Texas electricity providers minimizing costs to meet market demands

Residential electricity rates in competitive areas in Texas have declined relative to wholesale electricity prices, which suggests that Texas electricity providers are minimizing costs to meet market demands, according to a new paper from Rice University’s Baker Institute for Public Policy.

Ken Medlock is the senior director of the Baker Institute’s Center for Energy Studies.

In “Electricity Reform and Retail Pricing in Texas,” the researchers examine the impact of Senate Bill 7, legislation enacted in 1999 to reform Texas’ electricity market, unbundling market structure away from monopoly utilities and introducing competition in wholesale and retail electricity markets. The paper’s authors are Ken Medlock, senior director of the Center for Energy Studies (CES) at the Baker Institute; Peter Hartley, economics professor and faculty scholar at CES; and Olivera Jankovska, nonresident scholar at CES.

The study focuses on retail competition and considers monthly residential billing data for both competitive and noncompetitive market areas in the state of Texas between 2002 and 2016. In 2002, when competition was initially introduced, the average price paid by residential customers in competitive areas was between 2 and 3 cents higher than the rates paid in noncompetitive areas. This was before market reforms and retail competition could have had a material impact. However, by 2016, the average price paid by residential customers in competitive market areas had declined to a point of parity with, and in some cases below, the average price paid by customers in noncompetitive market areas. In fact, the price has generally moved in opposite directions across competitive and noncompetitive market areas, and average price in 2016 was higher in noncompetitive areas and lower in competitive areas than it was in 2002.

“The question of whether introducing competition in electricity markets has been successful is often raised,” Medlock said. “When considering metrics for success, it is important to look at the dynamic behavior of pricing, not just averages over a selected time period. Only considering averages through time ignores the dynamic impact that transitioning from one market structure to another may have. In our study, we see clear indications that in the 15 years since competition was formally introduced, electricity service providers have seen cost reductions beyond the costs of wholesale power and labor. This is consistent with what economic theory suggests competition will bring.”

Medlock also noted that wholesale electricity prices increased through 2006 before declining after 2008, which reflects the shale gas revolution and associated reductions in natural gas prices. Overall, the study noted that observed retail price changes clearly reflect shifts in wholesale prices and labor costs in competitive market areas. Moreover, relative price movements are consistent with the realization of cost-reducing efficiency improvements by electricity service providers. In sum, the results suggest that competition has delivered what was intended, Medlock said.

He noted that, as is often the case with any such endeavor, questions remain. In particular, he said he hopes his study will encourage further research on commercial electricity use and pricing across competitive and noncompetitive market areas, as well as a more micro-oriented look at electricity use and pricing to individual households. The major caveat is data availability, although the CES has begun collecting data under confidentiality from large commercial electricity users in Texas.

The paper was funded by the Baker Institute’s Center for Energy Studies and is available online at www.bakerinstitute.org/research/electricity-reform-and-retail-pricing-texas.

About Amy McCaig

Amy is a senior media relations specialist in Rice University's Office of Public Affairs.