The Texas Electricity Market: Competition in Name Only?

Supporters of Texas-style utility restructuring wrap themselves in the rhetoric of “competition.”  They want you to know that if there is one thing they support– it is competition.  Here at Power for Tomorrow, we support competitive forces too, we just believe that competition and regulation must be appropriately structured to benefit consumers.  And importantly, decisions about how to regulate the utility industry, should be grounded in reality.

In that vein, policymakers considering direct retail access (sometimes called “retail choice”) would be well-advised to study-up on the real-world outcome of Texas’ retail choice experiment because the result has been anything but robust competition for average Texans.

A key feature of Texas electricity deregulation was forcing incumbent utilities to divest generation.  Incumbents became regulated wires-only companies, while energy “retailers” – essentially middlemen energy marketers – were to compete for customers’ business using the wires companies to deliver their product (that is to say, electricity).  But not all these energy merchants are created equal – some are known as “gentailers.”  These are companies that both own generation and serve retail customers.  And today these gentailers are some of the most ardent backers of retail choice and restructuring across the country.  They also dominate the Texas electricity market, especially for residential customers.

Consider a pair of recently published studies in The Electricity Journal.  In October 2020, several academics noted a significant trend: just two unregulated firms dominated the Texas residential retail electricity market.  As of the writing of the article, those two companies – NRG and Vistra – were on the verge of controlling upwards of 80% of the residential market.  The authors noted this lack of competition would result in a “highly concentrated” market classification using methodologies employed by the US Department of Justice.  Recall also, this was before Winter Storm Uri, and since then, market concentration problems have likely become more pronounced.

The second study, published earlier this year, explored other data related to electricity competition in Texas.  It found that prices offered by gentailers – like NRG and Vistra – were higher than those offered by retail providers that do not own generation.

Together, these findings paint a troubling picture of electricity “competition” in Texas.  You have a highly concentrated market – one where an individual firm can exercise market power – paired with data showing those same powerful firms exhibiting a pattern of raising prices.  This looks a lot like a powerful oligopoly (if not duopoly) increasingly unrestrained by either market forces or price regulation. 

This is worth remembering the next time a retail choice advocate rails about monopolies and competition.  It doesn’t appear their policies result in healthy competition, at least not for average residential customers.  Rather, what emerges is a small number of firms, able to exercise market power, imposing prices above what a competitive market would bear.  In other words – it is just the sort of outcome that traditional utility regulation seeks to avoid.