Dear Professor Banks and Mr. Gould,
As promised, I just published the following articles in energyblogs.com in response to the article and the comments.
The Natural Monopoly Transportation System 10/28/2007 at 06:05 PM...EWPC provides a new configuration, in which the natural monopoly is reduced to the transportation system of the electric market, where the old config...
Handling Sweden’s Electric Reform Threats 10/28/2007 at 06:54 PM...Strong leadership is needed to complete the reform process in the Nordid countries to benefit end customers, by introducing a paradigm shift to EWPC...
A Futures Market under EWPC 10/28/2007 at 07:03 PM...The elements of a futures market under R1E2 EWPC to lead to an stable and competitive electric markets environment are explained. A Futures Marke...
A Little Silicon is Necessary but NOT Sufficient 10/28/2007 at 07:18 PM...There is more to markets than meter electronics. It is important to understand the need for retailers as the bridge between the retail and wholesale...
Best regards,
José Antonio
"Strong leadership" you say, José. You mean like Mr Hitler, who convinced the residents of Berlin that victory was at hand when the Russian army was almost in the suburbs, and the American Air Force was turning the city into rubble.
As for a futures market, we have a futures market in Scandinavia - NORDPOOL - and if there was any justice in this old world of ours, the people who set it up would be under investigation by the serious fraud squad.
Fred
No[!] "strong leadership" like the one of my hero, the sweidish Uno Lamm who stood against Hitler and who also faced the California IOUs with reasoned statements like those of my articles at an IEEE meeting to reduced California customers bills.
The fraud in NORDPOOL, if there is any, is fueled by E1R2 and the lack of EWPC with strong customer involvement.
José Antonio
Once again you miss the point, José. Uno Lamm was probably a candidate for the accolade of 'the best power engineer in the world'. I mentioned him in a conference in Rome, and the important Swedish economist who was the object of my remarks looked at me as if I was talking about Genghis Kahn.
After Lamm retired from ASEA, he published an anticle on economics in one of the major Swedish newspapers - probably Dagens Nyheter. For some reason my wife was taking the first course in economics about the same time, and it almost pains me to say that he wasn't half-way to her level, and the term was far from over. Conclusion: LAMM HAS NO PLACE IN THIS DISCUSSION!
"Strong customer involvement", you say. In financial economics that is called 'liquidity', and if there was no strong customer involvement, those scammers at NORDPOOL would have closed their doors long ago. Where this topic is concerned, you need to contact the finance department at your local university for some help. If they are honest, they would tell you that in all the finance books published since Adam and Eve, you probably wouldn't find a dozen pages on an electric derivatives market.
Fred
There are two kinds of strong customer participation and two kinds of rsik management, as explained to you earlier (maybe about 2 years ago) and as it is in the article on futures market. Yours is about the financial risk management - liquidity - aspect. Mine is about the physical risk management (power system reliability) contribution in the power system by the strong customers involvement, that result from the development of the resources of the demand side with EWPC to avoid getting the power system close to its capacitity limits anytime, anywhere.
I'm sorry José, but you've started saying things that you really dont want to say. Maybe you should have a rum and coke and take a nap before you post anything else.
According to you, Uno Lamm was a great engineer, and as a result he had the right to occupy what you call "center stage" in a discussion of electric markets. That he has a right to participate in such a discussion is correct, but unless he proves that he understands the economics issues, I think that he should be confined to the 'wings'. Incidentally, when I was working in Hong Kong, I don't think that I met or heard of an engineer who didn't think that electric deregulation was nutty. And how could it be anything else, considering that when the Enron people told Governor Pete Wilson of California that his constituents could reduce the electric price by 30-40% percent if deregulation took place, they forgot to mention - or didn't know anything about - Kirchoff's Law, which unfortunately prevented the kind of arbitrage that the blunderers running Enron had in mind. (Note, BLUNDERERS, because if Enron's top management had stayed awake, that firm would still be going strong.)
As for your comments on futures markets, well, the less said about those the better. I have taught futures and options markets all over the world, and they are very easy to understand - but still, people like you insist on NOT understanding them. I repeat, go into the finance section of a library, pull down all the books containing materials on futures, and try to find a more than a few pages on electric futures. Electric futures is a non-subject, and before you accuse me of being a communist, let me mention that hardly anybody published more on the usefulness of futures for the oil market than myself.)
José, everything that needs to be said I have said in my article and comments. DEREGULATION HAS FAILED, IS FAILING OR WILL FAIL EVERYWHERE. As for Uno Lamm, he was a brilliant engineer - perhaps the best power engineer in the world - but as far as I know he made no contributions to the deregulation debate, and if he had made comments, publically, in English or Swedish I would know about them.
Something else. In California and Sweden deregulation was referred to as an "experiment". It was an experiment that failed because it ignored economics truths - which you are also inclined to do. And yes, there will be books about electric futures markets, and they will be read by trusting students and professionals. But MY students will not read them, because if they do and sound off about it they will be given failing grades. I don't suffer foolishness gladly or otherwise.
