DEREGULATED ELECTRICITY IN TEXAS A HISTORY OF RETAIL COMPETITION MARCH 2014 Table of Charts More than $22 Billion in Lost Savings 4 Residential Electricity Price Increases: 2002-2012 6 Texas Electricity Prices Before and After Deregulation 11 Average Residential Electricity Prices Texas and United States 1990-2013 14 New Market, New Complications 21 Electricity Prices Higher Under Deregulation 26 Price Increases: Residential Electric Rates vs. Natural Gas 35 A Tale of Two Cities — Houston and San Antonio 39 Price Increases in Texas and Adjoining States: 2002-2012 42 Residential Electric Price Increases — Texas vs. United States 2002-2012 44 Nodal Project Final Costs Exceed Original Estimates By More Than 600 Percent 54 Electricity $488 More Expensive In 2009 For Texans Under Deregulated System 55 Growth of ERCOT Debt and Operating Expenses 56 More than $4,500 in Lost Savings 58 Average Residential Electricity Prices, 2010 - Areas Of Texas Inside And Outside Deregulation 60 ERCOT Usage Records 64 Stranded Costs Awards in Texas 66 Brattle Report: Comparisons of Policy Options 70 Electricity Prices in 2012: Texas and Adjoining States 74 Customer Complaints 80 Electricity Complaints Filed with Texas PUC 81 How Electricity Flows To Its Users 86 Wind Power: Saving Money For Texans Or Costing More? 90 Wind Classification 93 Table of Contents This report at a glance 1 Year: 2008 ERCOT’s Over-Budget and Behind-Schedule Market Overhaul 47 Executive summary & overview 2 Year: 2009 Major findings 3 The 81st Texas Legislature 55 Recommendations 5 Year: 2010 Nodal Project Goes Live 59 TCAP Members list 7 Year: 2011 The Early Years 9 The PUC Under Sunset Review 61 Year: 1999 Year: 2012 The 76th Texas Legislature - Senate Bill 7 Becomes Law 13 Reliability Questions Continue 67 Year: 2000 Year: 2013 The California Crisis and the Texas Experience 15 Texans Make Payments for Non-Existent Utility Taxes 71 Year: 2001 Appendix A The 77th Texas Legislature — Saying No To Ratepayer Refunds 17 Senate Bill 7 — Key Components 75 Year: 2002 Appendix B The Market Opens 25 Electricity Complaints 79 Year: 2003 Appendix C The 78th Texas Legislature — Staying the Course 30 Excess Mitigation Credits 83 Year: 2004 Appendix D The ERCOT Scandal — A “Crisis of Confidence” 33 Unbundling 85 Year: 2005 Appendix E The 79th Texas Legislature — The Wind Power Initiative 37 Electric Reliability Council of Texas 87 Year: 2006 Appendix F Mixed Reviews and Rolling Blackouts 40 Understanding Wind Power in Texas 89 Year: 2007 End Notes 95 The 80th Texas Legislature — The TXU Buyout 43 About Author 104 P1 • Deregulated Electricity in Texas This Report at a Glance Deregulated Electricity in Texas tells the story of Senate Bill 7, the deregulation law, from the very beginning. This report is an updated version of a similar report released to the Texas Leg- islature in 2009. This report is organized chronologically, with a preliminary section describing the years prior to passage of SB 7. Separate annual sections, beginning with 1999, describe key deregulation milestones every year since lawmakers adopted SB 7. • Deregulated Electricity in Texas includes a num- ber of subsections that highlight key issues. These subsections are interspersed chronologi- About TCAP cally throughout the report. For example, sub- sections include one describing Enron’s activities at the formation of the deregulated market (in The Texas Coalition for Affordable Power (“TCAP”), the 2001 chapter), and one describing stranded a political subdivision corporation, enjoys a costs awards (in the 2011 chapter). These subsec- unique vantage point within the state’s deregu- tions have blue backgrounds. lated electricity market. Originally two separate non-profit corporations — the Cities Aggregation • A description of the key components of Senate Bill 7 Power Project and the South Texas Aggregation can be found in Appendix A. There are several other Project — TCAP pools the resources of its more appendices, including those describing ERCOT, elec- than 160 member political subdivisions to pur- tricity complaints and utility unbundling. chase electricity in bulk for the needs of local government authorities. • Deregulated Electricity in Texas includes charts and graphs that describe electric prices and complaint TCAP members purchase in excess of 1.3 billion data. The charts also examine the effect of natu- kilowatt-hours of power each year for street light- ral gas generation on the market, compare prices ing, office buildings, water plants and other mu- in regulated states versus deregulated states, and nicipal needs. An increase by even a single penny compare price increases among all states over time. in electric rates can cost cities millions of dollars — money that can impact municipal budgets