Guest Commentary: Texas’ deregulated power market should evolve to meet future challenges

By J. Paul Oxer, Julie Parsley and Pat Wood III

Reliable electricity is something that most Texans take for granted.  We flip on the switch and assume—in good weather and bad—that the lights will come on.  And that has been the case. Our sturdy grid is the foundation for robust economic investment, our open markets brim with innovation, and our power prices are lower by any measure than they were a decade ago under regulation.   We want to keep it that way.

When the competitive electricity market was introduced, old, inefficient power plants were operating across the state, largely because they were profitable in a regulated environment.  But in a competitive market, these plants fell to more efficient generation that is cheaper to operate.   Newer plants were financed not by raising money through regulated electricity rates you used to pay, but through investment by the companies that operate in the competitive market.  Shifting this risk from regulated utilities to competitive power suppliers has been one of the great victories of the Texas model, yielding price and environmental benefits far greater than was originally envisioned.

Fortunately, our Texas economy is booming, and while this growth is good news for Texas, power demand is growing faster than power supply, putting stress on the electric grid.   And if the drought continues, that stress will only rise faster.

The Public Utility Commission (PUC), which oversees all of this, is looking this week into whether adjustments to the market rules are needed to keep our power market competitive, reliable, and efficient.  The PUC is essentially looking to provide an “insurance policy” for the electric grid.  We insure our health, homes, and cars.  Insuring our power market is smart as well.  Regulated and competitive markets around the world do this by adopting a formal “reserve margin.”  This makes sure that we have extra generation on hand in case of sudden weather changes or unplanned outages.    The Electric Reliability Council of Texas (“ERCOT”), the organization that runs the Texas electric grid, monitors the supply/demand balance and has concluded it will reach a critical minimum soon. To protect against blackouts, it’s time to treat power generation like we do driving, and require insurance in the form of a reserve margin.

Adopting a reserve margin has caused concern among some who raise two basic issues: this insurance policy will raise electric bills; and it is incompatible with the free, competitive electricity market that Texas enjoys.  As to cost, rules can be developed so the cost to retail customers, if any, will be as minimal as possible.   Determinations about the size of the reserve margin and how the “premium” would be collected will be made in early 2014, and those would impact overall costs.   ERCOT’s counterpart in the mid-Atlantic states adopted a more traditional form of insurance program a few years ago and actually found overall costs dropped, presumably due to reduction of blackout risk.   We also see this price drop effect in world oil markets, whenever the threat of war in the Middle East is lessened.

As for the second concern, many competitive markets have insurance-type rules or “stopgaps” to ensure that they operate properly.   For instance, similar rules govern the New York Stock Exchange to prevent it from “crashing.”  Surely no one would argue that the New York Stock Exchange isn’t part of the free market simply because these protective rules are in place.  A program much like the reserve margin already exists in a limited form in the Texas competitive electricity market.  Some large industrial customers receive payments from ERCOT if they drop off of the electric system when asked.  It seems only fair to broaden such a demand response program to residential and small commercial customers as well, which will help ensure the reliability of the system and potentially reduce costs.

When the market rules were first written at the opening of the market twelve years ago, outdated generation plants ruled the market, but those electric dinosaurs are now extinct.  Now we must bring our market rules into the present, and match them to a grid with much more renewable generation, newer-technology gas plants, widespread advanced meters, and many more market-smart customers.

Texas is rightly proud to rely on markets rather than government.  A sad gaze at our federal government illustrates the contrast.  But markets don’t just happen:  they work best with good policy, good infrastructure, balanced market rules, and vigilant oversight.  We deserve no less.

J. Paul Oxer is chairman of the Texas Department of Housing and Community Affairs and managing director of McDaniell, Hunter & Prince Inc., where he specializes in transaction management and project development for investment in utility infrastructure. Julie Parsley served on the Public Utility Commission of Texas from 2002 to 2008, appointed by Governor Rick Perry. Patrick Wood, III served on the Public Utility Commission of Texas from 1995 to 2001, appointed by then-Governor W. Bush.  He served as Federal Energy Regulatory Commission Chairman from 2001 to 2005.