The dead-end of regulator’s capacity for price controls shows up once again, while modeling the Smart Grid business case. Under today’s EPAct, price controls are designed for simple problems, when we are facing a very tough systemic crisis. A systemic solution requires a EWPC re-regulation EPAct that deregulates wholesale and retail commercial energy transactions, while keeping regulated the Smart Grid reliable transport.
Can the Power Industry Eliminate its Price Controls to the End Customer?
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
First posted in the GMH Blog, on May 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.
I have selected this article as the eight recommended reading associated with the overdue price control debate [1]. The introduction to the other seven recommended articles was summarized as “The regulation vs. deregulation discussion was about the wrong question. An undiscussed issue during the debate, price control is the key to a properly framed debate. As utilities keep wining rate cases to the regulators, customers are now facing a very large risk of increasing rates as unprepared regulators are part of a flawed system that pushes them to make incredible bets on Intelligent Utility Enterprise and Smart Grid investments.”
It is important to recognize that the “incredible bets on Intelligent Utility Enterprise and Smart Grid investments,” correspond to the combined utility rate case. Under EWPC, the Smart Grid investments will remain on price control regulation with the ordinary approach [2].
Building models for the Smart Grid business case gives another clear example of the systemic crisis of the power industry to contribute to the undiscussed price controls issue. This time, Jagoron Mukherjee brings to the fore in such models new complexity issues introduced to regulators by the systemic crisis [3].
Today’s EPAct legislative and regulatory system was designed for regulators to take an ordinary approach to face simple problems for revising rate structures that can be resolved by three processes: 1) in a piece by piece basis, 2) using existing solutions, and 3) under the guidance of experts and authorities [4]. That approach, which is valid in under normal and stable conditions, cannot be applied under the highly uncertain present environment of the Third Industrial Revolution, which is transforming the power industry with digital technologies. [5].
Referring to modeling Smart Grid benefits required by regulators, Jagoron writes that “Some of these benefits, such as increased customer satisfaction, though hard to quantify, are benefits nevertheless and, depending on the regulatory environment, may need to be considered in the regulatory review process. The rationale to include these benefits is that despite the lack of realization of some of these societal or non-operational benefits, the market or society at large benefits from various aspects of implementing Smart Grid technologies and needs to be considered in these discussions [3].”
The complexity of the regulatory problem is compounded, because utilities will be investing not only in the Smart Grid (SG) but also in the Intelligent Utility Enterprise (IUE) to replace their obsolete business model. [6] The US Government Accountability Office (GAO) is actually asking the FERC to consider cross-subsidization – unfairly passing on to consumers the cost of transactions between utility companies and their “affiliates” [7]. By reading about multi-state regulatory requirements, GAO concerns get multiplied as cross- subsidization complexity increases by involving several states regulators in one utility application.
Jagoron adds that “The costs and the potential benefits of these projects are inherently uncertain, and difficult to quantify, as is the case with any new technology and uncertainty in service level and customer acceptance” [3].This means that regulators have to face a very tough problem, which shows that the regulatory ordinary price controls approach should not apply at least for the very risky and costly IUE systems. The separation of the SG and IUE price controls is the key to solution of the systemic crisis, if most of the uncertainty of the new technology goes to the open market [6].
Adam Kahane, in his book “Solving Tough Problems: an open way of talking, listening, and creating new realities,” implies that legislators and regulators need an extraordinary approach for complex problems that include three different processes: 1) Systemic: the system as a whole (dynamics complexity), 2) Creative: emerging solutions (generative complexity), and 3) Participative: stakeholders and “stickholders” (social complexity) [4].
It is now clear that the simple problem (price control) process does not apply. However, thinking in a detached mechanistic way, instead of a systemic way, regulators seem to be unaware of the difference that involve them in very complex regulatory cost recovery system trap that should not result in revised rate structures. In fact, state regulators are actually calling for a systemic process as they require “that utilities include system-wide benefits into their business case [3].”
In addition, whether they like it or not, regulators are an integral part of today’s systemic crisis and one of the most important contributors to the solution. Their contribution is for state regulators to step aside from the ordinary approach of price control regulation of energy sales, to prudential regulations approach designed to protect customers from supply disruptions and unfair pricing, under the new EWPC market architecture and design paradigm that faces dynamic complexity. [8].
Under the EWPC, that emerged last year from a creative process under the Energy Central Network, complexity is reduced by dividing the system in two: an open commercial market and a closed transportation market, which are designed to mutually reinforce each other in a virtuous way to produce system-wide benefits, as described next [2].
System-wide benefits will be the result of least costs transportation (tightly integrated T&D) expansion plans of the transportation network that include and enable system-wide benefits to the open market. In other words, the least costs expansion plans will consider the investments, operation, maintenance and outage costs forecasts of the whole power system, including the value chain (generation, retail, customer) of the open market.
In the closed market, the smart grid transportation only utility will operate under a regulatory compact. The new compact will shift from the old utility obligation to serve to the new utility obligation to transport, in exchange for tolls that enable investors to get a prescribed regulated return on investment. The necessity, motivation, and incentives to expand at least costs are then part of the regulatory transportation only compact.
The difference to customers between the old and new regulations will be demand response as a condition of service. It is that condition of service that enables a vibrant retail market to be developed by Second Generation Retailers (2GRs) [9] to produce very large coordination saving that maximize system-wide benefits, as some customers are better able than others to contribute to produce the required aggregate demand response every time and everywhere.
