Excessive marketing costs are identified by Marty Agius, under today’s regulations, which make utilities and regulators unable to add customer value as will be done under EWPC. Added to his arguments is the large value creation waiting to happen with the emergence of business model innovations, to be develop by retail marketers (2GRs) to integrate demand to power system planning, operation and control, since market research doesn’t work yet.
Utilities and Regulators’ Value Destruction
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
First posted in the GMH Blog, on April 9th, 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.
On 12.21.05 I wrote the following under the article Free All Wisconsin Utilities to Make Money Helping Customers Save Energy:
The architecture of a "true" deregulated model is centered on independent retail-marketers, and a new value chain, whose mission is to segment customers according to electricity value added services, which customers can select. The value chain is wholesale, retail, end customer, leaving the distributor as a pure transporter charging a toll. Retail-marketers then take control of the strategic Enterprise Solutions, developing innovative business models. As each customer selects what he perceives is the maximum value addition, the economy as a whole maximizes welfare.
This is just a glimpse of my insights, design, research and, humbled observations of the past 10 years. By no means am I saying that retail markets development will be easy. No; there is a lot of work needed to make it happen. Most investment in energy efficiency needs to look to the next 5 years, away from the Continuity scenario. I will be very happy if one place in the world decides to initiate the experiments required for the development of new business models on retail marketing, and I wish to be
there.
In response to the above, Len Gould wrote: “Jose: You're close, just not going quite far enough. You need to eliminate your "Retail marketers" by implementing intelligent software within the customer's meters which takes over the simple task of selecting either a lowest-cost supplier from among all available in a central electronic "marketplace", or alternatively choose to not purchase, and shut down some of the customer's less critical loads if the price exceeds customer-set limits.” As can be seen next, Len’s opinion (which he should change as soon as possible) can now be classified as the first and foremost of the many IMEUC False Facts.
Marty Agius, Executive Vice President, SKM Group, article Relevant issues affecting the utility industry today shows very clearly that utilities need to implement retail marketing, but the market architecture and design in place are totally flawed. Marty shows that utilities and the regulator controlled market rules are generating immense value destruction with excessive marketing costs because:
-- Marketing of products and services need to utilize pinpoint targeting
-- Public service commissions want all audiences treated equally
-- To enhance shareholder value, the right audience needs to be reached with a relevant message
Even more important to value creation, as can be seen in the EWPC article Market Research Doesn’t Work Yet for Demand Integration (please hit the link to read this highly recommended article), is that “Demand integration is a discontinuous innovation and the reason why the responses of customers are way off with respect to the non-trivial concept of demand response. Politics should NOT continue to play major interventions in regard to betting on outcomes in alternative energy and demand response, as the installation of AMI is developed by 2GRs under competition. Great opportunities are waiting “that promises much more value creation over time” under the EWPC paradigm shift.”
Further, as can be seen in the EWPC article EWPC Leadership (w/o links), “…the EWPC breakthrough … brings absolute clarity and direction to enable a cultural shift to the power industry of the third industrial revolution. Demand Integration by 2GRs result in large coordination savings for society as a whole, both in customers' multiyear investments and operation costs...”
As a conclusion, it is now very clear that after a lot of work, Electricity Without Price Controls (EWPC) emerged at the beginning of 2007 as the winning market architecture and design paradigm on the market vs. market competition. For a quick introduction, EWPC is contrasted with the he old paradigm in the GMH essay Electricity for the New Millennium.
Two excerpts from the essay on the new paradigm reveal, first, “In the Third Industrial Revolution that we are living today … energy costs are becoming prohibited and retail customers' transactions costs are going down year after year. The regulator as an intermediary is now an unnecessary overhead, as customers' perception on electricity's value vary widely. Both of those changes are enabling a new paradigm that allows the liberalization of electricity markets, so customers have freedom of choice, fair and efficient prices, while the power system is planned, operated and controlled effectively with the response of the customers enabled by technology.
Second, “under the breakthrough EWPC market architecture and design paradigm, "... the layers of overhead of both utilities and the regulator are removed," and a new breed of Second Generation Retailer - 2GR compete at their own risk (neither at the ratepayer, nor taxpayer) in several worldwide market segments trying to develop business model innovations, as business do in many other industries.
Marty,
Jose Antonio suggests "Excessive marketing costs" exist under today's regulations. I must agree with Jose on this point, since existing utility business models and business practices do indeed make it very difficult to justify adding or creating "customer value". Simply put, our existing utility companies under regulation cannot easily implement anything new for their customers' benefit, because they have no solid financial incentives to do it without implementing general rate increases or government subsidies.
What I disagree with is Jose's suggested means of implementing his EWPC market reforms to change the utility industry into different business models. Len Gould's IMEUC market reform proposal is the only logical suggestion that would among other things force open standards on smart meters and energy marketing. Open industry standards are key to successfully foster innovation and add customer value, as has been practiced in other industries for years.
