Energy Basics: How Texas Electricity Actually Works

Deregulation, REPs, TDUs, ERCOT, and how to read your bill — the foundation every Texas energy buyer needs.

The Texas electricity market is unlike any other in the United States, and the people who get burned by it are almost always the ones who skipped the basics. Most owners we sit down with can quote their last invoice total to the cent, but when we ask who actually generated their electricity last month, who delivered it, and who set the wholesale clearing price, the room goes quiet. That gap between what's on the bill and what's happening behind it is where suppliers make their margin, and it's the gap this section is built to close.

Texas deregulated its retail electricity market in 2002 under Senate Bill 7. Before that, a single utility — Reliant for Houston, TXU for Dallas-Fort Worth, AEP for South Texas — generated the power, owned the wires, billed the customer, and answered the phone when the lights went out. Deregulation broke that single company into three pieces, and once you understand those three pieces, the rest of the market starts making sense. We cover this end-to-end in our deregulation primer, but here is the short version every Texas energy buyer should have memorized.

The three companies behind your meter

The first piece is the Retail Electric Provider, or REP. This is the company whose name appears on your bill — TXU Energy, Reliant, Constellation, Engie, NRG, Direct Energy, Cirro, Champion, Gexa, Hudson, Calpine, Tara, and roughly 100 others. The REP is essentially a reseller. It buys electricity in bulk on the ERCOT wholesale market or through bilateral contracts, marks it up, and sells it to you at a retail rate. The REP does not own a single power plant or a single utility pole. What it owns is the customer relationship and the contract.

The second piece is the Transmission and Distribution Utility, or TDU (sometimes called the TDSP — Transmission and Distribution Service Provider). This is the regulated utility that owns the wires running into your building. In the Houston area that's CenterPoint Energy. In Dallas-Fort Worth it's Oncor. In South Texas (Corpus Christi, Laredo, the Valley) it's AEP Texas Central. In West Texas it's AEP Texas North. In the Rio Grande Valley around McAllen, it's Texas-New Mexico Power. The TDU reads your meter, maintains the lines, and restores power when an outage happens. You do not pick your TDU — geography picks it for you. The delivery charges on your bill go to the TDU regardless of which REP you choose, and those charges are set by the Public Utility Commission of Texas, not by the market. We break down every line item in how to read your commercial electricity bill, and we explain the REP-vs-TDU split in detail in REP vs Utility.

The third piece is ERCOT — the Electric Reliability Council of Texas. ERCOT is the grid operator. It does not generate, transmit, or sell power. What it does is balance supply and demand on the Texas grid in real time, second by second, and clear a wholesale market that runs every five minutes. ERCOT covers about 90% of the state's load — everything except El Paso (which is on the WECC interconnection) and a handful of counties in East Texas and the Panhandle that are on Eastern Interconnection utilities like Entergy and SWEPCO. If you're in ERCOT, your wholesale price is set by ERCOT's locational marginal pricing system, capped at $5,000 per megawatt-hour after the post-Uri reforms (lowered from $9,000 by HB 16 in the 2023 session).

Why this structure matters when you sign a contract

Here's the part most buyers miss: the energy supply portion of your bill — the part the REP controls — is usually only 50 to 70% of the all-in cost per kWh. The rest is delivery (TDU charges), transmission cost recovery factors, ERCOT administrative fees, gross receipts taxes, and various rider charges. When a REP quotes you "4.9 cents per kWh" on a fixed-rate contract, that 4.9 cents is the energy charge only. Add the TDU pass-through, and your real all-in cost for a Houston commercial account is closer to 9 to 11 cents per kWh depending on rate class and load profile.

This is why you cannot compare REP A's "fixed rate" against REP B's "all-in rate" without doing the math yourself. The contracts are not apples to apples until you normalize for what's bundled and what's passed through. A REP that quotes 5.2 cents bundled (TDU included) is often cheaper than a REP that quotes 4.6 cents unbundled (TDU passed through), even though the headline number looks worse. Always ask whether the rate is bundled or pass-through, and always model it against your actual TDU rate sheet.

The other thing the structure forces on you: when something goes wrong, you have to know who to call. Power's out? That's the TDU — calling your REP gets you a transfer at best. Bill is wrong? That's the REP. Question about ERCOT pricing or generator outages affecting market prices? That's neither — that's a market question, and the answer lives in ERCOT's daily operating reports. Most operators we talk to spend the first six months of a contract calling the wrong company.

Demand charges: where 30 to 70% of your bill actually comes from

One of the biggest blind spots for new commercial buyers is the demand charge. If you're on a residential or small commercial tariff (typically under 10 kW peak demand), you don't pay one — you pay only for the energy (kWh) you consume. But once you cross into mid-size or large commercial rate classes, the bill flips. Your kWh charge stays roughly proportional, but a separate kW charge appears, and that kW charge is based on your single highest 15-minute demand peak in the billing cycle.

That's worth re-reading. You can run flat for 29 days of the month and spike for 15 minutes on the 30th — say, a chiller, a freezer compressor cycling on with the AC, a welding shift starting up, a kitchen pre-heat — and that single 15-minute window sets your demand charge for the whole month. For a Houston commercial account in CenterPoint territory, the TDU demand charge alone runs roughly $9 to $14 per kW depending on rate class, and the REP often layers a generation demand charge on top. A 200 kW peak that could have been 150 kW with operational changes is the difference between a $1,800-per-month demand line item and a $2,500-per-month one. Multiply that by 12 months and demand management starts to look like the cheapest energy investment a building can make.

We cover the mechanics, the calculation methods (15-minute interval, 30-minute, ratchet rules), and operational tactics for cutting peaks in what is a demand charge. If you're running anything bigger than a small office, this is the article we tell people to read first.

How to actually read what shows up in the mail

Texas commercial bills are not designed to be read. They're designed to be paid. Every REP uses a different layout, different naming conventions, and different rounding rules, and the line items move around depending on contract structure. But under the noise, every commercial bill in ERCOT has the same six categories of charges:

If your bill doesn't break these out cleanly, you're either on a bundled rate that's hiding the breakdown or your REP is using a custom format. Either way, you're entitled to a line-item breakdown — request the "supplier statement" or "interval data" if your account portal doesn't show it. We walk through a real Texas commercial bill, line by line, in how to read your commercial electricity bill, including how to spot REP markups disguised as pass-throughs.

What this section won't do

This isn't where we tell you which REP to sign with, what rate to lock, or when to renew — those decisions depend on your load profile, your risk tolerance, and where the ERCOT forward curve is on the day you go to market, and we cover them in the Rate Structures and Contract Strategy sections. What this section does is make sure you walk into those decisions knowing what every term on the screen actually means. The buyers who get a fair price in Texas are not the ones with the biggest accounts or the loudest negotiating style. They're the ones who understood the structure before they sat down at the table.

Start with the four articles below. They're written in the order most operators benefit from reading them — deregulation history first, then REP vs TDU mechanics, then demand charges, then the bill walkthrough. Read in that sequence, you'll have the foundation in about 45 minutes. From there, the Rate Structures section is the natural next stop.

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