If you find this article informative and worthwhile, please support my work by donating if you can.

logo    Deregulating the Electric Power Industry


Legislators, whose knowledge of economics consists of a list of slogans, no matter how well intentioned, can cause insurmountable problems for their constituents.

Two years ago, the Texas legislature began deregulating electricity in Texas. It has not gone well. Electricity rates have skyrocketed to, I believe, the highest in the nation. The people are angry, and legislators are asking questions but not the right ones. Two legislators deeply involved in this deregulation scheme are Senator Troy Fraser and Representative Phil King, who is quoted as having said, "When you have a competitive market that's competitively structured, youre always going to get the best price and the best innovation and the best service," a trite slogan if there ever was one (and not even logically sensible either).

The responses to questions given by the heads of Texas power companies were ludicrous; yet no one seemed to point that out. When why, after pledging to lower prices when the price of natural gas fell, TXU didn't do it, TXU's chief executive, John Wilder, said that the company had surveyed some if its customers and found that they preferred stable prices rather than prices that follow natural gas markets. But no one, apparently, asked, which customers TXU surveyed. How many were households? And no one asked why TXU had pledged to keep its price at the level that corresponds to the natural gas markets after the hurricanes rather than the markets that were in effect before? His response amounted to telling the legislators at the meeting that TXU pledged to keep its price pegged at the highest level the natural gas markets have ever seen. Nice deal for TXU; not so nice for the people of Texas whom the legislature is supposed to represent; yet apparently no one called him to account. Does any legislator really believe that his constituents advocate that price level, and does any believe he could be elected if he campaigned by pledging to keep Texas electricity rates the highest in the nation? I think not.

If nothing else, what these legislators demonstrate is an absolute ignorance of economic principles.

Although it is generally true that competition is preferable to monopoly in any economy that exhibits some measure of free enterprise, one or another of two things is required if such competition is to effectively place downward pressure on prices: one is elasticity and the other is that supply must exceed demand. Neither of these conditions is true in today's electricity market.

A product is said to be elastic if there is at least one other product that consumers can use instead. The clearest examples are in foodstuffs. If the price of beef gets too high, consumers can switch to pork, chicken, lamb, or fish. But electricity is not elastic. No other product exists that consumers can use instead, and in today's world, they cannot do without it. So they have no choice but to pay whatever price the provider chooses to charge. Not a good deal for people!

Notice that I exemplified elasticity with beef, not Swifts Premium beef or Hormel beef, for although there may be slight differences in price between the two, the differential is never enough that switching from one brand to another would matter much. And that has been the case with electricity rates in Texas since deregulation began. TXU's price was called the price to beat and there are other providers whose prices beat it. But when most consumers looked at those prices, they shrugged their shoulders in indifference. The differentials were not enough to make the switch worthwhile, and when TXU successfully got permission to raise its price to beat when the price of natural gas rose, these other providers quickly raised theirs too. So much for competition.

Now someone may say that when one airline's prices get too high, consumers switch to other airlines, and its true; however, theres a difference. In airline travel there's a distinction between high frill and no frill airlines. There is no such thing as high or low frill electricity.

For competition to effectively reduce prices, supply must also exceed demand. Say we have three orchards growing apples, and assume that the growers know that they not only can sell every apple they grow, they know that if they could grow more, they could sell those too. Why would any of the three reduce his price? As a matter of fact, this situation can result in the raising of prices, for a grower may raise his price, knowing that although the other growers apples may sell faster, when they are all sold, consumers will buy his at the higher price. Competition would only result in lower prices if the growers knew that they were unlikely sell all of their apples, and the grower with the lowest price would sell more of his than the others would. But that situation is not true in the Texas electricity market. Supply barely meets demand, and in summer, there are times, as brownouts prove, that it can't even meet demand.

There was a time, of course, when supply did exceed demand, and in order to sell more of the electricity being produced, electric companies had rates that declined with usage; the more electricity a consumer used, the lower the per unit rate. Those days, however, are long past.

So since electricity is not elastic and supply does not exceed demand, competition not only will not, it cannot be an effective price reducer.

What, then, has the Texas legislature done? It has sold the people of Texas a pig in a poke and given a goose that lays golden eggs to the electricity companies. It is difficult to see how this can be construed as representing their constituents.

Of course, if consumers were organized, they could pressure these companies and get really reduced prices and, perhaps, true competition. If half or  more of TXU's customers could be persuaded to switch to other providers even if little or no money would be saved by doing so, TXU's income would plummet and in order to stem the drain, TXU would have to reduce its price. That would force the other providers to reduce theirs too. Unfortunately to exercise this consumer power, consumers need organizational leadership. The governor could provide it, but he won't. Some well-known legislator could provide it, but I doubt that any will. Even a very prominent non-political person could provide it. What, I wonder, are the chances of that? (11/15/2006)