Texas Defeats Electric Competition (Part 2)
By Bill Peacock -- January 25, 2024Editor’s Note: The following is the second in a three-part series by the Energy Alliance, a project of the Texas Business Coalition, examining how the Public Utility Commission of Texas has violated consumer choice and market forces in the Texas electric market. Yesterday’s post, Storm Uri: The PUCT’s $26 billion Electricity Tax.
On January 30, the Texas Supreme Court will hold a hearing to determine whether the Public Utility Commission of Texas (PUC) violated the Texas Legislature’s instructions that “electric services and their prices should be determined by customer choices and the normal forces of competition” when it arbitrarily set the price of electricity at $9,000 per megawatt hour during Winter Storm Uri. The Texas Third Court of Appeals has already determined the PUC’s action to be illegal.
While the Texas Attorney General’s office (OAG) is defending the PUC’s action in court, it has sued others, like Google, for “us[ing] its powerful position … to unlawfully exclude competition,” the same thing the PUC did. It has also argued PUC’s actions “were … consistent with the overall statutory scheme” of the Public Utility Code.
Yet OAG’s argument ignores the Legislature’s explicit pro-competition language in Texas’ Public Utility Code. And ignores what statutory language looks like when the Texas Legislature explicitly directs an agency to take an anticompetitive regulatory posture.
Title Insurance Market Prices (Regulation) and Electricity Prices (Competition)
Title 11 of the Texas Insurance Code begins, “The purpose of this title is to completely regulate the business of title insurance on real property … .” The reason for this is because, unlike the Utilities Code, which focuses on “customer choice[]” and “protect[ing] the public interest … that encourages full and fair competition,” a fundamental purpose of the Title Insurance Code is to “provide adequate and reasonable rates of return for title insurance companies and title insurance agents.”
Furthermore, instead of the Utility Code’s focus on “reasonable prices” for customers, Title II of the Insurance Code seeks prices (rates) that are “reasonable as to the public” but are also “nonconfiscatory as to title insurance companies and title insurance agents.”
The statutory language suggests that the Legislature understands that a title insurance market where reasonable “prices [are] determined by customer choices and the normal forces of competition” would not always provide what some—perhaps title insurance companies and title insurance agents—might consider “adequate and reasonable rates of return for [all] title insurance companies and title insurance agents.”
Thus it has explicitly directed “the commissioner [to] fix and promulgate the premium rates to be charged by a title insurance company or by a title insurance agent for title insurance policies.” The PUC was not given this authority. Thus, as one might expect, the development and outcomes of prices in these two markets have historically been very different.
Pricing in Texas’ Electricity and Title Insurance Markets Have Historically Been Very Different
Since competition was introduced into ERCOT in 2001, its wholesale and retail markets have worked together to produce prices that are driven by “customer choices and the normal forces of competition.” Prior to competition, five monopoly retail electric utilities charged essentially the same price for retail customers. By 2010, competition led to 29 competitive retail electric providers offered 138 plans to Texas retail customers at a wide range of prices. Retail customers determined what prices they were willing to pay among these choices, and the wholesale market reacted to the retail prices in the setting of wholesale prices and choices made in investing in new generation.
On the other hand, in 2016 LBJ School of Public Affairs Professor David Eaton explained, “Price competition does not and cannot exist in the title insurance market in Texas under the current regulatory structure.” The chart below shows the 2017 prices offered by six of the largest title insurance companies in Texas for a $200,000 home financed with a $170,000 loan. Each company offered the same price for the same policy to all customers. Customers had no choice about what price they paid.
PUC Price-Setting Eliminated Competition in ERCOT During Storm Uri
Despite the different pricing structures in the electricity and title insurance markets, for about 80 hours during the week of February 15, 2021, the pricing in both markets were identical because of the PUC’s price-setting rule.
Just as there was a single, identical price charged across the title insurance market, there was also a single, identical price charged for electricity under the PUC’s price-setting rule. In the electricity market, just as in the title insurance market, sellers (generators) could only sell their product at the price set by regulators. In the electricity market, just as in the title insurance market, buyers could only buy the product at the price set by regulators. There was no competition.
Additionally, the PUC’s and TDI’s pricing structures “ke[pt] up the market price of particular commodities above the natural price.” The University of Texas’s Lyndon B. Johnson School of Public Affairs determined that the Legislature’s regulatory structure for the title insurance market “add[ed] an expected incidental charge of $1,663 per lender’s title policy.” The price in the electricity market while the PUC’s price-setting rule was in effect was about $6,578 per megawatt higher than estimated market prices. The higher price cost Texans an estimated $26.3 billion.
It is impossible for the pricing structure in ERCOT that week to exist in a competitive market where “prices [are] determined by customer choices and the normal forces of competition.” The fact that for 80 hours this pricing structure did exist demonstrates conclusively that the PUC acted as if it had been given regulatory authority it did not have. In adopting its price-setting rule, the PUC acted as if the Texas Legislature had granted it authority to “completely regulate” the Texas electricity market and “fix and promulgate the [prices] to be charged by a [generation] company.” As we have seen with the title insurance market, if the Legislature had desired to give the PUC this authority it could have done so. But it did not.
In Part 3 of this series, we will examine the consequences of the upcoming Supreme Court decision on Texans and the Texas electricity market.