Texas and the State of Deregulation

Episode ID S1E05
May 25, 2021

There is plenty of blame to go around for the Texas power outages this past winter. But what role, if any, did deregulation have? In this episode of Power Plays, CoBank’s Teri Viswanath and Tamra Reynolds visit with two leading policy experts for their insights: Dr. Michael E. Webber, chief science and technology officer at ENGIE and Josey Centennial Professor of Energy Resources at The University of Texas, and Paul Griffin, executive director of Energy Fairness and former senior government affairs advisor for Tri-State Generation & Transmission Association.


Teri Viswanath: Welcome to Power Plays a CoBank knowledge exchange podcast series in audio program, where we connect you with top energy, environmental innovators who share their insights, experience, and market observations. Hello, I'm Teri Viswanath, the lead economist for power, energy, and water at CoBank. I'm joined today by cohost and CoBank regional vice president, Tamra Reynolds. Hey Tamra.

Tamra Reynolds: Hey Teri. I'm excited about this episode where we talk about the notion of resiliency through the lens of market structure. I know that both you and I wanted to understand whether February's electricity crisis exposed any flaws in market design and regulatory oversight and frankly, to be blunt, are consumers actually worse off because of deregulation?

Teri: I remember you and I discussed the series of articles that the Wall Street Journal published in February and in March that explored deregulation from a consumer's perspective. The first had the attention-grabbing headline Texas electric bills were $28 billion higher under deregulation. For that article, the Journal calculated separate annual statewide rates for utilities and retailers by adding up all of the revenues each type of provider received and dividing it by the kilowatt-hours of electricity sold.

Based on their assessment from 2004 through 2019, the annual rate for electricity from Texas’ regulated utilities was 8% lower on average than the nationwide average rate while the rates for retail providers average 13% higher than that nationwide rate. Their follow-up feature, deregulation aimed to lower home power bills for many, but it didn't expanded the analysis to include other deregulated states. With the upshot however, it was the same. In nearly every deregulated state The Wall Street Journal found that retailers charge more than the incumbent utilities and each of the five years from 2015 through 2019.

Tamra: Wow. That's interesting. Deregulation was advocated on the basis that electricity consumers would ultimately pay less over time as a result of competition. Just like with many other competitive marketplaces like a mortgage lending market or anything else. We caught up with Paul Griffin, the executive director of Energy Fairness and former senior government affairs advisor for Tri-State Generation and NRECA here's what he had to say about affordability and reliability.

Paul, you wrote this really great and compelling op-ed that appeared in Utility Dive back in February the entire crisis had unfolded and the title of that op-ed was, “The real problem in Texas, well, it's deregulation. You make a really good point, I think it's very compelling, which is the fact that part of the problem is we might not have adequate resources. Talk to us a little bit about that story, what the situation was before deregulation, and then when deregulation occurred, how did that change the landscape with regard to resources?

Paul: Well, with respect to resources, we were-- Let's start out by saying that before deregulation was implemented in the state of Texas the lead proponent of deregulation, Pat Wood boasted about Texas is the lowest star state's reserve margin being 25%, which is great. It was the best in the country. Fast forward 15 years or so into deregulation and it had gone down to about 7.5%. There's reliability put at the forefront of why deregulation was a problem.

That's what led us to start looking more and more into this from the reliability perspective, and then jump to July 2nd, 2019, when there was a Texas Sizzler if you will, and you see rates, retail rates jump about 25-fold within a day to $920.48 a kilowatt-hour, then you have the affordability issue. You don't have either affordability nor reliability, and you definitely don't want affordability or liability, you want both. That's what prompted us to write that article or me to write the article.

Tamra: I think you shared an interesting chart with us before we got on this call that really compares average residential rates in 2020 that were paid by consumers. It breaks it down between states that were regulated and deregulated, or however you want to say deregulated, reconstructed markets for the 48 states, the lower 48, which Alaska hates to hear us say that. 8 of the 10 highest rate states were notably deregulated. Can we talk a little bit about what that means?

