Can the Power Industry Eliminate its Price Controls to the End Customer?

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

Dr. Molina Morillo Pequeños Grandes Cambios

Original del periódico EL DIA Pequeños grandes cambios, en Mis Buenos Días, por el Dr. Rafael Molina Morillo

“Nos caen sus comentarios como anillo al dedo”, nos escribe la señora Berenice Ramírez de Hermón, refiriéndose a mis recientes columnas sobre las actitudes que los dominicanos debemos cambiar.

“En nuestras manos está cambiar nuestro presente y el futuro de nuestros hijos –agrega-. ¿Cómo? No dejándonos llevar por la corriente con la frase que nos dice: ‘Si otros hacen lo incorrecto, yo también tengo derecho a hacerlo’.

“Debemos cambiar –prosigue- pero no solo cambiar a los políticos de turno, sino también cambiar nuestra mentalidad pasiva cuando no exigimos nuestros derechos; cuando vamos a un mercado o supermercado y aún a sabiendas de que el precio del producto no es real lo compramos para demostrar a los demás que tenemos poder adquisitivo aunque nos esté llevando quien nos trajo; cuando en un parqueo estamos esperando pacientemente que se desocupe un espacio y llega un bien educado hijo de su madre y nos atropella porque él cree que nuestro tiempo no vale y toma primero el parqueo y nosotros para evitar un problema no protestamos; lo mismo cuando hacemos fila para pagar algún servicio y llega un conocido de los empleados y es atendido sin pensar que nuestro tiempo vale igual que el de otro.

Prefiero no seguir con una larga lista pero estoy convencida de que los dominicanos honestos, de bien y respetuosos somos más que los dañinos, que hemos permitido que personas sin escrúpulos decidan sobre lo fundamental para la nación.

“Espero –concluye- que se pueda iniciar una campaña para que empecemos a tomar conciencia, pues los niños aprenden los anuncios que escuchan o ven y escuchan y eso podría ser el inicio de un cambio en la conducta ciudadana.

Ojalá algún canal o emisora de radio obvie lo que cuesta un espacio y empiece una campaña de educación y conciencia como aquella que había hace muchos años: ‘El agua es vida, no la desperdicies’. Yo aún la recuerdo, eso queda.”

(r.molina@codetel.net.do)

Energía Agrava Sostenibilidad Sector Turismo

Noticia original Energía agrava la sostenibilidad del sector turismo

El presidente y el vicepresidente ejecutivo de la Asociación Nacional de Hoteles y Restaurantes (Asonahores) fueron los invitados ayer al Desayuno Económico del periódico El Caribe, donde explicaron las proyecciones, expectativas y problemáticas que presenta la industria hotelera

Por Desirée Martínez / El Caribe

Miercoles 7 de mayo del 2008 actualizado a las 1:40 AM

A continuación un extracto de la noticia relativo al tema energía:

Una de las mayores dificultades que enfrenta el sector turístico hotelero de República Dominicana es el alto costo de la energía eléctrica, debido a que el gasto de una habitación le representa el 20 por ciento de su ingreso.

De esta forma lo explicó el presidente de la Asociación Nacional de Hoteles y Restaurantes, (Asonahores), Luis López.

Entrevistado en el Desayuno Económico de El Caribe, por Héctor Linares, editor de la sección Dinero de este medio y la periodista Desireé Martínez, citó que también afecta la competitividad del sector la falta de terminación de obras de infraestructuras viales.

López señaló "si logramos que los impuestos que paga el sector se focalicen en su beneficio, sin lugar a dudas seguiríamos creciendo". Planteó que de cada peso que facturan los hoteles, 20 centavos van a pagar la energía eléctrica, lo que es insostenible para la industria de la hospitalidad.

Aunque cuenten con autogeneración eléctrica, cuando tienen que pagar por alguna razón el servicio a empresas particulares, el kilovatio hora les cuesta 24 centavos de dólar.

El hotelero citó que sus competidores reciben la energía entre 10 y 12 centavos de dólares, diferencia que limita la competitividad del turismo dominicano.

Asimismo, refirió que una forma de paliar un poco el costo de la factura energética es comprando directamente a las generadoras, lo que según refirió está siendo bloqueado por "fuertes intereses dentro de la industria de generación eléctrica".

La energía eléctrica es el soporte fundamental para el sector hotelero. Para Asonahores reviste vital importancia el planteamiento de una solución a ese problema que inquieta al empresario hotelero. El turismo constituye uno de los fenómenos económicos más importantes del país.

An Overdue Debate: Customers’ Price Controls

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.

To Congressional Requesters of Utility Oversight

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.

To Congressional Requesters of Utility Oversight

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

First posted in the GMH Blog, on May 2nd, 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.