That is how the breakthrough system-wide benefits will be the result of demand integration into power system planning, operation and control, which requires considering the large investments made by 2GRs, customers’, and generators, and not just the old utilities investments. The social complexity issue is then solved by 2GRs as they produce the large system-wide coordination savings under retail and wholesale competition by integrating demand.
Coordination savings can be considered in “valuation models… that … quantify societal benefits, such as avoided generation [and transmission and distribution] investment, reduction of greenhouse gases and overall carbon footprint… [3]”. That is also how the EWPC change brings 2GRs and customers’ as an integral part of the solution to the systemic crisis.
As can be seen above, regulators are then able to call for system-wide benefits and transport tolls, but are no longer able to define customers’ energy rates. One way to understand why regulators lose their price control power is the freedom customers should have to invest, or not, given the widely varying perception of benefits from electric power service that they will expect (such as “increased satisfaction due to better service and billing, and wider service and choices [3].”).
Another way to understand these new conditions is that regulators will not be able to control energy prices that depend on customers’ investments that impact their balance sheets and income statements in important ways. While some customers will be able to negotiate prices with 2GRs, most of them will be able to select from the competition the business plan that best fits their needs for low cost and/or high value. As every customer gets the best market deal, the total economy gets the maximum social welfare.
As far for modeling and uncertainty are concerned, the interface standards between the open and the closed markets will be the key. Since 2GRs will actually develop their competitive business models, they will need to invest at their own risk in their Retailers’ Enterprise Solutions that will have standard interfaces for the smart grid. That way, most of the technology uncertainty will be left to the market as is common practice in other industries.
While competition will be absent for the Smart Grid under EWPC, competitive 2GRs replace the regulated stillborn IUE monopolistic retail arms of the old utilities. Operating under the EWPC market architecture and design paradigm, multi-state regulatory requirements difficulties mentioned by Jagoron should disappear in the new EWPC EPAct legislation, allowing the development of the Smart Grid transportation utility under a minimum set of compatible federal rules.
Conclusion: The dead-end of regulator’s capacity for price controls shows up once again, while modeling the Smart Grid business case. Under today’s EPAct, price controls are designed for simple problem, when we are facing a very a tough systemic crisis. A systemic solution requires a EWPC re-regulation EPAct that deregulates wholesale and retail commercial energy transactions, while keeping regulated the Smart Grid reliable transport. A generic framework and valuation model for the Smart Grid might be developed under the EWPC market design and architecture as most of the legislative and regulatory uncertainty disappears under the EWPC EPAct.
References:
[1] An Overdue Debate: Customers’ Price Controls
[2] Free Market and Central Planning, Under R1E2
[3] Energy Pulse article Building Models for the Smart Grid Business Case, Jagoron Mukherjee, Senior Consultant, KEMA,…
[4] “Building Collaborations to Change Our Organizations and the World: System Thinking in Action,” December 1-3, 2004. The 14th Annual Pegasus Conference.
[5] The Electricity Revolution
[6] Leadership Answers What to do First
[7] To Congressional Requesters of Utility Oversight
[8] Shrinking the Regulator’s Jobs
[9] Second Generation Retailers - 2GRs
The author have exposed several complexities that regulators should not handle. Those complexities signal a change in era from the Second Industrial Revolution to the Third Industrial Revolution that have finally emerged. It does not matter how intelligent regulators are, they should become aware that their price control job as an intermediary of the end customer is longer not for them. To find out, please take a look at the EWPC article Can the Power Industry Eliminate its Price Controls to the End Customer? The summary of the article is:
The dead-end of regulator's capacity for price controls shows up once again, while modeling the Smart Grid business case. Under today's EPAct, price controls are designed for simple problems, when we are facing a very tough systemic crisis. A systemic solution requires a EWPC re-regulation EPAct that deregulates wholesale and retail commercial energy transactions, while keeping regulated the Smart Grid reliable transport.
Can the Power Industry Eliminate its Price Controls to the End Customer?
Thank you. I will take my own advice when I write it into the EWPC Textbook, after getting more input from the overdue debate on price controls. One thing is clear: regulators have hit a dead-end.
Thank you Mr. Hempling,
Your introduction about conversational clarity on the debate of competition vs. regulation seems to be in synchonicity with the EWPC article "Can the Power Industry Eliminate its Price Controls to the End Customer?" The summary of the article is:
The dead-end of regulator's capacity for price controls shows up once again, while modeling the Smart Grid business case. Under today's EPAct, price controls are designed for simple problems, when we are facing a very tough systemic crisis. A systemic solution requires a EWPC re-regulation EPAct that deregulates wholesale and retail commercial energy transactions, while keeping regulated the Smart Grid reliable transport.
Contrary to your excellent essay, Don Giegler – a tough critic of deregulation – has claimed that the article is a "convoluted quagmire." While respecting Mr. Giegler's opinion, I ask for the benefit of the doubt on its conversational clarity.
I claim that EWPC market architecture and design paradigm emerged at the beginning of last year, as a result of a generative dialogue in the Energy Central Network (ECN). The ECN is like the environment and water that have recently fed the seed of the EWPC tree. I happen to be the seed, that have been taking the nutrients off the books and articles, many of which are posted in the ECN since the 1970s.
