Last week students attending classes at Pennsylvania’s Kutztown University felt the heat from unseasonably warm weather-even indoors. One student said, “It was like 90 degrees outside and they decided to turn off the air-conditioning.”

The same day, Indiana Michigan Power was forced to turn off power to 3,300 customers in Ft. Wayne.

These weren’t the only places that faced problems. Last week’s “unusual, extreme heat”-with highs in the 90s-led to curtailments or rolling blackouts in Indiana, Michigan, Ohio and Pennsylvania.

All of this took place in the service territory of PJM Interconnect, a regional transmission organization that is charged with ensuring the reliable transmission and distribution of electricity through “all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.”

A PJM spokesman said 154 megawatts were curtailed, with customers losing power from about 90 minutes to as much as 8 hours.

For Texans, the important thing to note is that the electricity market operated by PJM is a capacity market, most notable for its centralized government control and $54 billion of subsidies to generators since 2007, which is being held up as the model for Texas in our effort to make sure our electricity grid is reliable.

This begs the question; do we really want to run the risk of importing East Coast-style regulatory policies and rolling blackouts into our world-class, competitive electricity market?

Texas’ outstanding success in creating jobs-more than twice as many jobs than the rest of the country combined-and sustained economic growth over the last 15 years have come about by rejecting these very same policies. By rejecting competition in favor of a capacity market, not only would we increase the risk of rolling blackouts, but also the risk of economic decline.

Texas did come close to experiencing reliability problems in the summer of 2011 when record breaking temperatures approaching 110 pushed the Texas electricity grid to its limit. However, relying mostly on competitive forces Texas’ electricity market came through unscathed.

Yet, as the Foundation’s Executive Director Arlene Wohlgemuth notes in her commentary this week in the Austin American-Statesman , “Though we survived 2011 without any interruptions in service, the thin reserve margins that summer opened the door for generators to begin the push for subsidies in the form of a capacity market, where generators get paid for generating capacity-regardless of whether consumers need it.”

Proponents of changing to a capacity market fear that the competitive market can’t maintain adequate supplies of electricity to ensure a reliable system-either because they place more faith in government intervention than markets, they don’t believe that it is political feasible to eliminate the intervention, or because it is easier to guarantee future profits in a less competitive market.

Whatever their reasons, there is no evidence that existing capacity markets operating throughout the U.S. are any more reliable than Texas’ energy-only market; in fact, as witnessed by last week’s rolling blackouts the evidence takes us in the opposite direction. There is plenty of evidence, however, that capacity markets make electricity more expensive and will result in billions of dollars a year in subsidies for generators.

The Center for Economic Freedom’s new paper, Competition is Working in the Texas Electricity Market , examines how competition is faring in the Texas electricity market. There are three markers that can help determine how well competition is working: consumer choice, prices, and reliability. This paper examines the first two: a future paper will examine the issue of reliability. We conclude that concerns about the competitive market are unfounded in these two areas. Competition is working.

Texans are paying less for electricity today in real dollars than they did in 2001, even though U.S. consumers are paying more. Additionally, Texans in the competitive region of the state (ERCOT) have choice in the marketplace previously undreamed of in electricity markets. Competition in Texas’ energy-only market is the one factor that sets Texas apart from the rest of the country that would make these benefits possible.

The Public Utility Commission of Texas is considering multiple ways of increasing government intervention in the Texas electricity market place, including a capacity market and an operating reserve demand curve. This effort is taking us in the wrong direction. The answer to increasing the reliability of the Texas electricity market is less intervention-not more.


Our next paper, by CEF policy analyst Kathleen Hunker, will examine the problems inherent in capacity markets. A future paper in this series will provide recommendations to increase reliability by decreasing intervention so the free market can work and provide Texans with an affordable, reliable supply of electricity.