Power plans spark shock and awe
Deregulation makes for murky and confusing Texas electricity market
Abasic economic principle holds that the key to well-functioning and efficient free markets is transparency, a state of affairs that allows participants to have the same access to information to make decisions on what to buy and sell. It works in stock, oil, and currency markets, where prices and other essential information are available to everyone.
But in Texas, where electricity deregulation was touted as unleashing the power of free enterprise, power markets tend to be more like frosted glass than clear panes. The murkiness extends from retail plans with confusing pricing and terms to wholesale markets, where bids are kept secret, to transmission, where the biggest commercial and industrial power users can game the system to push costs onto small businesses and households.
Texans have paid for this lack of transparency. For nearly two decades, consumers living within competitive power markets of Texas — which cover about 85 percent of the state — have consistently paid higher prices for electricity than those buying electricity from regulated municipal utilities and cooperatives, according to the Texas Coalition for Affordable Power, a group of cities that buy power in the deregulated market.
On average, Texans who choose their electric providers pay nearly 9 percent more for electricity than those in the regulated markets, such as in Austin and San Antonio, according to the coalition. For the average Houston customer, that has translated into an extra cost of nearly $400 a year in each of the past 15 years.
Call it the deregulation premium.
Power to confuse
The Texas power market was deregulated two decades ago at the urging of big industrial users and power companies, ultimately forcing millions of Texans to bone up on electricity. In 2002, Texas regulators launched the retail electricity shopping website known today as Power to Choose with the goal of allowing consumers to easily compare plans on price, amount of renewable power and customer service.
But the shopping site became overwhelmed with offerings. Some compa
nies offered more than 30 plans that were hard to distinguish from each other. Several retailers showcased multi-tiered electricity plans with low teaser rates designed to catch the attention of shoppers, only to have those who signed up learn too late that using one kilowatt hour above a certain threshold would send the advertised price soaring by as much as 10 times.
Other companies offered “free nights and weekends” plans that could cost consumers more because of much higher weekday rates. One company offered a $600 bill credit for a two-year plan that would cost customers twice as much as another plan offered by the same company.
As a result, buying electricity became so confusing that consumers gave up looking for better deals, undermining what is supposed to be the key advantage of competitive markets. Only about 16 percent of the Houston utility CenterPoint Energy’s 2.4 million residential customers switched plans in 2018, even though research shows switchers can save hundreds of dollars each year.
“Retail electric providers have figured out how to make it complicated,” said Ed Hirs, an energy economist at the University of Houston.
And they have succeeded in that endeavor to the point that a cottage industry emerged to help consumers sift through power plans to find the best deals. But the approximately 1,000 brokers in the state operate in an opaque market with few rules. The brokers don’t have to disclose information such as their ownership or deals made with retail electricity companies to steer clients to their plans.
Power Wizard, one of the newer brokers in the Houston area, claimed on its website to be completely independent and “totally unbiased” with no connections to retail electricity providers. Power Wizard, however, is owned by the Florida company NextEra Energy, which is also the parent of the Houston retail electricity provider Gexa, according to filings with the Texas Secretary of State. In addition, Gexa’s president is also CEO of Power Wizard.
Power Wizard, which retracted its claim of independence after being contacted by the Houston Chronicle, said it doesn’t give preferential treatment to Gexa plans.
Trent Crow, a former energy trader and founder of Real Simple Energy, a website that charges consumers $9 a month to find and manage low-cost electricity plans, said part of the business model for retail electricity providers is to make things as complicated as they can, which makes it difficult for customers to estimate potential monthly costs and compare plans to competitors.
“People get confused and lose trust,” he said. “They are overpaying but they can't put their finger on why.”
Wholesale complexity
Wholesale power markets are complex operations in which generators essentially bid prices in 5 to 15 second intervals to sell power into the grid. The state’s grid manager, the Electric Reliability Council of Texas, accepts the bids, starting with the lowest first and working its way up until it has enough power to meet demand. Generators who sell into the market receive the highest average price during a 15-minute period.
