The California commissioners need to shift their mindsets “to show that retail competition is not only possible, but absolutely necessary to turn the electricity industry into a vibrant value added business for all stakeholders.” That is the EWPC story that emerged from a generative dialogue, enriching the debate between the story of incumbent utilities and the story of the coalition.
The Good, the Bad and the Ugly
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
First posted in the GMH Blog, on March 13th, 2008.
Copyright © 2008 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. This article is an unedited, an uncorrected, draft material of The EWPC Textbook. Please write to javs@ieee.org to contact the author for any kind of engagement.
The summary of the EWPC article The BIG California LIE says “The BIG LIE is that retail competition is impossible in electric markets. The implementation of a competitive retail market was the center of the debate in California. Instead of cooperating to implement it, the three big California utilities, that didn't care about the end-costumers, acted very irresponsibly. EWPC is the paradigm shift to show that retail competition is not only possible, but absolutely necessary to turn the electricity industry into a vibrant value added business for all stakeholders.”
As I said in the EWPC article High Leverage Shake-Up in California, to which this article is a follow up, I am changing the opinion of “Instead of cooperating to implement it, the three big California utilities, that didn't care about the end-costumers, acted very irresponsibly,” since the utilities were not alone, but were also prisoners of the system like FERC and the PUC.
The good news is that the PUC is trying to amend the BIG LIE, by working hard to show the whole world that retail competition is possible. But to show it, the powerful commissioners will need to change their mindsets with a paradigm shift to EWPC.
So, I agree everyone should get both sides of the story. But there are not only an advocate and an opponent, as it was to be. To make things simple, I will say that there are only three sides to the story, the Good, the Bad and the Ugly.
The EWPC’s System: the Good System emerged as a Simple System.
This is an emergent story. The aim is a high leverage systemic transformation to insert the power industry in the third industrial revolution. The leverage is to come from the development of business model innovations, including the smart grid, that mutually reinforce themselves.
The Simple System leaves the transportation grid – a natural monopoly – as the integrated transportation only utility, that takes the central stage from generation by fulfilling an ultraquality imperative. Ultraquality transportation is a characteristic of the system for high power quality and system reliability, and not a characteristic of the unreliable parts like the generating units.
The smart grid transportation utility will provide for the long-term stability needed for investments in the power system, eliminate cross-subsidies and avoid unintended consequences, by providing a fundamental systemic solution to the worldwide electric industry systemic crisis. Generation and retail become fully competitive activities in the open market. No customer gets discriminated.
My story: “EWPC is the paradigm shift to show that retail competition is not only possible, but absolutely necessary to turn the electricity industry into a vibrant value added business for all stakeholders.”
The incumbent’s System: the Bad System is an evolution of the Old System.
This story is lead by the three California utilities, which have a lot of power and have the California legislators - the status quo - in their side. The Bad System has large power customers who had already signed direct access contracts, but discriminates everybody else to remain as utility customers.
The incumbent utilities’ story: “… expanded direct access could undermine the long-term stability needed for investments in the power system, shift costs from one group of customers to another and produce unintended consequences such as the failed deregulation." I agree that it is to be expected with a symptomatic solution of the systemic crisis, resulting by remaining imprison by the generation centered stage utility system.
The Coalition System: the Ugly System is a very Complex System.
This story is led by a coalition of power companies and government agencies that now wants to revive the “direct access” part of the failed deregulation experiment. The CPUC is looking for a symptomatic solution within the boundaries of the present imprisoning system.
Competition was closed in California until 2017 when the long term contracts between the California Department of Water Resources expire. But the PUC decided to look at whether the contracts could be assigned to someone else, such as the utilities. Such symptomatic solution is bound to be a low leverage system intervention, that increases even more the complexity of the existing system.
The coalition story: “…direct access allows customers to choose rates and services that help them compete and manage risks while developing a broad power market that can provide more options and lower prices for customers.” This is not possible with structural separation as the Carnegie Mellon Electricity Industry Center working paper showed. To make it possible a paradigm shift to EWPC is needed.