The US Government Accountability Office (GAO) explains why it did the study “Utility Oversight: Recent Changes in Law Call for Improved Vigilance by FERC,” in response to Congressional Requesters, introducing it with “Under … PUHCA 1935 and other laws, federal agencies and state commissions have traditionally regulated utilities to protect consumers from supply disruptions and unfair pricing…” GAO has “… considerable interest in whether cross-subsidization – unfairly passing on to consumers the cost of transactions between utility companies and their “affiliates” – could occur.”

The investment in the rush signaled by “Utilities Full Speed Ahead on IUE/SG,” is the key to a kind cross-subsidization activity, which by the design of the system are just undetectable, as state commissions become heavily involved to sanctify the large bets of IUE/SG projects. Just as the reengineering experiments of the past, where 75% of projects became failures, in this case the value destruction will go into customers’ rates.

The large fines that the law provides just don’t apply in the cases where “the potential flow-through of any inappropriate costs to consumers of regulated utilities” bets. Instead of allowing such costly bets, “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.” (See EWPC article EWPC Can’t Be a Market Winner for details.)

The problem is that the federal agencies, the state commissions, and the utilities are all part of a flawed system. Peter Senge in the Fifth Discipline gave this lesson: “Different people in the same [system] structure tend to produce qualitatively similar results. When there are problems, or performance fails to live up to what is intended, it is easy to find someone to blame. But, more often than we realize, systems cause their own crisis, not external forces or individuals’ mistakes.

For example, FERC has been blamed for his part at the California crisis, as Ken Silverstein report on his energybiz insider article “FERC Oversight Attacked,” that says “FERC is still trying to shed its corporate lapdog image that it earned during the California energy crisis.” The attack should be to the system.

The system is so complex, that it makes it very difficult and involved to demonstrate oversight vigilance. Instead, by changing the system to EWPC such cross-subsidization disappears, since there is not an incumbent regulated retailer.

A new Energy Policy Act is needed to enable the EWPC market architecture and design paradigm shift. The political leadership of the Congressional Requesters is expected.

EWPC Can’t Be a Market Winner

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.

EWPC Can’t Be a Market Winner

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

First posted in the GMH Blog, on April 29th, 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.

This is another attempt to have a mature level 3, win/win communications mode. Level 3 win-win communications mode is nothing more than a generative dialogue. I am not my opinion, is a generative dialogue key principle that allows the separation of our opinions from us.

I have invested many posts trying to patiently explain myself as have many other persons that have responded. I have been writing about market architecture and design, and getting technologies responses that have slowly help the truth arise. I changed my opinion to accept a comparison between EWPC and IMEUC, because they are not at all comparable. EWPC is about market structures and rules. EWPC development is about consulting work, not about technology design of market business models.

Based on the above, I can also say that EWPC is not the winner of the market vs. market competition as it was suggested by Geoffrey Moore. In fact, EWPC was not supposed to be in the market vs. market competition in the first place. Once again, EWPC is just a market architecture and design paradigm that emerged to enable open retail competition on the U.S. federal level and at the global level.

In fact, Warren Causey wrote (see his complete comment in the EWPC article Breakthrough Suggestions for Today's Utilities Environments) : “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.” EWPC should be compared with price controls that regulators have.

That comparison is precisely the reason that I am assuming that a shift from today’s regulated markets (where utilities win rate cases to the regulators) to competitive markets is bound to occur at the global level. The market bridge between supply and demand on any given market segment can filled up by one of many market business models. That is part of the EWPC architecture. As simple as that!

In addition to the Intelligent Utility Enterprise and Smart Grid (IUE/SG) that Warren Causey reports (see please EWPC article Leadership Answers What to do First), another of many potential market bridges (a market switchboard business model) is IMEUC, which needs to have all customers on board. But the only way IMEUC can be adopted is when a regulator makes the same highly risky bet of utilities IUE/SG to select it.

There are also switchboards that don’t need to have all customers on board. In that case what’s needed is a market design that doesn’t allow free riders, as they will be poorly designed market rules if the allow free riders. The resulting market rules are very important for the required transition period to competition, where some customers remain under the old rules modified to eliminate cross-subsidies.

The particular example of how to avoid free riders in a transition, especially to open retail markets at the federal and global levels, was given by Nat Treadway, in his article The Dawn of Electricity Competition: Efficient Prices and Efficient Choices. Treadway explains that, “The design of default service (also called basic or standard service or provider of last resort) was identified as the most significant determinant of the success of retail electricity choice. A poorly designed default service undermines competition. If default service is designed to satisfy all residential consumers’ needs, or if it bundles and spreads risks among all consumers, or if it is priced below market, then it is unlikely that new retail electricity providers will enter the market. With few choices, consumers are left with only the poorly designed default service, and with limited benefit.”

There are many other potential alternative market business models that retailers can develop to bridge supply and demand and which customers have choice to select. I contend that today’s 1GRs will be replaced by 2GRs that operate at the Control Level and the Economic Level to integrate demand to power system planning, operation, and control. That I said is the market breakthrough, not a technology breakthrough. But, the real proof will be left to market vs. market competition, which will be ready to start as soon as the EWPC EPAct suggested in the above mentioned EWPC article Leadership Answers What to do First is enacted.