In other states, the bidding is public and the pricing immediately available. Not in Texas, where bids are kept secret for 60 days. In addition, ERCOT doesn’t disclose companies that hold power back from the market, whether unexpected or planned. Finally, ERCOT, a private organization overseen by a board of directors comprising representatives of power companies, is not subject to the state’s open meeting and public records laws.
These murky conditions have made the market vulnerable to manipulation as an incident in May demonstrated. A twominute data error, which showed 4,000 megawatts of power suddenly coming offline, sent prices soaring from $40 per megawatt hour to $9,000, the maximum allowed, and resulted in an estimated windfall for power companies of $18 million. plus tens of millions more from futures contracts priced higher as a result.
The cause of the price spike only became public because the Houston merchant power company Calpine disclosed it was responsible for the error. The Houston consulting First Principles Economics. meanwhile, found 55 incidents of power inexplicably moving on and off the market during a fourmonth period this spring.
It’s not publicly known which companies were involved, or whether the market movements were accidental, erroneous or intentional. But they likely increased prices, according to First Principles.
ERCOT said it understands the importance of transparency to a wellfunctioning market. The grid manager, said spokeswoman Leslie Sopko, strives to ensure timely and relevant information is available to consumers and market participants.
The May incident involving Calpine came to light because of the company Griddy, which sells electricity to retail customers at the same price as wholesale spot markets. When the company learned of the data error, it told its customers and promised rebates.
But Griddy has had its own transparency challenges. Its fees are hidden in fine print, including charges passed through from the Public Utility Commission and ERCOT. Its advertised prices this summer also didn’t include surcharges paid to generators during periods of high demand.
Finally, Griddy didn’t clearly disclose the risks of wholesale markets, where prices can quickly soar. Many of its customers’ were stunned when their bills jumped by hundreds of dollars as power demand and prices spiked this summer.
“When you do something nobody's ever done before, you wind up learning a lot of lessons along the way,” said Jeremy
Zarowitz, vice president of marketing and analytics for Griddy. “August was a blessing in the sense that it brought a lot of these things to light that might have otherwise remained below the radar.”
Cost shifting
Big commercial and industrial electricity users, meanwhile, have operated under the radar to cut transmission costs, shifting them to residential and small business customers. Under state rules, commercial and industrial customers are assessed transmission fees based on their power consumption during four 15-minute peak-demand periods over the summer — one each in June, July, August and September.
Companies that can identify those peak periods — and another cottage industry of consultants has emerged to help them — can reduce or shut down power during these brief periods and lower annual transmission bills by tens, if not hundreds of thousands of dollars. Other users must pick up those costs to maintain and upgrade the transmission system.
There are no estimates of the overall costs getting shifted. But two years ago, the power company NRG Energy told the Public Utility Commission that the cost allocation system allows larger and more sophisticated electricity customers to reduce their portion of transmission costs at the expense of other users.
The Public Utility Commission
is considering whether to change the system as part of a rate case for CenterPoint Energy.
Since almost the beginning of electrification more than a century ago, political and business leaders have debated how to treat electricity, whether as a commodity to be bought and sold, like copper, oil or soybeans, or a public service, like roads or sewers. The deregulation movement that gained momentum in the 1990s viewed power as a commodity that could be allocated efficiently and fairly by markets.
Nearly two decades after the start of deregulation in Texas, many consumers still operate under a misguided assumption that getting electricity reliably depends on which retailer they choose. Power, however, is delivered by utilities, such as CenterPoint, no matter which retailer is chosen. In the end, electricity is the same; it; the only real difference between companies is price.
“Too many Texans are still overpaying for power,” said Fred Anders, founder of Texas Power Guide in Houston, a website that helps consumers find the lowest cost plans. “And very likely a disproportionate share of them are people who can least afford to overpay and have less time and awareness to navigate the minefield of gimmicks in the electricity market.”