With the aim of facilitating a better-informed debate, we embarked earlier this year on the preparation of a series of studies of energy retail markets around the world. Here we look at some of the findings of the first of these studies, which will be launched shortly. It focuses on the state of Texas in the US--a good place to start, because the retail electricity market there is probably the most competitive in the world.
Texas' location within the US has made it ideal for the development of a successful competitive electricity market, without external control. Every other market in the nation is under the authority of the Federal Energy Regulatory Commission (FERC); but the Texan grid operator ERCOT (the Electricity Reliability Council of Texas)-operates in effect as an electrical island, with only a few interconnectors importing and exporting electricity. In 1975, Public Utility Commission of Texas (PUCT) was created, taking control of wholesale and retail market regulation in the state. For almost 20 years, PUCT regulated the system heavily, as was the case in all non-competitive markets pre-reform. The state's incumbent energy suppliers included approximately 60 city-owned utilities and 74 rural electric cooperatives. But the majority of supply came from five private-companies. Suppliers were responsible for meeting their own load demands through own-generation or short-term bilateral contracts.
In 1995, the Texas legislature evolved the ERCOT into a full independent system operator, creating a wholesale electricity market. Then, in 1999, it established the framework to require retail competition in electricity for customers of private utilities. It restructured the electric utility industry, requiring functional unbundling of vertically integrated companies. The framework:
- designated ERCOT responsible for operating the interconnected network in Texas as a single control area, and to that end it had to implement a balancing arrangement for wholesale trading between generators;
- provided that a pilot retail customer choice programme should commence in June 2001, with full retail choice beginning in January 2002 for the then 6.1mn meter points served by the investor-owned utilities. In future, customers would be supplied by "Retail Electric Providers" (REPs); and
- required PUCT to designate "providers of last resort" to ensure all customers had access to electricity.
The retail market was thus kick-started in 2002, but in an interesting way. In their traditional service territory, the incumbent retailers were initially only able to offer a "price-to-beat" tariff, set at 6% less than the rates in effect on 1 Jan 1999. This rate was readjusted twice a year based on changing wholesale prices, which stopped incumbents from offering lower prices. The price-to-beat continued until the incumbent lost 40% or more of residential and small commercial load, or until January 2005 (whichever came first). But the incumbents were free to seek customers in other companies' areas. Thus, Reliant Energy (a split off from Houston Lighting & Power caused by the reform) lost 600,000 of its legacy customers in the Houston area, but won 550,000 in other areas.
The Annual Baseline Assessment of Choice in Canada (ABBACUS) has highlighted the success of price-to-beat tariff in encouraging REPs to enter the market. The number of active REPs had increased by 2013 from 10 to 52 and the number of products to increase from 11 to 322.
Switching rates have been strong. Since 2002, over 63% of residential customers have moved away from their incumbent suppliers, with virtually all of the remainder choosing competitive rates with the incumbent REPs. The comparable rate in the small non-residential sector is 70.5% and in the large non-residential sector it is 77.2%.
Texas is therefore considered a "hot market" by switching analyst VaasaETT, having experienced rates of around 13%/ year since 2002. The switching rate in 2013 was over 14%. Every customer in Texas that could choose a competitive electric service has done so, compared with 68.5% in Illinois and 50.2% in Ohio.
Currently, the market has 110 REPs, alongside non-competitive municipal, cooperative and investor-owned suppliers. The largest three suppliers in Texas are TXU Energy (with 15.77% of Texan customers), Reliant Energy (12.28%) and CPS Energy (the non-competitive municipal-owned supplier in San Antonio) (6.54%).
The Texan market has a Herfindahl-Hirschman Index (HHI) of 440, showing very low retail market concentration and a highly competitive market. Its retail prices are slightly below the US average, though it does enjoy access to lots of cheap gas. And, according to ABACCUS, it is the most competitive residential and industrial & commercial market in the US.
The competitiveness of the market has alleviated the need for deep regulation. While the PUCT has been vigilant in monitoring and resolving customer complaints, it treats the retail market as any other market and does not become involved any more than is necessary. It takes a "hands off" approach, collecting little data about the retail and wholesale markets, though retailers must publish their own complaints data by month by category, and they are awarded a "plug" rating, which shows their performance relative to their competitors.
The regulator has, however, done much to educate consumers, and plays a key role in empowering them to act in the market. Notably, the PUCT has, since 2001, operated a "Power to Choose" website, which helps customers compare offers and shop for providers, as well as learn more about the incentives for energy efficiency. It does not, however, switch customers directly, rather linking through to the companies' own websites, and the emphasis is on finding the cheapest plan given the consumer's preferences, not on savings. The site is simple and very user friendly.
A common offering available through most, if not all, suppliers is a "month-to-month" product that allows customers to switch at short notice and generally allows suppliers to change price at 45 days' notice. Indeed there are many providers of three and six month plans in contrast to GB, and under and over utilisation charges are a standard feature of the market.
Smart meters are the norm (see below). Many tariffs are typically multi-rate based on a customer's electricity usage, with provision of "lifeline" rate for low consumption customers. For example, on the Power to Choose website, Green Mountain Energy's tariff, "Pollution Free Conserve 12 Choice" says that: if a customer uses 500kWh per month, they will pay 5.6¢/kWh; if they use 1000kWh, they will pay 6.2¢/kWh; and if a customer uses 2000kWh or more, they will pay 8.9¢/kWh. In contrast, standard plans see a diminishing usage charge with higher consumption as fixed charges (usually metering and customer charges). Termination fees are administered and these appear high compared to GB.
Competition is encouraged by the fact that, when a customer transfers, there is no obligation on them to stay with their current supplier--not even to pay a termination fee. When moving into a new property, a customer must find a new supplier for the property as the old one is removed along with the property's electricity supply. However, a customer cannot switch more than once every 12 months, unless it takes a short duration plan and this expires. The switch must be performed as soon as reasonably practical.
Moreover, the Texas Legislature recognised in 2005 the benefits that could accrue from smart meters, supporting their deployment in the state. Legislation passed in 2007 ruled that "net metering and advanced meter information networks be deployed as rapidly as possible to allow customers to better manage energy use and control costs, and to facilitate demand response initiatives." The responsibility went to the transmission and distribution utilities (TDUs) and, as of September 2014, TDUs in ERCOT had rolled out to 95% of customers, with over 6.7mn meters installed. For these customers switching can be implemented in that day's data run if communicated in time.
The PUCT decided to give people a choice to opt out of smart meters, but customers have to pay the costs that will be incurred. This can be a one-time fee, a recurring fee or both.
So there are several aspects to the success of the Texas electricity market. FERC's lack of involvement with the wholesale market and transmission has circumvented the challenges of overlapping jurisdictions and turf wars between federal and state authorities typical of the US, and restrictions on the level of capacity that corporations can own has facilitated the development of a very liquid contract market. Regulatory rules are relatively light though the state regulator has revoked a number of certificates following investigations.
The market has also benefited from the requirement on consumers to make a positive decision to choose a supplier when they move. But perhaps our most notable finding was the positive feeling among industry participants towards the regulator PUCT, which was commonly regarded as fair and as having established proportionate market rules with minimal price regulation.