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 push them to make incredible bets on Intelligent Utility Enterprise and Smart Grid investments.
An Overdue Debate: Customers’ Price Controls
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
First posted in the GMH Blog, on May 5th, 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.
As old regulation is just obsolete and deregulation was flawed, the debate between regulation and deregulation was the wrong question. The right question is Can the power industry eliminate its price controls to the end customer?
We need to make a fundamental shift in perspective to increase efficiency of the power industry. The shift is that integrating demand to power system planning, operation and control in the next 15 years. In fact, that is the breakthrough.
As utilities are in a hurry to keep wining rate cases to the regulators to produce the shift, customers are now facing a very large risk of increasing rates as unprepared regulators are part of a flawed system that push them to make incredible bets on Intelligent Utility Enterprise and Smart Grid investments. Competition should be organized for the development of market business model for global retail market segments.
I have selected 7 articles on Electricity Without Price Controls (EWPC) for the customers, as recommended reading to initiate the overdue debate on price controls. Below, each of the EWPC article (ordered chronologically) is followed by its summary:
1. Demand Integration is NOT the Province of Politics (12/06/07)
Demand integration and system reliability are not the provinces of politics, but of engineering systems and competition. FERC’s demand response staff assessment begs the question of a properly restructured electricity market. The highly complex paradigm inherent on its market structure will become even more complex if FERC’s correct instructions are implemented. A paradigm shift to the EWPC market structure and design is expected to avoid getting the developed countries’ power industry into that of third world service.
2. Shrinking the Regulator’s Jobs (02/20/08)
There is a need for a shared vision to restructure the power industry, shrinking 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.
3. Utilities and Regulators’ Value Destruction (04/09/08)
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.
4. Leadership Answers What to do First (04/16/08)
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.
5. Breakthrough Suggestions for Today's Utilities Environments (04/23/08)
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.
6. EWPC Can’t Be a Market Winner (04/29/08)
2GRs want to compete to develop market business model innovations for global retail market segments. On a given market segment, the market winner of the market vs. market competition can only be enabled after the EWPC EPAct is enacted. The EWPC EPAct should forbid state regulators from letting utilities win rate cases that involve Intelligent Utility Enterprise and Smart Grid investments, because of the high risks of failure involved.
7. To Congressional Requesters of Utility Oversight (05/02/08)
Being unnecessarily flawed, and complex, today's EPAct causes its own crisis. Under those circumstances, FERC utility oversight will not be able to produce the expected results. What’s needed is the simpler EWPC system to protect customers from supply disruptions and unfair pricing. The political answer is a EWPC EPAct.
  |
||||||||
|
||||||||
|
||||||||
|
||||||||
|
Sponsored Content
|
||||||||
|
HOME |
POWER INDUSTRY |
UTILITY BUSINESS |
INTELLIGENT UTILITY & SMART GRID |
POWER GENERATION |
POWER DELIVERY |
ENERGY STORAGE |
END USE & MANAGEMENT
MY ACCOUNT | MY BLOGS | MAKE AN ENTRY | ABOUT US | FEEDBACK | ADVERTISING | PRIVACY POLICY | TERMS OF USE | CONTENT POLICY | WHAT IS A BLOG |
||||||||
Copyright © 1996-2012 by CyberTech, Inc. All rights reserved.
Energy Central ® is a registered trademark of CyberTech, Incorporated.
CyberTech does not warrant that the information or services of Energy Central will meet any specific requirements; nor will it be error free or uninterrupted; nor shall CyberTech be liable for any indirect, incidental or consequential damages (including lost data, information or profits) sustained or incurred in connection with the use of, operation of, or inability to use Energy Central.
2821 S. Parker Rd. Ste 1105 Aurora, CO 80014
Contact: Phone - 303-782-5510 Fax - 303-782-5331 or service@energycentral.com.
Would also point out that changing from "monopoly utilities winning rate cases (current VIU)" to "customers making long-term contracts with retailers (EWPC)" simply shifts the burden of "making bets on the future of energy" from regulators to customers, while providing no customer protection or provision to help them. At least the regulators have large support staffs of analysts, and paid time to make decisions. IMEUC, on the other hand, allows the free market of competitive generating entites to sell their product at whatever price they require into a competitive real-time market, a system where neither customers or regulators make bets on the future of energy supplies. Whatever happens to electricity supply/demand in future is what happens to customers, which is how things work in eg. the liquid fuels market, and is how things must work for any long-term stability in a volatile market.
1) Regulators bets are on market business model technologies, like IMEUC.
2) Regulators shift from price controls to prudential regulation to protect customers.
"Sidlo says that Sunrgi will initially be targeting utility-scale developments and is in talks with strategic partners, including manufacturers." Are utility-scale developments needed just because of regulated price controls to the end-customer?
Sunrgi solar technology on many roofs seems to be the logical case for distributed solar generation that statistically would have a high net input into a smart grid that transport electricity in both ways. Do non utility-scale developments need the elimination of price controls to the end-customer to be viable? Most energy will be produced where needed without transportation losses.
