Even in Texas Competition Between Electric Wires Companies is Prohibited, Except in Lubbock

Michael Giberson

Power to The Woodlands, Texas, a little north of Houston, is delivered by two different companies. Depending on which neighborhood you live in, either your power comes via CenterPoint Energy or it comes via Entergy Texas.  After power outages caused by Hurricane Ike, it took up to a week longer for power to be restored to the CenterPoint Energy neighborhoods than the Entergy Texas neighborhoods, and that prompted some interest in having service to the community integrated under Entergy Texas.

NewsWatch: Energy highlights a Houston Chronicle story that reports the response from the Public Utility Commission of Texas.  In brief, the move is not impossible, but the barriers are substantial. The Chronicle quotes Barry Smitherman, chairman of the PUCT, from a letter to the town: “Essentially, there is a high statutory standard that must be met before a service territory can be transferred ….”

NewsWatch: Energy provides this summary of the regulatory barriers:

  • CenterPoint holds the certificate of convenience and necessity for Sterling Ridge and Creekside Park, which gives exclusive rights to provide electricity in those areas.
  • A certificate of convenience and necessity can only be revoked if the company no longer provide power service in that area.
  • Multiple [certificates of convenience and necessity] are not permitted in any given area.

While there would be some expense involved in actually disconnecting from one system and connecting to the other, the expense is not the problem.  The key barriers are all matters of public policy.

Interestingly, in my new hometown of Lubbock, Texas, competition between distribution companies has long been the norm.  I don’t know if overlapping certificates of convenience and necessity have been issued.  More likely, the arrangement was grandfathered in when the state regulatory commission was established. But the Lubbock example suggests another approach for The Woodlands: don’t switch from one to the other, allow both.

Lubbock Power & Light explains the history of competition as one in which early city commissioners were unhappy with the local privately-provided electric power service, and so authorized the build of a municipal generator.  I suspect typically in such cases the municipal government would acquire the local distribution equipment from the displaced private owner, but the Lubbock government refused offers from Texas Utilities to transfer the existing Lubbock distribution system.  And so, according to LP&L:

Today, the vast majority of Lubbock remains dual-certified and customers still have a choice of electric utility providers. Customers whose account balances are current are allowed to switch from one company to the other at their discretion. The competition for the electric dollar in Lubbock has resulted in some of the lowest electricity costs in the state of Texas and in the nation. Another major benefit of competition is that customers enjoy increased levels of customer service than would be found in cities this size with only one electric provider.

In the past six months we have switched from one utility to the other exactly once.  So far my current provider hasn’t given me a good reason to go back, but it is nice to know that I could if I wanted too.

A 1981 story in Reason magazine tells the story of power competition in Lubbock, noting for example:

In Lubbock, … the city fathers wrote into the city charter that any change in the competition between Lubbock Power & Light and Southwestern Public Service Company must be approved by three-fourths of the registered voters. Nowhere in the country do three-fourths of the registered voters even vote, much less agree!

The Reason article then digs into the research of economists like Greg Jarrell and Walter Primeaux, among others. Jarrell’s research into the emergence of public utility regulation of electric power turned up some surprises:

In fact, Jarrell discovered, the first states to come around to regulation were those whose utility rates had been much lower (by an amazing 46 percent) than those of late-regulating states. Profits, too, were lower (by 38 percent) and output was higher (by 23 percent). In short, it appeared that regulation was sought most avidly precisely in those states with the least monopolistic utilities, those least able to manipulate output and prices. This finding bore out the suspicion that it was the utilities themselves that wanted regulation, to protect themselves from competition.

Further confirmation came from Jarrell’s second finding. After five years of state regulation, he discovered, the utilities’ prices and profits had both increased, while electricity output fell. Regulation was creating the very monopolistic results the public was told it would counteract!

After a student tipped Primeaux in 1968 to electric utility competition in Lubbock, Primeaux started researching the topic:

Among Primeaux’s discoveries was the fact that electric utility competition seemed to be dying out. By 1972 the number of cities with competition had dropped from 49 to 35. And today Primeaux’s tally reveals only 23 competitive cities.

Turning his research to the cause of this demise, he found that the opponents of competition were not consumers in the area but regulatory officials committed to its elimination on theoretical grounds. Like their predecessors, public utility regulators remain convinced that electric utilities constitute a natural monopoly and should therefore be subject to rate-of-return regulation.

(Yes, Virginia, economic theories are performative, and not just Black, Scholes and Merton.)

The prospects for The Woodlands are complicated by the fact that CenterPoint Energy is part of the ERCOT system, while Entergy Texas is part of the Eastern Interconnection.  Entergy Texas has been seeking to join ERCOT for a few years, but that isn’t likely to happen soon, and may not happen at all.

But even with that additional layer of technical complexity, the main barrier to wires-level competition for The Woodlands is Texas state regulatory policy.  Some folks in The Woodlands want to switch distribution utilities.  The state of Texas, which otherwise has some of the most pro-competitive retail power policies in the United States, prohibits such switches.  Texas could, and should, allow consumers in The Woodlands the power to choose their own electric distribution company.