I believe that every article on the near 120 posts on the EWPC Blog ( http://www.energyblogs.com/ewpc )can be though of as a holographic image from a different perspective of the whole EWPC market architecture and design paradigm shift. As it happens, tomorrow, the GMH Blog ( http://grupomillenium.blogspot.com/ )is three years old. I have earlier call myself the Organic Seed of the GMH, but only recently I have understood it as clear as above.
I hope that the EWPC market architecture and design paradigm gets the proper hearing from here on.
I will be on the road in the next few days.
Regards,
José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
Organic Seed of the GMH and EWPC
An interesting approach, Scott. What would you say shows evidence of effective competition? That same evidence would seem to be necessary to support affirmative answers to the very pesky question 2 you pose above, if one assumes economies of scale and scope are sufficiently low. What, by the bye, is "sufficiently low"? Perhaps some of us are being a bit too strict about "confronting practice".
I would amend "too strict" as either "too shortsighted" or, worse, "too willing to waste others resources when 'confronting practice' ". You will, of course, have to refer back to Scott's article for his question 2, but that should be no problem for a master of re-entrant references.
On page 8 of the article "Rethinking Electricity Restructuring," Peter Van Duren and Jerry Taylor, wrote that "...the pursue of innovation and dynamic efficiency (how to organize a business) is as important – if not more so – than the pursuit of static efficiency (how best to deliver a service within a set organizational structure). Market agents are simple far better at discovering innovative organizational structures, manufacturing practices, product lines, pricing regimes, and retail service arrangements than are state regulatory officials or the incumbent monopolies they regulate."
Please recall the article Rethinking Electricity Restructuring as EWPC ( please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/10/... ) to see that "Strong EWPC market architecture and design recommendations to restructure worldwide electricity markets, supersede those proposed in 2004 by Peter Van Doren and Jerry Taylor of the Cato Institute by resolving the "previously unknown" problem created by a flawed deregulation. Those recommendations are developed to support slicing the last of the regulated monopolies with a strong sense of urgency." Recall also that Fred Banks are based only on that flawed deregulation.
Enabled by the EWPC market architecture and design paradigm, effective competition is economically desirable, as EWPC introduces dynamic efficiencies with 2GRs that will develop business model innovations for the corresponding market segments.
Don Giegler on 1.3.08
Jose,
I think you'd better hurry up and find those resources because the longer you make unsupported assertions like: " It was precisely the large capacity investment and the end of power system economy of scale that led to the restructuring efforts..."
Jose Antonio Vanderhorst-Silverio on 1.3.08
The assertion "It was precisely the large capacity investment and the end of power system economy of scale that led to the restructuring efforts" is supported by the Cato Institute 2004 report statements. Van Duren and Taylor statement was "Electricity restructuring was initiated in the 1990s to remedy the problem of relatively high electricity costs in the Northeast and California... Economist wanted reform to eliminate regulatory incentives to overbuild generating capacity and spur the introduction of real time prices." (Please see Rethinking Electricity Restructuring as EWPC - the link is in my previous post).
(End of the Grooming Wind quotes)
Since "static efficiency" is "how best to deliver a service within a set organizational structure," it is even more clear that regulators are increasing the regulatory incentives by making large bets to let utilities, "eliminate regulatory incentives to overbuild generating capacity and spur the introduction of real time prices," without introducing the required reform to shift from "static efficiency" to "dynamic efficiency" as will be enabled by the EWPC market architecture and design paradigm.
Under EWPC, economies of scale and scope will be the result of shifting from state jurisdiction of regulated "static efficiency" market business model to federal jurisdiction for 2GRs market business model that will enable competitive innovations under "dynamic efficiency."
Economies of scope are highlighted in the EWPC article Breakthrough Suggestions for Today's Utilities Environments (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2008/4/2... ), whose summary says: "Business model competition for retail services is the key to a breakthrough in utilities services. Economies of scale and scope of electricity, gas and water will enhance their business models. The general public should be aware of the harm of extending utilities business model of winning rate cases to the regulator as we enter the Third Industrial Revolution."
The problem with the deregulation policy was the large systemic diseconomies of scale (see the three problems below) that led Van Doren and Taylor to "recommend total abandonment of restructuring." See the EWPC article Rethinking Electricity Restructuring as EWPC (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/10/... ), from where I copy the following:
EWPC restructuring with its R1E2 (Reliability First, Economy Second) priority will remedy such problem while satisfying economist wants and enabling maximum social welfare through an open market in the generation, retail, customer value chain under prudential regulation. For details please read Free Market and Central Planning, Under R1E2 (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/9/2... ) and Engineers Needed for Lower Prices (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/9/2... ).
In the conclusions of the [Van Doren and Taylor] paper, it is stated: "While restructuring does not have quite as bad a record as the anti-market factions would maintain, it has created problems previously unknown in the electricity industry. Those problems generally arose because electricity restructuring:
o Focused on generation competition and ignored the pricing and incentives issues involved managing the transmission system and its public commons characteristics. o Grafted a relatively free wholesale market onto a heavily regulated retail market; and o Established artificial market institutions that invited manipulation and abuse. The end result has proven far from satisfactory."
Those "previously unknown" problems arose because of the non-trivial nature of the vertically integrated utilities (VIUs) paradigm which is preserved under EWPC with R1E2, which is one of the important discoveries which I claim to have made with EWPC. Please read also Only Two Stable Paradigms (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/10/... ).
