Overrated

Doris Marshall is perilously close to living beyond her means. Each month this 63-year-old African-American woman who owns a small house in Satin—a spot on the road near Waco—stretches her $514 Social Security check to pay for food, 10 prescription drugs, gas for her aging Cadillac, and her phone and utility bills. She can manage—barely—but for how much longer she doesn’t know. “Only by the grace of God do I make it,” says Marshall as she sits in her living room beneath a painting of a dark-skinned Jesus. In her lap is a stack of bills from her electric provider, TXU Energy. Marshall has watched her electric bill double over the last four-and-a-half years—from $70 to $140 for a typical month—as TXU has raised its rate seven times. “That’s not good for no one that’s on a fixed income,” Marshall says. “You’re not going to get lights for free, I know, but on the same token you shouldn’t have to decide whether to buy medicine or lights.”

Marshall is one of several million Texans unfortunate enough to live in a part of the state where a grand experiment with deregulation of the electricity industry is well under way.

Since 2002, the year some electricity markets were opened to competition, electric bills in these areas have risen 70 to 110 percent. Consumers with average-sized homes have begun reporting monthly bills as high as $500 in Houston, Dallas-Fort Worth, and South Texas. At the same time, state assistance programs for low-income consumers have been eliminated. “So many seniors are in survival mode,” says Lue Taff, elder support director at the Senior Source in Dallas, which provides a variety of services to the elderly. “They call all of the agencies that they can, they ask for help from family and friends, they eat less food, they may not buy their medications, and then they may hop around from one [electric] company to another.”

Taff and other social-service workers report that requests for help with electricity bills have been climbing for the past few years. So far this year, the 2-1-1 hotline, which connects people with nonprofit groups and government agencies, has received over 126,000 calls for electric-bill assistance in Texas, 83 percent of the total call volume. While some cities and utilities maintain funds for bill assistance, the agencies don’t have enough money to meet the demand each month. They are being asked to fill in for the state, which until September of last year offered a 10 to 20 percent discount to some 400,000 low-income households. “The social safety net has turned into a cargo net,” says Joe Sanchez, AARP’s associate state director for advocacy.

Some lawmakers and consumer advocates contend that the primary accomplishment of deregulation so far has been to boost power companies’ profits. Meanwhile, true believers in market economics say Texas needs more time to see the benefits of economic competition. The one thing both sides agree on is that Texas is in deep: The Legislature has taken major steps toward deregulating and restructuring the electricity industry, and there may be no turning back.

Electricity deregulation in Texas began as little more than a gleam in Jeffrey Skilling’s eye. Skilling and other Enron Corp. executives, thinking big in the 1990s, wanted a piece of the $19 billion Texas electricity industry. The public, as even proponents will admit, had little interest in radically altering a system that provided low rates and generally reliable service. But the Legislature moved toward deregulation in 1995, setting up competition among power generators at the wholesale level. Retail competition was a much bigger gamble. To convince lawmakers and the public of deregulation’s merits, Enron and its allies promised that restructuring would offer Texans lower prices and “consumer choice.” In 1996 Skilling (now facing 185 years in prison for misdeeds at Enron) told the Fort Worth Star-Telegram that the statewide average of about 6 cents per kilowatt hour was an “absurdly high” price for electricity. “There’s nothing in this market that suggests we won’t see the same savings of 30 to 40 percent we’ve already seen elsewhere,” he said. Today the state average is almost 12 cents per kwh—and generally much higher in the deregulated areas.

The Enron-inspired dreams were entrancing, though, to the Texas Legislature in 1999. That year, lawmakers approved a deregulation plan with bipartisan support. The new law, called the Texas Electric Choice Act (Senate Bill 7), was designed to turn the regulated system on its head. Instead of regulators setting the rates of vertically integrated utility monopolies, prices would be set by market forces. To accomplish this, SB 7 forced the privately owned utility companies to break up (or “unbundle”) into three components. The vast majority of the 82 city-owned utilities and 74 rural electric cooperatives, which together serve 6 million Texan customers, chose to opt out of retail competition. Other areas with investor-owned utilities—El Paso, East Texas, and the Panhandle—were not generally subject to deregulation.

