Propelling the Power Industry to a Superior Solution Path
By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
First posted in the GMH Blog, on February 15th, 2009.
Copyright © 2009 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.
This article is a follow up that reinforces the essence of the EWPC article Just as Pogo, IOUs Found the Enemy. This is done while following a set of personal opinions provided a few weeks ago by Mr. James Carson. It can be inferred that a regulation deregulation debate is a costly distraction for all stakeholders, especially for IOUs.
To support even more that IOUs met the enemy, I found strong findings that have also been made at DOE, by a team led by Steve Pullings. A key example can be found in the article How Private Investment Is Pushing Utilities to the Edge, where Mr. Pullings gives three options on the trend that innovations and investment “are turning new companies into competitors for utility customer attention and dollars:”
Utilities may choose to fight this trend when it starts to show harm to the bottom line, but the fight may be with the consumer. It is not a good plan to make an enemy of your customer base while trying to retain them.
Utilities may choose to ignore this Edge investment movement. However, this can only be a short-term strategy until revenue loss forces reconsideration of this strategy.
Utilities may choose to get involved in the Edge Movement. While risky and not a typical space for utilities, it may be the only way to stay relevant to customers. This means new business models and new unregulated (probably) lines of business. Today, internal and regulatory policies do not recognize this need. Utilities could leverage this consumer interest in ET [energy technologies] with regulators.
All three options lead to the same conclusion: Just as Pogo, IOUs “met the enemy and he is us.” If the customer is not the enemy, just as Pogo they are. If they choose to ignore the trend, sooner or later they will see that they are their own enemy. However, as they recognize being their own enemy and decide to get involved, IOUs investors need to push for regulatory policies that enable the EWPC market architecture and design paradigm.
As readers may recall, under the EWPC article Breakthrough Suggestions for Today's Utilities Environments, Warren Causey wrote: “In order to adopt EWPC, public utility commissions would have to let go of their authority to regulate rates at the retail level. This is a political issue. PUCs are political entities. Commissioners pretend to believe they are "serving the public interest" by protecting the public from nasty old utilities.”
Most of the responses to Mr. Carson that I will provide below, can be found on the interchanges we had two years ago, under the article Playing with Fire - The 10 Tcf/year Supply Gap -- Part I, by Andrew Weissman, Editor-in-Chief & Publisher, EnergyBusinessWatch.com. Other elements can be found on my presentation at Carnegie Mellon University a few months later.
1. Fred C. Schweepe was one of the few holders of institutional memory.
Mr. Carson changed a bit his opinion about Schweppe as he read occasionally in the past two years. But my opinion is that Schweppe held institutional memory back in the 80s. As an example of key insights, Prof. Schweppe and his team made two critical warnings, which I posted on 12.20.06 under the Playing With Fire article:
The deregulation concept of this chapter is based on a supply and demand marketplace. Most of the other deregulation literature is oriented only to the supply side i.e., to deregulating generation without altering the way users buy electricity. We believe that deregulation which considerers only the supply side of the supply-demand equation is very dangerous and could have very negative results… A second major difference between this chapter and most of the rest of the deregulation literature lies in our concern that the economics and physical security of power systems not be destroyed or compromised.
In those days the warnings should have been considered as tall orders, but they were just ignored by using the wisdom of crowds (more below). Instead, an immense value destruction, not just for the U.S., but for the global power industry, as the dangerous and negative results came true, in addition to the destruction of the economics and physical security, as the policy economy first, reliability second (E1R2) was deployed with organized markets.
2. The separation of the Anti-System Utility
Mr. Carson opinion is that IOUs have changed their opinion considerably, but forgot to talk about the key issue: about the separation of the grid and the enterprise, as Warren Causey calls them, to enable deregulation that considers the demand side of the supply-demand equation as physical distribution is kept regulated, but retail gets deregulated (with prudential regulations). Readers can take a look at the EWPC article The Anti-System Utility, by hitting its hyperlink. This is part of what the article says:
When an organization operates as a system, the value of the whole is greater than sum of the value of its parts.
Reading carefully the article by Warren Causey, I come to the following conclusion:
The sum of the potential value of the grid plus the sum of the potential value of the enterprise is greater than the potential value of the utility, meaning that the utility instead of being organized as a system, it can be though as an anti-system.