Finally, I do not need a shot of Aquavit. I need a rhum and coke, or perhaps more than one, and need them badly.
Fred
I agree with your analysis that all present attempts at (de/re)-regulation are failures, as they must be by their design. I would just like to ask you for a few further clarifications.
1) Is it fair for me to presume that you have fallen back to the "natural monopoly" position as simply the best choice of a set of ugly options? e.g. Are you satisfied with the skewed incentives to management of a monopoly generating company (i. higher they can get costs, more profits they make ii. no way except vigilant study of huge impenetrable submissions documents to identify events of utility influence on regulators iii. politicians manipulating electricity rates for political purposes. iv. large potential for taxpaid subsidies of electricity rates if the monopoly is government owned.)
2) How much of your dislike of NORDPOOL is related to the fact it opens up the continental market to Swedish generators, therefore leaving Swedish customers exposed to competition from buyers in Denmark and Germany? Is this not a separate issue form the issue of whether generation should be a monopoly?
I am looking for a reason within your position for why you might have a negative position on implementation of a free and open market where every customer gets equal access to every generation source in their region including the smallest home CHP units, at whatever competitive price the generation might be satisfied with, e.g. IMEUC. It makes no statement regarding international / cross-border transmission, that being a separate issue. Given that, I can't see exactly why you take the position you do, unless you believe that such a system is simply impossible to implement, which I consider to be an engineering issue and not an economics issue, as the economics of implementation cost appear to be quite straightforwardly in favour of implementation.
Sorry this is so wordy, and thanks in advance for reading it.
It's like this, Len. I dont mind answering any of these questions because I have been answering them since my first deregulation song-and-dance in Hongkong, in 2001.
1) When they introduced deregulatioin they brought it in with lies about electric firms not being natural monopolies (or strong oligopolies), and in addition there were no returns to scale in generation or transmission. (The same treatment has been given gas.) They sold this gobbledygook with the help of a tidal wave of propaganda aimed at the decision makers. Enron was one of the big suppliers of these lies, although it is possible/likely that some ignorance was involved on the part of Enron's managers. In any event, I am a bottom line sort of guy, which means that I ALWAYS make it clear that what consumers wanted was lower prices and not blather about CHOICE - e.g. choosing suppliers and playing games with meters. They were promised lower prices because, according to the theory, regulation ALWAYS meant higher prices. My reply here was a paraphrasing of Joseph Goebbels: THE BIGGER THE LIE THE HARDER PEOPLE WILL WORK TO BELIEVE IT. Let me also point out that many myths about choice came into the picture via academic members of the deregulation booster club, who in turn received research grants and were invited to the conferences that are so dear to their hearts: conferences where they keep their mouths shut and dream about the subsidized dinners that they will enjoy that night. I can mention that here in Sweden we got choice, but along with it higher prices, and now everyone except the rich curse deregulation - at least most of the time. Naturally, some free market fanatics wouldn't have it any other way, regardless of how much money they lose.
2) And yes, NORDPOOL means that if demand jumps up relative to supply in e.g. Germany, it influences the prices at Nordpool and similar establishments, and my electric bill goes up. Accordingly, if e.g. the Germans massacre their nuclear sector as they say they will, I might lose a vacation in Paris: Springtime for deregulation and Germany means winter for Sweden and Fred. And remember this, when they were bringing in deregulation, the theory was that regulation ALWAYS meant higher prices, while under deregulation, if supply failed to keep up with demand, that would be taken care of very rapidly by the transparent prices formed on exchanges like NORDPOOL leading to an increase in supply and reduction in demand. This is Econ 101, but in the last chapters of a good Econ 101 book they would make it clear that this is a gross oversimplification of the way that certain real-world markets and industries work. Moreover, in California the theory initially was that all pricing should be done on exchanges (i.e.auction markets like NORDPOOL) where long-term arrangements would be taboo. This was the craziest idea of all.
3) Yes, I agree, we do have an engineering issue here, but why should suppliers invest in order to make it better for consumers and reduce their own profits. Deregulation has meant a reduction in investment and an increase in gaming - which makes all the economic sense in the world to me. In Sweden the largest generator Vattenfall has enjoyed record profits since deregulation, and as expected reliability has gone down. As I noted somewhere, Kimery C. Vories in his letter to EnergyBiz (June 21, 2007) said that the same thing has happened in my former home state, Illinois. Also, with Vattenfall, when deregulation came in the management said to hell with Sweden and now they spend a large part of the time in Germany enjoying their higher salaries and playing kings of the hill.
4) People in Sweden write and ask me why did deregulation increase their electric bill, and my answer is simple: profit maximization by suppliers can be taken to an extreme, which means a reduction in investment and some degree of gaming - i.e. strategic cooperation by suppliers, even if it is tacit.
Somebody from California came here and said that it was not possible to cancel deregulation. Of course he didn't say it when I was present, because I would have told the colleagues exactly what it was possible to do, using what is sometimes called non-academic language. And finally, I gave my first lecture on electric deregulation in Hong Kong, but wrote my first paper earlier. Since then I have written many papers and given many lectures, BUT IN TRUTH THEY ARE ALMOST ALWAYS THE SAME. If there is any difference it is in the number of failures: they steadily increase.