For everyone else, it was a new day. Companies could get into the power generation business, or into transmission and distribution of electricity, or the retail and marketing end of things. (The transmission and distribution of electricity, considered a “natural monopoly,” remained regulated, while the production of power and the retailing to consumers was opened to competition.) The old utilities could split into separate companies or restructure as a holding corporation with distinct businesses. To get the process going, the Legislature forced the largest utilities (Houston Industries, now Reliant Energy Inc., and Texas Utilities, now TXU), to sell off enough power plants to reduce their market share to 20 percent of generating capacity. At the same time, companies were allowed to recoup some $9 billion in unpaid debts tied up mainly in the state’s two nuclear power plants. Consumers and industrial power users are still paying for these costs through a monthly charge on each bill.

On January 1, 2002, after a three-year rate freeze, the initial round of retail competition began with new companies vying to win customers. Reliant could sell electricity in TXU’s backyard and vice-versa; a start-up company with $100,000 in capital and not a single power plant could try to snatch market share from the big boys. To give the entrants a leg up, SB 7 makes the successors of the former monopoly utilities—First Choice Power, CPL, WTU, Reliant, and TXU—subject to continued limited regulation. They are required to offer an above-market “price-to-beat” rate to individuals within their regional service areas who have not switched to an alternative provider. Twice a year, the retail companies offering the rate can ask the Public Utility Commission, the state’s regulatory agency, for an adjustment to the price-to-beat based solely on the price of natural gas. (At the time SB 7 was drafted natural gas was cheap and favored for being relatively clean-burning.) In 2005, the incumbents were allowed to begin offering electric plans other than the price-to-beat. And on January 1, 2007, the price-to-beat will be lifted, and full-blown competition will commence. The government’s role will be limited to coordinating the electric grid and policing the unfettered market.

At first, economists, lawmakers, and industry reps hailed Texas as the model for deregulation. Even in 2001, the year before retail competition began, when California’s deregulation experiment suffered from blackouts, price gouging, and illegal trading activities by Enron and others, deregulation proponents touted the safeguards in the Texas model. But in the aftermath of California’s disaster and Enron’s 2001 collapse, many states hit the brakes on deregulation. Thirty-four states have scrapped or delayed retail deregulation or have confined it to large business customers, according to a 2005 study by energy industry consultants. “Now as the fiction of deregulation is exposed, more are figuring out how to get out of it,” says Mark Cooper, director of research with the Consumer Federation of America. Texas, he notes, is “hard-core” and represents perhaps the last stand of deregulation in the United States.

With that in mind, the free-marketers have sought to fight off the naysayers. In April, Jim Burke, the CEO of TXU Energy, the largest power company in the state with over 2 million customers, told lawmakers gathered to discuss electricity issues the day after rolling blackouts across the state, “Texas has by far the most successful market in the country and [is] arguably on its way to the most successful market in the world.” Burke cited figures that show 30 percent of Texans have switched to an alternative provider. He spoke of competitive alternatives to the price-to-beat in the most expensive deregulated regions and of innovative electricity plans. He noted that there are a dozen retailers in some service areas, far more than any other comparable state. Burke also acknowledged the elephant in the room: “However, there have been a lot of challenges. Higher prices have cast doubt on whether this is a successful model.”

Rep. Sylvester Turner, a Houston Democrat, was a supporter of deregulation in 1999, but he is now one of the system’s fiercest critics. Hailing from a solidly Democratic district in Houston where 20 percent of the people live in poverty, Turner understands how a penny-ante issue for affluent people like the monthly electricity bill can be of paramount concern to households surviving paycheck to paycheck. “The reality is that Texas used to be a low-cost energy state,” he says. “Not only do we [now] exceed the national average, we exceed what people are paying in regulated areas, what people are paying in co-ops, city-owned utilities.”

In April, Turner, an 18-year veteran of the Legislature who mixes a lawyer’s intellectual precision with preacherly appeals to the common good, organized a town hall meeting in Houston to discuss electricity rates. Houston Mayor Bill White attended, as well as two U.S. congressmen, representatives from the electric companies, and consumer advocates. The turnout surprised Turner: 700 people—frustrated and angry—came from all over the city to complain about high rates and confusing choices. “No matter what the PUC and the industry is trying to convince people, that all is well and this is the best thing going and you’re really getting a good deal,” Turner said, “I’m sorry, I think the people beg to differ.”

