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Texas Froze by Design

Summary:
In 2002, under Governor Rick Perry, Texas deregulated its electricity system and established a free market, managed by a non-profit entity, with roughly 70 providers. But while the new system worked most of the time, people need electricity all the time. AUSTIN – Harvard Kennedy School’s William Hogan is credited with designing the Texas energy market. As Texans froze and their water pipes burst, he reportedly remarked that the state’s energy market has functioned as designed. No Time to Waste PS OnPoint John Keatley  Free to read Growth Is Not Enough PS OnPoint

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In 2002, under Governor Rick Perry, Texas deregulated its electricity system and established a free market, managed by a non-profit entity, with roughly 70 providers. But while the new system worked most of the time, people need electricity all the time.

AUSTIN – Harvard Kennedy School’s William Hogan is credited with designing the Texas energy market. As Texans froze and their water pipes burst, he reportedly remarked that the state’s energy market has functioned as designed.

Hogan is right, which says a lot about how some economists think.

For years, electric utilities were a stable, dull business. To counter the effects of monopoly, utility commissions set and stabilized prices, and companies got a rate of return on their investment that was (in principle) enough to cover construction, maintenance, and a fair profit.

But economists complained: utilities had an incentive to over-invest. The bigger their operations and the higher their total costs, the more they could extract from the rate-setters.

Electricity is the ultimate standard product, every jolt exactly like every other. Texas had a self-enclosed energy grid, cut off from interstate commerce and thus exempt from federal regulations. What better place, what better product, to prove the virtues of a competitive, deregulated system?

So, economists proposed a free market: let generating companies compete to deliver power to consumers through the common electrical grid. Freely chosen contracts would govern the terms and the price. Competition would maximize efficiency, and prices would reflect fuel costs and the smallest possible profit margin.

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