Paul: It was quite startling, the difference in rates when you look at the deregulated versus the regulated marketplace. It might sound good on paper, retail choice or deregulated marketplace, but at the end of the day, when it comes to affordability and reliability, it's just not. I think if anything, this storm did us for a Winter Storm Uri did as the favor for the short-term pain that it inflicted on about 4 million Texans. It did us the favor of actually peeling back the layers of what deregulated marketplaces really mean. Once people started to study what they really meant, we saw that from a perspective of affordability and reliability, it's really not a great deal.

Tamra: Teri, our discussion with Paul seemed to indicate that consumers might not be better off under deregulation, but other smart minds have disagreed on this point. More to the point on Texas, I have deep ties to that state. It's just not clear to me that different market design would have insulated the state against the crisis that occurred in February or that regulation would have solved that. There's just more to it than regulation versus deregulation.

To more fully explore the discussion around market design, we reached out to Dr. Michael Webber. Michael serves as the chief science and technology officer at ENGIE and is also the Josey Centennial Professor in energy resources at the University of Texas at Austin. He's authored more than 400 publications, holds six patents and serves on the advisory board for Scientific American. This was that discussion, Michael, welcome to our program.

Dr. Michael Webber: Thank you so much. I appreciate the opportunity to be part of the conversation

Tamra: By way of background, it's always been assumed that certain industries can't support true competition. US electric utilities were historically thought to be the top of that list. Michael, can you provide us with a little background on deregulation with particular attention on Texas?

Michael: Sure. Why don't I just add a little bit more to what you said about regulation because for the first 100 years or so of the electric utility, or the gas utility, or the water utility or the wastewater utility, there were two parts of it that went hand in hand. One was this concept of a natural monopoly and the other is this concept of regulation. The natural monopoly is one where there is a lot of infrastructures, which you said is expensive, but one is also that it's a set of equipment you don't want to duplicate.

It doesn't make sense to have two sets of wires and poles or two sets of water pipes or two sets of sewers and that kind of thing. It makes sense to have one set of all of that expensive and extensive infrastructure and that creates a natural monopoly. The trade-off for having a monopoly where you're protected from the competition is that you would be regulated, that your company would provide services, but what was determined to be a fair rate. This is the trade-off, this natural monopoly with the regulated monopoly or the regulation.

Tamra: That's the economies of scale, it was just the cost, right, economies of scale.

Michael: Yes. If we can divide the cost of wires and poles over everyone in the service area, rather than having three sets of wires of poles divided over a third of the service. It just drives the cost down. It gets economies of scale. It also lets you do a couple of things. That regulated version for 100 years, let us expand the reach of the utilities to really improve access for everybody. If you had a regulated monopoly or utility, you could justify stringing the wires and poles another few miles down the road to get to that retiree in a country road, whereas it might be too expensive otherwise.

Urban areas, maybe you could justify the cost more easily and so with the natural monopoly and the regulated rate structure, we really can prioritize increasing access. That was the motive for 100 years, it was 100% access to pipe water, sanitation, electricity, gas, where gas makes sense, this kind of thing. This natural monopoly and regulated monopoly went hand in hand and the ethic was really reliability, affordability, and access.

Well after 100 years or so of that, we had 100% access. Everyone had electricity and that led to the deregulation movement, which wasn't so much about access, but more about the efficiency of the markets or price or innovation, these other priorities. It was no longer about bringing the wires and poles up every home, but making sure they operated in the most effective way possible and that’s where the idea was like, “We’ll use markets, markets are efficient,” that kind of thing.

We had a regulated era for 100 years and we're moving into a deregulated area where it's deregulated in Texas and some parts of the Northeast and California, but not everywhere and that's to achieve different goals. We've had some hiccups as you know, so we can talk about, well, what are the strengths of regulation versus deregulation?

