The O Brother soundtrack went gold and shot up the country charts.
With the new of California’s electricity crisis getting worse every day, should Texans worry when this summer brings the first test of a deregulated, competitive electric power industry here? Are blackouts, bankruptcies, and bigger bills in our future? The answer appears to be no for blackouts and bankruptcies—but bigger bills may be a different story.
The law requires Texas’ behemoth electric utilities to transform (no pun intended) themselves into three separate entities—one to generate electricity and sell it wholesale, one to transmit electricity over wires, and one to sell it retail to your home and other local customers. The advantage of the old regulated system was that it was reliable; the disadvantage was that it was inefficient. Utilities could build expensive power plants and hire thousands of repair workers, knowing that they could pass their costs on to ratepayers. Deregulation was supposed to wring the inefficiencies out of the system; competition between wholesalers seeking to sell their power would allow retailers (your local utility) to provide you with cheaper electricity.
So watt (pun intended) went wrong? Should we rethink the experiment here? Not necessarily. Texas is not California, a fact we no longer feel the need to apologize for. State officials say three factors that contributed to the California crisis—a short supply of generated electricity, lack of water that limited hydroelectric power, and political blunders to appease consumers—will not happen here. Here’s how Texas stacks up against California, megawatt-wise:
Short Supply. The underlying cause of the California disaster goes back to Economics 101. What happens when demand exceeds supply? That’s right, class. Prices go up. California conservatively estimated the growth of Internet and computer-based (and therefore power-draining) companies. New power plants were needed, but California hasn’t added significant new sources of power in more than a decade, largely because environmental protection measures and NIMBY (“not in my back yard”) opposition make construction difficult. According to Texas Public Utility Commission chairman Pat Wood, it takes about two years to build a power plant in Texas; in California, with its maze of local and state regulations, the process drags on for six to seven years. In Texas 23 new plants, with a capacity of 8,600 megawatts, have begun operations since 1995, and an additional 24 plants, which are expected to produce another 12,745 megawatts, are under construction—giving the state plenty of excess generating capacity.
Bad Luck. California relies on hydroelectric plants for 25 percent of its power. But a drought seriously curtailed the ability of hydroelectric plants to produce electricity. So California had to look outside its borders for more power, only to find that drought had afflicted the big hydroelectric plants of the Pacific Northwest. It can’t happen here: Less than one percent of electricity in Texas comes from hydroelectric power.
Political Blunders. The bad luck of the drought couldn’t be avoided, but bad provisions in the law could have been. When the price of power rose—in part because of scarce supply and in part because of unanticipated increases in the cost of natural gas used to generate electricity—the retail utilities found that they could not pass the high cost on to their local customers. Their rates were frozen by California law. Buying electricity high and selling it low sent the utilities to the brink of bankruptcy. The low retail prices gave ratepayers no incentive to cut consumption, so demand remained high. In Texas, utilities will be able to pass through increased wholesale electricity costs to their customers.
Some California officials accuse wholesalers of manipulating the price of electricity by withholding supply until buyers are willing to pay higher prices. Among the targets is Houston-based Reliant Energy, which posted a 600 percent increase in the third-quarter earnings of its wholesale energy division; California accounted for $100 million of the $276 million increase. In Texas, though, retail companies will be allowed to make long-term deals with their wholesale suppliers that will limit price swings and greatly reduce the possibility that prices can be manipulated.
While Texas will probably avoid California’s jolting transition to competitive electricity, the possibility remains that the change won’t be completely painless. It’s up to the marketplace to provide cheap electricity throughout a state. If that doesn’t happen, consumers may find that they miss that old utility company, however bloated and inefficient. At least it was there—and so was its electricity.