Fred
EWPC is not deregulation as you lecture it. EWPC emerged while you were watching in the past two years as a paradigm shift away from the vertical integration monopoly. All the E1R2 deregulation you wrote about is most probably true, but is now history. I am sorry your book is made obsolete with respect to R1E2 EWPC.
Regards,
José Antonio
So my book has been made obsolete. That's funny, I've been running around all over the place telling people that I've written the best energy economics textbook in human history, and now I hear that it's obsolete. Statements like that remind me of the dean of engineering (or something) at Illinois Institute of Technology in Chicago who told me that I was completely and utterly hopeless, but he was wrong. I'm not 'completely' hopeless, just...
I insist that a strong dosis of leadership, like that of the late Uno Lamm, is needed for Sweden and the Nordid countries to allow the end-customers the opportunity to help transform the power market for the good, as I explained in my article.
Interesting watching the tennis ball go back and forth across the net, but ... could one of you gentlemen offer a concrete and real world solution to the problem of the consumer having his wallet cleaned out by ever increasing power costs?
Mike Keller Kansas
- One cannot store electricity, except at a significant loss (pumped hydro, compressed air, etc.) or at very high cost (batteries, etc.). - The capital cost to produce and deliver electricity to the consumer is some 10 times the cost incurred by other businesses. - One cannot direct flows of electricity - the flows follow basic laws of electromagnetism (Kirchoff's laws), not an economist's model.
These three points I learned as a college student in the 1960's and they haven't changed much in the interim 50 years. This differentiates the electric utility industry from others, and it is what makes the electric industry a natural monopoly. kWh cannot be compared to pork bellies because pork bellies can be stored cheaply, they follow economic routes to market, and the amortized capital cost is a small fraction of the total cost of production.
No talk about true deregulation will obviate the above points. One can cobble together, perhaps, an arcane set of rules enforcing minimum reliability standards among all of the players of a "deregulated" market, but don't pretend that this is truly deregulated.
Ergo, Professor Banks is absolutely correct in his premise.
Thank you for your interesting intervention.
Those three assumptions of the power industry are part of a larger set of assumptions that need to be questioned. The fifth technological revolution I mentioned in the article you intercepted says:
... as can be seen in my presentation at Carnegie Mellon University, "electric restructuring is 'fundamentally an information technology event.'" as Stanley Klein's wrote in 1998. Writing about technological revolutions, Dr. Carlota Pérez adds "these new technologies provide the potential for modernizing the whole productive structure and for raising the general level of productivity and quality to a higher plateau."
Two assumptions that no longer hold are that demand should be an externality and that customers reliability needs are similar. As a result of the second, average rates of neat customers classes are not accurate anymore. In addition, the business model of utilities, which winning rate case to a regulator, should be replaced by business model innovations in the fifth revolution.
Donella Meadows got the problem of deregulation very close to its essence in the article Restructuring and Faith in the Market. She said:
...electricity restructuring is not being driven by the goal of reducing residential rates. The drivers are technology and industry. New ways of making electricity, such as combined-cycle natural gas generators, and soon fuel cells, allow industrial users to produce their own power at lower cost and with less pollution. One by one they are slipping off the grid, leaving the utilities, with their huge, outmoded, unpaid-for power plants, in a panic.
To save themselves, the power companies meet in back rooms with politicians. They must accomplish three things. First, they must allow big customers to lock in low rates, so they will stay on the grid. Second, they must pay off the debt for their dinosaur plants. Third, they must sell the deal to the public by promising lower rates.
The solution to those problems is EWPC as explained in this "Response to Professor Banks" (please read all 4 articles above).
Ergo, both Freds need to update themselves.
I respectfully submit that you are dead wrong, because your thinking is mired in how things were decades ago. Current information technology is fully capable of implementing consumption management / price responsive systems which can make the customer's reaction to market condifions change as fast as the market changes. No-one (except Jose Antonio with EWPC) is proposing implementing de-regulation with a system as outdated as futures traders calling out prices of pork bellies on a distant trading floor, with the requisite warehouses etc. To see how a genulne market for all electricity customers could work, see the IMEUC blog on this site, on the menu above. The additional benefits which then emerge, and which cannot be accessed by any free market system any other way, are numerous 1) easy connection of local home CHP generation, solar thermal CHP, PV, wind, etc.. 2) support for grid-smart bi-directional PHEV systems. 3) fair compensation for those, resulting in a far greater incentive for those. 4) unlimited usage of unreliable renewables, e.g. wind generation well above the grid reserve level, and fair compensation of same. 5) all customers down to the smallest household paying only the wholesale price for their electricity same as the large industrials.
Check it out, it's worth a read.
We have some customer response here in Sweden because of deregulation, and my wife apparently changes suppliers from time to time.
As for me, I wouldn't touch this kind of thing with a ten foot pole. When they closed two nuclear reactors and deregulated, that meant to the best academic energy economist in the world - ME - that the electric price battle was lost.
