On Jan. 1, electricity prices could get a lot more confusing in Texas, but probably not much cheaper.

That's the day the Texas electricity market deregulates entirely and the official "price to beat," a benchmark price approved by regulators, disappears.

After a century of relying on state regulators to set electricity prices, Texans will cut the cord entirely. Electricity companies will set prices, and consumers will have to wade through dozens of rate plans and choose. Think buying a cellphone today vs. getting service from the old, regulated telephone company.

"The big challenge here, really, is a matter of the public getting used to things not being straightforward and simple for them," said Terry Clower, associate director of the University of North Texas Center for Economic Development and Research.

"There is a certain comfort level in having a regulated monopoly providing certain services. It was something you didn't have to worry about," he said.

Since deregulation was introduced in the retail electricity market in 2002, about 30 percent of Texans have switched to competing companies. Everyone else remains with the former utility monopolies, and most of them on the price to beat, a rate set by the companies based on natural gas and approved by regulators.

As new retailers try to win those customers, and the former monopolies such as TXU Corp. try to keep them, the competition should, in theory, push prices lower. But so far, that hasn't happened. Texans on average pay more for electricity than most Americans.

Some industry observers say the price to beat has kept retail prices artificially high because of the quirky way it's calculated, based on natural gas. Remove that benchmark, and prices would be more competitive. But others point to the wholesale markets, where high fuel prices and thin competition keep prices up.

Lawmakers wanted to ease Texans into deregulation when the retail market became competitive in 2002. So they created the price to beat, a benchmark rate charged by the former monopolies, including TXU.

The price to beat, based on a specific formula tied to the price of natural gas, was meant to be a bit high. It gave upstart retailers room to compete with the entrenched utilities, thus fostering a healthy competitive market.

Legislators worried that without the price to beat, the former monopolies could cut rates and drive competitors out of business, then ratchet prices much higher.

The idea worked, said Ray Perryman, an economist whose reports on the benefits of deregulation are often cited by Public Utility Commission officials.

Consumers switched to competing retail companies much faster than anticipated, he said. But the rapid rise in natural gas prices masked Dr. Perryman's research conclusions: Consumer prices would have been even higher if Texas hadn't deregulated.

"It seems like competition started, and electricity prices went up," he said. "But actually, competition started, and gas prices went up."

He expects retail prices to become more competitive next year.

Only the former monopolies may reset the price to beat, and they may do so twice annually. So when the hurricanes last year pushed natural gas prices to an all-time high, above $15 per million British thermal units, TXU boosted its price to beat 24 percent.

Since then, natural gas prices have dropped steadily, falling below $5 per million Btu this month. But there's no mechanism for the price to beat to decline as well. There's no incentive for TXU to change the price, and regulators say the law doesn't allow them to step in.

PUC member Barry Smitherman said he hopes retailers will cut prices when the price to beat vanishes.

"Some of the retail electric providers today, rather than competing against each other, they're competing against TXU. They're sort of pricing off the price to beat," he said. "I hope in January they start competing against each other."

But this week, TXU and Reliant said they will continue to apply the current price to beat to customers who don't switch to another plan by the end of the year. Both will offer bonuses to price-to-beat customers for sticking with the companies, but neither pledged to cut that standard price.

Texas households paid, on average, 13.32 cents per kilowatt-hour for electricity in June. That's above the U.S. average of 10.84 cents, according to data from the federal Department of Energy.

And in Texas, customers of deregulated, competitive electricity providers paid more for electricity than customers of some municipally owned power companies and co-ops.

David Sibley, a former Texas legislator who helped write the deregulation laws, said the difference boils down to fuel costs. Natural gas plants generate about half of Texas' electricity, while many of the municipally owned or cooperative electricity companies have contracts with coal plants.

"It looked like when gas was real cheap that they were going to get blown away. But, of course, that changed," he said. "Now those coal contracts are gold."

But that doesn't explain why deregulated markets around the country tend to have higher prices than regulated ones.

Ken Rose, an independent consultant and a senior fellow at Michigan State University, found that deregulated prices are higher – and have risen faster – than regulated rates.

He blames a lack of competition in wholesale generation markets – not the retailers, which have to pay the wholesale prices.

"Whatever happens in that wholesale market, good or bad, is going to be reflected in retail prices," he said.

First, Mr. Rose said, electricity must be generated locally. So prices in a region are determined by the amount and type of generation nearby, and whether enough transmission lines exist to bring in more power when needed.

Further, it's difficult for consumers and generators to quickly respond to rising electricity prices, he said. So supply and demand can get out of balance and squeeze prices.

People can't easily cut their demand for electricity when prices rise. "On a hot day in Texas, people are still going to run their air conditioner," he said.

And when a generation company detects rising demand for more power, it takes years and a lot of investment to actually build the plants.

