Electric deregulation might be the cure for Weatherford

Your electric bill could be worse: You could live in Weatherford.

About 30 miles west of Fort Worth, the city has generally enjoyed lower electric rates than most other places in Texas — until this summer, when prices nearly doubled and residents revolted. Last week, voters filed a recall petition for two City Council members, and the city manager resigned, barely holding back tears.

The public reaction was extreme, but residents are angry and anxious about electric prices throughout the state. What’s unusual about Weatherford is that its electricity comes from a city-owned utility with regulated rates.

Many people thought that munis and electric co-operatives were somehow protected from extreme price swings, but Weatherford’s case shatters that illusion. (More examples: San Antonio’s muni raised rates by 31 percent this summer, and the Magic Valley co-op in South Texas had a 42 percent price hike.)

It’s refreshing that no one in Weatherford is blaming deregulation, the favorite whipping boy for every price spike in Texas electricity. Some residents even suggested that dereg is the best antidote to the problem, and city leaders say they’re considering all options, including getting out of the electric business.

The Weatherford experience shows that munis, like all other electric providers, can be waylaid by high natural gas prices and bottlenecks in transmission lines. But it also raises questions about whether the wholesale power business is becoming too competitive and complex for small operators.

It takes expertise in hedging and high finance to stay abreast of a rapidly changing market. And with the stakes growing, residents have to ask whether they want their city to divert so much attention from other services — and whether their muni can hold its own in a crowded, cutthroat industry.

"Maybe you can’t be in this part time," says David Sibley, an economics professor at the University of Texas at Austin. "It’s become a wild and woolly market, and the most sophisticated players know how to insulate themselves."

Weatherford officials got into trouble with a few bad bets. A year ago, they signed a five-year contract to get 40 percent of the city’s power from a coal plant in Vernon, a cheaper alternative than going for supplies strictly from natural gas.

But transmission lines from West Texas got clogged this spring after a lot more wind power came online. The city faced an additional $1.5 million charge to use the lines, and officials responded by changing the power contract to all-natural gas, with a variable rate.

Soon, gas prices spiked, and Weatherford’s electric rates jumped to almost 20 cents a kilowatt-hour in July from 10 cents in November.

"If we could do it over again, we would have locked in natural gas [supplies] a year ago, but nobody anticipated all this," says Sharon Hayes, Weatherford’s utilities director.

Mistakes happen, and Weatherford hasn’t made a lot. But unlike the competitive world, residents have to pay for them.

Rates in Weatherford fell to 15 cents per kwh in September as natural gas prices softened. That’s still well above the lowest competitive rate available in the area, around 12 cents.

Rep. Phil King, R-Weatherford, strongly supports deregulation, and he urged Weatherford to consider joining the competitive market. He lives outside the muni’s area, so he can buy electricity from any provider.

In July, he told the city that he was paying 11.6 cents per kwh compared with 19.9 cents for Weatherford’s muni. He had locked in his rate in the fall.

"The [commodity] markets are catching up with the munis and co-ops," King says. "And it’s very difficult for them to have the expertise to compete with the big guys like Reliant and TXU."

Munis and co-ops provide electricity to about 30 percent of Texas residents, and they have a good track record of reliability and low prices. In general, the biggest ones report that rates are about 1 cent to 1.5 cents lower per kwh than the lowest offers from providers in competitive areas.

When natural gas prices climb, their advantage grows because munis often have longer-term contracts, which translate into more stable rates.

"You’re not paying for profits," says Steve Moffitt, division manager for McCord Engineering in College Station and a consultant to Weatherford and other munis. "We don’t hear a lot of complaints about not having a choice [of providers], because customers usually have lower prices."

Among munis and co-ops, only Nueces Electric has joined the competitive market since the state fully deregulated, in 2002.

Moffitt says Weatherford’s problems were an anomaly, but I won’t be surprised if similar issues arise more often and if more residents start calling for competition. For better or worse, at least you get to choose your plan in a free market.

People in Weatherford could have avoided the summer price shock, or at least tempered it, if they had been allowed to shop around. Instead they were stuck with the city’s bum call.

Several small retail providers made the same mistake as Weatherford, gambling on spot prices for natural gas. They went out of business.

But in a regulated market, everybody pays for the losers.