One of my business writing clients asked me to look into some issues regarding the nuclear plant in Glen Rose, Texas (near Fort Worth), where he paid property taxes. The result was a series of four articles in the Glen Rose Newspaper. This was the first.
click to see scanned image from series
Part 1 of 4 (Glen Rose Newspaper, January 11, 2007)
Deregulation and its effect on Glen Rose
In the tranquil countryside north of Glen Rose, behind concrete walls four feet thick, the building blocks of the universe are carefully broken apart. This activity generates fierce heat. It boils water and spins turbines, electrifying the power lines that feed into our homes, schools and places of business.
Deregulation of the electricity market has affected the lives of millions of Texans. In Glen Rose, the effect has been magnified by our peculiar relationship to the energy industry through the Comanche Peak nuclear plant.
The final stage of electricity deregulation arrived on January 1, 2007. That makes this a good time to look back on how well it has worked, and to look forward to what the deregulated future holds for our community.
What is Deregulation?
The power of electricity was domesticated in the late nineteenth and early twentieth centuries. Before long it was being delivered directly to businesses and homes. Early on it was recognized that the natural market for this unique new product was a monopoly. It would be inefficient for multiple companies to each create their own separate energy plants. Not to mention multiple sets of power lines all going into the same buildings. A single network of lines "electrified" by power plants at various points was clearly the simplest, most cost-efficient set up.
For this reason, local governments either directly provided electricity to their residents, like they often do with tap water, or they granted monopoly rights to a private utility company. To prevent the private utility from taking advantage of its monopoly status, the rates charged were subjected to strict government oversight and regulation. In Glen Rose, the private utility that once held this monopoly power is the firm known today as the TXU Corporation.
In the latter part of the twentieth century, the deregulation of industries such as airlines and telecommunications occurred. This was done in an attempt to bring competitive forces to bear. Lower prices and technological innovations were the hoped for result. A further goal was the elimination of the expensive bureaucracies needed for regulation.
These deregulation efforts proved to be generally successful. Prices declined in the airline industry. New technologies such as cellular phones were created in the telecommunications industry. This led many to turn their eyes to the electricity industry as a new candidate for deregulation.
A number of states pursued electricity deregulation in the 1990’s. In Texas, people such as former state representative Steve Wolens, husband of current Dallas mayor Laura Miller, championed the cause. He noted that "competition in this critical household commodity should force electric rates down."
The bill deregulating Texas’ electricity market passed in May of 1999. Known as Senate Bill 7, Wolens himself co-authored it with David Sibley. It did not apply to areas of the state where electric service was provided by local government or consumer cooperatives. But such areas were allowed to participate in deregulation if they chose to. Areas such as Glen Rose, which were serviced by regulated private utilities, would have no choice but to deregulate.
One political stumbling block to deregulation had been the potential for communities near existing power plants to lose important tax revenue. It was envisioned that plants built during the days of regulation, like Comanche Peak, might not be able to compete with the newer plants that, it was thought, would start appearing when the floodgates of competition opened. The resulting lower values of these older plants would mean less property tax revenue for the communities where they were located.
Senate Bill 7 overcame this stumbling block. It created a special fund, called the System Benefit Fund (SBF). Some of the money from this fund was supposed to be used to make up the tax shortfall that deregulation was expected to bring.
The overall deregulation timeline which Senate Bill 7 laid out is shown in the figure at bottom.
Senate Bill 7 provided for existing electric rates to be frozen at their current levels in September of 1999. Competition began on January 1, 2002. At that time, the existing utilities began to offer a rate called the price-to-beat. It was a rate which represented a 6% discount from the pre-existing rate. The price-to-beat was still subject to government regulation. Changes in it, up or down, were only allowed in certain circumstances, such as when the price of natural gas changed. Natural gas is used by many plants to create electricity. Increases in its price mean higher costs for those plants.
Alternative electricity suppliers were now allowed to pursue customers, luring them away from the utility. The usual way to do this was to offer lower rates than the utility’s regulated price-to-beat. Finally, on January 1, 2007, the regulated price-to-beat went away. At that point, there were no more regulated electricity rates. The utility can now charge whatever rates it feels the market will bear. If it wishes, the utility can also charge a rate which undercuts the alternative suppliers.
The five-year period between when competition began and when the price-to-beat went away was designed to allow a competitive market to develop. It was feared that without such a period, the utilities would undercut any alternative suppliers from the start, preventing a competitive market from ever developing.
By the time the price-to-beat went away in 2007, it was believed that a free market would be established. Competitive pressures would keep electricity prices low. Providers would develop new technologies and innovative pricing plans in the battle to win customers.
But has this wonderful world envisioned back in 1999 been achieved? If so, why have most people’s electric rates gone up instead of coming down as predicted?
On another issue the prognosticators have been validated. There are fewer tax dollars coming from Comanche Peak. This happened because a sharp decrease in the plant’s appraised value accompanied deregulation. But was the decrease justified?
And did the System Benefit Fund perform its function, alleviating the effects of the tax shortfall?
These are the questions that will be answered over the course of this series. The answers may surprise you. Some may make you angry. Hopefully they will help us all get a better understanding of this complex subject of electricity deregulation and how it has impacted our community and our lives.