During the recent special session called by Gov. Rick Perry to draft a school finance plan, Turner proposed legislation to give rate relief to electricity consumers. One bill would have restored the $400 million “Lite-Up Texas” program, created as part of SB 7, to its original purpose—providing a 10 to 20 percent subsidy to low-income electric customers. (Although the state continues to collect fees from customers’ bills for the fund, the Legislature transferred the money into general revenue in 2005.) Turner also proposed forcing the former monopoly utilities to adjust their price-to-beat rates downward to reflect lower natural gas prices, which he said would save the average consumer an estimated $20 to $25 a month. (With 1.7 million TXU customers on price-to-beat, the total savings for these households each month would be about $40 million at current natural gas prices.) Since the price-to-beat goes away in January, Turner was pitching the bill as “summer relief,” as well as a way to get prices on track for full-blown competition next year.

Turner says customers are paying “artificially inflated prices” because the companies adjusted their rates upward, with PUC approval, after hurricanes Katrina and Rita when natural gas prices soared. Since then, natural gas has come down about 25 percent, but the price-to-beat electricity rates have remained the same. “It is certainly accurate to say that the specific price-to-beat, how it stands now, is inflated over the market price as it stands now,” said Terry Hadley, PUC spokesman. But, he added, incumbent companies phased in their price-to-beat rates so as to minimize impact and are offering discounts to customers who wish to switch off the price-to-beat.

But under the market design, inflated power prices should afford the other companies the opportunity to beat up on the incumbents. Oddly, the competitors’ rates have hardly budged. Tim Morstad, an analyst with the Office of Public Utility Counsel, the government’s consumer watchdog for utility matters, has calculated that the supposedly competitive rates have dropped less than 3 percent statewide since the beginning of the year.

The reason, Turner says, is that “it’s to [the competitors’] advantage for the market to be artificially higher than it should.” This way, the companies can still offer a small discount under the price-to-beat while keeping an ample profit margin. In fact, while competitive rates have not climbed as steeply as the price-to-beat, an Observer analysis of PUC data shows that the average competitive offer in all five major service areas has jumped considerably. The increases range from a low of 57 percent (First Choice Power area) to 105 percent (WTU area) between January 2002 and April 2006. Competitive companies within the TXU service area came in at a 77 percent increase, and the Reliant area power companies, 80 percent. CPL area competitive prices jumped 79 percent. If this is a competitive market, consumers can be excused for being the last to know; it appears that competitors followed closely on the heels of the price-to-beat as the price of turning on a light, switching on the A/C, or watching television became ever-more expensive.

Still, the PUC plays up the 30 percent of people who have moved off the PTB and captured some savings. “Well over a million people have switched to a competitive provider and apparently are satisfied with that,” said Hadley. But, he added, “Some people would say that’s not enough.”

Turner’s bills died in committee, a surprise to him since he had met with the governor the week before to sound him out on adding the bills to the agenda. Perry, Turner says, seemed amenable. But in the last days of the session, Perry OK’d an item from the industry’s wish list—”securitization” of bonds to pay for hurricane-related costs to the utilities—but not Turner’s bills. The next day, May 12, Turner took to the House floor to scorn the body for doing “more for the electricity people than we’ll do for mom and dad working two and three jobs just to keep their electricity on.”

To Turner’s chagrin, the PUC had joined the industry in vigorously attacking Turner’s price-to-beat-adjustment bill as government tampering with the market. PUC Chairman Paul Hudson—who only months earlier had floated a similar proposal at the PUC that was rejected by the other two commissioners—told Turner, “There are some customers in the marketplace today that I believe are paying more than they should, and I invite those customers to switch [providers].” Hudson and deregulation backers have been flogging a PUC study commissioned by Turner that concludes that a consumer in the Houston and Dallas-Fort Worth areas could have saved $1,450 and $800, respectively, over four years by switching to the lowest-cost provider each year versus what the study’s authors predict the consumer would have paid in a regulated environment. “It’s simply unacceptable that so many customers are seemingly unwilling to choose a new electricity provider in the face of new cost savings,” Hudson told Turner.

The
UC study “looks
t what may have happened,” says Carol Biedrzycki, executive director of Texas Ratepayers’ Organization to Save Electricity, or Texas ROSE. “It doesn’t look at what did happen. And it’s blaming the consumer for everything wrong with this market.” Turner, who has dismissed the PUC study as a whitewash, worries that lawmakers are naïve about actual consumer behavior. “The reality is, every year people are not going to switch,” Turner says. Low-income individuals tend to “stay with the incumbent for many reasons—the trust factor, the lack-of-trust factor with other providers, they’ve been bombarded so much, they’re working two, three jobs, so they stay.”

