Dear Professor Banks,
Thank you very much for your challenge (which I found by browsing your article): "I am thinking in particular of the consultant Jose Antonio Vanderhorst-Silverio. He admits that deregulation has been a disaster, but he also believes that somewhere out there is a magic formula for making everything right. My comment here reduces to the following: no playing games on the consumer side of the market can possibly offset the upward pressure on prices resulting from conventional profit maximizing behaviour on the supply side. Put another way, given the technological configuration of the electric sector (e.g. increasing returns to scale), deregulation invariably leads to much higher and more volatile electricity prices."
I will respond in full a few days, but the key finding that will be at the center is that deregulation was and is based on the faulty concept "economy first, reliability second." If reliability first, economy second, is a magic formula that allows to restructure power sectors worldwide into an electric network (integrated transportation) and a money network (on the customer, retail, generation value chain), let so be it.
It is clear that generation and customer are also part of the electric power system and transportation is part of the money system, but the "electric network" institution still keeps the leadership of the whole real time control, operation planning and long run planning of the power system.
Casazza identified two other important networks that are helping the transformation and that are missing above. The fuel network and the communication network. Both impact restructuring to help integrate demand into power system control, operation and planning in the 21st Century.
Best regards,
José Antonio
Reference and context: A New Lecture on Electric Deregulation Failure, by Ferdinand E. Banks, Professor.
I suppose that if enough money was spent on the 'power system' and various innovations, people would forget about the conspicuous failures of deregulation and take another crack at it. Being a 'bottom line' sort of person that doesn't interest me at all, because as I have pointed out any number of times, it was a mistake to buy the deregulation song and dance in the first place. Given the configuration of the electric power sector, It could only end up the way that it has ended up.
Recently Jerry Taylor at the Cato Institute informed me that he did not like the way that deregulation was carried out in the US. As I hope that I have made clear in the first chapter of my new textbook, this is a discussion that I don't want to have any part of; but Taylor also pointed out that he accepts that this industry is a "natural monopoly". It is a natural monopoly, and that just about settles the matter, because once we accept that we can bring some mainstream economic analysis into picture. What I would like now is for Taylor and others to elaborate on this topic and present their work to the EU Energy Directorate, because those ladies and gentlemen simply refuse to get the message.
I definitely agree with professor Banks "It is a natural monopoly" but believe it should have the added statement "unless effort is made to create a genuine market". All existing efforts at re-regulation and EWPC as near as I can tell make no effort to implement a genuine market in which all customers can participate, which is the core of what IMEUC (see blog on this site) does do.
Resigning yourself to operating the electrical system as a natural monopoly is a fairly safe second-best way to muddle into the future. It still leaves what is set to become the only energy source for our children's children exclusively in the hands of a few mopolists whose obvious incentives are a) to exclude as much as possible any means of electricity generation they don't own. (DG, solar thermal CHP, PV, etc.) b) to agressively capture the political process to which they respond. c) to decide your energy options for you with little if any choice left to the individual.
Imagine Excelon with some multiple of the profits presently accruing to Exon + (your largest local natural gas provider). In 40 years (+- depending on who you read) the electricity system WILL be a rolled-up aglomeration of all present energy systems (Oil, Natural Gas and Electricity). With that sort of economic power in the hand of a very few IOU monopolies or probably worse yet in the hands of governments, what will we have left to our grandkids?
With the intelligent application of a little silicon intelligence we can do better by provideing a genuine free market for every customer.
The business of creating an electric market in which customers enjoyed a meaningful participation was discussed by Fred Scheppe (of MIT) at a long conference in Portugal that I have mentioned a number of times in this forum. Doing this is almost certainly correct, but I stay away from this topic because I don't really understand the details, and in addition I think that the most important contribution that I can make is to emphasize that we are dealing with a natural monopoly, and that ELECTRIC DEREGULATION HAS FAILED, IS FAILING, OR WILL FAIL. I've mentioned/cited the contributions of many persons in this forum in my new textbook, but unfortunately my ability to use the computer is so pitiful that I could not reproduce many of the comments on electric deregulation that were published in this forum in the manner that they could/should have been reproduced.