Under the EWPC EPAct, regulators will no longer be making the large bets on markets business model (Intelligent Utility Enterprise and Smart Grid investments), that like those 75% of projects that end-up in failure in the reengineering revolution.

Dialogue, Reliability/Ultraquality & What to do First?

To answer ‘What to do First?,’ a generative dialogue insight is that in the EWPC EPAct to be enacted, all market business models should compete in a truly open market (except from the controlled transportation market) that doesn’t favor any party, nor control all customers. System adequacy and system security are non-trivial processes to implement system reliability and ultraquality transportation that should enable social maximum welfare in the open market.

Dialogue, Reliability/Ultraquality & What to do First?

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

First posted in the GMH Blog, on April 27th, 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.

1. On Generative Dialogues

I thank Todd for his “skillful conversation (SC),” in which he still defending IMEUC. Defending is not a level 3, win-win communications mode, as Todd forgets the “Unjustified Universal System” part of the GMH post A Universal System with Price Spikes. By ignoring that IMEUC should compete on the open market, instead of being selected as a risky bet of a regulator, as Jim seems to assert, the conversation could get stocked with a disagreement on the What to do First question to go forward.

According to Dr. William Isaacs, the author of “dialogue and the art of thinking together,” the ‘SC’ is part of “productive defensiveness,” as opposed to “unproductive defensiveness.” For more than 28 months, I have faced a lot of “unproductive defensiveness” and also every once in a while some “productive defensiveness.” The problem is that while the former is more productive than the latter, it is still very ineffective.

Dr. Isaacs suggests that deliberation in a different way is more productive. His dialogue process goes through three stages: suspension (listening without resistance; dis-identity), reflective dialogue (explores underlying causes, rules, and assumptions to get to deeper questions and framing of problems), and to generative dialogue (invents unprecedented possibilities and new insights; produces collective flow). That is the sole reason why I have promoted the level 3, win-win communications mode to enable a generative dialogue, since November 2006, when I recorded an EnergyPulse post as the GMH post Let's Get Out of Back Rooms to a Generative Dialogue.

2. On Reliability and Ultraquality

I want to ask again, do we all want to shift from defend to suspend? If we do, we should suspend our opinions on how the non-trivial engineering planning should be accomplished in these conversations. Assuming we are willing to suspend, so we can get to more important matters, like “What to do First?,” I will respond to Todds’ questions on (system) reliability and ultraquality as follows:

System reliability involves system security (for the short run – i.e. operations planning) and system adequacy (for the long run - i.e. investments planning). The ultraquality imperative is the concept behind system reliability which under EWPC becomes transportation ultraquality.

System security was defined above on 4.25.08 in the paragraph that stars with "To fulfill its responsibility to transport, the transportation utility performs a non-trivial operations planning process (which I have named as reliability constraint generation and demand commitment)."

The process to implement system adequacy is also non-trivial and is aimed to produce the expansion planning of the transportation system at least costs, taking also into consideration all of the investments forecasted in the open market (by customers, retailers and generators) to enable the potential for maximum social welfare. At planning intervals, the interdependent transportation controlled market and the open market reinforce each other to produce maximum social welfare.

In the open market, the potential of maximum social welfare is handled at the Economic Level, not at the Control Level as Todd have proposed. It is at the Economic Level that we optimize the capital and operating costs to have both system security and system adequacy. If we don’t execute the Economic Level transactions between customers and 2GRs, we may end up having a very costly system.

If the power market operates at ultraquality, under the coordination of demand integration to power system planning and control, then less customers will justify investing in back-up power supplies. The maximum social welfare will be then be the result of large coordination savings at the Economic Level by 2GRs, instead of the large value destruction expected by the highly risky regulators bets.

3. On What to do First?

Todd wrote that “I don't see the point in promoting any 'what to do first' conversation until it's agreed upon that a) it's truly open in all parts (except maybe the natural monopoly of distribution) b) it's not favoring any party to a given competition and c) it's technically feasable (including economics).” My response in the same a, b, c order is as follows:

a) EWPC is truly open except for the natural monopoly of (tightly integrated transmission and distribution) Transportation compact.
b) EWPC doesn’t favor utilities or IMEUC to have all customers, as 2GRs want to compete by developing market business models.
c) The way to enable that a system is technically and economically feasible is not by regulators’ edits, but by a real market vs. market competition.

As all the elements of the 'what to do first' conversation are satisfied, the only thing in the way is the political will to enact the EWPC EPAct suggested in the EWPC article Leadership Answers What to do First, whose summary reads:

“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.”

Reference and context: Building Models for the Smart Grid Business Case, by Jagoron Mukherjee, Senior Consultant, KEMA