For her part, Doris Marshall hasn’t received a single solicitation from a TXU competitor in the mail but has looked into other companies on her own. She is not impressed. “I’m skeptical about people I’ve never heard of and know nothing about,” she says. “I know TXU and Reliant.” That attitude was also reflected at a May 30 rally at a Reliant shareholder meeting organized by the community action group ACORN. Protesters there, while criticizing Reliant, Houston’s incumbent utility, for “overcharging,” said they didn’t trust other companies, especially in a power emergency. “With the hurricane incident, you don’t want to change companies,” said Patricia Thompson, a Houston postal worker. She said that with a sister who depends on an oxygen respirator, “I can’t take the chance” of switching to an unknown provider.

“When consumers complain, they are often told they can save money if they shop around,” says AARP’s Sanchez. “But there are a number of barriers to that”—high deposits based on people’s credit history, confusing offers, misleading terms of service, companies going bankrupt or abandoning the retail market, and lack of trust between new electric companies and consumers. “We think electricity is headed down the same path we’ve seen mortgages and other financial institutions headed,” says Virginia Goldman, the head ACORN organizer in Houston. “The people with the worst credit and the least amount of money are going to end up paying the most and having to go with the electric providers that have the most predatory rates.”

There is evidence that this tiered system is already in play. One company operating in the Houston area, Affordable Power Plan LP, sells prepaid electricity plans from convenience stores. At a rate of 17 cents per kwh, Affordable is the least affordable in the entire Reliant service area, but Kamram Visani, the company’s president, says it charges a “premium” for not requiring a deposit or credit check. “We have a lot of customers who have been denied services by other companies because of bad credit or no credit,” says Visani. (The PUC staff is recommending $446,000 in fines against Affordable for allegedly illegally disconnecting customers; Visani says the charges are baseless.)

In the end, many consumers say they don’t see any substantial savings from the dozen or so competing companies in their area. At least in the TXU service area, this suspicion seems to be borne out by fact.

This spring, there were 13 companies offering 30 plans to Marshall in the TXU service area, according to the PUC’s online clearinghouse, powertochoose.com. The cheapest offer—11 percent off the price-to-beat rate of 15 cents per kwh—was StarLight Electric’s month-to-month “Star Treatment Plan.” However, the fine print contains some surprises. The listed price of $134 per month can be adjusted monthly to “reflect changes in the cost of fuel used to generate electricity,” according to the company’s “electricity facts label.” And for each month a consumer uses less than 1,000 kwh—say, 999 kwh—a “meter fee” of $10 is imposed, at which point it is more expensive than the price-to-beat. Like most companies, StarLight researches an applicant’s credit history and can require a deposit ($350 in this case) if the person’s credit is found “unsatisfactory.”

Other deals rely on an almost comically complex formula for setting rates. TXU offers a variable-rate service plan called “Energy Market Tracker+” under which monthly rates fluctuate based on the price of natural gas futures contracts on the New York Mercantile Exchange. Consumers who have deep knowledge of energy trading may wish to take a chance. But getting out of the two-year contract costs $200. “The average consumer is not equipped to make these complex decisions,” says Sanchez. “If you get the wrong plan, you’re locked into it and can’t get out of it.”

Hadley, the PUC spokesperson, said the agency closely monitors the powertochoose Web site for violations of the rules, but acknowledged that some companies’ electric plans needed to be reviewed. He warned that if “something seems way too complicated that should be a red flag to at the very least be careful before signing up with such a plan.” Caveat emptor.

What makes the Texas experiment with deregulation especially interesting is that a “control group” has survived—the municipal utilities and rural electric cooperatives. Nobody disputes that higher electric rates are partly due to the near-tripling in cost of natural gas, the fuel for 46 percent of Texas power generation. But the rates of still-regulated city-owned utilities and electric cooperatives, which also use natural gas power plants, are substantially cheaper almost across the board. A ratepayer in Austin—who must buy power from the city-owned Austin Energy—spends a little less than $95 each month for 1,000 kwh of electricity. In San Antonio, it’s about $72. Austin and San Antonio have the advantage of owning their own power plants, but the statewide average bill for customers served by municipally owned utilities is a little over $100 and is $97 for cooperatives, according to the PUC.