As they said in the US Navy at one time, "On every ship there is someone who doesn't get the message". The same applies to every forum, and that someone in this case is the good José. He absolutely refuses to understand. I met Fred Sweppe, a brilliant man, but who didn't live long enough for me to explain why electric deregulation was nutty if the goal was lower prices. He would have understood. Uno Lamm was a better than brilliant power engineer, but he didn't know any economics, and as far as I know he didn't have anything to say about regulation/deregulation. I could have taught him something however, and I am CERTAIN that he would have agreed, because the industrialists in Sweden who were in favor of deregulation now see it as a curse. Lars Bergmann is a big-time Swedish economics insider who is an amateur energy economist, and had never heard of Uno Lamm until I put him in his place one beautiful day in Rome.
This business of Dr Perez and Donella Meadows saying that technology....blah blah blah...,is just damned nonsense. We had the lowest cost electricity in the world here in Sweden because of nuclear energy and regulation, but the ignorant government ruined everything because they wanted higher electricity prices: higher electricity prices increased their revenues. And listen HOUSEHOLD ELECTRICITY COSTS CANNOT BE MATERIALLY DIMINISHED BY PLAYING GAMES WITH METERS AND GETTING WANNABE POLITICIANS TO INTRODUCE CRANK SCHEMES WITHOUT THE SLIGHTEST GROUNDING IN ECONOMIC LOGIC. Note - diminished but NOT MATERIALLY DIMINISHED. Anybody in this country who thinks that demand response can substitute for more nuclear energy and the abolishment of deregulation should be introduced to the gents in the white coats.
Electric exchanges/auction markets of the NORDPOOL type are a scam. They were introduced to complement that other scam electric deregulation. Let me say to Fred Plett that many engineers who were familiar with Kirchoff's laws were shouted down by know-nothings who claimed that any losses that resulted from ignoring Kirchoff's laws would be compensated for by a comprehensive deregulation. Several of the academic know-nothings even claimed that even if deregulation caused consumers some discomfort to begin with, they should smile and clap their hands because they would be the ultimate winners.
You're late José. You should have hit the conference/forum circuit seven or eight years ago when Enron was trying to make fools of California rate payers, and to a certain extent succeeded. Maybe you could have found yourself in position to enjoy some of the long green that was being passed out to charter members of the deregulation booster club.
It would be fun to get Fred and Len in a room together and let them go at it. I think a problem with IMEUC is that it is not really like a typical market, not really. If I flick on my 60" flat screen TV, and suck up an additional 1200 watts, that's an instantaneous request to buy power. But how much? For how long? I flick it off after 10 seconds and the energy needed is basically zero. I leave it on for 6 hours, we have some actual demand here. From the standpoint of the initial transaction (presumably begun and ended when I turn on the switch) the two events are the same. From the standpoint of the product needed, the result is very different. Even penny stocks trade in blocks of 100 shares or so, and the trade costs a few dollars for that as well. Does an instantaneous demand mean an implicit contract to buy a certain minimum amount of energy? Would the consumer be OK with that? (If so, that would give the consumer the incentive to avoid short, spurious loads, which the utility would probably appreciate.)
But regulation has its own problems as well. The biggest, as I see it, is disincentive to encourage energy saving and efficiency, though such a thing is a public good. I don't think too many people nowadays are concerned about regulation because they think prices are too high. I think they are concerned about regulation because the utilities are not doing the things they want them to do. Well, if they are regulated, one would think it should be easier to get them to comply with these wishes compared with an unregulated system.
The electric utilities and the grid were developed when fuels were cheap, the implications of carbon emissions were unknown, and the biggest problem was that electricity would be "too cheap to meter". None of that is true now. Something probably has to change. Does this mean deregulation? No, probably not. Does this mean re-regulation, something probably just a scary and risky as deregulation? Possibly.
Sorry, Professor Banks, but I must respectfully disagree. With all the faults / failures / messes of de-regulation here in Ontario, and as much as I do dislike it, it has STILL brought one huge benefit which I appreciate, which is some market discipline to the old government-run Ontario Hydro. As I have said in the past, OntH used to be technically superb in all it's areas. It's crews could do any high-tech task in the most technically perfect way possible. BIUT i also know from experience, they WERE THE MOST EXPENSIVE way to get that job done I, or anyone else, has ever seen.
Evidence:
1) Many years ago, I used to be sent by my employer for training courses at their facilities. One in particular was the Hockley Valey Centre. This was a gorgeously built and maintained resort facility in the most beautiful country setting available in Ontario, next to a ski hill. At the end of one of our courses, the staff hustled us out at mid-day on the last day because the facility was about to be occupied hotelng by the retinue of Queen Elizabeth II, who was touring Canada at the time.
2) In the 1990's, a dumb big-shot politician was appointed CEO, Maurice Strong. His most publicized action was to have the utility purchase huge tracts of Amazon Rain Forest in order to protect them from loggers. With ratepayer money. Huge sums of it.