What is the problem? Incumbent’s monopoly mindsets and political interference.
The monopoly utility operates a cash cow and so the priority is the enterprise, not the grid, nor customer service. In addition, the utility is also a political target. So grid’s investments are postponed, over and over.
What’s the solution? To restructure by a paradigm shift from VIUs to EWPC.
In order to make the industry robust, competitive and fully functional, EWPC separates the utility grid from the enterprise, with the former integrated to transmission and the latter open to competition. When that is done, the new utility becomes the transportation grid and several 2GRs (see link Second Generation Retailer - 2GR) take over a segment of the market by adding to their part of the enterprise the non-trivial functions of competition and integration of demand to the industry. Incumbents IOUs should decide whether they select one and only one of three activities (no Chinese walls allowed) of the restructured industry: generation, transportation, and retail.
As the grid is integrated with transmission, the resulting transportation utility budget is applied entirely to the modernization of the greater grid in a given area. As the regulated enterprise is transformed into several competing enterprises (aka Second Generation Retailers), the political target disappears, and investments, innovations, and jobs with a lot future are created.
So, as nasty old IOUs became regulated anti-utility they have no longer a chance to get involved. To get involved, IOUs investors will need to compete as 2GRs under an EWPC energy policy act (EPAct). Otherwise, they shoul become regulated wires only utilities.
3. Center attention in the essential systemic elements of the transformation.
While the devil is in the details, we can forget them as I explain now. Any professional system architect, which knows how to get the true systems’ requirements, will agree with me. The practice of system architecture is powerful because it allows separating the essential systemic elements from the many different incarnations. To restructure the power industry under EWPC only the true requirements are needed. In fact, active demand calls for active distribution. Passive demand and distribution was a hidden underlying assumption made by William Hogan when he claimed that “Retail Access is Easy, It’s Getting Wholesale Access that is Hard.” In slide 7 of the my presentation says:
The death of Fred Schweppe in 1988 and a misunderstanding by William Hogan in 1992 of Schweppe’s work on the energy marketplace were “small chance events early in the history of” deregulation that “tilt[ed] the competitive balance, ”to an inferior solution path, as W. Brian Arthur explained in general in his Scientific American, February 1990, article “Positive Feedbacks in the Economy.”
4. The policy reliability first, economy second (R1E2) is based on the essential ultraquality imperative
In the first point above, Schweppe and his colleagues had the “…concern that the economics and physical security of the power systems not be destroyed or compromised.” Just as the architeture and design of a nuclear power plant or a deep space vehicle, which needs to meet the ultraquality imperative, power system (R1) architecture and design can not be done by the wisdom of crouds as should be done polically for money system (E2) of the open market. To address the concern, there is a need for the R1E2 policy to lift the competitive balance to a superior solution path. Positive feedbacks are actually to be enabled by customer utility interactions.
5. Active Demand is another essential systemic element not considered at the outset of deregulation.
As explained in point 3, Dr. Hogan claim that retail access because he misunderstood Schweppe. In a post under the “Playing with Fire…” Energy Pulse article I quoted Schweppe et al saying that:
It turns out, that Schweppe’s said: "conventional metering is replaced by a Marketing Interface to Customer (MIC) which, in addition to measuring power usage, multiplies the usage by posted price and records the total cost [3]," which means that Homeostatic Utility Control was what we are now calling demand response.
The regulated “energy marketplace involves the utility and its customers operating as partners… Utility implementation concerns include real-time calculation/prediction of hourly spot prices, metering-communication-billing, and system control center operation using the new control signal called price… customers who choose to exploit the energy marketplace potentials must implement the appropriate response systems (today demand response), which could range from simple manual response to sophisticated digital controls…”
It is really a pity that Hogan misunderstood that Demand Response had been around longer than deregulation. That means that wholesale deregulation without retail deregulation has destroyed “the economics and physical security of the power systems.” In addition, under EWPC article Demand Integration is NOT the Province of Politics, it is only in the "2007 Assessment of Demand Response and Advanced Metering," that “the Federal Energy Regulatory Commission (FERC) has issued the incorporation of demand response to transmission planning.”
