Competitive Electricity Markets in Texas: a Primer

The Texas Legislature’s restructuring (sometimes called “deregulation”) of the retail electricity market, which began in 2002, applies only to investor-owned utilities (IOUs) within the ERCOT region. Utilities owned by cities and rural cooperatives may join the deregulated market but are not required to do so, and so long as they do not, they are called “non-opt-in entities” (NOIEs). So far, only one Texas cooperative and no city-owned utilities have opened themselves to competition.1

Competitive markets exist where traditional IOUs once operated prior to deregulation. The PUC refers to these market areas by the names of the pre-existing utilities that were once their sole electricity providers — Oncor, AEP North, AEP Central, Centerpoint and Texas-New Mexico Power (Exhibit 1).

Exhibit 1

Texas Competitive Retail Areas

This map of Texas highlights the service territories of five major regulated electric utilities as they existed prior to electric competition in 2002. The five territories – Texas-New Mexico Power Company, AEP Texas Central, AEP Texas North, CenterPoint Energy and “other” – are now served by competitive retailers, but the Public Utility Commission of Texas still recognizes these areas by their former regulated entities’ name.

Source: Public Utility Commission of Texas

To introduce competition, the incumbent IOUs divided themselves into separate wholesale generation, transmission and distribution and retail companies.

  • Suppliers of wholesale generation are deregulated companies that own power-generating plants and sell electricity to retail electric providers (REPs).
  • Transmission and distribution utilities (TDUs) are regulated companies that own the power lines through which the electricity flows.
  • The retail segment comprises REPs that sell electricity to end users.

The Legislature believed that REPs spun out from IOUs would have a built-in competitive advantage in the newly deregulated market. To foster competition, state law required PUC to set a mid-range “price to beat” for retail electricity sales to residential and small commercial customers that incumbent retailers were required to offer; emerging competitors could offer a lower price if they chose. After competitors achieved a foothold in the market, PUC gradually lowered the “price to beat” until all retailers were free to set their prices in an open market.

Today, PUC tracks how many customers within the former incumbent utilities’ markets now purchase electricity from a competitive REP. PUC reports that 57 percent of all residential customers in these areas were purchasing electricity from a competitive REP as of December 2011.2

Outside of ERCOT’s territory, and in the areas of ERCOT served by co-ops and city-owned utilities, a single entity still can generate, transmit, distribute and sell electricity to retail customers, as a “vertically integrated” utility. Southwestern Public Service Company, for example, is an integrated utility serving the Panhandle and South Plains within the SPP.3 Austin Energy and City Public Service of San Antonio are vertically integrated MOUs within ERCOT.

Generation

In 2010, Texas’ net generation capacity totaled 108,258 megawatts (MW).4 Net generation capacity is the maximum amount of electricity all Texas generators could produce at a single moment, less the electricity needed to run the generation facilities. Actual generation totaled 411.7 million megawatt hours (MMWh), with natural gas-fueled generation accounting for 45.4 percent of the total, followed by coal at 36.4 percent and nuclear at 10 percent. Renewable fuels, primarily wind, provided 6.7 percent. These figures contrast with the 1990 fuel mix, when natural gas provided 48.4 percent of total generation, followed by coal with 42.9 percent, nuclear with 5.6 percent and wind and other renewables provided only 0.5 percent. (Exhibit 1.)5

Exhibit 2

Texas Electricity Generation, by Fuel

Download Data

Texas hosts several types of electricity generators. Perhaps surprisingly, traditional electric utilities, such as MOUs, co-ops and IOUs outside ERCOT’s jurisdiction, provide only a quarter of the state’s capacity. With deregulation, independent power producers flourished as companies only in the business of generating and selling electricity. These companies (and some manufacturing plants that generate their own power, such as oil refineries and chemical plants) account for three-quarters of state capacity.6

The transmission and distribution of electricity over wires remains regulated throughout Texas. This is because economists and governments view transmission wires and poles as a natural monopoly, since it would not be economically efficient for multiple companies to duplicate transmission-line networks.

The 1995 Texas Legislature deregulated wholesale electricity sales between power generators and REPs within ERCOT’s territory. This wholesale market is subject only to limited regulation by PUC, while FERC oversees wholesale markets in the non-ERCOT regions. Under a 2005 federal law, FERC also assumed reliability oversight over the entire state.