Mar 12 - McClatchy-Tribune Regional News - Jim Fuquay Fort Worth Star-Telegram, Texas
Electricity retailers believe that they can make more money selling less electricity, a number of the companies told an industry gathering here Tuesday.
"Customers are going to reduce their usage, and they are going to turn to someone who will help them. If we don't do it for them, someone else will," said Lois Hedg-peth, chief operating officer of Direct Energy, the North American electricity operation of England-based Centrica. To that end, the company has moved into the business of installing heating and cooling systems for its customers and offering other energy-related services, she said.
Jim Burke, chief executive of TXU Energy, said its pilot programs that put electricity usage monitors in homes "reduced annual consumption by an average of 5 to 7 percent." The monitor displays how much power a customer is using at the time and estimates the projected monthly bill.
Similar moves could help a customer cut electricity demand 10 percent or 20 percent, he said, but if TXU can also earn $5 to $7 a month providing a service that helps them achieve that, the company can come out ahead, he said.
Similarly, customers don't want to overspend to cut electricity use, he said, but if TXU can show them that there is a two-year return on an energy-efficiency project, they'll be more likely to do it. As an example, he cited spending between $1,000 and $2,000 to install a radiant barrier in a home's attic, which can keep the attic cooler and reduce air-conditioning use.
James Ajello, senior vice president of Reliant Energy in Houston, said putting more energy-management tools in the hands of customers will also help the industry by smoothing demand spikes that otherwise must be met with new capacity.
"Electricity is a low capacity-utilization industry, the lowest around," said Ajello, who said that on average, electricity producers operate at only 44 percent of capacity.
If the industry raised its utilization just from 44 percent to 54 percent, Ajello said, "we could avoid building five, 10, 15 base-load plants," saving the expense of constructing power plants whose costs can easily approach $1 billion.
My translation of this gobbledygook is: "Let us show you how to pay more and receive less." Its resemblance to EWPC is striking. I believe both strategies are based on speculative, untried ideas. It would not be surprising if the two-year returns are higher electric energy rates and inflated customer monthly bills.
Interesting that you find the integrated nature of the VIU necessary. Now if you work a little harder on "returns to scale" and what works best in markets with "imperfect competition" may be we can generate some dialogue.
The news added to the article shows that in Texas 1GR are now looking to rudimentary elements of 2GRs business model development. However, structural separation remains as a big barrier for the integrated smart grid transportation utility, as well as for fair competition.
In the Working Paper CEIC-08-03, Blumsack, Lave and Apt, wrote that "Focusing explicitly on the introduction of retail competition in Texas, Zarkinau and Whitworth (200) and Zarkinau, Fox and Smolen (2007) find evidence that retail prices for residential and commercial customers have actually increases in areas of Texas where retail competition has been introduced."
The integrated nature of the Vertically Integrated Utilities is no longer necessary as explained in the EWPC article "Another EWPC Discovery" (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2008/3/8... ) "The vertical integration paradigm mindset had a large negative impact on restructuring, which we can now be reversed by making a shift to the EWPC paradigm mindset. The abstract of the Working Paper CEIC-08-03, starts with "Restructuring of the electricity industry was expected to improve the operating efficiency of electric power generators, leading to lower production costs and retail prices." That is a great statement for the gone days of the second industrial revolution, but not for the third industrial revolution that we are experimenting."
This is the summary of the important discovery: instead of "retail competition for electric generation" as the Working Paper reads in page 3, what is needed in the third industrial revolution to reduce the risks in the power industry is Retail Competition and Active Demand (to get Demand Integration), under Ultraquality Transportation, which in turns are the three essential requirements of EWPC.
Although many times antigonistic, your inputs in the generative dialogue have helped clarify EWPC, being invaluable. Such is the case of the opportunity to write about "The Good, the Bad and the Ugly," instead of "only an advocate and an opponent." Thanks, once again.
It is not possible with structural separation, because there is a need for real separation between the utility enterprise and the utility grid. Integration is for Demand Integration to power system planning, operations and control, as well as transmission and distribution integration that results in the transportation utility compact.
