Deregulation of the Texas Electricity Market

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Texans use more electricity now than they ever have before, and retail electricity providers deliver power to about 27 million people in the state.

The market has been able to absorb this huge increase in demand by the free operations of the market, not direct government controls.

This article will teach you about the history of deregulation in Texas so you will be informed when shopping for the best electricity rates for your home.

Energy deregulation in Texas has helped create a robust competitive marketplace that can meet the public’s electricity needs while giving you the power to choose your home’s electricity provider.

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Deregulation of the Texas electricity market

Texas has a long cultural history of independence and freedom of personal choice. So, it’s no surprise that the state was among the first in the nation to free its electrical power grid from government control.

The first power plant in Texas was built in Galveston in the 1880s, just as the nation was starting to rebuild after the Civil War. Dozens of electricity generation facilities followed, mostly relying on the state’s mighty rivers and streams to generate plentiful hydroelectric power. Texas cities electrified quickly, and by the 1890s most major cities in the state were aglow with electrical lighting.

As anyone who has ever lived in or visited the state knows, Texas has robust natural resources. By the end of World War II, more than one million Texan homes were connected to the electrical grid.

By the late 1960’s, Texas was able to harness these resources into a strong electrical grid that was capable of providing power across the entire state. So, in 1970, the State created the Electric Reliability Council of Texas, or “ERCOT.”

Ever since then, ERCOT has been responsible for managing the Texan electrical grid. As part of this responsibility, ERCOT passes rules and regulations pertaining to electric utilities in Texas. This includes both consumer protection policies and public safety measures.

In 1975, the Texas legislature enacted the Public Utility Regulatory Act (“PURA”), which was aimed at providing the State with greater authority to regulate electricity rates and services. Prior to PURA, cities throughout Texas were individually responsible for regulating their respective electricity rates and services.

Thus, PURA represented a major change in the regulation of electricity in Texas. Rather than allowing electric companies to compete and deal with local communities individually, PURA allowed the state government to control electricity services.

Unfortunately, state regulation of energy markets didn’t go very well under PURA. Electricity rates skyrocketed after PURA’s enactment, largely due to an inflated market and the need for increased electric capacity. This prompted the Texas legislature to act again, this time with the goal of deregulating the electricity market in hopes that it would decrease electricity costs for Texan consumers statewide.

George W. Bush, who was Governor of Texas at the time, strongly supported electricity deregulation in the 1990s. “Competition in the electricity industry,” he claimed, “will benefit Texans by reducing rates and offering consumers more choices.” This sentiment, which was shared by many in the Texas legislature, guided Texas’ energy marketplace toward deregulation.

As a result, the Texas legislature passed two laws meant to deregulate the state’s electricity market. First, in 1995, the Texan legislature passed Bill 373, which changed ERCOT’s responsibilities with regard to regulating utilities. While Bill 373 represented a critical policy shift, it didn’t break down the state stronghold on electricity markets as well as the legislature had hoped. For this reason, the State passed Senate Bill 7 in 2002.

Senate Bill 7 fundamentally altered how Texans get their electricity. Before this law, electricity rates were tied by law to the cost of the fuel. In fact, power plants, electric lines, and entire customer distribution networks were owned by public utilities commissions rather than private enterprises.

By restoring privatization and breaking down regulations in the energy market, the Texas legislature hoped that a more competitive marketplace would emerge. With higher competition, customers would see lower rates.

Even despite popular and political support, full deregulation of Texas’ electricity market wasn’t easy. ERCOT, the entity responsible for implementing deregulation, faced early challenges shifting their internal operations to accommodate their new tasks. In fact, on the day that the deregulation pilot project began, ERCOT experienced system failures.

Power companies sent switch requests to ERCOT and their computer systems were unable to process the requests. Instead, ERCOT officials had to utilize manual workarounds rather than the fully-automated systems it was meant to rely on. This setback led to significant delays of electricity services, and electricity prices started to spike in response to the volatility.

Fortunately, however, the rough start to deregulation has given way to a smoothly-operating industry. Now, nearly all Texas power customers are able to choose among several retail electricity providers when deciding on their electric company.

Since Senate Bill 7 fully deregulated Texan power markets in 2002, customers have embraced the freedom of choice they get in selecting electricity service providers. And, more and more service providers are coming online all the time, making rates even more competitive and tailored to local needs.

Over the past fifty years, energy regulation in Texas has shifted from local regulation to statewide regulation, and then finally to deregulation. Texas deregulated its energy market to help make sure Texans have access to electricity at a competitive market price. As a result, Texans across the state can now enjoy the benefits of competitively-priced electricity without the burdens of excessive government controls.

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