The Case for the Deregulated Texas Power Grid

After the widespread power outages in Texas, reputable publications – the New York Times, Wall Street Journal and USA Today – blamed deregulation for the electrical grid’s failure.

What’s the alternative to deregulation?

California, in stark contrast to Texas’s system, instituted a public-private monopoly of the electric grid with the California Independent System Operator (CAISO) following blackouts and attempts to deregulate in the late 1990s.

High temperatures and increased demand in the early 2000s led to controlled, rolling blackouts under California’s deregulated grid. The same occurred as recently as the summer of 2020 with California’s state-run grid, as the New York Times acknowledges: “Poor Planning Left California Short of Electricity in a Heat Wave.”

Still, writers at the Times insist that “…Texas’ Drive for Energy Independence Set It Up for Disaster.”

Success of Texas’s Deregulation

Other than extraordinary circumstances, Texas’s deregulated system has in fact lowered prices, increased competition, and improved service for Texans. Following passage of the bipartisan Texas Senate Bill 7 in 1999, the energy sector was deregulated by unbundling each of the three stages of electricity provisioning: generation providers, transmission owners, and retail companies. Competition at each stage of the energy provision process has resulted in low energy prices in Texas of 8.28 cents per kWh for all sectors in 2019 compared to the national average that same year of 10.6 cents per kWh — Texans paid 28% less per Kilowatt hour than the average American in 2019.

Even the writers of the Times’s article critiquing Texas’s deregulation admit that Texas’s current system works outside of the rare instance of a supply shock:

“Mr. Bush’s prediction of lower-cost power generally came true, and the dream of a free-market electrical grid worked reasonably well most of the time, in large part because Texas had so much cheap natural gas as well as abundant wind to power renewable energy.”

To reverse course on a policy that makes electricity cheap and accessible to those who might otherwise not be able to afford it defies good sense. Moreover, the skyrocketing demand on the grid produced by the freezing temperatures threatened to cause a total blackout which Bill Magness, president and chief executive of the Electric Reliability Council of Texas (ERCOT), explained to the Times would mean

“talking about how many months it might be before you get your power back.” (Italics my own)

Price-Gouging: An Appropriate Response to Supply Shocks

While ERCOT should be, and has been, criticized for not doing in-person checkups of power plants, as documented by NBC, their policy of rolling blackouts coupled with the price hikes by electric companies reduced the quantity of electricity demanded such that the entire grid didn’t collapse indefinitely. Many non-economists denounce sellers’ raising the price of goods and services following a calamity – or any other reason for a leftward shift in supply – as “price-gouging.” As Donald Boudreaux points out in his article, New Light on Price Gouging, sellers are only able to raise the price to that level at which buyers are willing to purchase the commodity for. The process is entirely a two-way street,

“[a]nd so if modern-day witch hunters insist on persecuting those whose actions cause plywood prices to soar, they should fling at buyers’ fury no less fierce than is the fury that they fling at sellers. Yet seldom, if ever, do these witch hunters give evidence that they understand the role played by buyers in setting prices.”

To be sure, there were some highly publicized cases of exorbitant billings that strike people as unjust. To the indignation of many, The New York Times reported: “His Lights Stayed on During Texas’ Storm. Now He Owes $16,752.” In the piece, Mr. Upshaw describes his multi-thousand-dollar electric bill as

“not a cost that any reasonable person would have to pay for five days of intermittent electric service being used at the bare minimum.”

Mr. Upshaw is absolutely right – provided a normal supply of electricity. However, given its drastically reduced supply, electricity was allocated to those who valued it the most. Griddy, the variable rate electricity supplier, did not avail itself of an asymmetry of information between itself and its customers regarding the incoming rate hikes due to the storm, but

“encouraged all of its customers — about 29,000 people – to switch to another provider when the storm arrived.”

It’s politically expedient to blame an increase in prices on evil, greedy capitalists rather than acknowledge that the consumer is equally responsible and the whole process is actually an efficient and fair way to allocate resources in times of extreme scarcity and soaring demand.

Not only do laws forbidding “price-gouging” do nothing to increase the supply and access to whatever good is being demanded; they artificially dissuade entry into the market, i.e. they perpetuate the shortage by destroying the incentive for new firms to enter the market by imposing an effective price ceiling.

Government Control of Utilities

To delegate control of utilities to the public sector presupposes no risk to ceding control of utilities to the state. Had the electric utilities been run by the state in this crisis, their response could not have been better, considering the external factors of inclement weather, icy roads, and frozen oil wells. In fact, the Times authors state the very same:

“[e]ntire energy infrastructure was walloped with glacial temperatures that even under the strongest of regulations might have frozen gas wells and downed power lines” (italics my own).

Government officials are susceptible to political pressures which might encourage them to not initiate controlled blackouts of their voters, leading to a wholesale collapse of the entire grid for months.

California has been struggling with its outdated, crumbling electrical infrastructure, especially amidst increased demand for power during the summer months and wildfires. Even worse, when the government controls utilities, it can engage in dystopian behavior as exhibited in California towards those ne’er do wells, those so-called “superspreader” teens, who had their water and power shut down following their deigning to engage in unsanctioned, nonessential gatherings in L.A.

A government-run electrical grid might not raise prices in times of crisis, but unless it has some mystical ability to conjure energy ex nihilo, it will have to decide, either arbitrarily or upon some other discriminatory criterion, whose power gets shut off first, last or let the whole state go dark to avoid claims of unfairness.

Deregulation has been good for Texas residents by providing them with competitive, low prices. When the Texas grid failed recently, it was due to extrinsic circumstances that an expensive and heavily-regulated grid would have similarly struggled to handle.

In the face of demand surges and supply shocks, a government-run grid would have still had to decide whose power gets shut off, lest the entire grid be allowed to collapse completely.

While ERCOT failed in not inspecting the grid in-person due to concerns over the coronavirus, its response to issue controlled, rolling blackouts was rational and imperative to returning power to the state in under a week rather than weeks or months.

Calls to increase regulation do not consider the costs and benefits of such political action. What happened in Texas was nearly unprecedented. Markets learn from outlier events such as this one. Institutions and individuals will adapt in light of new perceptions of weather exigencies and risks. This is the major advantage of any deregulation market: it is adaptive. The same cannot be said for any system of regulated state control.

‍

This article was originaly posted On AIER and has been reposted with permission.

‍