A comparison between the power industry vertical integration and electricity without price controls (EWPC) non-trivial paradigms, will show that EWPC should be adopted in the new US Energy Bill, as part of a new deal , like the one of the 1930s, to get the world power industry in a superior development path.

Mr. Chris Neil

Dear Sir,

Most my comments under your EnergyPulse article An Analysis of the Carbon Emissions Impact of the Senate Energy Bill, seem to be outside of your article scope (as Jim wrote), but as you will see they are not, because there are two important externalities, demand and environmental costs, that need to be considered in the market architecture and design.

I am suggesting that you should develop at least two scenarios, of the type that Shell Oil Co. developed for planning under uncertainty, as there is a lot of uncertainty about the future. Such uncertainty, affects in a large measure long term forecasts of the carbon emission impacts that you are developing. An important conclusion will be for the US Congress to consider EWPC as the paradigm market architecture and design of the Energy Bill.

Many intelligent people write statements which are intuitive about vertical integration (VI), which is the dominant and non-trivial paradigm, as I explained in post Lowest Cost Electricity Generation is Just Intuitive. One of the limitations of VI is that demand is an externality. Under VI the power industry is operating all over the world, in some cases with incremental extensions. Most lobby activity at the US Congress, as Mark explained, is spent defending the VI paradigm, which I assume is the basis for your models of the electricity industry.

Given that VI has outlived by about two decades its useful life, it is very important that in your simulations of the carbon emission impact you take into consideration how the fuel feedback mechanism operates in the pure VI. As fuel costs increases, customers pay the increment, with no reduction of fuel consumption at all. Some of the extensions are at most incremental, probably not reducing sufficient carbon emissions.

The best bet was a regulated energy marketplace, which Fred Schweppe suggested in the 80's. However, most of the costly deregulation experiments have very useful lessons that make unnecessary to develop today the regulated energy marketplace, as the business model of utilities – winning rate case to the regulator – get in the way as an old habit. In addition, Schweppe didn’t visualize the extension of his model to the EWPC market architecture and design.

In my presentation at Carnegie Mellon University, last March I said that “The death of Fred Schweppe in 1988 and a misunderstanding by William Hogan (a very smart economist but now we now that VI is a non-trivial doctrine) of Schweppe’s work on the energy marketplace were “small chance events early in the history of deregulation that ‘tilt[ed] the competitive balance’, to an inferior solution path, as W. Brain Arthur explained in general in his Scientific American, February 1990, article “Positive Feedbacks in the Economy.”

In the deregulation paradigm, fuel costs increases lead to an amplification of fuel use, which means that there is a perverse incentive to use more fuel. That is one way to see the scam, because as costs increases, reliability decreases too, making customer expected costs to raise a lot. So you should no waste any effort to simulate a deregulation scenario in your comparisons. That explains why I have only concentrated my attention on the comparison of VI paradigm with the EWPC paradigm in my posts under your article.

Finally, in the EWPC non-trivial paradigm as fuel costs increases lead to a mitigation of fuel use, as demand is no longer an exogenous variable. This results as demand elasticity is increased with the development of the resources of the demand side. Carbon emission reduction is much larger than under the VI paradigm.

The two scenarios suggested could be:

Business as Usual: “no carbon tax.”

The New Future: “carbon tax.”

As you will see, under EWPC the emissions reduction impact will be much better in both scenarios, to confirm that is a superior solution path. It is because of such results, US Congress should bypass lobbyists and make a New Deal.

Best regards,

José Antonio Vanderhorst-Silverio, Ph.D.