Texans face the very real threat of what is essentially a $4 billion annual tax increase. The Public Utility Commission of Texas (PUC) hosted a workshop Tuesday on whether Texas should abandon the energy-only market and replace it with a capacity market. A decision in favor of a capacity market could redistribute billions of tax-payer dollars to big energy companies as well as shift the risk of bad investments onto consumers.
Considering the fact that Texas just saw its business tax climate fall, now is not the time for the appointed PUC commissioners to threaten taxpayers and future businesses with the prospect of a ten-figure tax hike.
In simple terms, a capacity market is a method of redistribution where generating plants receive a string of tax-payer subsidies to offset their operational costs, which theoretically spurs investments. Proponents of a capacity market justify the redistribution by arguing that projected shortfalls in the reserve margin mean that the competitive market cannot incite enough energy investments to meet peak demand. However, as the latest Policy Perspective series prepared by the Center for Economic Freedom show, Texas’ energy-only market is not broken.
Texas boasts one of the greatest energy markets in the world. Its robust competition has brought Texas billions of dollars in investment in new energy generation, strong reserves of affordably priced electricity, and dozens of energy providers. Today, Texans pay about 21.7 percent less for electricity in real dollars than they did before competition was introduced. Consumers also benefit from greater choice, being able to choose from more than 200 plans from over 30 providers.
Not everyone in the industry, however, has had an easy time with competition. Consumers were paying higher prices in the regulated market, in part, to provide generation companies guaranteed returns. Lacking those returns, businesses must compete to make a profit, and some are competing more successfully than others. Many of these companies feel that government needs to step in where their own business plans failed and suggest that the government subsidize their costs. They pinky swear that the guaranteed profits will lead them to produce more electricity.
The proposal is based on bad data. Energy-only markets historically depict shortfalls because competitive markets induce investments only when they are needed, not years in advance when they can only be sustained through government subsidies.
Moreover, past experience shows that capacity markets are expensive and only have a threadbare track record of boosting energy investments. Calculations from multiple organizations reckon that imposing a capacity market on Texas will cost consumers between $3 and $5 billion per year with no guarantee that the extra subsidies will boost capacity or be invested in new generation. Capacity payments seem to be more about guaranteeing profits to large generating companies than about advancing the needs of taxpayers and Texas employers.
Worse, the threat of a multi-billion dollar tax hike could not come at an unhappier time. The Tax Foundation just released a report on each state’s business tax climate. According to this year’s index, because of rising property taxes, the Texas’ tax system only ranked as the 11th most competitive in the United States, two spots lower than last year’s report. This is a harsh blow for a state that prides itself on being a haven for new businesses.
A capacity market will only aggravate the wound. Capacity markets, and their accompanying costs, will not be kind to small businesses. A similar market in New Jersey caused electric bills to jump on average $1,000 per year for retail stores and $15,000 for industrial facilities. Capacity payments became just one more hurdle that NJ entrepreneurs faced when starting a business-just one more reason why so many Northeastern entrepreneurs picked up shop and moved to Texas for greater economic opportunities.
Imposing a capacity market onto Texas will only increase the costs of doing business in the state. If Texas is to remain truly committed to its reputation as a sanctuary for new businesses and economic opportunities, then the PUC needs to reject a capacity market and all of its associated subsidies.
The energy-only market has provided Texans with reliable and cheap electricity since its inception, and it will continue to do so if left unmolested by government and special interests. Now is not the time for the PUC to substitute it out with an inferior product, especially not one that will impose a multi-billion dollar tax on Texas consumers.
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