and the ability to fund essential services. High electric prices also can impact the welfare of city residents. TCAP wants what all Texans want: a fair system for delivering electricity. tcaptx.com A History of Retail Competition • P2 Executive Summary and Overview On Jan. 1, 2002, precisely at the stroke of midnight, Texas broke with its long tradition of regu- lating most electric service. It was a colossal policy change. No longer would giant, vertically- integrated utilities maintain their monopoly grip on residential and business customers. No longer would Austin political appointees determine directly the price of air conditioning and lighting homes. Instead, new Retail Electric Providers (REPs) would vie for business in most parts of Texas. In theory, the free market and competition would keep a lid on rates. There would be more choices and better service. These were the promises of electric deregulation. Have electric prices improved? Is service better? And • After arguing for years against market intervention, what about the bumps along the way? With the luxury of some of the largest generators in the state have hindsight, what can we say about the policies that worked been lobbying hard for new mandates and subsi- and those that have not? dies. Generators have argued they need the extra money to help keep up with future demand, but Deregulated Electricity in Texas: A History of Retail Competition base their arguments on faulty projections. attempts to provide answers to these questions. • The Texas Legislature has failed to act on important THIS REPORT EXAMINES THE FACTS THAT: reforms, including some that would guard against market abuse. • Texans in deregulated areas have consistently paid more for power than Texans outside deregulation. All KEY QUESTIONS RAISED IN told, Texans living in deregulated areas would have DEREGULATED ELECTRICITY IN TEXAS: saved more than $22 billion dollars in lower residen- tial elec tricity bills since 2002 had they paid the same • What’s the right balance between system reliability average prices as Texans living outside deregulation. and cost? • Average electricity prices in areas of Texas both in- • What can be done to reduce confusion in the retail side and outside of deregulation have declined in electricity market? recent years. For the first time in a decade, average prices in deregulated areas of Texas have dipped • What reforms would help guard the deregulated below the national average. market against anti-competitive abuse? • How can policymakers guard against waste and inefficiency at the organization that over- sees the power grid? MAKE A POWERFUL CHOICE P3 • Deregulated Electricity in Texas Major Findings Despite Recent Price Declines, Texans have Lost Ground During Deregulation Years Although average electricity prices in Texas have declined since a peak in 2008, they nonetheless remain higher than average electric prices charged in most adjoining states. Relative to electricity prices nationwide, Texans also lost ground during the first 10 years of deregulation. For the 10 years prior to the law, Texans paid average residential prices 6.4 percent below the national average. In the 10 years after deregulation, Texans paid prices 8.5 percent above the national average. Texans in Deregulated Areas have Consistently Paid More for Electricity All told, Texans living in deregulated areas would have saved more than $22 billion dollars in lower residential electricity bills since 2002 had they paid the same average prices as Texans living outside deregulation. The lost savings amounts to more than $4,500 for a typical household since 2002. Customer Complaints Trending Downward, but Still Remain Higher than Pre-Deregulation Levels As the number of electric providers has increased, so has the complexity of electric contracts. The number of discrete billing charges also has grown. Complaints from electricity customers have been much greater during deregulation, as compared to those filed with the Public Utility Commission prior to deregulation. However, customer complaints filed at the Public Utility Commission have declined in recent years, and in 2013 fell to their lowest point so far under deregulation. Market Power Abuse Remains a Concern Although the Texas Legislature adopted a helpful reform in 2011, abuse in the wholesale power market remains a concern. Alleged abuses have contributed to the financial failure of at least one market participant. One major electric company profited by about $4 million from alleged anti-competitive activities — even after paying a punitive settlement in the case. Price To Beat Mechanism Failed to Protect Consumers Deregulation-related charges known as stranded costs will add nearly $7 billion to consumer bills. Texans will continue