Most Texas Consumers Didn

Most Texas Consumers Didn't Switch Providers after Deregulation

By Sudeep Reddy, The Dallas Morning News -- April 18

For more than two years, Texas consumers have been bombarded with phone calls, advertisements and door-to-door pitches about changing their electricity service.

The reaction from the vast majority: Nothing.

Almost 28 months into electric competition, millions of consumers have scoffed at the notion of switching from their longtime providers.

But as state officials prepare for the first full-scale review of the electric deregulation law and the agency that implements it, they'll face a question that many had hoped would never come up:

What happens if Texans don't switch?

Ever mindful of potential cost savings, big businesses and other large users have quickly embraced the right to change electricity providers.

But residential customers, for whatever reason, haven't proved as price-conscious. As of December, in areas of the state open to competition, 14 percent of residential consumers received power from a provider that hadn't traditionally served the region.

Residential switching has slowly inched upward since the market opened, but every region remains dominated by the incumbent such as TXU Corp. in North Texas.

State officials are reluctant to characterize exactly how quickly they had expected consumers to embrace deregulation, but they insist it's on the right track.

"I don't think anybody contemplated upon the bill's passage in 1999 that it wasn't going to take a while for the market to develop," said Paul Hudson, chairman of the Texas Public Utility Commission, which oversees the electric industry.

Critics of deregulation say the state's approach to overseeing the market is flawed. Some consumer groups say the PUC has left most consumers behind as it's evolved from regulating rates to overseeing competition.

"All markets have limits," said Tim Morstad, a policy analyst at Consumers Union. "You deregulate a market and the bottom line seems to be promoting competition, not so much securing reasonable, affordable electricity for customers. We think it's time that the PUC and the Legislature recognize that putting electric customers first should be the bottom line."

The Sunset Advisory Commission, which reviews state agencies and legislation, will meet this summer to discuss electric deregulation and the PUC. The agency's staff is expected to release its first reports Monday.

The process will carry over into the 2005 legislative session, and consumer groups have already said they'll seek changes in the deregulation law to address problems that could result from the relatively low interest in competition from residential users.

The commission's review will be the first comprehensive look at deregulation since markets opened for competition in January 2002. And it will come as consumers face higher electricity rates, largely due to rising natural gas prices, instead of the lower rates that were envisioned when deregulation was passed under then-Gov. George W. Bush.

The review will arrive just as the state's incumbent electric companies prepare to break out of a transition period that was established to help the fledgling market mature.

The state's electric restructuring law mandated that incumbent utilities such as Dallas-based TXU lock in their base rates for residential and small-business customers until 2005 or until they lost 40 percent of their original customer base, whichever came first.

The companies were allowed to seek rate adjustments twice a year based on the changing costs for wholesale power. Last month, TXU filed for its fourth rate increase in two years, which would send electricity bills up more than 25 percent from pre-competition levels.

The increases, tied to rising natural gas prices, have sent some customers shopping for other providers. In North Texas, at least nine companies compete for residential customers at rates that are as much as 15 percent lower than the proposed TXU rates expected to go into effect next month.

For some groups of customers, competition has worked. By the end of last year, competing providers were selling 42 percent of the electricity used by small businesses, representing about 19 percent of the group. By meeting the 40 percent threshold, the incumbents have been freed to compete outside of the locked rates.

Larger commercial and industrial customers have switched in greater numbers. About 35 percent have moved to competitors, reflecting 60 percent of the electricity load for that segment.

Some residential users say the price difference isn't worth the trouble. Others wonder if they'll fare any better under alternate providers.

"The reason I haven't switched is I'm not sure how reliable and stable the prices would be with other companies," said Mesquite resident Edgar Lewis, who has received service from TXU and its predecessors for 47 years.

Many consumers were scared off from switching providers by the electricity crisis four years ago in California. Others were soured by the whole concept of deregulation with the collapse of its biggest proponent, Enron Corp.

Regulation was "simpler, less expensive and fairer," said Bettye Prentice of Richardson, who nevertheless switched her home from TXU to Reliant Energy six months ago, saving about $10 a month. "That's my way of protesting TXU. ... I've had no problem with ... [TXU], except for their increased rates after deregulation. Every rate increase they asked for, they got."

