Why did electricity rates zig when they should’ve zagged???

If there’s one thing that deregulation has taught us, it’s that while the market does result in price competition, the end result may not exactly come out in the wash. When prices are legally controlled, the cost of the product is dictated by the supplier or manufacturer within a range set by the regulating body and it’s usually geared to the “average” cost of production. Deregulation, such as what happened with Texas electricity rates, means that the price is determined by market demand – Retail Electric Providers buy energy in blocks and resell it and, like any other industry, buying in bulk results in a lower per-unit price. That’s why buying a drill at “Bob’s Auto Supply and Dentistry” is going to cost you more than the same drill at Home Depot: Bob’s only buying two or three drills a month, while Home Depot is buying two or three hundred a week! With regulated power, the governing utility set limits on how much can be charged, whether or not it’s in line with the actual cost of cooking up the electricity and serving it to the customer.

The bubble of wishful thinking hits the needle point of Reality

In a perfect world, market competition is better for the customer than regulation because there is incentive for new players to jump into the water. This means the customer has the power to choose which of the Retail Electric Providers will suit his needs. Those who provide a superior product at a competitive price will profit and those that don’t, won’t. But clearly that isn’t always what happens: after deregulation in Texas, electricity rates for some did drop but overall, the prices went up faster when compared to regulated areas of the state. Why is that?

Part of the problem is that when prices are regulated, they are usually not in line with anything in the real world. Sure, we’d all like to pay 2c/kWh for our electricity but if it costs 5c/kWh to generate it, that’s pie-in-the-sky thinking. In a regulated market, the price is geared to the average cost of production – terrible news for solar thermal power generation (which costs the most) but very good news for natural gas and coal (which cost the least). So now the producer is handcuffed to the price they get which means either they cut back production or else it’s back to the government of Texas, electricity generation expenses in hand, doing the Oliver Twist (“P-p-please suh…. I want some more!”) just to stay in operation, never mind making any kind of profit. This is a real buzzkill for anyone thinking to start up a power generation business because “The whole point of starting a business is to lose money” said nobody, ever.

Corporate welfare: a self-fulfilling prophecy

Let’s say we have two cities in Texas, A and B. City A is regulated – they love their cheap power, they love having no Retail Electric Provider middlemen, and they’re comfortable with having just one utility as a go-to. They’re so comfortable with their electric rates that they’re not exactly conservative when it comes to using it (folks, this actually happens!). City B is deregulated – there’s more confusion and chaos, it’s a bubbling pot full of Retail Electric Providers all fighting to get to the surface and attract more customers yet their electric bills are not as low as City A’s even though City “Beople” are very responsible with their energy usage. City B customers are upset and annoyed: why do City A citizens pay less for more power when they don’t even have a free market? What they don’t realize is that part of the reason City A’s electric bills are so low is that, periodically, the state government has to top up the generator’s bank account – that means that everybody in the state, including the citizens of City B, is helping City A pay their power bills while City B people are self-sufficient and taking care of their own business while helping out City A!

When you look at it, which one really is the American way?

The smart thing to do is to keep on top of your electricity bill and shop, shop, shop! Visit ComparePower on a regular basis so when it’s time to renew your contract, you’ll have no doubt that you have the perfect plan to meet your needs at a price you can afford.