"The poor track record stems from systemic problems inherent in the reform itself," was the argument that led to Van Doren and Taylor to "recommend total abandonment of restructuring." I agree with their conclusions about restructuring with E1R2 priority. As the systemic problem is solved under EWPC by R1E2 ultraquality transportation, as it gets implemented by a system engineer in charge of short run and long run systemic risks, the argument doesn't hold as systemic issues disappear.
The paradigm shift to EWPC is a breakthough that is not resolved by extending the VIUs paradigm adding that "Smart electrical meters hold the key to lower costs, and increased reliability," as Burnett and Shurtleff wrote. As can be seen in The Sixth Disruptive Technology (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/9/3... ), the automated metering infrastructure (AMI) is just one of the disruptive technologies that need to be tightly integrated into a superior systemic solution in the coming years under the electricity without price controls (EWPC) market architecture and design. The problems Mr. Rawlingson identifies can be solved with the smart grid disruptive technologies as explained in the article Solving Smart Grid Cost Recovery (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/9/2... ).
The conclusion is that there is now a sense of urgency to introduce competition policy under EWPC in the power industry is strongly supported in the article Slicing the Last of the Regulated Monopolies (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/10/... ).
Given that VI has outlived by about two decades its useful life, it is very important that ... 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...
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.
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.
Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer.
Would you say regulator pressure is a price control, Jose?
The Power to Choose website in Texas has the following conditions: "A fixed electricity rate will generally remain the same throughout the term of a contract (with minor exceptions) and a variable electricity rate can go up or down based on the monthly changes in the electricity market. If you choose a plan with a long contract period and a fixed rate, you will have certainty that your price will not change during that time. While this may help your household budgeting, if market prices fall you may have to wait until your contract expires to enjoy a lower price."
If there were no exceptions, regulator pressures can be read as doing their job until the contract expires. If there were legal "minor" exceptions to allow for the price hike the regulator would not be able to pressure.
I'm a bit curious about what the characteristics may be for "power system economy of scale"? Is there an upper limit to what size in total MW is required for a generating entity to capture all, or essentially all, economies of scale? eg. would the 20 reactors + coal-burners + hydro facilities in Ontario (Bruce Nuclear about 5 GW, OPG about 7 GW nuclear + 4.5 GW coal + 5 GW hydro) operate significantly more cheaply if they were all operated by a single entity under full regulation? Why, by how much, and is it more than efficiencies created by market competition between the two generating entities now? Can several entities compete against each other across a broader region than any VIU has historically been allowed to operate in order to achieve the same scale efficiencies? I simply think a clear statement of it should be required prior to granting the point.
Len Gould on 5.20.08
The "upper limit" question actually should be two parts. 1) at what upper limit of size do proposed economies of scale taper off to insignificance? 2) what is the minimum efficient size of a generating entity?
Demand integration to power system planning, operation and control is where the breakthrogh EWPC market architecture and design paradigm new economy of scale is available at the federal level with market business model innovations. The result is maximum social welfare.
Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer.
Jose Antonio: I think, in the context which "economy of scale" has been discussed on this site, it basically is being used as an argument for (or against) the totally regulated VIU model (eg. prof. Banks several discussions), in which case I think it applies largely to generation as much as generation is the largest component of a VIU's costs.
Len Gould on 5.21.08
And I really don't see much at all how "economy of scale" could be significant to T&D beyond the typical regional grid scale which size is set for reasons of dispersal of dependency, not economy. As far as your retailers go, what specific economies of scale, would apply to retailing, and what percentage of total electricity cost to customers might such economies represent?
Len Gould 5.21.08
I would point out that, in Ontario, many of the very small municipally owned and managed telephone and TV Cable service providers are also many of the lowest cost ones, so I would presume that customer care costs flatten out at very low relative numbers.
The last time I looked at the English system (about 10 years ago) it did have a new layer of retailers between the generating companies and the customers. The new competitive retailers were competing with the extant retail monopolies with some success. They beauty of the new layer was its efficiency according to London Economics. A competitive retailer was characterized as a handful of buyers and a large group of salesmen in Ford Cortinas. No room in a competitive world for the overhead of utility VPs and bureaucracies. London Economics commented that in England and Australia old-line utilities wanted into the competitive retail business but always failed because they do not know how run efficient an efficient retail business. So I see no problem with Jose proposing new independent retailers. It is a good route from inefficiency to efficiency.
Lens's question about how to finance peak reductions in a competitive market is easily answered. The cost of generation alone is so much higher during peaks than at night that IF the cost differences were reflected in rates a standard part of commercial AC systems would be gas chillers and/or ice storage. The problem is how to get the regulatory rates replaced with economically efficient rates. By the way, the way things like that have happened in other industries is through the introduction of new retailers who are skilled at introducing change.
Finally, there is one additional refinement I think Scott Hempling would have done well to have included in his article. It is easy to demonstrate that a mature competitive system is more efficient than the regulatory system we have in the U.S. The big problem the electric industry faces is the same one faced by eastern Europe at the end of the Soviet era: How to transition from inefficient central planning to a market system? There is no systematic paradigm for such a transition. The transition is necessary, but cannot be fair to everyone along the way. I think a refined discussion requires not only a description of a viable market structure in the new end state. It also requires a distinct description of the phases proposed for getting from here to there. The countries in Eastern Europe have had varied success with varied approaches. Perhaps we should study them to inform ourselves about such transitions. The extent of central planning in the electric industry today is more akin to that of Eastern Europe's past than other industries in the U.S., such as transportation, that have gone through deregulation.
Thank you for your post.