3) In the late 1990's when the privatization was under way, a lot of Ont H staffers got thrown onto the open market by buyouts. I was working as independent contractor in IS for a large telecom, and some of them came on our crew. It was unbelievable. Technically superb BUT. They were signed on as private contractors, incorporated, but they interfaced with "management" of the project as if they were (still) unionized. They'd argue endlessly over having to work overtime without 1 1/2 pay, 2 1/2 on weekends, on and on. Negotiate for free meals if the work went 1/2 hr late, then negotiate over the quality of the food (which I thought was excellent). The project was in a bind, and I worked several months at 100+ hrs/ week and was happy for the opportunity (we were still being paid very well, and treated well) but these guys ended up getting dropped.
4) We used to attend user group meeting in evenings for the software I specialize in at Ont H HQ building. It's a palatial glass highrise right next to the provincial parliament bldgs, with a connecting underground passage.
5) A long endless list of others.
I'll bet the monopoly genco in Sweden was similar.
The point is, this is the sort of things you get with monopolies, because there are no market forces on them. Things can be done much better, though I agree existing de-regulation through retailers with no market system is not the correct way. TransCanada Pipelines has taken over operation of half their reactors now, and by all appearances/evidence is doing a terrific job at a much lower cost, still treating their people well.
IMEUC is not a "CRANK SCHEMES WITHOUT THE SLIGHTEST GROUNDING IN ECONOMIC LOGIC." It is a sensible system designed to get all participant's economic incentive vectors pointing is the direction society needs them pointing WRT comming dramatic changes in how electricity will be generated and used (replacing all transport fuels, perhaps becoming a significant substitute for heating fuels where efficient, e.g. ground-source heat pumps, small home CHP units like whispergen or GE SOFC's, Gen III and Gen IV nuclear, etc. etc. etc.)
No monopoly can possibly be nimble or smart enough to figure all these things out. As an economist you must know the issues there. There is no reason for your fear, and there is no stopping the technological changes so we might as well at least control how the technologies affect us, but implementing a FAIR AND OPEN market system like IMEUC.
"Both Freds need to update themselves" is an ad hominem attack. If you don't like the message, attack the messenger. There is no question in my mind that advanced metering and price signals can modify demand, as can payments to get off the grid for a period of time. This is a red herring to my argument about the natural monopoly status of the utility industry. Such technology is not dependent on a deregulated market to be implemented. Nor will consumer demand response ever approach the point that unregulated wholesale oligopolies can be controlled. There is also no question in my mind that there have been advances in generation technologies over time. None of these advances are driven by a deregulated market, and have and can be adopted by vertically integrated utilities. A deregulated market may have encouraged over-reliance on some of these technologies - for instance, the rush to gas turbine generators in New England with no thought of fuel diversity, resulting in many of them going bankrupt and being taken over by banks. Now there is a growing concern about reserve margins and the lack of new generation. Deregulation has resulted in a boom and bust cycle in generation construciton. Fuel cells and microturbines represent emerging technology choices that have not at this point refuted returns to scale of larger plants. There may be niches where end user generation makes sense, especially in cogeneration situations. What this has to do with deregulation or vertical disaggregation simply escapes me.
I think an issue with respect to the regulated markets is how reticent they are to accommodate new ideas. A good example of this is net-metering, the only way for small power producers to get compensated for generation on the grid. The problem is, if their generation exceeds their own power needs, they get paid nothing. Now I understand the economic basis of this on the face of it, the overhead of monitoring such a small power source is hardly worthwhile to a big utility. But they fail to see the larger picture on how such efforts may, over time increase energy production, and more importantly, promote energy conservation. Instead, they get bogged down in issues that are not monetarily significant (much less so than buying Amazon rainforest) but are very significant in how understanding how a future grid might work.
On the other hand, they do get pushed around by politicians, who vote for RP standards. That is a problem with big regulated monopolies; the only way you seem to be able to interact with them is by slamming them in the head with a monkey wrench -- not the best way to fine-tune a system. I'm not saying I know what the answer is, but I am saying that this is part of the problem, and what leads people to think about deregulation.
Prof. Banks
I think you should not be so cheerful in your crusade against deregulation because it is quite a "Downer". As you would agree there is no redeeming message in obliterating deregulations other than "Lets go back to the way things were 30 years ago". Vertical Monopolies offer No Panacea or great wisdom to the electric industry. Vertical Monopolies have their own "Ax to grind" which is: Executives maintaining a structure of steady and guaranteed return to investors, and Labor seeking generous and stable employment conditions. These costs are imposed on the public with electricity prices that are set by administrative and political mechanism. Indeed this is a fairly cozy and stable system for some but they ignore totally 21-century real life issues such as rise in fuel costs, environmental problems on one hand and the potential benefits of new generation and Information technology. In deregulation, the dominant forces are those who try to make a "fast buck" in the regulated monopolies it is the executives and their politicians, both don't care and actually hinder any traditional innovations for fear that it may alter their basic interests Deregulation is not about lower prices because we do not have a universal yardstick to compare to. The lower prices per KWhr that some States enjoy are only temporary, are tied with increased pollution and long range environmental damages and include an implicit obligation by the consumers for the debt of the utility.
