Why utility deregulation is the worst way to generate more electricity

The Hill

7 hours ago

The Trump administration, including the Department of Justice, is looking to ensure more electricity production through increased 'competition in the utility marketplace.' The president is right to be concerned that if we lack adequate electricity, we will not be able to build data centers and dominate artificial intelligence.
The administration is evaluating whether utility competition using electricity market deregulation will increase electricity supply. But this notion is deeply misguided. The regions of the country that embraced deregulation are just the ones failing to keep up with growing demand. Contrary to the spin of the deregulation cheerleaders, it is the traditionally regulated states, like Virginia and Georgia, where the utilities are showing that they can generate enough electricity to attract those data centers.
Furthermore, supporters of the deregulated electricity 'free markets' are not being honest when they say forcing electric utilities to compete with other energy providers benefits ratepayers. These deregulated electric states, currently about 20 of them, disadvantage consumers because their electric grids are overseen by organizations with the authority of government but run by people not elected, who cannot be sued and therefore lack real accountability.
For example, the Texas political leadership and some conservatives like the Washington-based think tank R Street contend that the Texas grid is an example of the free market in action. But the conservative Texas courts have ruled consistently that the Electric Reliability Council of Texas — the agency which runs the state's power grid — is the monopoly electricity provider in the wholesale market, and, in language that conjures the defunct Soviet Union, that it is 'an arm of the state.'
The Electric Reliability Council of Texas has failed just like the Soviet Union did. Following a deadly grid failure during the 2011 freeze, the state did nothing. The grid failure that followed in February 2021 left 246 dead and $4.2 billion in overcharges that the governor's appointees to Public Utility Commission of Texas enforced by suing to overturn an appellate court's decision to refund the $4.2 billion to customers.
The Wall Street Journal also found that Texans had been overcharged $28 billion.
If we are looking at ensuring the Lone Star State has enough energy, it must also be noted that the overcharges on Texans' electric bills have not gone toward building new power plants. They have gone to share buybacks, corporate bonuses, hedge funds and campaign contributions. The statewide performance fits exactly with the predatory behavior of a monopolist — less supply, higher prices.
To be sure, the allure of 'free markets' is nothing new. To understand why President Trump and others are suddenly talking about creating competition in the electric utility markets, it is worth examining how they came about.
Back in the 1990s, California and Texas led the way in deregulation, or breaking apart the old monopoly utilities to give consumers a choice of retail electricity suppliers rather than the one local utility, the monopoly in town, to provide electricity. The traditional, vertically integrated utilities are regulated by a commission accountable to voters, which sets electrical rates and determines how much infrastructure — like new generation and transmission lines — the utility can build and charge customers for.
But the thinking by proponents of deregulation was that entrenched monopolies cost consumers too much on a daily basis, in part because the electric utilities were also compensated to maintain enough electricity capacity to meet peak demand several times a year.
To save customers money by eliminating these costs for ensuring enough electricity no matter the weather, deregulated states created Soviet-style grid operators — as in Texas — to buy electricity wholesale according to the lowest price offered, be it from coal, natural gas, nuclear, solar, wind or battery. But by the time the power reaches the customer, it is costing ratepayers more than in the traditionally regulated states because of charges layered on by government-mandated middlemen, and there is no independent regulator to ensure affordable pricing and reliability.
In addition to higher electric bills for customers in deregulated electric markets, the lesson for the Department of Justice is the deregulated states are failing to bring online enough new electric generation. This is because deregulation supporters said that when a deregulated state or region lacked enough electricity, that 'market signals' would prod generators to invest in new power plants. But, again, it's not working in Texas, or any other deregulated state. Customers and taxpayers now pay large subsidies to keep older, less efficient power plants open.
If the Justice Department wants lower prices and more electricity to power the artificial intelligence revolution, it needs to look at the states with traditionally regulated electric utilities. Following the Federalist principles, lawmakers should not disturb these conservative states with fully regulated electric systems, which were prescient enough to focus on low cost and reliable electricity supply under government oversight, rather than building Soviet-style grid operators that lack accountability.
Edward Hirs is UH energy fellow at the University of Houston where he teaches energy economics.