The Deregulation Zombie Rises Again in Texas

Forced to use unprecedented amounts of electricity to heat their homes and stop their water pipes from freezing during the recent cold snap, Texas citizens found that their utilities were only adding to their misery.

Hourly prices for electricity literally skyrocketed. Prices spiked from $34 to $9,000 per megawatt hour in a few days due to the toxic interplay of rising demand and constrained supply in an unregulated market. An 11-year old boy died of hypothermia in a trailer that lost its electricity. The disaster was compounded by Texas’s earlier refusal to integrate its electricity grid with the rest of the country resulting in very limited access to the additional energy supplies it needed to cushion the impact of the deep freeze.

We have seen this all before.

The adoption of electricity deregulation 25 years ago had a devastating impact on electricity customers across the US, facilitating the rise and subsequent collapse of energy traders such as Enron. The deregulation debacle was a direct result of the theory, fashionable at the time, that customers would benefit from allowing market forces to determine supply and demand in electricity and that public regulation should be largely abandoned in favour of a free market in energy. It was a theory particularly ill-suited to managing a basic public service, such as electricity, and led to massive market manipulation, price gouging, rolling black outs and enormous hardship experienced by tens of millions of electricity customers who could not afford the outrageous bills of the energy marketers.

In 2000, deregulation in California and other US states enabled companies like Enron to invent creative ways to ‘game’ the system. They deliberately generated artificial shortages to push prices up and gouge vulnerable electricity consumers. Enron staff boasted about how strategies such as ‘ricochet’ ‘fat boy’ ‘get shorty’ and ‘death star’ enabled them to loot billions of dollars from captive customers. As enraged citizens forced state governments to take action, Enron’s house of cards collapsed, leaving a trail of bankruptcies and criminal convictions against its senior executives, Ken Lay and Richard Skilling.

In the aftermath of the Enron collapse, which caused so much disruption in those US states adopting the mantra of deregulation, governments imposed new regulations to tame the excesses that the unregulated market had generated. While partial re-regulation did not undue all the damage inflicted by electricity deregulation—and the US still has significant problems today—legislation implemented after the collapse of Enron signalled a return to a somewhat more sensible approach to managing electricity in the US and, in particular, curbing the worst excesses of the market.

But in the Lone Star State regulators forgot to put the spike through the spectre of deregulation and, like a zombie, it has again risen to inflict widespread damage on millions of electricity customers.

Still believing in the merits of unregulated markets, Texas politicians deliberately took steps to avoid integration with the national grid so that the state would not be required to enact policies designed to prevent Enron-like market manipulation from reoccurring. Rather, Texas politicians preserved the deregulated market, a decision that was favoured by energy corporations for both financial and ideological reasons. Deregulation also meant minimal public requirements on energy producers to invest in measures that would protect the system from extreme weather or other disruptions. The only part of the state which avoided the electricity crisis was El Paso which is connected to the national grid. The recent cold snap has exposed how little Texas politicians learned from the failed US electricity deregulation experiment, a particularly significant omission given that Enron had been headquartered in Texas.

While we are sheltered here in BC from the excesses of electricity deregulation, it could have been different.

At the time Enron was the poster child of the financial community in the mid-1990s, there was significant pressure on the BC government to follow the US model. BC did not follow suit partly because publicly owned BC Hydro had the second lowest prices in North America and it was hard to make the case that customers could get a better deal in a competitive energy market. And the government was rightly worried about loss of control over the provincial electricity system. So the Crown corporation remained in public hands. Alberta went the other way and experienced the kinds of price and supply instability that has characterized deregulation in the US.

Afraid of public backlash if it privatized BC Hydro, in the early 2000s the Gordon Campbell government found another way to support a private energy agenda. As Ken Davidson has thoroughly documented, the provincial government siphoned off billions of dollars of ratepayers’ money by forcing BC Hydro to sign energy contracts with private power producers at prices three or more times what the energy was worth. This policy legacy is now costing provincial electricity customers an extra $800 million every year for energy the utility does not need, much of which BC Hydro has to dump at fire sale prices on the international energy market.¹

The Texas experience should remind us that public regulation is not such a bad thing. Markets have their place in our economy. But they need to be properly overseen to protect the public interest and shelter customers from their excesses. Public ownership also has a place. The ideology that competition is always preferable to sound public regulatory policies is now having a rough go, as it should, in Texas. Citizens there are demanding their government fix the problem that its misguided belief in deregulated markets created. Unlike the politicians in Texas, we should learn from experience.

Note

[1] Ken Davidson. 2019. Zapped: A Review of BC Hydro’s Purchase of Power from Independent Power Producers

Topics: Climate change & energy policy, Privatization, P3s & public services