The answer to the question of what to do first is for the global power industry to get out of the wrong jungle to produce a EWPC based EPAct as soon as possible. That is the kind of leadership needed to face the inevitable fundamental changes required to significantly reduce today’s legislative and regulatory uncertainty.

Leadership Answers What to do First

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

First posted in the GMH Blog, on April 16th, 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.

I agree with Warren Causey’s article Utilities Full Speed Ahead on IUE/SG: The Question is What to do First that “the consensus is correct: ‘fundamental changes are inevitable… the paradigm is going to have to change.’” M.I.T. professor Fred C. Schweppe, and his research team, knew that in the 1980s. The EWPC effort that extended Schweppes work is about facing those inevitable fundamental changes, as can be seen in the EWPC article The Electricity Revolution, which is summarized as:

“Warren Causey is [also] reporting a technological revolution in the power industry, which is ahead of legislative and regulatory uncertainty and is heading for a very costly dead-end. Utilities in the US and Europe are trying to extend their obsolete business model of winning rate case to the regulators. Customers, [the general market] and society should not have to pay for such large value destruction, by adopting the EWPC market architecture and design paradigm that removes the uncertainty.”

The most important reason why the existing paradigm – the system - is failing is because of architecture and design flaws. Eberhardt Rechtin and Mark W. Maier, in their book “The Art of System Architecting,” have a descriptive heuristics that explains what happens: “In architecting a new [the paradigm in this case] program all the serious mistakes are made in the first day.” Leaving out utilities native loads, Open Transmission Access of EPAct 92 was such a serious mistake, which initiated the incremental path of the California crisis, the 2003 blackout, etc., that have taken us to today’s mess of costly and complex capacity markets, NERC mandatory requirements, etc.

Looking at the mistake from another perspective, legislators and regulators were trying to get efficiency from wholesale, when the breakthrough paradigm is all about business model innovations at retail to integrate demand to power system planning, operation and control. Such breakthrough is enabled by the Third Industrial (communications) Revolution. Most investments to develop the resources of the demand side will be customers’ investments, that need to be well coordinated to produce large savings. Such coordination should be the result of competition of innovations among open market Retailers’ Enterprise Solutions and the development of the smart grid transportation utilities, instead of monopoly Intelligent Utility Enterprise/Smart Grid solutions.

In the EWPC article Slicing the Last of the Regulated Monopolies (an update of an article with the same title by Lester P. Silverman, a director of McKinsey & Company, on The New York Times of July 21st, 1996.) it is very clear that at the outset “‘The wires business - the transmission and distribution of electricity - will remain regulated but will be operated by [transportation only] utilities … with access to the wires open to all [generators, retailers and customers] ... Many of today’s electric utilities will be little more than regulated wires companies, but some will have grown by acquiring neighboring wires and other [gas and/or water] operations... The energy service business [under Second Generation Retailers], which involves the packaging of energy and other services [to integrate the resources of the demand side to power system is the key to the breakthrough.]"’

Why Silverman’s vision didn’t happen? We have a strong case of lack of leadership to enable a robust system that protect consumers from supply disruptions and unfair pricing. Even though, as Warren says “there still are a lot of questions about what to do first … according to most experts – Congress failed to so in an Energy Policy Act (EPAct) adopted in December,” the real make or break answer is all about legislative and regulatory leadership, which I now discuss.

In the chapter on Habit 2, of “The 7 Habits of Highly Effective People,” Steven R. Covey tells a story about the difference between Leadership and Management to explain that leadership – “What are the things I want to accomplish?” – is the first question to ask, while management is the second question “How can I best accomplish certain things.”

Covey wrote “You can quickly grasp the important difference between the two if you envision a group of producers [the utilities] cutting their way through the jungle with machetes. They’re the producers, the problem solvers. They’re cutting through the undergrowth, clearing it out.”

“The managers [the legislators and regulators] are behind them, sharpening their machetes, writing policies and procedure manuals, holding muscle development programs, bringing in improved technologies and setting up working schedules and compensation programs [rate cases to be won by utilities] for machetes wielders.”

“The leader is the one who climbs the tallest tree, surveys the entire situation [see more than 110 articles in the EWPC Blog], and yells, “Wrong jungle.”

“But how do the busy [Utilities Full Speed Ahead on IUE/SG], efficient producers and managers often respond? ‘Shut up! [José Antonio] We’re making progress.’”

So, the simple answer to “What to do First” is that the power industry should get out of the wrong jungle and adopt the EWPC market architecture and design paradigm. The controlled market transportation utility with their regulated responsibility to transport will be aiming for ultraquality transportation and thus providing “the benefit of localizing disturbances and fragmenting responsibility and expense” with those of the non-real-time open market.

The modernization of the nationwide grid will then be done under a least cost transportation (tightly integrated T&D) expansion plan, considering the investments, operation, maintenance and outage costs forecasts of the whole power system including the value chain (generation, retail, customer) of the open market. The regulatory compact will shift from the utility obligation to serve to the utility obligation to transport in the closed market. The difference between the two will be demand response as a condition of service in the open market.

So, what to do first? Forgetting today’s mess, and starting from a clean slate from the ‘previous, historic paradigm,” as Warren calls it, the legislative and regulatory bodies need the vision and the courage to separate the regulated wire business, from the competitive retail and wholesale businesses of the open market. To go forward, they should take into account all the great insights that have emerged on EWPC market architecture and design paradigm, during the discussions on EnergyPulse and EnergyBlogs.com of the past 28 and 7 month, respectively. EWPC provides the required leadership to reduce the legislative and regulatory uncertainty to acceptable levels.

As Warren says “the next 10 to 15 years will see mayor changes – perhaps classified as upheavals by future historians…,” if the FERC, the administration and Congress of the US don’t take the leadership challenge head on, and produce a EWPC based EPAct to control the destiny of the global power industry, then as Jack Welch and Noel Tichy wrote, in their lessons in mastering change, “someone else will.”