One more point I want to make is it was the industry that asked to be regulated. It wasn't- -of overburdened government coming in and interfering and saying, “Ya’ll should be regulated.” It was really industry said, “Will you please regulate us so that we can have a more organized infrastructure? It would be cheaper and more effective for everybody.” It was a request by industry in exchange for the monopoly. We forget that. Today we act like government is intruding in opposing yourself to regulated industry when in fact historically it was industry that asked to be regulated.

Tamra: Michael, one of the considerations that often is talked about for supporting deregulation is the idea that consumers benefit from competition. Same thing from a lending perspective as well, if there’s more people competing you get the best deal. Supposed to make electricity more affordable. Can you give us more perspective on that?

Michael: The theory of market competition, the motivation for it is that you'll get more efficiency and therefore lower costs for consumers. We have evidence of this all sorts of places with competitive automobile markets, we can get a nice car for cheaper than in the regulated markets in other countries. The same is true with food in many things. We have competitive markets in many places in our experience and it leads to more consumer choice and lower prices for consumers, maybe with some trade-off, by the way, in reliability.

We have smartphones today, which are less reliable than our old regulator phone. By the way, they're more expensive, but they give us more features. It's not always cheaper, but maybe a better consumer experience. My smartphone is so much more expensive than my old landline, but it does so many more things for me. It's not just cheaper for consumers, but a different range of options for consumer experience.

In deregulated markets, there were different aspects for it in Texas and elsewhere. Deregulating the competition at the wholesale side, letting different types of power plants compete in a market and deregulating the consumer side in most places although there are cities like Austin and San Antonio and elsewhere where there's still a natural monopoly or regulated monopoly. You don't have consumer choice there, but you might have competitive choice on the wholesale side.

The wires and poles in the middle are regulated by the way. We didn't deregulate everything. We still kept the natural monopoly part of it and regulated that but other parts where there's room for many buyers and sellers, we opened up those markets. The question is what did that do for us? There are many things. Prices came down in Texas for the most part and carbon dioxide emissions went down too. This was a good economic environmental story. The rates might have been higher in Texas than some regulated communities, I think regulated monopolies in Georgia and elsewhere where they had lower rates, however it's not the rate that matters, it's the bill and sometimes these get confused and some of the reporting.

In Austin, Texas, some people complained that our rates are a little higher, but our bills are lower because we've used a higher rates to invest in energy efficiency for about 30 years. There's some confusion between rate and bill and what matters is total outlay. Then there's the other confusion, which is there's how much you pay each month and there's how much you pay every few years when something goes wrong. That's what we had with Winter Storm Uri a couple months ago, a 100 to $200 billion event. We had cheaper prices, but then we weren't prepared for these multi-bazillion-dollar events and that's expensive.

It becomes pretty complex quickly like, do we want the efficiency of the market or do we want the reliability of the regulated thing or some combination of both? I think there's room for a hybrid solution, which is in the world of auto safety, food safety, elevator safety, aviation safety, you name it, the regulators set some minimum safety and performance standards above, which you have competition. When you go to the grocery store, you have all sorts of options for food, but you have some minimum expectation that all of it will be safe, that it won't be bad for you, or maybe not poisonous, I should say. It might be food that's junk food, but it won't be poisonous.

The food meets a minimum standard for safety and the same for automobiles. They all have airbags and antilock brake systems and that kind of thing, but you can choose what car you have. There's room for regulation in Texas to meet some minimum performance standards so we don't have the $100, $200 billion surprise and have a competitive market above it. There's even room for regulation above that for prices but the trade-off is, if you have regulated prices, you might not invite the cleaner options. A lot of the cleaner options like wind and solar compete very well in these competitive markets.

We have to be careful about what we mean by regulation although regulated markets are often much dirtier and they are sometimes cheaper by rate of more expensive by bill or other way around and they are more predictable though. They don't tend to have the expensive mistakes. Having said that, the regulated markets just outside Texas during Winter Storm Uri also had their problems, they didn't necessarily have better performance.

