Tuesday, April 6, 2010

Killing Innovation in Electric Retailing

In his Sunday column, Loren Steffy does something I have yet to see an elected official do: He admits that the "deregulated" electric market in Texas is heavily regulated. And, though unintentionally, he demonstrates how regulations directly harm producers, and indirectly harm consumers.

In the summer of 2008 Marcie Zlotnik, chairman and COO of StarTex Power, a Houston-based electricity retailer, sought to differentiate her company by alerting customers when their contract would expire. The Public Utility Commission (PUC)--the state agency that regulates the "deregulated" industry--decided that this was such a good idea that it forced all retailers to do the same thing. Steffy quotes Zlotnik:
To me, that was a competitive advantage. It is now mandated. There goes my competitive advantage.
Which means, Zlotnik came up with an innovation that benefited her company and its customers. But the PUC wiped out her innovation and any rewards she might have received. Instead of allowing electric retailers to compete and innovate--and operate in a free market--the PUC stifles competition by forcing "innovations" upon everyone, whether they like it or not.

But the destructive consequences of the PUC go even further:
In an industry where the line between profit and loss is razor thin--margins for most retailers are in the low single digits--some companies worry that regulators are stifling competition by over-emphasizing consumer safeguards.

"That is a concern because it does take resources away from innovations and new products," said Catherine Webking, the executive director for the Texas Energy Association for Marketers, which represents electric retailers.
As we saw with Zlotnik, those who do innovate can have their competitive advantage wiped out by the arbitrary decree of the PUC. What incentive does any retailer have to come up with innovations in such an environment? The answer is: NONE. In fact, they have a huge disincentive because the "reward" for their thought and effort is have their creation forced upon the entire industry. Would Apple come up with new products if its competitors were forced to make the same devices? The answer is a resounding NO.

Of course, the regulations forced upon the "deregulated" electric industry are for the protection of consumers, because we are too damn stupid to make decisions for ourselves. We need the regulators at the PUC issuing mandates and dictates so that the "deregulated" electric industry doesn't take advantage of consumers. Addressing "smart meters", which retailers say will be beneficial to consumers, an attorney for the Citizens Aggregation Power Project said,
There's just as much potential that retail electric providers can create systems that will generate additional revenue.
Yes, this is a possibility. In fact, I would argue that it is a probability, because businesses tend to "create systems that will generate additional revenue." They are, after all, in business to make money. Further, I hope that electric retailers make oodles of money, because that means that they will be able to deliver the electricity that I want and need.

Electric companies have a moral right to use their property as they choose. If consumers don't like the service or products the companies offer, they can find their electricity elsewhere. That is how the free market works. But it can't work, nor do companies have an incentive to innovate, when government is regulating their affairs.

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