The idea of introducing retailers to compete with incumbent retailers, aka structural separation, has been found to be dead end for regulators, as they are already making incredible bets on market business models.
EWPC is different from the English system and is based on recent insights that call for the tight integration of transportation (transmission and distribution) to enable the smart grid as a separate controlled market from the open (retail and wholesale) commercial transactions market. So, under EWPC there are no incumbent retailers.
The analogy of the transition from Soviet era is great: "How to transition from inefficient central planning to a market system?" However, conversational clarity demands that under EWPC is just for the commercial transactions market, and not for the central planning of the transportation market. The transition should start with a EWPC EPAct.
"Lowest cost electricity generation" [lacks conversational clarity of a concept that seems to be true and non-trivial] is a good statement to get many readers on the same page. It is also good for Joseph, because his "reality check" that I quoted above is mistaken and it also stresses even more that he might not be representing ordinary folks well. I repeat, Joseph Rosenthal said before: "It is better to just do one big thing, in my view, like build a nuclear plant, and then do your best to regulate the cost using traditional rate principles. If you try to do 10 good small things, you'll wind up doing 90 bad small things for campaign contributors. That's the reality check."
The idea of a system with just one big thing is very, very costly, because the parts are unreliable and the load is variable. That is why peaking units are required [under vertical integration] and they are the marginal units.
Lowest cost electricity generation does not make any sense to a system engineer, nor to the end customers that pay for it. As an old system planner, I will tell facts and the origin of the idea.
Under vertical integration, systems engineers made long run least cost expansion plans and as a result came up with a generation mix adapted to the forecasted long term demand. Such optimization was to minimize the costs of investments, operation, maintenance and outages [of the whole power system for many years] to produce reliable electricity.
To produce reliable electricity is a property of the whole system not of the parts. To have 24 hours of loss of load probability [in ten years] - as many systems were designed - generation reserves of 20 or 25 percent resulted for many systems.
I read that PJM had recently more than 30 percent reserves. That is one of the main reasons that demand response is not attractive, because it makes obsolete a lot of generating units.
That is also why retail customers get rates which are way above the cost of base load generation. They [PJM] have a lot of coal units, but ask what is the retail rate residential customers are paying for.
Hydro and nuclear seems a good mix. However, with a very uncertain future demand and with a lot of climate changes working out, I would not bet on it and have some gas installed. Or better yet, [under EWPC] I would develop the resources of the demand side to integrate it as active demand, or said in other words develop an effective rationing system [what I later called rational rationing] or still in another way change demand from inelastic to elastic. [The EWPC breakthrough economy of scale from 2GRs comes from demand integration to the whole power system in planning, operation, and control, and not just by retail which is only a part]
Sorry for the class. But I fell it was needed for some of the people posting their ideas without sufficient understanding [change "without sufficient understanding of" to "lacking conversational clarity about"] electric power system planning.
In my first post above I wrote "I hope that the EWPC market architecture and design paradigm gets the proper hearing from here on." More than 30 posts have been written under your fine article and it seems that the hearing produced enough conversational clarity.
You started your article by quoting A. Kahn, The Economics of Regulation: Principles and Institutions, Vol. I, Introduction at xxxvii; Volume II at 114 (1970; 1988 edition), that says "central, continuing responsibility of legislatures and regulatory commissions [is] finding the best possible mix of inevitably imperfect regulation and inevitably imperfect competition."
To complement your quote and the proposed statement "Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer," below you can find an specific guide in an update of the EWPC article Ohio Should Focus on EWPC (please hit the link http://www.energyblogs.com/ewpc/index.cfm/2007/11/... ), in reference also to Alfred E. Kahn and the other prestigious economists Paul L. Joskow, William W. Hogan, Peter Cramtom, Howard J. Axelrod and Vernon L. Smith that signed the June 26, 2006, Open Letter to Policymakers.
The conclusion of the letter states: "... despite the recent increases in electricity prices, policymakers should stay the course and continue to support restructuring and the evolution of competitive wholesale and retail markets for power. Competition is the very foundation of our nation's economy. Competitive electricity markets are relatively new and will continue to evolve. We urge policymakers to focus on making the necessary improvements in market design and resist the temptation to reject competition for a return to heavy-handed regulation. We are persuaded that competition in electricity markets will stand the test of time and continue to provide visible customer benefits."
It is important to highlight the suggestion to "... focus on making the necessary improvement in market design and resist the temptation to reject competition for a return to heavy-handed regulation," since EWPC market architecture and design emerged as the key to such improvements.
[We could generalize that some utilities are stating that] "... if we fail to preserve the market-based option for utilities and customers, we create a number of legal problems that won't easily or quickly be resolved." Such argument, however, contradicts the conclusion of the prominent economists, since the utilities grid and enterprise need to be separated to make the necessary improvements to allow competition to emerge in the enterprise without incumbent retailer.
Regards,
José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
Organic Seed of the GMH and EWPC
Dick Maklay makes a worthwhile statement of the problem at one point: "The big problem the electric industry faces is the same one faced by eastern Europe at the end of the Soviet era: How to transition from inefficient central planning to a market system? There is no systematic paradigm for such a transition."
The fact that doing that transition through retailers is the only model which has been tried to this point doesn't mean it is the only possibility, especially since most if not all current attempts at that transition are in various stages of failure. The proper method of transitioning is to open up the (present) wholesale market for all customers to participate, and provise each customer as part of their basic service with an automated agent which will act for them in their interests, in that market. Independent companies can then compete to provide a) better agents, b) services which can help customers load-shift from peak to off-peak c) efficiency services d) distributed generation CHP equipment e) etc. etc.
