Any championship football coach can tell you that successfully converting a fourth and long does not depend on making a quick decision; it depends on making the right decision. Considering that a bad call could add upwards of $4 billion per year to Texans’ electricity bills, the Public Utility Commission of Texas should heed that gridiron wisdom when deciding the fate of Texas’ competitive electricity market.
For more than a year, the PUC has debated whether to abandon Texas’ competitive, energy-only market for a system of centralized planning and corporate subsidies. Commonly called a capacity market, this corporate redistribution scheme would issue generating companies a string of subsidies in the hopes of encouraging more investment in new generation.
Generation companies contend that such a radical transformation is necessary if Texas wishes to maintain a reliable supply of electricity. Citing a handful of reports, they allege that there is simply not enough money in the market for generators to earn a profit without subsidies. Despite mounting evidence that the competitive market is working and that Texas is not experiencing an energy shortage, the PUC has continued to debate this question.
However, a careful examination of the facts shows that the predictions of energy shortfalls used to justify interventions are overblown.
In the 18 years since Texas began its transition to a competitive electricity market, Texas has been blessed with a reliable and affordable supply of electricity. Prices are lower today in real dollars than they were in 2001, and billions of dollars of investments has provided all the electricity we need. In fact, the transition to competition has been so successful that the market has too much electricity today — which is one reason prices are so low.
The competitive market will continue to provide adequate supplies in the future just as it has in the past. Texas has never run out of electricity because of inadequate investment in new generation, even during 2011’s record drought and heat wave.
Behind the ongoing debate are official projections that Texas will soon be running short of electricity. But a paper released by the Texas Public Policy Foundation recently illustrated that these projections have overestimated future demand 79 percent of the time while consistently underestimating future supply. Adjust for these flaws, and a new picture emerges, one where Texas has enough existing and planned generation to meet demand for the next five or six years, at the very least.
However, this doesn’t mean there are no problems in the market. In fact, the lengthy debate at the PUC has introduced a large dose of regulatory uncertainty in the market, delaying investment and threatening to bring about the very thing that the PUC is trying to avoid.
In response, there is pressure building on the PUC to make a quick decision on this issue. One idea the utility commission staff has put forward is to adopt a mandatory reserve margin now and wait till later to fill in the details about how to guarantee the reserves.
But make no mistake about it — a PUC decision to adopt a mandatory reserve margin would in fact impose a capacity market and a $4 billion a year electricity tax on Texas consumers. The details to follow would be relatively unimportant.
The PUC should not rush into a decision to mandate a reserve margin. In fact, it should not adopt a mandatory reserve margin at all. Projections of future reserves in a capacity market would be no more reliable than projections today, but the cost of poor projections for consumers would be significant.
The competitive electricity market is not broken. The PUC should not adopt a mandatory reserve margin or a capacity market. Less, not more, regulation is what will help keep the lights on and benefit Texas consumers. For their sake, the utility commission should take a time out and focus on making the right call.
Hunker is a policy analyst with the Center for Economic Freedom at the Texas Public Policy Foundation.