Tamra: You're making a really good point here. The regulators are given a skip and in this case, what you're saying is probably not the case because we still need that. We can't resolve a free market in such a way that consumers will continue to be protected.

Michael: The question is for energy, what level of government involvement do we want? Do we want it on the price setting part or just on the safety part or some combination? There's definitely examples in other states about how to do it. Generally speaking, there's a very prominent role for government in safety. I wouldn’t say that's public safety, consumer safety. There's a prominent role for government in public safety to make sure that the lights stay on and the heaters stay on if there's a winter storm, that kind of thing, environmental safety, so that the smokestacks don't cost too much pollution, that kind of thing and whether or not the government should set prices is open for debate.

In Texas, which has a mostly competitive market, the government absolutely has a role of setting prices on the wires and poles. So it's not even a free market in Texas, which is deregulated and even within Texas and the co-ops and some of the municipal utilities also have price setting that's not set by the open market. Even in a Texas where we say we have a free market, we have some level of regulation both on safety and on price setting but I would say there's certainly a lot more room for government engagement on public safety and reliability.

As we saw, there wasn't enough public safety and reliability with Winter Storm Uri. Maybe there's a role on price setting, but this gets controversial because when the government starts to set prices, they might set it based on campaign donations rather than public good or cleanliness or other things. This is a tricky path to go as well I would say. I tend to defer to my default thinking that it's good for the government to set the rules of the game, the labor safety environmental standards, and then let the markets compete within those rules, the exception being for natural monopolies but we'll see, I think what we have now isn't working so it's time to rethink.

Tamra: Yes and the not working part, four minutes away from a complete shutdown, is that what we're hearing? To reenergize the electric grid from a complete shutdown or a black start could have actually meant a longer period of time without power. I think your point about what level do we need and certainly, there seems to be this baseline that we need to make sure is present.

Michael: Yes, we were within seconds to minutes of complete collapse for the Texas grid, which would have been amazing and uncharted territory for us. We don't know how long that takes, certainly days or probably weeks to months to bring the whole system back up. It's like a design of dominoes where you knock the dominoes down, they all fall down, they maybe a neat pattern.

You can't set them back up immediately. You have to set them up one domino at a time. That's the way it is with the grid with power plants. When they all go down, you bring them back up one power plant at a time. There's hundreds of them in Texas, each one takes hours or days to bring up and you have to bring them up in sequence. This is neocatastrophic and the question is what do we do to prevent that?

I think there's room for more engagement by policy-makers and decision-makers to set minimum expectations or minimum standards for safety and reliability, which could be winterization or other investments or things we can do and we didn't have that. We took our eye off the ball, so to speak and said, “Well, the markets will figure it out,” but that kind of thing, the markets have trouble figuring out because the incentive in cutting those corners on safety in particular is a recurring theme and industry for 100 of years. That's why we have elevator for safety laws, and that’s why we have automobile safety laws, and food safety laws is because you don't want the moral hazard of a company thinking, “Well, if we cut corners, we’d make more money,” when cutting those corners put people at risk.

We, I think generally agree among the parties that engagement for safety as an appropriate role of the government. Whether the government should set prices too, I guess we can debate but I think that there's room for more to set those minimum standards because the market has trouble getting us there.

Tamra: You made a good point about the Texas market, when we think about a deregulated market, which is deregulated markets are prohibited from generation and transmission ownership, the simple idea, but even here there's this nuance. If we begin to take a look and think about the current construct of centralized generation and transmission, what we've witnessed now is even in those regulated markets with utilities, what’s occurring is developers are actually developing a significant, a majority of the resource base.

Even the idea of traditional utility ownership from centralized generation, transmission, distribution, even that model has evolved in the marketplace. I think a lot of blurred lines in terms of deregulation and pure regulation in terms of even the market construct.