This would enable a fair and equitable transition, and be fair to everyone along the way, provided provision is made to reimburse incumbent VIU's for any REAL losses incurred due to poor regulatory decisions made prior. All other entities (competitive generation, any incumbent retailers with long-term supply contracts,, etc.) can simply participate in the new market at the point which most suits their resources.
Readers need to concentrate on all the post above on one thing: the basic debate underneath the explanations is that of the overdue price controls. Regulators should not be allowed by legislative action to make the technology bets they are currently doing.
Competetive retailers on EWPC replace two middlemen for the customers: the regulator and the regulated retailers (utility enterprise side) of the utility. Several market segments might develop with business model innovations. By lacking demand integration to power system planning, operation and control, IMEUC market manager is a retailer that makes very large risks on long term contracts together with the regulator.
Instead of a unique, universal (all customers need to participate), "perfect" market business model on a state jurisdiction to be enabled by a highly risky regulator bet on IMEUCs technology, EWPC market architecture and design paradigm allows for a diversity of business models that allow retailers to compete on the whole federal juristiction (as soon a the EWPC EPAct is enacted.)
I personally think the big "high-risk bet" is for regulators to force all customers to squeeze into the limited and in many way restricted, incentive-poor "retailer interface model". In an open and free market, customers should be allowed to choose to deal with retailers, or directly with providers, according to their needs.
Len Gould on 5.22.08
Then if retailers can survive, they'll become a dominant interface. If not, as I suspect, they and we will find that out.
Dick,
"It is easy to demonstrate that a mature competitive system is more efficient than the regulatory system we have in the U.S."
Seems to presume you've answered Scott's question 2 and have shown that "...economies of scale and scope sufficiently low that competition will not damage 'static efficiency' ". I, for one, look forward to demonstration of your claim, preferably in the present or past tense.
Len, I have not seen examples of automated interfaces between retail customers and producers in any industry that I can think of. I suspect that is due to specialization of skills. Those who are best at large scale production are not the best at devising interfaces for retail customers. So the role of devising interfaces for retail customers would seem to fall to entities we could call retailers. Having one mandatory design has yet to work anywhere, so it seems that we will need competing interface designs.
Don, as I am sure you know there is no definitive proof that will satisfy everyone as to the merits of centrally planned systems vs. market systems. But if central planning really worked we would be emulating the successful Soviet Union on a broad scale, and China's market reforms would be a huge failure. The failure of central planning in the electric industry can be seen in the abysmal utilization rates of generation and delivery systems as compared with competitively organized industries. Electric generation, transmission and distribution are highly capital intensive and one of the major criteria in capital industries is capital utilization. We get an F. A micro analysis shows that technologies such as ice storage and gas AC are highly economic, but regulatory pricing hides that truth from decision makers. Politically driven, anti-economic retail prices may be the largest unavoidable Achilles heel of regulation. Jose points to a central planning system that implicitly assumes retail prices are optimal, and minimizes costs on only one side of the meter. Having participated in that planning system I thoroughly understand how much the omission of considering changes on the customer side of the meter limits the ability of utility planning to achieve decent results at a societal level. Time and space do not allow a complete list of the industry's failures and the alternatives. But some of those who post here have laid out skeletons of more viable market based approaches.
Dick Maclay on 5.22.08
Don, put another way I am an optimist. Since it is easy to prove that the regulated industry deserves a grade of F, or D with grade inflation, it must be possible to do better. Since every other industry except water delivery seems to do better with a market based approach approach then must be capable of doing better too with a market paradigm. It takes a real pessimist, or ignorance of how far short the electric industry falls in efficiency, to believe that we cannot surmise that the answer to Scott's question 2 is settled.
There are no restrictions on market business models to bridge generation and customers. If there are middlemen that are not retailers let them compete on the federal market without state regulators needing to make bets. Once again, "Readers need to concentrate on all the post above on one thing: the basic debate underneath the explanations is that of the overdue price controls. Regulators should not be allowed by legislative action to make the technology bets they are currently doing."
Dick wrote "Jose points to a central planning system that implicitly assumes retail prices are optimal, and minimizes costs on only one side of the meter," introducing conversational obscurity.
In the first post under this article says "A systemic solution requires a EWPC re-regulation EPAct that deregulates wholesale and retail commercial energy transactions, while keeping regulated the Smart Grid reliable transport." I don't think anyone has participated on the EWPC mixed market system that only emerged last year.
Under EWPC, the transportation utility has a responsibility to transport that minimizes the investments on T&D taking in consideration the power system as a whole. Such least cost expansion of transportation enables maximum social welfare in the open market.
During real time operation, the system operator has complete control of the whole power system as supply and demand is committed. All commercial transactions at retail and wholesale are done in the open market on both sides of the meter. The open market and the central planning mutually reinforce each other.
Dick: "So the role of devising interfaces for retail customers would seem to fall to entities we could call retailers." -- See, that's where we differ. It IS a large software project, but the requirements are easily identified and stated, so in fact does not require a lot of competitive market input to develop, and what works for region A also works for all other regions. It's a problem which belongs with the regulators not some disparate bunch of retailers competing on false marketing department parameters.
My premise is we need to get regulators out of the business of setting up price tables and into the business of setting up competitive markets.
