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Energy Institute Examines Electric Restructuring in Texas

A White Paper Explains the Benefits of a Competitive Market

HOUSTON - The Energy Institute at the University of Houston released a study today on the impact of restructuring the Texas electric market. The Institute's findings conclude that competition in the sale of electricity will be beneficial for the state, and that Texas restructuring is drastically different than that of California's.

The authors of the study argue that the Texas law and competition will bring electric prices down. Beginning in January 2002, a six percent discount to most electric customers who do not switch to new provider will significantly lower electric bills. With this discount alone the typical residential customer could save about $78 per year, and the average commercial customer could see $425 in annual savings. Those customers who do switch to a new provider are also likely to see savings. Overall, savings by electricity customers statewide could add up to almost a billion dollars in a year.

The authors of the study note the difficulty in comparing prices under competition and regulation. They conclude that competition will result in lower total electric bills for customers than in a regulated market. Under both regulation and competition, however, the rates that customers pay will be affected by changes in the price of natural gas. During 2000 the cost of natural gas rose, and prices for electricity in Texas also rose. The study concludes that in a competitive market a customer's electric bill would be lower than in a regulated market, but that future prices may be higher than today's prices, if fuel prices increase.

A second focus of the study evaluates the environmental effects of electric restructuring. Provisions in the restructuring legislation are expected to improve air quality by requiring renewable energy to generate 2,000 MW of the state's electricity. The law also requires older high-emission power plants to reduce their emissions or shut down. Additionally, recent technological advances mean that new clean-burning natural gas power plants are built faster and more efficiently. The use of smaller on-site generation units will also conserve resources by limiting the need to build new transmission lines.

The study contrasts the strengths of the Texas competition model with the California restructuring. The California model did not permit retailers to buy power under long-term contracts, so that they could not manage their price risks. More importantly, California did not build enough power plants to meet the rising demand of a strong economy. Fueled by growth in Silicon Valley in the 1990s, the demand for power in California increased, outstripping supply.

Texas, on the other hand, has a healthy reserve margin of electric generating capacity, and the supply of electricity should be adequate for customers' needs, even in the hottest months. Unlike California, Texas allows new power plants to be built quickly to meet customers' needs, and it has enjoyed a building boom of new power plants since 1995. And unlike California, Texas allows the retail electric providers to buy power under long-term contracts, and use these contracts to manage the risk of price increases.

The report notes that competition in the airlines, telecommunications, and natural gas industries in the late 1960s to the early 1990s led to lower prices, new technologies and innovation, and better products and services. The same benefits are expected to come from restructuring the U.S. electric industry. Forty-two states are in various stages of implementing electric deregulation legislation, and at least three states, Pennsylvania, New Jersey, and Maryland, are examples of electric competition working well.

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