6. The excessive complexity of organized wholesale markets is the result of the restructuring mistake.
The way to avoid the extremely destructive and uncertain method is to apply system architecture to find the true requirements, as mentioned in point 3. By discovering the essential systemic elements it is possible to apply the lesson that Dee Hock, CEO Emeritus VISA International, gave us: “Simple, clear purpose and principles give rise to complex and intelligent behavior. Complex rules and regulations give rise to simple and stupid behavior.”
7. To forget distracting details, a system architect is needed
DOE and IOUs will agree that with the system architecture approach, we can forget the details by selecting a system architect to lead the effort of developing an attractive open federal market as suggested in the EWPC article To Dr. Chu: Align Stimulus to Clean Energy Reform.
Nonsense. My point is that the power markets are already beyond this. I have pointed out several times that retail level competition is already underway in many states. If you want to find out more, visit the 'Compete Coalition' and their member websites.
http://www.competecoalition.com/
The entire problem with Mr Vanderhorst-Silverio's perspective is that "EWPC centers its attention in the essential systemic elements of the transformation. This is what I wrote on another EWPC article, which also explains the flaw of wholesale deregulation: We should forget the details, and focus just on the essence."
FORGET THE DETAILS AND FOCUS JUST ON THE ESSENSE. Not gonna happen.
Most of the other deregulation literature is oriented only to the supply side i.e., to deregulating generation without altering the way users buy electricity. We believe that deregulation which considerers only the supply side of the supply-demand equation is very dangerous and could have very negative results... A second major difference between this chapter and most of the rest of the deregulation literature lies in our concern that the economics and physical security of power systems not be destroyed or compromised.
Residential prices in Texas are relatively the highest in any deregulated state, because the prices retailers offer are close to those of the incumbent retailers. Competition is mainly on price. There is not a great effort to develop the resources of the demand side.
The incumbents monopoly minset is still embeded in the regulations in Texas and elsewhere. There has been no innovation in retail business models and wholesale markets are excesively complex. The paradigm shift is still waiting to happen. The Edge is where most of the value creation is being generated. IOUs need to concentrate on how to propel the industry to a superior solution path to open the federal market.
Quite true. A large part of the extraordinary volatility of power prices can be attributed to the absolute lack of demand elasticity with respect to price. Double, triple, or more price changes have no measurable effect on consumption. In fact, if you plot a traditional demand curve with quantity (load) on the x-axis and supply on the y-axis, the slope of the demand curve line is reverse what it 'should' look like. Higher prices seem to lead to higher consumption.
NEVERTHELESS, FERC is pressing forward with demand response initiatives that are intended to change that. Several states already have retail programs in place that facilitate consumer response to prices. Furthermore, these entities are finding that the details matter a great deal.
<< A second major difference between this chapter and most of the rest of the deregulation literature lies in our concern that the economics and physical security of power systems not be destroyed or compromised. >>
It's not part of the de-regulation literature because it is not directly pertinent. Security is a function of the transmission function which has not been de-regulated, and is under the control of the ISOs in regions that have them. Point: It is being handled.
<< Residential prices in Texas are relatively the highest in any deregulated state, because the prices retailers offer are close to those of the incumbent retailers. Competition is mainly on price. There is not a great effort to develop the resources of the demand side. >>
First, you have a factual error. Residential prices in Texas are the lowest, not the highest, among retail de-regulated states. Most of the effort to 'develop the resources of the demand side' are being done indirectly by making the consumer more aware of price signals and enabling them to respond to them. For example, the default for c&i customers in several states is LMP (locational marginal price). There is anecdotal evidence that some are reducing costs by time shifting consumption in response to price signals.
Finally, the solution to this conundrum will be technology. Eventually, 'smart grid' and related information processing technologies will enable consumers to program their response to market conditions, even at the household level. In a recent EnergyBlogs post, Elisa Wood discussed efforts at Google to help with this.
JBCarson@RisQuant.com, www.RisQuant.com
In a system the value additions comes from the relationships among the parts. That is why in my last response, which was centered on ALL of the essential elements, I said that "organized wholesale markets that did not take the essential into account what Schweppe suggested." This time is more of the same, as all answers are interrelated.