Len Gould on 5.23.08
Don is clearly correct in declaring the electricity business a failed market system, but doesn't address the reasons why that has been so up to now. The reason is that electricity is a very difficult product to package and sell in an economically efficient and useful manner. There can be no question that setting up some electricity pumps on the occasional street corner under the supervision of a few low-paid clerks doesn't work for marketing electricity, but that's still the only paradigm that's being considered for the electricity industry to now.
Only with the advent of current state-of-art digital electronics has a real solution to that problem become available. A smart computer agent working full-time for each customer to optomize their purchases and consumption by interacting with a computerized regional market solves the problem, and is in fact the only possible solution. Putting lipstick on corner gas station operators and calling them pretty "electricity retailers" doesn't make them so, and I've seen no system proposal, including EWPC, which provides and market-based incentives to change that.
Once the regulators implement an intelligent
As NERC is now enforcing mandatory requirements, such least cost expansion plans are not being done. When I wrote in my last post "minimizes the investments on T&D taking in consideration the power system as a whole," what is meant is the same expansion plan, but for only making decisions on T&D. As demand gets integrated to power system planning, operation and control, the expansion plans can be modeled for demand, generation and T&D for every control area.
Len's post came while I was writing my post. I respect his opinion, but I repeat once again "Readers need to concentrate on all the post above on one thing: the basic debate underneath the explanations is that of the overdue price controls. Regulators should not be allowed by legislative action to make the technology bets they are currently doing."
Once the regulators implement an intelligent computer-based competitive market for ALL customers to buy from AND sell into, and then concentrate on managing the rules in order to keep the grid up and running, then we'll have a solution. Then micro-CHP, DG, distributed PV, wind, grid-wise autos, thermal storage systems etc. etc. etc. all will all become priced at their real value and, if economical, start contributing to solutions.
Any proposed "system" which doesn't explicitly show how it integrates all these items into it's system of grid management, is not a real system. What incentives will customers with a micro-CHP furnace see when grid frequency drops 0.5%? When grid voltage falls in one neighbourhood? or rises? etc. etc.
Len Gould on 5.23.08
Jose Antonio: Price controls are NOT the core issue. In fact, there is not any one "core issue" except the absence of a fair and open competitive market for all suppliers on an equal basis, and for all customers.
Dick,
"Since every other industry except water delivery seems to do better with a market based approach approach then must be capable of doing better too with a market paradigm. It takes a real pessimist, or ignorance of how far short the electric industry falls in efficiency, to believe that we cannot surmise that the answer to Scott's question 2 is settled."
Since we are assigning grades here, let me congratulate you on an "A" for expert application of what used to be known as the "fallacy of composition" (minus the water delivery white crow) and answer evasion. In my opinion, comparison of economies of scale and scope achieved by regulated VIUs not suffering from restructuring to the centrally planned economies of the former U.S.S.R, et. al. is not an answer. Nor is market reform in China. Nor is a litany of industry failures and lessons learned. I believe we've gone around and around on this question before and I've stated application of some of those optimization techniques promoted by Rand Corporation in the '50s and '60s for airline scheduling and trajectory optimization might improve the "abysmal utilization rates of generation and delivery systems". But competitive electric retailers to eliminate "spinning reserve" and provide economic retail prices? Where? Now how far short do regulated "unrestructured" VIUs fall in efficiency and what measure do you propose that will show how that shortfall is or has been overcome by "more viable market based approaches"?
Readers should inquire into the meaning of "... the absence of a fair and open competitive market for all suppliers on an equal basis, and for all customers." Regulators can no longer represent all customers, because of the widely different perceptions, wants and needs customer have. Customers need choice that a regulator can not longer provide them. Price control is the key issue.
As many of the customers become prosumers (producers and consumers) they are suppliers with there own rights. As consumers invest to become prosumers they, as a whole new class of investors, would spend billions of dollars, which makes available a great opportunity to coordinate the savings that would lead to the maximum social welfare for the whole power system with demand now integrated. In order for each customer to know how much to invest in energy efficiency, in demand response, in distributed generation, etc., a middlemen is required to coordinate the process to the breakthrough demand integration.
The point is that it is not just a short run problem, but more importantly also a long run problem that requires all the coordination savings that can be extracted in the most effective and efficient way. Second generation retailers will integrate the resources of the demand side to the power system planning, operation and control to produce the necessary economy of scales and scope on the federal jurisdiction.
State regulators and a business model based on short run activities are thus very limited. The idea that all of the activities to service customers can be programmed in a computer is faulty, since individual customers have their own perceptions of the service they need, which are subject to change as customer get to experience innovations as they arrive.
Now readers can see how people get ignored to come up with "Once the regulators implement an intelligent computer-based competitive market for ALL customers to buy from AND sell into, and then concentrate on managing the rules in order to keep the grid up and running, then we'll have a solution... It IS a large software project, but the requirements are easily identified and stated, so in fact does not require a lot of competitive market input to develop, and what works for region A also works for all other regions. It's a problem which belongs with the regulators not some disparate bunch of retailers competing on false marketing department parameters."
That was precisely the mistake of many reengineering projects that forgot to understand that people do not behave as machines do. The toll was 75 percent of project failure. William Isaacs wrote in the page 186 of his book "Dialogue and the art of thinking together," that "despite growing to a $51 billion industry, the reengineering movement 'ignored people,' which is to say, it ignored the systemic effects that the interaction between people create within organizations."