The price controls debate seems to be overdue.
Jose Antonio: The main falacy in your above (red herring?) is that anyone in this debate is advocating price controls.
Sooner or later, a public price control debate will arrive. The sooner, the better, to avoid the large value destruction that we are already experimenting.
I will repeat [from another article] the origen of the value destruction inherent with regulators price controls: "The difference is very simple: when regulators make those very risky bets, customers' end-up paying the mistake with higher rates that protect utilities and IMEUC. For utilities failure is not a survival issue, which will be for 2GRs."
Jose Antonio: How do you get "higher rates that protect utilities and IMEUC" ? You clearly do NOT UNDERSTAND IMEUC, so please stop discussing it.
do understand IMEUC. You are jumping to the conclusion that IMEUC works. I am not that far ahead, as IMEUC is a very risky project. Being very kind, IMEUC is a very risky technology candidate that has a 75% risk of project failure, as many reengineering projects in the 1990s. Under regulation, project failure costs will be added to all customers.
Today's prudential requirements should no allow regulators to take such risks. That is an example that clearly justifies the price control debate (for more details hit the red link in yesterday post.) That is the proper meaning of the quote "when regulators make those very risky bets, customers' end-up paying the mistake with higher rates that protect utilities and IMEUC." Those reasons explain the dead-end that regulators have with price controls.
Regulators should not be allowed to make those bets (they are already making) for captive market business model technology systems. Market business models technology risks should be left to open market competition, as has been done successfully for quite some time in the electronic industry.
Jose Antonio: "has a 75% risk of project failure," ????? You're getting that from where? Averages of even unique custom business software project's I've worked on are closer to 100% success. With the sort of budget this software can justify, and the simplicity of the specs, it will have very nearly a 100% liklihood of complete success. Don't take US air traffic control as a typical project, it's not.
Statements such as that simply reinforce your lack of cred.
I repeat: IMEUC is NOT a "risky bet by regulators", it's merely a more efficient use of existing funds currently being wasted by utilities on already-obsolete AMI systems.
Jose Antonio: "Market business models technology risks should be left to open market competition, as has been done successfully for quite some time in the electronic industry." -- While market competition among retailers clearly makes sense for a manufactured durable goods market which can be warehoused and distributed, the rules involved clearly do NOT translate directly to electricity, as you would know if you'd ever investigated the reasoning for application of the SMD standard market design as practically the exclusive market design for open market wholesale electricity. SMD and electronics goods markets bear absolutely no resemblance, for good reasons, but no knowledgeable person I know of is bemoaning the lack of "competing market designs or business models implemented in single wholesale regions for electricity", as you appear to be doing for retail with EWPC. The concept presents so many obvious flaws (which I've asked you to resolve repeatedly without response beyond wordy fluff) it becomes absurd.
a) How are competing EWPC retailers incented to spend money on customer demand management systems when the benefits will accrue to their competitors as much as to themselves?
b) Is electricity marketed at wholesale to the retailers in an SMD or similar market? If not, then how?
c) What incentive exactly in EWPC causes retailers to promote conservation when that simply reduces their gross sales?
d) Are retailers also allowed to own generation in a market?
e) What happens to a customer contract with a retailer, and any control equipment the retailer has installed at the customer's site, when the customer moves to a different address within the same market? Outside the market?
f) Are customer / retailer contracts items of public information? Consumption history? If not, how is an ISO supposed to prepare dispatch plans?
etc. etc. etc.
Of course I know you will simple post a reference link to some non-existent location of "answers", knowing no-one will check it out anyway....
g) Is each retailer in a region responsible for reading the meters of their own customers? How is meter accuracy enforced?
h) Is there a "retailer of last resort" for deadbeat customers? If not, how is that issue dealt with? How about the senior citizen with an iron lung machine?
i) How are large new generating investments financed by a bunch of small-cap retailers? You claimed before that they are not small-cap, but huge global entities. Where do they emerge from? I see nothing like that today even though several jurisdictions are already operating EWPC except for the absence of integrated Transmission and Distribution, and the occasional transitional wholesale price cap, which in Ontario was simply implemented to forestall exploitation of customers by generating entities gifted with valuable nuclear and hydro facilities at giveaway prices.
j) Why must Transmission and Distribution merge into a single entity in a market region?
k) What would be the regional extent of a market under EWPC? A US state or Cdn province? If smaller, how distinguished regarding transmission management. If larger, how does it deal with states' constitutional rights?
My response is part of the ongoing debate on price controls. Regulated price controls is a dead-end to the progress of the energy and water sectors in the ongoing Third Industrial Revolution.
Commercial electric service that involves the planning, operating and control for the Third Industrial Revolution is similar to that of commercial air travel that emerged in the 1930s with the DC-3. It is only when all the technologies emerged and were tightly integrated that commercial air travel became a reality. A piecemeal approach to commercial electric service is bound to fail, and fail bad.