The cheapest service plan—one negotiated by the City of Houston—in the entire deregulated market is about 35 percent more expensive. What accounts for this difference? “[T]he energy being sold in the deregulated service areas didn’t cost any more to produce than in the regulated areas,” says Biedrzycki of Texas ROSE. “The difference is in the way the pricing is established.” In the deregulated market, economists and industry experts say, expensive natural gas-fueled plants generally act on the “margin” to set the wholesale price that retail power companies must pay for all power generation. Even though it’s currently much less expensive to create electricity from coal and nuclear generators, costly natural gas plants control the market price.

“[O]wners of nuclear and coal plants have no incentive to charge anything less than the gas-based market price [to retailers],” as the Association of Electric Companies of Texas explained in a presentation to lawmakers recently.

This allows generating companies like TXU Power, which boasts a portfolio of coal- and lignite-fired power plants, to reap huge profits, $520 million in the first quarter of 2006 alone. That profit margin, says Tom “Smitty” Smith, director of consumer group Public Citizen, ultimately shows up in people’s bills. “TXU puts 38 to 40 percent of their revenue in the pocket of their shareholders,” he says. “The difference is reflected almost percent-by-percent in the cost of electricity to the consumer.” Jess Totten, a member of the PUC’s oversight division, agreed that higher prices in the wholesale market are due to “the fact that companies that own coal and nuclear are earning significant profits that are based on the difference between the market price and their cost of production.” But, he added, that’s the way the market is supposed to work. “[P]eople get price signals from the market; they see that coal is an attractive resource; and they invest in coal.” TXU definitely got the signal. With earnings of $1.7 billion in 2005, four times that of 2004, TXU is plowing that cash into 11 new coal-fired plants in Texas at a cost to the company of $10 billion. TXU expects the plants to earn $180 million a year and pay for themselves within eight years. (TXU has also been making other power plays with cash: Executives and PACs affiliated with TXU Corp. contributed at least $2 million to state candidates and committees from 1999 through 2005, according to Texans for Public Justice. During the same time period, the company spent between $5.9 million and $13.3 million on lobbying.)

Nonprofit, city-owned utilities and rural electric cooperatives, which together serve about 25 percent of the state’s residents, on the other hand, calculate the price of electricity based simply on the cost of producing or purchasing power and delivering it to customers. Austin Energy, like other consumer- or city-owned utilities, bases its rates on fixed costs (wires, power plants, payroll, etc.) plus “a dollar-to-dollar recovery of fuel costs” based on the average of their fuel costs, says Ed Clark, Austin Energy spokesman. “In other words there is no profit on that [fuel] charge,” says Clark. The only profit culled from ratepayers is 9 percent off the top that goes into the city’s coffers. Because the entire rate structure for city-owned utilities and cooperatives is cost-based, and because they spend much less on marketing and executive salaries, public power has generally been able to avoid skyrocketing retail prices. Rural cooperatives, created by farmers and ranchers in the 1930s with the help of the Rural Electrification Administration, have the unique distinction of being directly owned by the ratepayers, who exercise democratic control over the cooperative’s decisions.

Consumer advocates suggest that the best model for electricity may be a long-established one. “We as citizens could and should control our power sources,” says Smith. “Take back our power supply … and develop new municipal utilities and new rural electric co-ops. That’s the preferred way.”

But undoing deregulation is easier said than done. “It’s a Humpty-Dumpty problem,” says Jim Boyle, a longtime Austin utility lawyer. “Once you’ve unbundled it’s extremely difficult to re-bundle.” And virtually no one in the Legislature, including Turner, is exploring the idea of “re-regulation.” The power companies, meanwhile, are promising that as retail competition matures, rates will be settled by the market, companies will develop innovative “demand-side” products such as meters that show consumers what they are paying for electricity at any given moment, and investors will be driven to build power plants that are efficient and environmentally friendly.

That leaves open the question of how electricity will play out as a political issue. A Katrina-size hurricane could disrupt natural gas facilities along the Gulf, sending prices through the roof; a scorching summer could lead to a mass of people unable to pay their bills; or a round of consolidation could leave a handful of companies controlling the power industry in Texas. One thing is for sure, says Turner: “Electricity is a political issue, and it’s going to get hotter and hotter.”