FERC is doing incremental initiative, as an afterthought of a flawed design, only in 2007 they started to implemente Schweppe's suggestions. The key was to restructure from the beginning so that the industry would have been "altering the way users buy electricity." But Hogan misunderstood that. It is just excessively expensive to go incrementally from one paradigm to another, as each operates as a big magnet as I explained in a comment to respond to you under Dr. Chu's article, whose link is at the end of this article.
The most important flawed was violating the ultraquality imperative as transmission and distribution were separated by Open Transmission Access. As users in the retail markets alter the way the buy electricity, to change for example the time they use electricity to reduce through distribution the transmision loads. It was through that load reduction feedback mechanism (Schweepe was by far the best control research engineer of the US at that time) that the physical security of whole the power system were not to be compromised. Many congested transmission lines were the result of trying to sell electricity that should not have been sold in the first place under the R1E2 policy.
"On average, residential electricity rates have increased by greater percentages in deregulated states than they have in regulated states. And among deregulated states, nowhere has it increased by a greater percentage than it has in Texas. A review of federal data shows that since 1999, electricity prices for residential users have increased by more than 64 percent in Texas." Source, 10 Years of Senate Bill 7, THE HISTORY OF ELECTRIC DEREGULATION IN TEXAS, The Unfulfilled Promise of Utility Restructuring/ A Special Research Project by
Cities Aggregation Power Project, Inc.
By letting technology do the work it is doing, you are suggesting that IOUs ignore the trend that Mr. Pulling described. If such advice is taken by an IOU investor he/she will be hitting him/her/self in the foot. What they should do if they are no risk averse is to involve themselves, if they are risk averse accept to keep a regulated business of wires only transportation or just get out of the way now that they can before somebody else like Google take their profits away.
Steve you have done a great leadership job on the emergent whole of the power industry. It is only over the weekend that I found your posts, which are the result of a system approach.
As a systemic consultant on electricity, I have been doing a similar job since 1996 and with more intensity since 2003. I have written more than 130 articles and received lots of comments on www.energyblogs.com about what I termed electricity without price controls (EWPC) market architecture and design paradigm..
One of my humble contributions on the emergent whole was to discover that the large complexity of the industry included all the resources of the demand side, which is a wide open market beyond the meter – at the Edge – that needs to be integrated to power system planning, operations and control, by the development of the resources of the demand side. It is important to recall that the late Fred C. Schweppe offered important element of what was emerging with his regulated energy marketplace, as the first step before deregulation.
EWPC has extended Schweppe's work by dividing the whole into two smaller systems that mutually reinforce each other: a free money market and a regulated power market. The money market should close during operations planning, so that security constraint spot prices reflect both supply and demand commitments and not at real time balancing.
In the most recent article "Propelling the Power Industry to a Superior Solution Path," I quoted one your article How Private Investment Is Pushing Utilities to the Edge, which mutually reinforces the EWPC article Just as Pogo, IOUs Found the Enemy.
I hope to get the benefit of our interchanges and those of the SGN new team leader, Joe Miller, to try to raise the bar of the power industry for good, to enable the development of retail market business model innovations for the federal market.
Best regards,
José Antonio
Vanderhorst-Silverio << FERC is doing incremental initiative, as an afterthought of a flawed design, only in 2007 they started to implemente Schweppe's suggestions. >>
Could that be because they DO NOT HAVE THE STATUTORY AUTHORITY? Haven't I already pointed this out on another thread? It was not until the 2005 EPACT that Congress gave them any statutory authority to pursue initiatives like this. The regulatory authority to implement demand side reforms lies (currently anyway) with the states, and there is very very little chance that that will change anytime soon.
Instead of statutory authority, system architects say something like this: the worst mistakes are made on the first day; in this case it was EPAct 92 Open Transmission Access.
In addition to the above, without trying to be exhaustive, nor perfect, the details of the score are at least as follows:
The grid and the enterprise can be separated to create value;
As nasty utilities disappear with EWPC, to shift to the R1E2 policy in order to reduce rates, PUCs have a tall political order, which I believe they will meet, altering the way users buy electricity, as Schweppe suggested, in order to create "investments, innovations, and jobs with a lot future;"
Advice to IOUs to ignore the Edge is now missing;
"To stay relevant to customers;" the best non risk averse, competitive mindset IOUs are now in favor of an open federal retail (enterprise) market competition, based just on the essential systemic elements of EWPC;.
