problem. Regulation of the accounting industry and calls for CEO accountability are on the way, and none too soon. 

Third, where is the “failed history of telephone deregulation”? I could swear that my phone bill has gone down while I increased my long-distance calling! And what of the explosion of wireless technologies undreamed of a couple of decades ago? If this is failure, we need some in the electric industry! 

Fourth, the PUC has never “squeezed out” all of the savings in the electric industry. The PUC is probably the most effective state agency in Texas (a bias revealed: I worked at the PUC for 14 years), but it does not “squeeze out savings” like juice from a grapefruit. Rather, the PUC deliberately peels off the layers of an onion. No matter how thorough its work, there are always many more layers, and almost everyone is left crying. The PUC does a good job, but it cannot achieve a market efficient outcome. Let’s keep the PUC focused on the network monopoly, and leave the discipline of markets to competition. 

Mr. Horne laments corporate greed, and says that deregulation was always about which company could get the most money in a deregulated market. While pro-market philosophies have recently (and probably briefly) gone out of style, they are a mainstay of our culture. Rather than join the anti-greed bandwagon, I prefer to rationally assess and thoughtfully design a market structure to allow society to prosper from the individual’s desire to make a dollar. Isn’t that the course we’ve pursued for 226 years?

Mr. Horne makes factual errors:

1. Was there profit in electricity before deregulation? You bet there was! Houston Lighting and Power Company (Houston Industries) was a for-profit corporation that was given a return on, and a return of, its invested capital. Houstonians have been paying for the expensive South Texas (nuclear) Project for a decade, and that included a profit for the use of stockholder money. There’s profit in growth too. Growth in electricity usage benefits utilities because revenues usually grow faster than costs.

2. Did utilities borrow and trade power in times of shortage? Yes, but an incredible number of trades did not occur prior to restructuring and competitive pressures. PUC staff studies revealed millions in fuel cost savings and investment deferrals that could have been achieved; however, the regulatory scheme did not reward utilities for common sense trades. Power trading saves millions, and the middleman takes a slice for services rendered. 

3. Weren’t the large customers already “effectively deregulated”? Yes. I agree with Mr. Horne that competitive pressures resulted in lower prices (3 to 4 cents per kilowatt-hour) for some customers. Opportunities for efficient cogeneration (customer production and use of heat and electric energy) abound in Houston. Cogeneration doubles the efficiency of fuel use.

4. Weren’t these large customers paying “more than their fair share”? Not necessarily. The 9 to 10 cents paid by residential customers included fixed costs (under the regulatory formulas) that would have been paid by large customers. I agree that large customers use fewer services as compared to residential customers, but the fundamental service—continuous, on-demand, reliable power—is the same for both customer groups. Small customers were left with high rates; large customers got choices. It’s fairer and more efficient to increase everyone’s choices.

5. Does the big expense come from building transmission lines across the state and into homes? No. Most of the 9 to 10 cents you pay is related to power generation, not wires. 

6. Was “deregulation a fiasco in California”? Yes, the electric industry in California is in disarray, but you cannot have a “deregulation fiasco” absent deregulation. California is paying for its bureaucratic, centralized restructuring scheme, not for anything remotely like “deregulation.” 

Texas’ efforts to restructure the industry have not gone unnoticed. The Center for the Advancement of Energy Markets issues a biannual scorecard to measure progress on energy restructuring. In its most recent Retail Energy Deregulation Index (the RED Index), the Center ranks Texas first in North America with 69 out of a possible 100 points. Deregulated? No. Restructured? Yes, well on its way. Texas beat other states, but the report identifies a number of policy choices that would improve the market. (A free summary of the RED Index is available at http://www.caem.org.)

Has the electric industry in Texas been “deregulated”? No. The new structure has resulted in more regulation of the wires and greater consumer protection. Is the electric industry in Texas in need of “re-regulation”? No. We are wasting time when we try to scare with the words “Enron” and “California.” Will the industry stumble in the coming months and years? Of course it will. But we will learn, adjust, and move on. We are human. Does the PUC have authority to monitor the industry and to make appropriate corrections? By and large, yes, but additional authority could be granted. Given his business acumen and former position as a Houston Industries board member, Mr. Horne is in a good position to advance the dialogue about customer education that will bring low-cost energy service to all customers. Texas is behind other states in natural gas industry restructuring. Let’s turn our attention to retail gas sales and deliberate that!