Len Gould aptly stated the dilemma:
"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?
So Prof. Banks, rather than basking in the seeming failure of deregulation please join the search for a better system for future generations.
Steve Rozenman Ph.D.
I certainly dont like disagreeing with Len or anybody else in this forum, because they know a lot of things that I dont know; but what I know I really and truly know.
You probably have heard the expression deregulation experiment - this was applied to the California and Sweden, and probably elsewhere. These experiments have failed, as Len admits.
Now lets talk about a REGULATION EXPERIMENT, and the only one of these that I know everything about is the one in Sweden before deregulation. WITH REGULATION WE HAD THE LOWEST COST ELECTRICITY IN THE WORLD (with the possible exception now and then of Norway), and could have had the lowest priced electricity for households and small businesses. Of course, heavy industry did get cheaper electricity. Had regulation continued in Sweden, and the Swedish government decided not to enter the EU nor send billions to stone age countries in the Third World so that they could buy weapons and plane tickets, it would have been possible for this country to continue to be an example for the rest of the world where things like health care, education and the quality of life is concerned. The regulation experiment worked in this country, and the deregulation experiment has failed here, there and everywhere, and those failures cannot be corrected by tinkering with meters, customer response, IMEUC, or promoting rap-is-sap music. This is the point that I attempted to make earlier, and will expand on some day because I happen to be convinced that economic logic is on my side.
There seems to have been some petty (or perhaps not so petty) corruption and incompetence in Ontario. Curing that sort of thing is simple - do the same thing with the offending parties that Hughes Aircraft in LA did with me. They showed me the door. But in truth I'm not worried about petty corruption and incompetence, which they probably have/had here too, but even so provided this country with comparatively inexpensive and reliable power. What worries me is a highly educated public deciding that their world will be better with deregulation because then they have CHOICE, AND IN ADDITION A FEW METERS AT THEIR DISPOSAL. Fred Plett says that deregulation has resulted in a boom and bust cycle in generation construction. Of course it has, because deregulation increases uncertainty. Moreover, it reduces the incentive to invest: INVESTING INCREASES CAPACITY, WHICH IN DUE COURSE WILL/MIGHT LEAD TO A FALL IN OUTPUT PRICES. When Professor Bill Hogan of Harvard went to the UK, he was surprised or shocked or something that investment had stagnated. I dont see why he was surprised. Once they deregulated it made all the sense in the world.
And finally, I'm not against meters, choice, futures contracts for electricity and all the rest of it. I'm against them in the context of deregulation because what they do is to make fools of rate payers.
Fred (Banks)
Professor Banks: You make a strong argument, with which my immediate tendancy is to agree. I would point out though, that NONE of the specific shortcomings of monopoly utilities were corruption, they were simply the logical outcome of how that system WILL ALWAYS operate. I'm again contracting now at a (semi-regulated-monopoly/semi-de-regulated) utility, and it is rife with similarities carried over from it's recent history as a full regulated monopoly. It's having a painful time adjusting. One thing that is clearly obvious is that although it collects lage sums from the regulator in order to promote energy efficiency among its customers, it never really does, and in our quarterly staff meetings the top executives continually encourage people to promote additional consumption out in the community in any way possible.
I also see it being (im)practically impossible, no doubt massively (excessively) costly, and very politically unwise vis. Canada's largest trading partner, for us to go back now. I think to progress from here, we're all going to need to get somewhat intelligently creative.
Steve, you want me to join in the search for a "better system". Why didn't you tell me to go to Baghdad and paint the outer walls of the Green Zone blue?
You use the term "seeming failure". You mean FAILURE, don't you. We're talking about failure here, Doctor. According to information reaching me, deregulation has failed in every state in the US if the intention was to reduce electric prices - and that, rather than giving the TV audience some meters to play with, WAS the intention.
The world that we are going to leave our grandkids! If my grandkids and their friends are dumb enough to buy deregulation, I don't care what kind of world they end up with. In case you are interested, the main reason for my disgust with dregulation is that it mirrors the kind of stupidity that led this country into the EU. Sure, 'to err is human', but colleagues, to make errors like deregulation, and then conclude (like our good friend José) that somewhere out there is a magic meter or anagram that will make things right -- no no, Steve and Len. Fred might be arrogant and obnoxious occasionally, but he aint stupid - at least not that stupid. The villain here is deregulation and not monopolies, because very large monopolies whose directors get the kind of salaries they deserve can be regulated. With deregulation the directors give themselves even bigger salaries, along with perks and bonuses, and then run off to enjoy the night life in Kabul or somewhere.
One more thing that you might or might not appreciate. I've faced a lot of people who thought that they would put me in my place on this deregulation thing. They all took a beating , because every one of them knew that they had gotten it wrong. Arguing in favor of deregulation when it has failed, is failing or will fail everywhere must be pretty depressing.
So Fred: Are you recommending re-regulating? With government buyouts? What solution do you propose?
