Wind Subsidies and ‘Predatory Pricing’ in Texas (Part III: Time for Regulators to Investigate Predatory Pricing in Texas?)

Given the obvious harm caused by the renewable energy industry’s pricing practices on grid reliability, not to mention other competitors, can regulators find predatory pricing in violation of antitrust law?

Politically correct renewables have become the energy de jour of many politicians, regulators, environmental groups, and members of the public. As such, there is little political will to take on the renewable energy industry. Antitrust regulators have long demonstrated great selectiveness in what companies they target for enforcement of potential violations.

Perhaps the most important reason can be garnered from the Federal Trade Commission’s explanation of predatory pricing:

Can prices ever be “too low?” The short answer is yes, but not very often. Generally, low prices benefit consumers. Consumers are harmed only if below-cost pricing allows a dominant competitor to knock its rivals out of the market and then raise prices to above-market levels for a substantial time.

A firm’s independent decision to reduce prices to a level below its own costs does not necessarily injure competition, and, in fact, may simply reflect particularly vigorous competition. Instances of a large firm using low prices to drive smaller competitors out of the market in hopes of raising prices after they leave are rare.

This strategy can only be successful if the short-run losses from pricing below cost will be made up for by much higher prices over a longer period of time after competitors leave the market.

The focus of antitrust has been on firms that impose higher “monopoly” prices after their competitors have been put out of business because of below-cost pricing. But this is hidden by the fact that renewable generators, without raising their prices, benefit from low prices as if prices were being raised.

Because of subsidies, in other words, they can continue to undercut their competitors indefinitely and still make profits that their cost structure would not otherwise allow. And this can go on even after the subsidies run out, because the subsidies have retired their capital costs to leave minimal marginal costs.

In theory, antitrust laws are designed “to protect the process of competition for the benefit of consumers” (Federal Trade Commission). Since renewable generators continue unabated their strategy of undercutting the prices of their competitors—even as many of them go out of business, the question becomes how are consumers harmed?  

Consumers are harmed by the ongoing low market prices in ERCOT because the total cost they pay for electricity is increasing. In two ways.

First, even when the prices remain low, consumers are harmed because they are also taxpayers who must bear the cost of the renewable energy subsidies in the form tax credits and direct payments to generators. While the visible price that consumers pay for electricity because of renewable energy may be lower, the total cost is not. The hidden costs include higher taxes and the less reliable supply of electricity. Our previous research has shown that renewable subsidies in Texas this year should total about $2.3 billion. Since 2006, Texas renewable generators have received about $19 billion in subsidies.

Second, Texas prices are not saying low, but have rapidly increased. In January 2019, the PUC implemented a two-step increase to through an artificial price adder to administratively increase electricity prices. The first increase took place in the Spring of 2019. As a result, Texans paid approximately $3.6 billion more for electricity at the wholesale level. Similarly, retail electric prices in Texas increased by 6.8% last year, more than the 1.3% increase in U.S. retail prices.

Meanwhile, renewable generators continue their practice of often selling electricity below their and their competitors’ cost. However now, almost magically, prices are increasing. As are profits for renewable and all other generators. As L. M. Sixel reported in the Houston Chronicle, the price adder helped NRG “convert a $72 million third-quarter loss in 2018 into a $372 million profit for the same period in 2019.” Vistra Energy’s “third-quarter income from generation increased $226 million in Texas before taxes and other factors, off-setting lower generation prices in other markets.”

Policymakers and regulators have not pursued the pricing practices of renewable generators under antitrust law because they do not fit the classic definition of predatory pricing, because they are the result of popular government intervention in the market, and because the administrative price adders are making most of the industry whole again.

Conclusion

Despite the FTC’s claims, in reality antitrust laws have been adopted not to police anticompetitive activity that harms consumers—which rarely, if ever, takes place in a free market, but to help increase the profits of inefficient companies struggling against more efficient competitors. In the case of the Texas electricity market, many efficient thermal generators did go out of business because of the below cost pricing. But those who have been able to hang around long enough to benefit from the government’s intervention can now, along with renewable generators, rake in the profits. It turns out that consumers are the ones being hunted down by the pricing practices of the renewable industry, aided and abetted by government. And no one in government seems to care.

———————

Bill Peacock is Policy Director at The Energy Alliance, a project of the Texas Business Coalition. This post is a revised version of a study prepared for the Alliance. This completes this three-part series with Part I on Tuesday and Part II yesterday.

The post Wind Subsidies and ‘Predatory Pricing’ in Texas (Part III: Time for Regulators to Investigate Predatory Pricing in Texas?) appeared first on Master Resource.

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October 15, 2020 at 01:10AM

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