Marty,
Be aware of False Fact #9: "A never-ending series of confusions." Also read carefully because of False Fact #10 [it is actually #11]: My "constant eroneous comments about IMEUC." Please recall that "By no means am I saying that retail markets development [to integrate demand to power system planning, operation and control] will be easy."
Right now there are more than 110 EWPC articles, but I will try to condense the idea. If you don't understand something please ask and will try to answer it. Please concentrate on the difference between the market vs. market competition (which I don't mention below) won by EWPC at the beginning of last year (that might be a homework for you) and the company vs. company competition between competitive retailers. Such separation is a mean to reduce complexity.
What follows is an update of my suggestion of 12.21.05 and Len's response on the same date. A few updates within brackets:
The architecture [and design] of a "true" deregulated [now the re-regulated EWPC technology neutral market] model is centered on independent retail-marketers [now 2GRs], and a new value chain [different from the supply chain], whose mission is to segment customers [to deploy marketing expenses effectively] according to electricity value added services, which customers can select. The value chain is wholesale, retail, end customer, leaving the [physical] distributor [under a fully integrated T&D controlled market] as a pure transporter charging a toll [False Fact #8. The utility enterprise and the utility grid separation will never "get ever implemented politically." This is where your corageous article has a lot of value]. Retail-marketers then take control of the strategic [now Retailers'] Enterprise Solutions [see The Sixth Disruptive Technology (in the link http://www.energyblogs.com/ewpc/index.cfm/2007/9/3... ), today's most viewed article on EnergyBlogs with 1110 hits], developing innovative [instead of just one regulated monopoly] business models. As each customer selects what he perceives [not what the utility thinks] is the maximum value addition [taking into account custumers' own long term investments], the economy as a whole maximizes welfare.... By no means am I saying that retail markets development will be easy [or inexpensive]. No; there is a lot of work needed to make it happen [in the company vs. company competition, instead of regulators bets under the monopoly business model of utilities winning rate cases]. Most [customers'] investment in energy efficiency needs to look to the next 5 years ... I will be very happy if one place in the world decides to initiate the experiments required for the development of new business models on retail marketing, and I wish to be there.
In response to the above, Len Gould wrote: "Jose: You're close, just not going quite far enough. You need to eliminate [False Fact #5. 2GRs are not needed] your "Retail marketers" by implementing intelligent software [who is going to pay for the marketing costs and customer investments costs or is the government to impose the solution on every customer at all costs - see "False Fact #4: IMEUC operates on the Economic Level," and can do it without retail marketers] within the customer's meters which takes over the simple task of selecting either a lowest-cost supplier from among all available in a [physical technology biased] central electronic "marketplace", or alternatively choose to not purchase, and shut down some of the customer's less critical loads if the price exceeds customer-set limits."
To all readers,
With the intention of keeping the utility intact, Jeff Tolnar, Chief Technology Officer, BPL Global, with his article The Many Faces of Demand (in the link http://www.energypulse.net/centers/article/article... ), has made a great contribution to EWPC market architecture and design paradigm second phase of competition. He has contributed to the art and practice of the holistic approach of Second Generation Retailers business model innovations, which is The Sixth Disruptive Technology (1117 hits so far. Please hit link http://www.energyblogs.com/ewpc/index.cfm/2007/9/3... here and below to read article) of EWPC.
Jeff introduces Demand Dispatch (DD) as that " places a control device at direct load points in the premise – air conditioners, water heaters, pool pumps, etc. These devices are then monitored in real time by ... [2GRs under EWPC]. When demand reductions are required, a central system will shed exactly the amount of load that is required and restore that amount when desired. This offers a program to match demand reduction needs with very predictive and verifiable results."
DD is a great example of a retail marketing activity of 2GRs that is required to be performed at the economic level, under competition, and not under monopoly at the control level. Once agreed on a service plan contract, DD is not an invasion of privacy to those customers that perceive it as a good money saving opportunity, having a very large worldwide market segment potential.
Updating what Jeff wrote from the Demand Integration EWPC breakthrough perspective, the following results: "In order to maximize the investment in a demand ... [Integration] solution, we must take into account as many parts of the value proposition as possible. A holistic demand ... [integration] approach can be used to manage ... [low reserves, in time and space,] and address [customers' value creation and] other operational concerns."
In the EWPC context of having the utitily enterprise replaced by competitive 2GRs, the article The Electricity Revolution ( http://www.energyblogs.com/ewpc/index.cfm/2008/4/1... )is highly recommended.
Jose Antonio: "When demand reductions are required, a central system will shed exactly the amount of load that is required and restore that amount when desired. " -- Who set {required} and {desired}? -- If it's the selling company, I can't imagine many individuals going for it. If it's the customers, then you've simply lifted a caocept from IMEUC.
That is why I wrote "DD is a great example of a retail marketing activity of 2GRs that is required to be performed at the economic level, under competition, and not under monopoly at the control level. Once agreed on a service plan contract, DD is not an invasion of privacy to those customers that perceive it as a good money saving opportunity, having a very large worldwide market segment potential."