I would also mention that in my currrent contract, I get to see up close and in detail exactly what "energy retailers" do, which is practically nothing (useful). The distribution company (by regulator mandate) MUST maintain all the customer care, metering, billing, etc. etc. system, at a cost to customers set by the regulator and heavily inflated as much as possible in order to maximize distribution's profits. Would that get cheaper if the retailers took over the delivery of those services, as Jose Antonio appears to be promoting in EWPC? No, because of the distinctive features of large business software, e.g. it costs millions of dollars to service the first customer, but almost nothing to service the next million customers.
IMEUC deals with all the issues, Fred. I suggest you re-evaluate it.
It is amazing that there is still people who believe in plan economy. Ferdinand wouldn't the regime in North Korea give you an interesting job. You can teach in dirigisme and plan economy. In the free world venture capital will invest in small scale renewable and Free Energy as in Free market forces will dominate.
Yes there will be problem during deregulation phase. It is always a lot of problem after communism. The problem started with regulation. The physics on the earth will force us into free energy market because the renewable is on everybody's roof. The large centralised model is a dead end because energy resources with the necessary high energy density will soon be very expensive. You maybe have some figures in uranium resources but much of nuclear investment will be outstripped by free market forces technology. The world doesn't need more accounting now. It is not compiling figures from existing technology the world need. The world needs a lot of new disruptive technology that harness renewable.
Peter Platell
I am bound to the principle that I am not my opinion. Please accept, with a lot of respect and with a positive attitude, my suggestion of the "... need to update themselves." It is not a personal attack at all, but a sincere wish. However, time will tell.
Best regards,
José Antonio Vanderhorst Silverio, Ph.D.
Peter, you want me to go to North Korea and teach them a few things about communism. Actually I might end up there: I've taught in Hong Kong, Singapore and Bangkok, and I was a soldier in Japan. I'm also the most productive economist in the history of Uppsala University, which is an institution that is well over 500 years now, and I like to put in a claim that I am one of the best economics teachers in the world - certainly better than any in Sweden. But even so, frankly, I prefer to remain in a country in the far north of Europe and wait for its residents to install the "renewable" that is going to be on everybody's roof - according to your good self.
With thinking like yours, no wonder this country is going to the dogs.
And Len, they should very definitely reregulate in Sweden - haven't they done the equivalent in many states in the US. As for Canada and elsewhere, I don't know. What I do know however is that if the Canadians play their hand right, they could - could not will - turn out to be the richest country in the world.
Steve Rozenman
Professor Banks, look at the flaws in regulation.
The high costs of regulated monopolies are spread over all the consumers through average pricing plus an implicit guarantee for the long-range debt of monopolies with unrestraint investment appetite. The lag in investment in new generation or infrastructure in deregulation merely reveals the banking practice of seeking iron clad guarantees for the repayment of loans - recall "stranded cost". Such guarantees should be figured when comparing cost of electricity. Essentially in regulated monopolies the reliability that is enjoined by some are cross-subsidized by consumers who do not need the reliability but they have no choice. Deregulation highlighted the true real time cost of electricity, which is well hidden in a regulated structure. Regulation is "business as usual" with all its cozy flaws. I do not state any position in this debate but with rise in fuel costs, environmental problems and new generation and Information technology the debate is not yet settled.
Steve Rozenman
Steve, we had a wonderful saying in the US once: never look a gift horse in the mouth.
Regulation in Sweden gave us the lowest cost electricity in the world - most of the time - as well as comparatively inexpensive, reliable power. As for your talk about 'regulation being business as usual', the Swedish industrial elite wanted deregulation for the kind of reasons that you give. Now they have their deregulation and are seriously mad. Given the opportunity, they will move everything that is movable out of this country.
That's the bottom line, and once you have that you can derive the rest - although in this case it doesn't matter. You've got to get yourself together, Doctor, because the argument in the post just above belongs on CNN or Fox News, and not in this forum. If I was running this show, I would have sent that post back to you. I mean some of the things you say are amateur stuff - like your comment about banking.
I'll tell you the problem with academic economics: half of it is a crock, and students spend at least half of their time with that half.
Please see the article "Customer Wallet Cleaning Problem and Solution" in the link http://www.energyblogs.com/ewpc/index.cfm/2007/11/...
Prof. Banks Please let's keep this discussions without insults. Your comment about "I mean some of the things you say are amateur stuff - like your comment about banking." make me realise that you perhaps don't understand that in Regulation the Banking "amateur staff" is the resposibility of the consumer wheras in Deregulation it is part of the risk of the investors where it should properly lie.
Steve Rozenman
I understand what you are talking about, Steve, but I wonder if you do. Even the mention of banking in the present discussion is amateur- irrelevant is perhaps a better word. Incidentally, I wrote an elementary book on international finance that you might think about looking at some day if you decide that you would like to join some of my former students on millionaire's row.
