Academic journal article Review of Business & Finance Studies

Deregulation & Privatization: Texas Electric Power Market Evidence

Academic journal article Review of Business & Finance Studies

Deregulation & Privatization: Texas Electric Power Market Evidence

Article excerpt

ABSTRACT

The electric power industry is moving away from a regulated utility model, toward a deregulated market-based model-thereby intending to improve system efficiency by reducing generation costs and customer prices, while at the same time improving capital expenditures and service reliability. This paper is the first in the literature to statistically test Texas' electricity prices, relative to U.S. electricity prices-and use energy emergency alerts and reserve margin forecasts to determine Texas' power system reliability-since deregulation in 2002. Implementation of suggested reforms will help ensure the market-based design succeeds. Recommendations are offered for future research.

JEL: G31, G38, H44, K23

KEYWORDS: Texas Electricity Market, Deregulation, Privatization, Reserve Margins

INTRODUCTION

Electricity is important. The Edison Electric Institute (May 2013) reports the United States (U.S.) electric power industry is an $840-billion dollar a year business-totaling 5.25% of GDP. Electric power is the most capital-intensive U.S. industry, and is planning to spend $85 billion a year, through 2015, for new, energy-efficient and environmentally friendly generation capacity, including advancements in transmission, distribution, and smart-grid system upgrades.

The electrical power grid in Texas is an interconnected system, providing electricity from supply generation to end-use consumers, over a wide geographical area. In the U.S. there are three major wide-area synchronous electric power grids: 1) Western Interconnection, serving the western states (excluding Alaska and Hawaii); 2) Eastern Interconnection, serving the eastern states; and 3) Texas Interconnection, serving only Texas. Interestingly, Texas is unique; it has a separate power grid from the rest of the country. Consequently, the Texas deregulated and privatized electric power market is an excellent subject to study and compare with what is occurring across the U.S.

The Electric Reliability Council of Texas (ERCOT) (2013) administers the Texas Interconnection grid for 23 million Texas customers. ERCOT is an independent system operator (ISO)-consisting of consumers, cooperatives, electric power generators, retail electric providers, electric power marketers, investor-owned electric utilities and municipal-owned electric utilities. ERCOT schedules electricity delivery on the Texas Interconnection grid linking 40,500 miles of transmission and distribution lines, with more than 550 power generating units. ERCOT is a membership-based 501(c) (4) nonprofit corporation, governed by a board of directors, overseen by the Public Utility Commission of Texas (PUCT) and the Texas Legislature.

This research tests whether ERCOT is achieving its stated mission, "to ensure a reliable electric grid and efficient electricity market." This is the first research in the literature to use means testing to statistically analyze electricity prices for the Texas Interconnection grid, pre-and-post 2002 deregulation, relative to U.S. electricity prices. Energy emergency alerts, since 2006, and ERCOT reserve margin forecasts, through 2023, are presented to determine Texas' power system reliability.

Beginning in the 1990s, the literature describes countries from around the world that deregulate their electric power markets. Expectations were that prices would naturally fall under "free market" competition and reliability would improve. Results for retail customers worldwide disappoint. Electricity prices globally, after deregulation, far exceed general price and wage gains.

The rest of the paper's organization is as follows. Section 2 discusses relevant electricity market deregulation literature. Section 3 provides the data source and statistical methods used. Energy emergency alert and reserve margin system reliability indicators are explained. Section 4 presents the empirical results and a discussion of electric power deregulation in Texas, including bankruptcy. …

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