Electricity Reform and Retail Pricing in Texas

Electricity market reforms have pursued two main goals, both aimed at increasing economic efficiency. The first is to make prices more reflective of costs so that consumers can make more efficient decisions about where and when to consume electricity. The second goal is to ensure that suppliers minimize the costs of supply. How successful has electricity market reform in Texas been with regard to achieving these goals? We focus on one aspect of this overall set of desired outcomes, namely whether movements in retail prices reflect wholesale market prices and whether reform has delivered cost reductions in the delivery of energy services by retailers. We find clear evidence that retail prices in competitive market areas better reflect wholesale prices and have moved favorably for consumers relative to wholesale prices. The same is not necessarily true for consumers in non-competitive market areas. This suggests that competitive retail markets have delivered cost reductions consistent with electricity service providers reducing their marginal costs. The effort that Texas undertook over a decade ago to introduce competition into the retail electricity supply thus appears to be yielding the benefits to consumers that were intended in competitive areas. Consumers in less competitive areas do not appear to have benefited as much