Tinkering with fractured systems, like IMEUC, is bound to result in higher than 75% risk of failure. Integrating demand (that is now considered an externality) to power system planning, operation and control, involves recognizing that the legal and regulatory system is flawed, as it pushes regulators to make very risky bets without taking into consideration how tightly integrate all technologies. It doesn't matter how bright the regulator, they just can't face the challenge.
Jose Antonio: "Tinkering with fractured systems, like IMEUC" ?? IMEUC is revolutionary in design compared to EWPC, which is simply the existing (failed) system now used in Ontario, Texas etc. but with a very few minor modifications.
Ridiculous. How do you hope to maintain any credibility?
The center of the discussion is on the EWPC article "An Overdue Debate: Customers' Price Controls" (this article). The response fits very well that aim.
This post is self contained, so there is no need to hit the links to get the message. However, if readers want, they can confirm the reference to "...IMEUC is one close and fractured strategy, like any other experienced deregulation efforts... " (recently repeated in the article EWPC's Tipping Point [please hit link here and next within brackets http://www.energyblogs.com/ewpc/index.cfm/2008/3/3... ],) when Len accepted to participate in the generative dialogue in 2006, under the article "Playing with Fire - The 10 Tcf/year Supply Gap -- Part I" [ http://www.energypulse.net/centers/article/article... ], which ended when I summarized previous post with the convincing post, from which I extract the following:
"Based on mechanistic thinking, IMEUC is one close and fractured strategy, like any other experienced deregulation efforts, that suggests retaining one of the key elements of retail business model innovations – the metering function – as a monopoly. The intermediary Market Manager is designed to contract base load units based on long run forecasting under uncertainty, arising from improper market signals.
IMEUC as a switchboard intermediary is just one of the many potential business models. It is only through execution – high dynamic complexity – of the development of the resources on the demand side that the potential will be realized. Other potential business model innovations won't be able to be developed if IMEUC is unfairly and prematurely selected, by giving it market power over other intermediaries. It is no correct to assume how customers will behave – and evolve - beforehand. Instead, there is a need for a customer orientation.
While incremental costs might become negligible, sunk costs might be comparatively prohibitive for all customers. As a "right" solution, IMEUC becomes a strong barrier to emergent – high generative complexity - creative destruction. The best way to find out what the real overhead costs will be is in Phase Two with the right strategy and flawless execution under competition."
Len ended that generative dialogue participation retracting (since then, he has retracted many, many other times) with: " Jose Antonio: Your cogent discussion raises some issues with IMEUC which I hope to clarify in a third article in the series here on EnergyPulse in perhaps a couple of weeks, provided I can submit it up to the high standards of the editorial staff. Thank you."
On 12.22.06, an extract on the original "Playing with Fire... Part 1," EnergyPulse article that makes very clear that I understood IMEUC as a fractured strategy.
Vanderhorst-Silverio: After reading the [IMEUC] article suggested and its follow up, I find that after looking closely IMEUC does not corresponds to the new integral reform paradigm. IMEUC is based on mechanistic thinking about fundamental electricity economics, as can be found under the heading "Metrics" a statement that says: "[E]very consumer of utilities will benefit from a system such as this in three ways: first...every entity at every stage in the supply chain will be constrained to making their own good investment and operating decisions or be out-competed by a more efficient operator..."
As the result of efficiency on every stage of the supply chain, any competent electric power system planner would see a repetition of the fault found in the deregulation experiments of the last decade: the system is also fractured. Hence IMEUC does not lead to the maximum value expected by society as is EWPC where the system architecture is modularized at the proper interfaces on the value chain. For example, retail marketing is an essential service for the development of the resources of the demand side that is disintegrated in the IMEUC. A fault on market architecture is evident on IMEUC that becomes a barrier to emerging retail marketing business model innovations under competition.
It was to the innovation concept that Mr. Wimberly responded to my conclusion that "instead of Utilities Enterprise Solutions, a Retailers Enterprise Solutions arrives, which will make much more business for IT suppliers than expected under the Continuity Scenario. The main reason is that current business models are at the end of there useful life, while new technology is available to be transformed into competing innovative business models, leading to true deregulation [now reregulation] of electric markets."
While under EWPC obsolescence risk of customer interfaces are taken by retail marketers, under IMEUC monopoly regime the bets of the Market Manager on the customer interface (including metering) are transferred to the rate payers. As customers needs evolve, retail competition should be centered on business model innovations for the different market segments. One size fit all system is also big bet.
In addition, under IMEUC the Market Manager remains as an intermediary for base load generation based on very risky forecasting. Forecasting great weaknesses that leads to playing with fire have already been delved at length earlier on under this article. The resulting market design is no robust enough, leading to either excessive costs of over-capacity or under-capacity by missing proper whole system long run risk management. A market design error has been made, as an improper market signal may lead to large levies imposed on customers when there is a large forecasting error.