About 70 percent of the electricity consumed within ERCOT’s deregulated market is purchased from competitive providers. The remainder is provided by a traditional, regulated market outside of ERCOT, or by a NOIE.7

Texas Municipal and Cooperative Electric Systems

According to PUC, 77 municipally owned utilities (MOUs) currently serve Texas cities including Austin, Lubbock and San Antonio, as well as smaller cities and communities such as Brady, Floresville, Pineland, Seymour and Tulia.

MOUs are publicly owned, nonprofit utilities that generate or purchase power and control its distribution to area residents. Municipal utilities began in the 19th century as a way to bring power to cities that lacked investor-owned utilities. Municipal governments either set their own electric rates or approve the rates set by their utilities.

Energy cooperatives were first created in the 1930s, to bring power to rural communities where investor-owned utilities could not operate profitably. Federal legislation allowed people in sparsely populated areas to join together to borrow money at low-interest rates and build facilities to bring electricity to their homes and farms.

Today, 73 co-ops provide electricity in communities throughout Texas.8 These electric cooperatives are private, nonprofit utilities owned and controlled by the members they serve. Cooperatives pay no federal taxes, but do pay state property taxes.

River Authorities

River authorities are both electricity generators and wholesalers, often selling to co-ops, but do not sell power in a retail environment.

Between 1929 and 1949, Texas formed four river authorities to manage water resources and produce electricity. The Lower Colorado, Brazos, Sabine and Guadalupe-Blanco river authorities still operate today. These authorities operate under state authority as independent nonprofit organizations. They do not have taxing authority, instead covering their operating expenses with revenues and fees generated by their energy, water and community services. A governor-appointed board of directors manages each authority.9

The Lower Colorado River Authority (LCRA), created in 1931, is by far the largest electricity producer among the authorities, with more than 3,600 megawatts of installed electrical capacity. LCRA does not sell electricity directly to retail customers but instead sells wholesale to more than 40 retail utilities, including MOUs and electric cooperatives that serve more than a million Texans in 55 counties. LCRA also operates more than 3,300 miles of transmission lines.10

The remaining river authorities (Brazos, Sabine and Guadalupe-Blanco) are primarily water conservation and reclamation entities; each can generate electrical power but none has more than 30 megawatts of installed capacity.11

1 Public Utility Commission of Texas, “Alphabetical Directory of Retail Electric Providers,” http://www.puc.state.tx.us/industry/electric/directories/rep/alpha_rep.aspx. (Last visited February 14, 2012.)

2 Data supplied by Grace Godines, Competitive Markets Division, Public Utility Commission of Texas, April 12, 2012.

3Southwestern Public Service Company, a subsidiary of Xcel Energy, “2011 Annual Report,” p. 7, http://thomson.mobular.net/thomson/7/3205/4595/. (Last visited April 5, 2012.)

4U.S. Energy Information Administration, “Texas Electricity Profile, Table 4: Electric Power Industry Capability by Primary Energy Source, 1990 through 2010,” available in Excel format at http://www.eia.gov/electricity/state/texas/index.cfm. (Last visited April 5, 2012.)

5U.S. Energy Information Administration, “Texas Electricity Profile, Table 5: Electric Power Industry Generation by Primary Energy Source, 1990 through 2010,” available in Excel format at http://www.eia.gov/electricity/state/texas/index.cfm. (Last visited April 5, 2012.)

6Energy Information Administration, “Texas Electricity Profile 2010, Table 4.”

7Electric Reliability Council of Texas, “ERCOT Quick Facts,” http://www.ercot.com/content/news/presentations/2012/ERCOT%20Quick%20Facts%20-%20Jan%202012.pdf. (Last visited February 7, 2012.)

8Public Utility Commission of Texas, “Electric Industry, Market Directories: Electric Companies Serving Texas,” available in Excel format at http://www.puc.state.tx.us/industry/electric/directories/Default.aspx. (Last visited February 29, 2012.)

9See Lower Colorado River Authority, www.lcra.org; Sabine River Authority, www.sratx.org; Guadalupe-Blanco River Authority, www.gbra.org; and Brazos River Authority, www.brazos.org. (Last visited February 22, 2012.)

10Lower Colorado River Authority, “The ABCs of LCRA,” http://www.lcra.org/about/overview/index.html. (Last visited February 22, 2012.)

11U.S. Energy Information Administration, “Existing Electric Generating Units in the United States, 2010,” available in Excel format at http://www.eia.doe.gov/cneaf/electricity/page/capacity/capacity.html. (Last visited February 22, 2012.)