Don’t Mess with Deregulation

The deregulation blame-game is well underway. But what’s the alternative?

By Matt Patterson, August 2, 2021

KUT, Austin’s station for National Public Radio, recently published an article titled, “How Deregulation Laid the Foundation For Texas’ February Blackouts.” Deregulation of the energy grid occurred in Texas in 1999, through the passage of Senate Bill 7.[i] This separated the three segments of the electric grid – generators, transmission companies, and retail providers – creating competition among generators and providing choice to retail customers, while maintaining state oversight of transmission infrastructure. The purpose of deregulation was to create competition, give consumers greater control over the energy prices they pay, and attract investment into generation infrastructure.

The KUT article claimed that “…the failure of the state’s electric grid is the result of decisions made decades earlier – decisions like isolating the state’s grid from the rest of the country.”[ii] KUT continues to blame deregulation for the power going out in February of this year during Winter Storm Uri. A storm that The New York Times (NYT) noted brought “glacial temperatures that even under the strongest of regulations might have frozen gas wells and downed power lines.”[iii] Without providing much detail, KUT attempts to explain how deregulation was at fault:

The new system rewarded cost efficiency. The provider with the lowest energy prices won, ignoring weatherization warnings and taking plants offline to save on labor. And those two factors would figure prominently in why the lights were out for so long during February's winter storm.

It appears as though yet another government-subsidized entity wants people to think that more government control, not less, could have prevented the Texas blackouts (what were Ronald Reagan’s nine most terrifying words?). It wasn’t only KUT making this claim, however. Articles from USA Today,[iv] The Wall Street Journal,[v] and the NYTall made similar claims that deregulation was the focal point of the failure. Vox suggested that “the promise of greater reliability and lower costs did not materialize for millions of Texans under the state’s free-for-all, go-it-alone energy system.”[vi]

But all these anti-deregulation articles are missing one important question: What does the alternative to deregulation look like?

The answer to this question is not hard to find. In response to rolling blackouts in the early 2000s, California regulated its energy sector and removed competitive retail choice from the market.[vii] While the state does allow some choice for commercial consumers, competition does not extend to residential consumers. So, what did state regulation of the electric grid lead to? Well, more blackouts. The NYT, in an article from August 2020 titled “Poor Planning Left California Short of Electricity in a Heat Wave,” explains what went wrong with the state-run grid:

But even if all of the missing capacity had been available, California would probably still have struggled to deliver enough electricity to homes where families were cranking up air-conditioners. That’s because the manager of the grid and state regulators were relying on power from plants that either had permanently shut down or could not have realistically achieved the targets set for them.

The blackout caused by Winter Storm Uri no doubt brought about painful memories to the throngs of Californian ex-pats who fled the state for Texas.

Beyond the issues with California’s state-run grid, it is a fallacy to claim that deregulation has been bad for Texas energy consumers. The American Institute for Economic Research (AIER) rightfully explains that “other than extraordinary circumstances, Texas’s deregulated system has in fact lowered prices, increased competition, and improved service for Texans.”[viii] The U.S. Energy Information Administration (EIA) found that Texans paid 28 percent less per kilowatt hour than the average American in 2019.[ix] The Texas Public Utility Commission (PUC) operates a tool called “Power to Choose,” which offers consumers options based on their level of energy consumption and location.[x] There is some research involved in choosing the best rate plan, but the savings can be substantial.

Outlets like KUT and others would have you believe that deregulation has only benefitted energy companies and their investors, while leaving consumers out in the cold. But the reality is that competition and deregulation are crucial to improving the performance of the grid. More competition allows markets to learn from events and make appropriate adjustments. AIER sums this point up perfectly: “This is the major advantage of any deregulation market: it is adaptive. The same cannot be said for any system of regulated state control.”[xi]

[i] [ii] [iii] [iv] [v] [vi] [vii] [viii] [ix] [x] [xi]