Texas Electricity Deregulation
What is Texas Electricity Deregulation?

On January 1, 2002, the Texas State Legislature decided to deregulate the electricity industry and open up the supply of electricity to competition. But as someone with a home or business in the state of Texas — what does this mean for you? And why, after living for so long with a regulated energy market, did this change come about?

Electricity Deregulation
In 1995, the Texas Senate passed Bill 373. This bill outline several important changes to the electricity market, which primarily affected the Electric Reliability Council of Texas (ERCOT). Formed in the 1970, ERCOT was (and still is) the organization responsible for managing the flow of electricity to the majority of customers living in Texas via an electric grid. ERCOT was also partly responsible for helping to manage regulations for Texas utilities.

Bill 373 required ERCOT to enforce some of the following changes:
Utilities needed to give independent energy generators access to transmission capabilities in order to provide support for a wholesale market.
The utilities needed to acknowledge new, unregulated entities or participants in the wholesale market such as, power marketers and exempt wholesale generators.
Utilities were required to give non-utility wholesale market entities the ability to offer market-based prices.
Deregulate rates previously regulated by the Public Utility Commission of Texas for electric cooperative distribution.

Senate Bill 7
Unfortunately, the initial effort to move to a wholesale, energy deregulated market failed. Despite this, in 1999 the effort finally saw success. Senate Bill 7 was passed, a bill that forced ERCOT to create competition within the retail electricity industry. The driving force behind Senate Bill 7 was the concept of Price to Beat. The idea behind Price to Beat established the concept of a regulated rate that would help to control the way utilities priced electricity.

A major concern in establishing a deregulated market is that established energy providers would undersell to prevent competition with emerging retail energy providers. Senate Bill 7 hoped to prevent this by establishing a “price floor,” which would give new retail energy providers the time they needed to develop their business. A new Retail Energy Provider could charge rates that were lower than the Price to Beat, while existing providers had to offer rates that were equal to or above the Price to Beat.

Definition of a Retail Energy Provider (Senate Bill 7)
The role, responsibility and regulations for Retail Energy Providers (REPs) are defined in detail within Senate Bill 7. The Bill itself is available online, however we’ve included, word for word, the basic definition of what an REP is and how they are allowed to operate:

‘Retail electric utility’ means a person, political subdivision, electric cooperative, or agency that operates, maintains, or controls in this state a facility to provide retail electric utility service. The term does not include a corporation described by Section 32.053 to the extent that the corporation sells electricity exclusively at wholesale and not to the ultimate consumer.

A qualifying cogenerator that sells electric energy at retail to the sole purchaser of the cogenerator’s thermal output under Sections 35.061 and 36.007 is not for that reason considered to be a retail electric utility. The owner or operator of a qualifying cogeneration facility who was issued the necessary environmental permits from the Texas Natural Resource Conservation Commission after January 1, 1998, and who commenced construction of such qualifying facility before July 1, 1998, may provide electricity to the purchasers of the thermal output of that qualifying facility and shall not for that reason be considered an electric utility or a retail electric utility, provided that the purchasers of the thermal output are owners of manufacturing or process operation facilities that are located on a site entirely owned before September, 1987, by one owner who retained ownership after September, 1987, of some portion of the facilities and that those facilities now share some integrated operations, such as the provision of services and raw materials.”

Throughout Senate Bill 7, there are many other references to REPs, some of which include:

“Retail electric provider” means a person that sells electric energy to retail customers in this state. A retail electric provider may not own or operate generation assets.

“Separately metered” means metered by an individual meter that is used to measure electric energy consumption by a retail customer and for which the customer is directly billed by a utility, retail electric provider, electric cooperative, or municipally owned utility.
The commission shall ensure that an electric utility or transmission and distribution utility provides nondiscriminatory access to wholesale transmission service for qualifying facilities, exempt wholesale generators, power marketers, power generation companies, retail electric providers, and other electric utilities or transmission and distribution utilities.

LIMIT IN CERTAIN AREAS. Sections 35.102 and 35.103 do not apply to the rates, retail service area, facilities, or public retail customers of a municipally owned electric utility that has not adopted customer choice or an electric cooperative that has not adopted customer choice. In a certificated service area of an electric utility in which customer choice has not been introduced, the state may not engage in retail transactions that exceed 2.5 percent of a retail electric utility’s total retail load.

In 2002, the Public Utility Commission appointed ERCOT as an independent organization, giving them the responsibility to maintain reliability of the electricity system, as well as to manage and monitor a competitive wholesale and retail electricity market.

Deregulation forced utilities in Texas to change their existing structure. Instead of managing the entire electricity process from generation to customer service, they now had to separate their business into three parts:

Retail Electric Providers – These organizations must successfully register with the Public Utility Commission of Texas and are responsible for the supply of energy to consumers. Electricity customers in deregulated energy areas of Texas have the option to choose their Retail Electric Provider.
Distribution and Transmission (utility company) – Remain regulated. These companies are responsible for the delivery of electricity as well as the maintenance of poles and wires.
Power Generation – These companies must be registered with the Public Utility Commission of Texas. They must also abide by outlined market rules. They are responsible for the generation of electricity.
While energy deregulation is currently available to most cities within Texas, there are still some areas that are energy regulated. Today, approximately 85% of energy consumers in Texas have the ability to choose their Retail Energy Supplier.

Benefits of Electricity Deregulation
The main benefit to an energy deregulated market is that the rates for electricity lower (over time). While the years following 2002 saw an increase for residential customer electricity rates, the years between 2010 and 2015 have seen a significant decrease. Texas rates during this time fell well below the national average.
Introducing competition to the electricity market is also a significant benefit to Texans. Naturally, when you have more companies with similar products to choose from, those companies need to ensure that their products (and rates) are the best in the business. If a customer is not satisfied with their rates with one REP for example, they can switch to another REP with relative ease. Overall, energy deregulation prevents companies from turning into monopolies that have complete control over the cost of electricity.