Competing providers say they've been pleased with the interest from residential users. Some markets, such as West Texas, have almost 20 percent of their customers served by a non-incumbent.

"When you consider that residential customers are the least likely to switch, those numbers are really phenomenal," said Terri Eaton, manager of government affairs in Texas for Green Mountain Energy Co.

Green Mountain charges more than the incumbent but wins over customers because it sells pollution-free power from wind farms.

"We switched because even though it's slightly more expensive, we want to support environmentally sound companies," said Julia Agostini, a doctor who lives in northeast Dallas.

The issue isn't just how many customers have left the incumbent, or how many companies are competing, but where most customers are going, said Clarence Johnson, director of regulatory analysis at the Office of Public Utility Counsel, the state-appointed consumer advocate.

Newer providers have made a dent, but they're still a small part of the picture. In North Texas, for instance, the strongest competition to TXU has been from Reliant Energy, Houston's incumbent provider and the state's second-largest utility. TXU has fought Reliant in Houston to compete for customers there. The PUC doesn't release data about which companies have taken the lead in an area.

If smaller companies don't pick up enough customers in comparison with their larger competitors, "you have the potential for real adverse impacts," Mr. Johnson said.

"If in reality it's sort of a reciprocal relationship in each other's service territory ... that can be a situation that has some real market power risks," he said. "It creates ideal conditions for pricing behavior that appears to coordinated."

Companies may not collude directly, he said, but a dominant firm could take the lead and others could follow suit. "Those all become much more possible when you have just a few very large competitors," Mr. Johnson said.

Even without reaching the 40 percent threshold, TXU and other incumbent providers will be freed from state-imposed rates in January.

Then the companies will be allowed to lower their prices and offer discounts or other benefits to customers. That could help incumbents regain market share in their original territories.

They'll still be required to offer locked-in base rates, known as the "price to beat," through 2006 for customers who want it.

Consumer groups have fought incumbents' rate increases, charging that the PUC's formula artificially increased price-to-beat rates to force consumers to switch. The rate is pegged to natural gas prices, but half the state's electricity is generated from other fuels.

But some groups, such as Consumers Union, say they'll seek an extension beyond 2006 to ensure that rates are capped. Next year's Legislature would have to consider the issue, in its last regular session before the price-to-beat rate expires.

TXU and other companies say that the market doesn't need major changes from lawmakers, and that adjustments should be left to the PUC.

"Senate Bill 7 was designed very carefully and with the direct purpose of creating and protecting this competitive market," said TXU spokeswoman Kimberly Morgan. "It's like a finely tuned machine. When you go in and start changing this component and that component, that may have an adverse effect on other parts."

Having different rate structures could lead to customer confusion, Ms. Morgan said, and it would prevent TXU from offering some customers discounts and new services. "Extending that would only hurt customers because we're still bound by those rules," she said.

Indeed, after being open for six years, the market should be mature by 2007, said John Fainter, president of the Association of Electric Companies of Texas, a trade group representing the state's largest utilities including TXU.

"One thing you have to do is believe in markets," Mr. Fainter said. "You can't artificially restrict them. The price to beat was a transition issue to ensure that competitive providers have the opportunity to develop a position in the market and grow. It was designed as a transition issue, not as a permanent issue."

But Mr. Morstad, the Consumers Union analyst, said most residential users aren't receiving the benefits promised by deregulation, and the market-based approach needs to be changed. In terms of service, for instance, consumer complaints to the PUC about electricity providers have increased seven-fold since deregulation started.

"We think that small electric customers haven't realized the promised gains of deregulation," he said. "As we continue to work towards a competitive market, we should have more of a focus on the customer. We can't just look at some theoretical belief in how it'll all pan out."

Mr. Hudson, the PUC chairman, said it's too early to judge competition.

"It's going to take time for this market to develop," he said. "Those that are impatient with competition, I don't know how to respond to that. Philosophically, I believe that competition works."

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