On the need of rational rationing that competitive 2GRs will be able handle as they replace the regulated enterprise side of the utilities, Warren Causey wrote that "Here are some examples of customer concerns utilities and their CISs will have to deal with in the future (which they are not able to do, just as it is not possible to teach new tricks to an old dog) : . .. · As electricity becomes more scarce--something that is predicted by virtually everyone knowledgeable about the state of the industry--residential customers are going to have to deal with reduced supplies... As the shortages become more acute as carbon constraints continue to drive out the 50% of U.S. electricity currently generated by coal, demand response likely will have to become mandatory. When it is mandatory, it becomes rationing. . . · As demand response/rationing takes hold, utilities are going to have to know a lot more about the lifestyles of their customers. To see the complete article "Customer care is about to become much more complex for utilities. Current systems can't handle it," please hit the link http://www.energyblogs.com/Causey/index.cfm/2008/3...
some of our more left-leaning politicians and cost all of us a bundle!
some of our more left-leaning politicians and cost all of us a bundle!" Don Giegler.
On the contrary, EWPC Good, Simple, and very Familiar System is neither unsupported, nor wishful thinking. It is a very Familiar System that separates the real natural transportation monopoly market from the real commercial and competitive free market.
Free market, no left-leaning, nor-right-leaning, powerful California commissioners need to show the required leadership, entrusted to them by the general public, to base their actions in that "There is a need for a shared vision to restructure the power industry, shrinking [their own] regulators jobs to price controls of the remaining transportation electric utilities and letting end-customers make their own investments and purchasing decisions of electricity. The shared vision needs to go to the public opinion so that high level political decisions are enabled to restructure the electricity industry and shrinking regulators jobs." See Shrinking the Regulator's Jobs (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2008/2/2... ) for details.
Under EWPC, "retail competition is not only possible, but absolutely necessary to turn the electricity industry into a vibrant value added business for all stakeholders." EWPC is well supported as a paradigm shift to help California commissioners shift their mind-sets from ongoing communist like average rates to introduce a competitive free market of electric power on a value chain generation, retail, and customer. The Old System, "that had served the country so well - until the world changed," is now a very Bad System that is now totally unsupported and has been kept in force by left-leaning politicians all over the world, mainly as a result of the BIG LIE.
I will give you all a quote from Megatrends on the "Law of the Situation: the railroads [and utilities] did not understand."
Suppose that somewhere along the way a railroad [utility] company, sensing the changes in its business environment, had engaged in the process of reconceptualizing what business it was in. Suppose they had said, "Let's get out of the railroad [energy producing] business and into the transportation [energy-moving] business." They could have created systems that moved goods [energy] by rail, truck, airplane, [to or from the customer] or in combination, as appropriate. "Moves goods [energy]" is the customer-oriented point. Instead, they continued transfixed by the lore of railroading [generating] that had served the country so well - until the world changed.
Of this phenomenon Walter B. Wriston, chairman of Citycorp, in 1981 said: "The philosophy of the divine right of kings died hundreds of years ago, but not, it seems, the divine right of inherited markets. Some people still believe there's a divine dispensation that their markets are theirs - and no one else's - now and forevermore. It is an old dream that dies hard, yet no businessman in a free society can control a market when the customers decide to go somewhere else. All the king's horses and all the king's man are helpless in the face of a better product [service]. Our commercial history is filled with examples of companies that failed to change in a changing world, and became tombstones in the corporate graveyard.
If "...demand response likely will have to become mandatory. When it is mandatory, it becomes rationing. . . · As demand response/rationing takes hold, utilities are going to have to know a lot more about the lifestyles of their customers." and WTO intervention to break up VIUs comprise your ideas of a neither left- or right-leaning free market, your concept of markets is even further out on the left tail than I thought!
Be a good sport. As you will see below, this is "a fascinating time-period in which to live."
EWPC is no about the left or the right. It's about ending the rampant value destruction originated in the Old System, the Bad System, and even more the Ugly System. The Good EWPC System is about developing the resources of the demand side for innovation to flourish and generate a lot of value creation in the benefit of ALL stakeholders.
To continue reading my response, please go to "The Good, the Bad and the Ugly II" in the link
http://www.energyblogs.com/ewpc/index.cfm/2008/3/1...