Michael: This is a good point. If you looked at the history, we talked about it earlier, where natural monopolies and regulation go hand in hand. That makes sense if you have large central generating stations that are far away and then wires and poles and that kind of thing. But as we were coming into more technology-enhanced future with more micro grids, or storage, and solar panels, and distributed generation, there's less of this natural hand in hand thing because you don't have 10 power plants serving a large city. You might have tens of thousands of small power plants on our rooftops.

This old monopoly model doesn't make sense but you need price incentives and structures that reward people for how their power is generated on the roof, or if they give access to the system. I think this all says that the whole model's changing. The technologies are changing. The consumer preferences are changing. The policies are changing around cleanliness and that kind of thing. The answer we had in the late 1800s might not be the answer, but the answer we had in the 1990s also might not be the answer. We need new business models, which applies new regulations as well.

Now in Texas, we have such a mixed story because we have almost pure competition on the retail side, say in Dallas and Houston, but we don't have that. We have regulated markets in Austin and San Antonio. Austin with its regulated market was able to justify the expenses for winterization and weatherization had a higher performance. You could argue that the regulated market of Austin did really well because it could justify the investments, that kind of thing, and it protected its people so to speak.

You could also argue that the regulated markets and Louisiana did badly. They got hit by the same storm and they failed. The same answer a regulated market doesn't work the same in all places. It depends how it's applied. By the way, some people say, “Well, we need competitive markets. We just need a capacity market instead of an energy-only market, which is a detail of the market structure.” A capacity market would have asked for another two to three gigawatts of capacity, but we were 20 to 30-gigawatt shy.

It's not clear that better market design would have solved it. It's not clear that regulation would have solved it. Probably we need a more sophisticated version of all of it and that's where I say we need some minimum standards through regulatory expectation and mandate, and then maybe competition above that to set the price but we also need to protect the consumers from these price spikes. There's no way consumers have the time or know-how to watch the markets in real-time to protect themselves from these price spikes. We can't do that. We don't do that in any other market. Why would we expect people to do that in the electricity market?

Most other markets have rules against say price gouging and things like that so there are consumer price protections built-in, in other markets. This is all to say, there's no easy answer. It's pretty messy, but I think we can get to something better and I think the way to get somebody better is probably not to get into the culture wars of wind versus gas or fossil fuels or all good, or even the definition of what firm power is that kind of thing. I think we just need to plan for the future and do so intentional.

Tamra: Teri, I came away from our discussion with Paul and Michael with a better understanding of the complexity of the problem. To Michael's point, there is room for more engagement by policymakers and decision-makers to set some of those minimum expectations or minimum standards for safety and reliability. With regard to market design, well, as we've discussed in prior programs, the technology might be driving a more nuanced answer.

Teri: I think you're correct. We still have a landscape full of somewhat remote, large central generating stations, but we also have tens of thousands of small power plants on our rooftops. A natural monopoly, as we consider electricity supply, it's changed. We hope you've enjoyed this episode of Power Plays a CoBank knowledge exchange podcast series.

Tamra: Be sure to like us on social and rate us on your favorite podcast app.

Teri: Join us next month for our electric vehicle podcast.

Speaker 4: At the end of the day, these things are fun to drive. That is very important to most American consumers is that their car is fun because we are very passionate about our vehicles in this country.

Tamra: Just in time for the summer driving season. What will it take for Americans to rev up EV adoption?

Teri: And how the speed of adoption might vary for rural communities? We'll cover it all on our next Power Play series. We’ll see you then.

Disclaimer: The information provided in this podcast is not intended to be investment, tax, or legal advice and should not be relied upon by listeners for such purposes. The information contained in this podcast has been compiled from what CoBank regards as reliable sources. However, CoBank does not make any representation or warranty regarding the content, and disclaims any responsibility for the information, materials, third-party opinions, and data included in this podcast. In no event will CoBank be liable for any decision made or actions taken by any person or persons relying on the information contained in this podcast.

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