February 22, 2014

Consumers pay to soothe the fears of Texas policymakers

Public Utility Commission policy change would cost more and wouldn’t work.

A newly released study suggests that policymakers’ fears of being held responsible for power outages lead to higher costs for consumers.

The study found that policymakers usually desire a higher level of reliability than is “economically optimal,” so they set capacity reliability standards for electricity markets above the level that best balances the costs of outages with consumer prices.

The higher standard means higher prices.

Although the study’s author, the Brattle Group, doesn’t explicitly blame higher prices on the fears of policymakers, this is clearly the phenomenon at work in the Texas debate over shifting to what’s called a “capacity market.”

Back in 2012, two reports projecting future supplies of electricity below Texas’ reliability standard (a smaller reserve margin) triggered a panic among Texas policymakers.

Ignoring the obvious flaws in the reports, Texas’ Public Utility Commission began a push for a $3.2 billion electricity tax on Texas consumers to subsidize generators and, at least in theory, increase capacity (a higher reserve margin).

Perhaps the panic stemmed from policymakers’ fears of not wanting to be in charge when the lights went out. In any case, the fear of blackouts led to support for a system that actually makes outages more likely to occur.

As we know from experiences outside Texas, capacity markets are less efficient and less reliable than competitive markets. So while blackouts become more likely, the centralized nature of capacity markets may give policymakers the illusion of control.

The result is that while policymakers feel more confidant, consumers wind up paying more for a less-reliable system.

This phenomenon is nothing new to Texas. Fifteen years ago, regulators at the Texas Department of Insurance feared that insurance companies would charge consumers too much for homeowner policies. The resulting regulations led to the Texas mold crisis that cost consumers hundreds of millions of dollars in higher premiums.

Policymakers are often successful in pushing these expensive regulations because the costs are usually hidden from consumers — at least until it is too late.

In this case, the Brattle Group claims that policymakers’ imposition of a higher reliability standard in Texas won’t cost consumers too much. It does this by offsetting the certain $3.2 billion a year electricity tax with theoretical savings generated from its economic model.

It is unlikely, though, that those theoretical savings will actually materialize to help Texas consumers pay their electricity bill.

Advocates for a capacity market also argue that the competitive market won’t be able to meet the demands of consumers if they want a higher level of reliability.

At the Texas Public Policy Foundation, we hear this all the time. Markets are fine generally, it is said, except when it comes to this particular market. So the free market may work for computers, but not for insurance, water or electricity.

This simply isn’t the case.

The unparalleled success of Texas’ world-class electricity market has shown time and again that consumers’ preferences are reflected in the price and choices available in the market. If consumers are willing to pay more for increased reliability, consumers will get what they want.

In fact, the cost for consumer-driven reliability would be much less than the proposed capacity market because the competitive market is more efficient. Additionally, prices will be higher in a capacity market because they are set by regulators under the influence of profit-seeking corporations.

Perhaps the most important thing to remember is that whatever the price electricity will be in the competitive market, the price will reflect the preferences of buyers and sellers, not of policymakers.

For both moral and practical reasons, policymakers should stick with the competitive electricity market.

Bill Peacock is the Vice President for Research and Director for the Center for Economic Freedom at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. bpeacock@texaspolicy.com

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