And yes, as I mentioned somewhere, I don't suffier foolishness gladly. The story of electric deregulation is right out there in the open for everybody to examine. It's a done deal. It has failed just about everywhere, and where it hasn't failed the explanation is excessive generating capacity. When that goes, then another flop. What's the point in this pretense? Maybe you should look at the letter in EnergyBiz Insider by Kimery C. Vories to see what happened in my former home state, Illinois (June 21, 2007). That sort of fiasco has, is or will take place everywhere. And I repeat: CONSUMERS WANT LOWER ELECTRIC PRICES. THEY NEITHER WANT OR NEED AMATEUR, PSUEDO INTELLECTUAL WAFFLING!. For instance a year or so ago there was some funny business in Montana that resulted in ordinary people losing thousands of dollars. They didn't have PhDs, but they immediately identified deregulation as the cause of their trouble.
Fred
I would say YES, as the knowledge required to decide that the decade old debate between great scams and the apparently lesser and more familiar customer wallet cleaning have been over has been available for more than a year.
Can We Concentrate on Results?
Work out, Ohio Senate. Right on. Groovy. So another sparrow is about to fall, because proving that competition is or will take place is like proving that two plus two is equal to five. And incidentally, as long as there are increasing returns to scale in generation and transmission, competition is wrong even if it could be mandated.
Thank you José. Wake the town and tell the stakeholders.
Fred
Dear Matt,
I think I found by myself, on the website of the PA Consulting Group, the answer to my question: "Should Electricity Without Price Controls (EWPC) be considered as a new paradigm of the electricity industry?"
In a bilingual Spanish-English comment entitled Oferta Servicio Apoyo a Renegociación Parte 2, related to a publicly presented to support a benchmarking case by a Member of PA Management Group, in the Dominican Republic. The result of the study was that PPAs negotiated on back rooms could be placed in the first or second quartile, by normalizing them with the weighted average cost of capital, which includes country risk figures. If that is true, then all the PPAs in the sample and segment were also no competitive, as explained in the following comment.
I found in the website an interesting paragraph in the introduction of the report "Viewpoint on Energy: shortages, surplus, and the search for value" of PA Consulting," prepared by Todd Filsinger, Member del PA Management Group, to the article prepared by Edward Kee (also a member) entitled "Reaping the benefits of electricity industry reform: defining and limiting the use of price controls," that says:
Deregulated wholesale electricity markets have come under attack for their perceived deficiencies. Edward argues that the competitive benefits of wholesale competition have never been realized because of the deleterious impact of retail market regulation and political interventions, which decouple the ultimate consumer from real-time market pricing, thwarting economically rational decisions on power consumption. He concludes that only when the retail customer is allowed to decide when and how much to consume based on the actual cost of providing that service, will the many promised benefits of competitive energy markets be realized.
I believe that the paragraph can be taken as a useful contribution to the generative dialogue I proposed earlier in the post Let's Get Out of Back Rooms to a Generative Dialogue. A generative dialogue cannot be done by looking the issues in isolation topic by topic, but as a system, cutting across topics. Please follow the links on the post.
We can also answer the question "Is competition needed in the industry?," once we have a system where "the deleterious impact of retail market regulation and political interventions, which..." do not "... decouple the ultimate consumer from real-time market pricing," allowing, instead of "... thwarting economically rational decisions on power consumption," benchmarking will make sense. I believe that such a standard will be EWPC.
The above also means that the questions: "Can benchmarking help identifiy which industries are in the NO PROFIT ZONE? Is the utility industry in the PROFIT ZONE because they are taking customers for a ride?" can be easily answered, once such an efficient system is available. Please explain if the logic is mistaken!
Regards,
Jose Antonio Vanderhorst-Silverio, PhD
Interdependent (Systemic) Consutant on Electricity
Santo Domingo, Dominican Republic
I finally got hold of the article "Uno Lamm: Inventor and Activist," by Catherine Wollard, published in March 1988 on the IEEE Spectrum.
As I told you earlier, Uno Lamm has been my hero because "Working on ideas outside his field, Lamm says, 'I can enjoy the enthusiasm built on partial ignorance.'" I had learned that statement about 1980, when I started to emulate that enthusiasm which keeps me going.
In 1955, Lamm organized – and was appointed head of – the Atomic Department... Supervising what he called 'the work of the future' for three years, Lamm saw Asea's first reactors go into service... Proud of the safety record of Asea-built reactors, Lamm said he raised strenuous criticism of one government design plant, which Asea found "inherently unsafe." Eventually, construction was halted...
Under pressure from a strong antinuclear movement [about 1988, and not because of deregulation], Sweden recently decided to phase out gradually all the country's nuclear plants, which provide half its electricity. Unsurprisingly, Lamm thinks the decision "very wrong – there is no failure of nuclear energy, but a failure of politicians."
My conclusion on your article is that E2R1 Deregulation is a clear failure of politicians. Whether R1E2 is a magic formula or not, power markets can now be separated into a regulated controlled transportation market and an open market under prudential regulations where vibrant competition can be developed worldwide, under EWPC market architecture and design, as explained above. My recommendation for strong leadership with "Uno Lamm is a Leader Role Model" (hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/10/...) is to mitigate the failure of politicians.
Best regards,
José Antonio