The best risk averse, monopoly mindset IOUs will try mergers and acquisition of other grids; Schweppe's institutional memory grew stronger;
We can propel the power industry to a higher plateau;
The regulation – deregulation debate is just a costly distraction. DOE, IOUs and PUCs can forget more details.
Residential Electric Price Offers Falling in Texas; Consumers Support Competition
Competitive electricity markets continue producing strong customer value nationwide
Released: February 9, 2009
Texas residential electric price offers have fallen by more than 28 percent since July 2008, when natural gas prices were at an all time high, according to recent reviews. Texas serves as the most recent example of how competitive electricity markets across the nation are continuing to outperform monopoly structures.
"Texas continues to raise the standard by providing real benefits to customers, illustrating how competition clearly outpaces monopoly structures in pricing, in addition to other metrics like the development of renewable energy. Because competitive markets respond faster to price signals, customers in these markets see reductions in their rates much more quickly than in monopoly markets, and Texas is a great example of how this works," said Joel Malina, executive director of the COMPETE Coalition, an advocacy organization representing more than 280 electricity customers, suppliers, generators and other stakeholders.
http://www.competecoalition.com/newsroom/residenti...
Without trying to be exhaustive, nor perfect, the State of the Art involves:
A separation of the grid and the enterprise to create value for IOUs investors and customers;
Without nasty utilities under EWPC, the R1E2 policy is the key for PUCs to reduce rates. EWPC will help create "investments, innovations, and jobs with a lot future," by letting users alter the way they buy electricity, as Schweppe envisioned;
IOUs should not ignore the Edge where value creation is increasing fast (which I called the vibrant everyone for himself - EFH - market much earlier) nor fight the users; after the meter EFH is in the Profit Zone, while for all practical purposes, behind the meter IOUs, are already in the NO PROFIT ZONE and sliding very fast..
"To stay relevant to customers;" the best non risk averse, competitive mindset IOUs are now in favor of an open federal retail (enterprise) market competition, based just on the essential systemic elements of EWPC; Business model innovations are required to integrate the EFH market to power system planning, operations, and control, to get into the Profit Zone.
The best risk averse, monopoly mindset IOUs will try mergers and acquisition of other grids;
Once an EWPC based EPAct is enacted, the power industry can be propelled through a process to a much higher plateau;
MAJOR FINDINGS of http://www.capptx.com/files/HistElectricDereg_TX.p...
When lawmakers adopted Senate Bill 7, they intended the legislation to bring about a fully competitive market that greatly expanded the number of providers, improved customer service and lowered prices for all Texans. Has the deregulated market fulfilled the promise of SB 7? The History of Electric Deregulation in Texas records significant events over the past 10 years to help answer that question. Major findings of this report include:
The Number of Providers Has Increased But Customer Prices Are Higher, Not Lower
Enron Played a Key Role in the Deregulation of the Market
Market Power Abuses are Serious and Reoccurring
Efforts to Help Customers Have Been Ignored
Renewable Energy Gains May Be Tempered by Higher Costs for Consumers
Problems with the Power Grid Operator Persist
Transmission System Constraints Hamper Seamless Flow of Power
The COMPETE coalition helps serve the national interest by advocating policies which promote reliable, low-cost electric power through competitive U.S. electricity markets. Compete's members include 281 electricity customers, suppliers, generators, and their nearly 7 million American workers as well as electricity consumers. We advocate well functioning, competitive wholesale electricity markets which enable state governments to implement retail electric service options best sited to their regional needs and which enable consumers to benefit from the best possible price and service.
I repeat "We advocate well functioning, competitive wholesale electricity markets which enable state governments to implement retail electric service options best sited to their regional needs and which enable consumers to benefit from the best possible price and service."
Such statement is the result of the EPAct 92 BIG flaw, explained above.
Under EWPC, retail electric service is not simply enabled by wholesale electricity markets. Retail electric markets and wholesale electricity markets mutually reinforce each other to provide a fully functional electric service. That is why EWPC is able to produce a superior solution path through innovation in retail electric service at the federal level.