"What typically happens in a competitive market is any competitive business wants to charge the highest price they can, but they have competitors to contend with, so they can't," Mr. Rose said. "But once in a while it happens where, because of those market conditions I was talking about, it doesn't work so well."

The Public Utility Commission recently released a report that suggested one of Texas' biggest wholesale players may have withheld power from the market last year to boost prices. The report didn't identify the company, but considering the large amount of power the report said the company had offered, the company may have been TXU. Company officials have said that TXU doesn't manipulate markets and that the numbers in the report don't point to TXU.

If a wholesale company consistently manipulates the market to boost prices, that could trickle down to consumers as retail providers raise their rates to absorb the extra cost.

Many retail electricity providers are trying to differentiate themselves with whiz-bang products and services rather than low prices. Most charge only a penny or two less than the price to beat.

Texans can choose a plan that charges different rates at various times of day, or a plan with one steady rate for the next few years. Consumers can add a fee for annual air conditioning maintenance to the monthly bill, or rent a device that monitors the amount of electricity a household uses.

And in some cities, including Dallas, folks can go to retail stores and sign up for electricity plans, similar to cellphone stores.

Experts say the market is shaping up to look like the mobile phone market. Consider the vast difference between the mobile phone market – with lots of technology, services and pricing plans to choose from – and the old, regulated telephone company, which offered one price and basically one type of telephone.

Electricity marketers just have to convince people to change their mind-set for electricity, as they've done for phone service. About 70 percent of Texas households still pay the price-to-beat rate for electricity. That's one of the highest prices offered.

TXU Energy chief executive Jim Burke said the company will contact its price-to-beat customers and ask them to choose a different rate plan. Anyone who doesn't switch will end up paying a default rate, with no discount, no price guarantees and no special service.

Mr. Burke declined to say what the default price will be. He said he'll look at commodity prices, TXU's profit margin and competitors' rates to determine the price.

Some observers expect TXU's default rate to become a new benchmark for everyone else, and to remain relatively high.

Kevin West, head of Texas marketing for Direct Energy, a competing provider in North Texas, said he plans to continue setting his prices just below TXU's.

"We will move lower if they move lower, though they've never demonstrated that they want to do that," he said.

That could mean the inflated price to beat might lead to a permanently inflated market, said state Rep. Sylvester Turner, D-Houston, who has criticized deregulation and electricity prices. Fear of political backlash after a hot, expensive summer may keep retailers in check for a time, he said, but he worries prices will eventually rise.

"My guess will be, because the Legislature will be in session, that prices will be restrained between January and the end of May. The critical question is: What will happen when the Legislature is no longer in session?" he said.

Mr. Turner had encouraged the Public Utility Commission this year to reset the price to beat on its own after natural gas prices dropped. But the commissioners determined it would be illegal for them to influence market prices.

Legislators are expected to debate electricity prices and deregulation during the session.

Ask Gov. Rick Perry whether electricity prices are too high in Texas, and it's like asking him about the price of any product outside of his realm of influence.

"Yeah," he said. "And so are car prices and beer prices. Everything's too high."

E-mail esouder@dallasnews.com

Do I have to switch electricity companies?
No. If you do nothing, nothing will happen. TXU will still charge you the same rate per kilowatt-hour in January as it charges you today.

Should I switch?
You should compare pricing plans from several companies and decide.

Why did TXU call and offer me a new plan? Should I accept?
TXU wants to keep its customers, so it's contacting people who are still on the price to beat and asking them to consider a different pricing plan. You should consider the offer, compare it to other companies and make a decision.

What will happen if I don't switch?
If you do nothing, you'll still pay the same price per kilowatt-hour for electricity next year.

What if I switch and I don't like it?
You can switch back. You may switch when you want and as often as you please. Just make sure the contract you signed doesn't have a cancellation fee.

I can't make up my mind. Can I wait?
Of course. You don't have to switch before Jan. 1; you can take as long as you want to choose a pricing plan.

Why should I switch?
Dozens of companies are offering lower electricity prices than the price to beat. You can save money – and in some cases, you can get extras, like air conditioner maintenance service or frequent-flier miles.

Does it cost money to switch?
Maybe. You may have to pay your new provider a deposit. And if you already signed up for a long-term contract, there may be a cancellation fee.

Is it a good idea to sign a long-term contract and lock in these high electricity rates? What if prices drop?
That's the risk consumers must take. You have to decide if you prefer a steady price or to ride the market.

1999: Legislature passes electricity market deregulation laws.

2002: Competition begins in the retail market. TXU and other former monopolies must charge the price to beat, while competitors set their own prices.

2005: TXU and other former monopolies may charge less than the price to beat.

2007: The price to beat goes away, and all companies may set their own prices.

SOURCE: Dallas Morning News research