R Street senior fellow Mike Haugh has a new post up this week about one of the central benefits of Texas’s retail competitive electricity market, fixed price contracts.
“Everyone has heard of the sky-high electric bills as a result of being on hourly pricing contracts. This means the customer pays the hourly clearing price in the ERCOT wholesale market for their electric commodity. This is a very risky proposition because the only protection is a $9,000 per megawatt price cap. All price risks of the market are placed on the customer, these suppliers are not out to protect customers but to offer them an opportunity to “play the market”. These are the stories that are making the news; what is not making the news are the customers that chose a stable product and are protected from these large price swings.
“Under the old regulatory model customers had one choice for their electric supply—the monopoly utility. Utilities would try to manage some of the price risks for customers, but their main priority was making sure the lights stayed on and that all their costs were being recovered through the regulatory paradigm. Then came deregulation and the ability to choose your energy supplier, which included the pricing structure and the source of generation. Deregulation allowed customers to hedge the risks of the wholesale generation markets by choosing a fixed price contract. With a fixed price contract, the supplier—not the customer—takes on the risk of the price increasing. This pricing mechanism may come with a premium, but in times like these, that cost is justified.”
Check out Mike’s full commentary at RStreet.org.