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Analysis: The murky and confusing Texas electricity market

By: L.M. Sixel |

A basic economic principle holds that a 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 the compeititive 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 of cities such as as 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 providing transparency by allowing consumers to compare plans on price, amount of renewable power and customer service.

But the shopping site became overwhelmed with offerings. Some companies offerred more than 30 plans that were hard to distinguish from each other. Several retail electric providers began offering 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 ultimately cost customers twice as much as another plan offered by the same company.

As a result, buying electricity became so confusing that consumers just gave up looking for better deals, undermining what is supposed a key advantage of competitive markets. Only about 16 percent of CenterPoint Energy’s 2.4 million residential customers switched plans in 2018, even though research shows that 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 in that endeavor to the point that a cottage industry has emerged to help consumers sift through retail power plans to find the best deals. But these brokers operate in an opaque market with few rules. Only since September were the approximately 1,000 retail electricity brokers operating in Texas required to register with the state by providing their names, addresses and contact information.

The brokers don’t have to disclose more critical information, such as their ownership or deals they make with retail electricity companies to steer clients to their plans.

Power Wizard, one of the newer brokers in 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 questioned by the Houston Chronicle, said it doesn’t give preferential treatment to Gexa plans.

Trent Crow, a former JP Morgan energy trader and founder of Real Simple Energy, a website that charges conumers $9 a month to find and manage low-cost electricity plans, said part of the business model for the retail electricity providers is to make things as complicated as they can. That in turn makes it difficult for customer to estimate potential monthly costs and easily 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. Ultimately, 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 the 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 two-minute 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 by state rules, and resulted in an estimated windfall for power companies of $18 million and 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 data error. The consulting firm First Principles Economics of Houston found 55 incidents of power inexplicably moving on and off the market during a four-month 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 wholesale prices, according to First Principles, which ultimately mean higher retail prices.

ERCOT said it understands the importance of transparency to a well-functioning 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 only because of the California-based 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.