Jose Antonio Vanderhorst-Silverio on 5.23.08
Dick,
The response to Don can be found in the above post that also supports your statement "I have not seen examples of automated interfaces between retail customers and producers in any industry that I can think of. I suspect that is due to specialization of skills. Those who are best at large scale production are not the best at devising interfaces for retail customers. So the role of devising interfaces for retail customers would seem to fall to entities we could call retailers. Having one mandatory design has yet to work anywhere, so it seems that we will need competing interface designs."
Don, you overlook my comments about the micro-analyses of the electric industry. Regulated rates misrepresent the costs of providing service. Therefore, we find customers installing equipment that makes sense given the rates, but that often is clearly not the economic choice when both customer and utility costs are taken into account. Our company is dealing with this subject with some commercial companies and utilities now. Unfortunately, regulated prices are so misleading that it is impossible to correct the effects of bad price signals on a significant scale. This is what is depressing capacity utilization and it is limiting our ability to reduce air emissions as well.
No system that is applied only on the utility side of the meter can cure the biggest problem in the electric industry – customers optimizing to misleading retail prices. Unfortunately, regulators are proving incapable of fixing their prices. The same problem existed in transportation to a lesser degree until Jimmy Carter appointed commissioners who ordered staff to LET change happen instead of trying to make change happen. The regulatory problems in the electric industry are much more extensive than they were in transportation. That makes it very easy to point out on a micro scale how to improve efficiency by removing the influence of regulators. When macro and micro analyses reach the same conclusions that increases confidence in the results.
Unlike purists such as Jose, I tend to think we should phase in deregulation. That will allow people like yourself see what it can do, and early market experiments in new arrangements can be done by those volunteering to participate without disturbing your grand mother's equanimity.
Dick,
Sounds reasonable to me. Now all you have to do is find a bunch of folks with a helluva lot more money a helluva lot less sense than grandma!
Don Giegler on 5.24.08
...and a helluva lot less...
I will tell you where we agree and where we need to inquire further on your last post.
We agree that "Regulated rates misrepresent the costs of providing service. Therefore, we find customers installing equipment that makes sense given the rates, but that often is clearly not the economic choice when both customer and utility costs are taken into account... Unfortunately, regulated prices are so misleading that it is impossible to correct the effects of bad price signals on a significant scale. This is what is depressing capacity utilization and it is limiting our ability to reduce air emissions as well ... No system that is applied only on the utility side of the meter can cure the biggest problem in the electric industry – customers optimizing to misleading retail prices" In a sense, we need a way to maximize social welfare.
We also agree that "Unfortunately, regulators are proving incapable of fixing their prices. ... The regulatory problems in the electric industry are much more extensive than they were in transportation. That makes it very easy to point out on a micro scale how to improve efficiency by removing the influence of regulators. When macro and micro analyses reach the same conclusions that increases confidence in the results." That is just another way of saying "Readers need to concentrate on all the post above on one thing: the basic debate underneath the explanations is that of the overdue price controls. Regulators should not be allowed by legislative action to make the technology bets they are currently doing."
Both of those agreements suffice to support the statement "Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer." Next this is where we differ. I suggest that we dialogue to inquiry to get in balanced with advocacy. Your comments are invited for a generative dialogue.
Phasing in deregulation is to enable the E1R2 policy (see earlier posts and their links), which leads to a systemic crisis (when the power system gets into its limits on E1 events that disrupt R2 – most price spikes are correlated with low reliability - like that of the 2003 blackout arise that reduce stakeholders confidence) and as a result a vicious circle. All the complexity introduced for example by capacity markets and NERC mandatory requirements need to be dismantled by going back to the essence which is on what EWPC is based on.
One of the most important benefits of the EWPC approach, which you consider purist, is the R1E2 policy. See on my post of 5.19.08 that Van Doren and Taylor "... 'previously unknown' problems arose because of the non-trivial nature of the vertically integrated utilities (VIUs) paradigm which is preserved under EWPC with R1E2." In practice, the implementation of the open and the closed ideal markets reference will be impacted by the reality of its approximations.
The R1E2 policy is required to develop a futures market, which is not possible with the E1R2 policy, as just one critical event might disrupt them. The futures market will be enabled by the smart grid transportation only utility. Instead of the vicious circle that the E2R1 policy produces, the systemic interaction of the open and closed market should aim to a virtuous circle.
Regards,
José Antonio
If you want to study deregulation, then you should come to Sweden to find out what it can mean. The corporation directors who could not wait to see "freedom" happen are now screaming bloody murder because of the increased price of electricity. Even the dumbest member of the corporate branch of the deregulation booster club now comprehends that deregulation was a mistake.
For the directors of the utility companies, deregulation was an answer to their prayers. This was OK with me, because to my way of thinking these directors were underpaid. What was not OK was that the largest utility/generator - Vattenfall - immediately turned their attention to Germany, and so when the ignorant politicians in Sweden began a nuclear retreat, the big generating companies didn't bother to protest. Why should they: supply down, price up, and besides, they preferred to work in Germany rather than Sweden.
Will deregulation lead to an efficient market system? As I have pointed out a couple of dozen - or more - times in this forum, if you really believe that you should read the last half of your favorite intermediate microeconomics textbook. If you did read it, and understand it, you would find out that the answer is NO. That, gentlemen, is the bottom line, and I hope that somebody here remembers it when these crazy deregulation experiments once again receive the kiss of life.
Fred