Deregulation Done Right
The Texas Electricity Restructuring Story

Media inquiries: Véronique Rodman
202.862.4870 (vrodman@aei.org)
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In the early 1990s, the electricity industry was plagued by cost overruns and stagnant productivity. Many states turned to deregulation to promote innovation and cut costs, a strategy that had worked for the telecommunications, trucking, natural gas, and airline industries. Yet, after the California energy market's infamous meltdown of 2000-2001 triggered the recall election of Governor Gray Davis, deregulation lost political and popular support. Plans to introduce competition and retail choice in electricity markets were stalled or abandoned nationwide--in every state but Texas.

Electricity Restructuring: The Texas Story (AEI Press, November 2009), edited by L. Lynne Kiesling of Northwestern University and Andrew N. Kleit of Pennsylvania State University, explores how Texas's groundbreaking program of electricity restructuring has become a model for truly competitive energy markets in the United States. Part history book and part how-to guide, this volume combines academic analyses with firsthand accounts by the actual architects of Texas electricity restructuring. Among their observations:

  • Independence from federal oversight was necessary for Texas to restructure effectively. Originally, the Electric Reliability Council of Texas (ERCOT) freed itself from regulation by refusing to connect to utilities in states outside of Texas. As the electricity demand in the state grew, isolation became less viable. David Spence and Darren Bush explain how ERCOT was able to negotiate the equivalent of a treaty persuading federal authorities to withdraw their oversight.
  • Because it cannot be stored easily or cheaply, electricity supply must be closely matched to demand. Other U.S. system operators try to generate adequate supply by creating “capacity markets” in which firms are paid for available capacity whether it is used to generate electricity or not. Capacity markets allow generators to earn extra money without encouraging the generation of electricity where and when it is needed. Eric S. Schubert, Shmuel S. Oren, and Parviz Adib describe how Texas was able to create sufficient capacity while avoiding the capacity markets used elsewhere.
  • Restructuring promotes the growth of newer, more efficient electricity technologies and business models, which increases and differentiates the supply of power in the electricity grid. Nat Treadway explains how this benefits consumers and the system as a whole, and what Texas has done to encourage such innovation.
  • Steven L. Puller finds that most inefficiencies in the Texas power industry occur not because large companies dominate the market, but because small firms do not fully recognize their profit opportunities. Puller estimates that roughly 80 percent of inefficiencies can be attributed to smaller firms effectively pricing themselves out of the market.
  • L. Lynne Kiesling explains how Texas policymakers successfully integrated wholesale and retail competition using a "price-to-beat" mechanism that prevented incumbent retailers from lowering their prices, thus deterring other firms from entering electricity markets. This mechanism provided the Texas market with enough flexibility to weather an unanticipated increase in natural gas prices.
  • Finally, Andrew N. Kleit argues that the nature of electricity markets necessitates "market monitoring" to prevent anticompetitive behavior. Ongoing regulatory analysis of market outcomes, combined with the willingness to use that analysis to revise market rules and facilitate competition, is essential to the continued success of Texas's restructuring design. Unfortunately, as Kleit explains, there is a great deal of tension in Texas's current market monitoring policy.

After nearly a decade of open competition, the success of electricity restructuring in Texas proves that deregulation is both feasible and effective. State policymakers' commitment to competition, decentralized coordination, and ongoing market analysis has made Texas's electricity industry the most competitive in the country. Electricity Restructuring: The Texas Story offers a unique set of guidelines for deregulation done right.

L. Lynne Kiesling is a senior lecturer in the Department of Economics at Northwestern University, and in the Social Enterprise at Kellogg (SEEK) program in the Kellogg School of Management at Northwestern University.

Andrew N. Kleit is a professor of energy and environmental economics and directs the program in Energy Business and Finance at the Pennsylvania State University.

Contributors: Parviz Adib, Darren Bush, Gürcan Gülen, L. Lynne Kiesling, Andrew N. Kleit, Shmuel S. Oren, Brett A. Perlman, Steven L. Puller, Eric S. Schubert, David Spence, Jess Totten, Nat Treadway, Pat Wood III

Interview Requests:
For interview requests, please contact the editors directly. L. Lynne Kiesling can be reached at lkiesling@northwestern.edu (847.491.8250), and Andrew N. Kleit can be reached at ank1@psu.edu (814.865.0711). For all other media inquiries, please contact Véronique Rodman at vrodman@aei.org (202.862.4871) or Sara Huneke at sara.huneke@aei.org (202.862.4870).

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