2006: New Challenges and Opportunities in the Brazilian Electric Energy Arena Part 5

Dear Rafael,

The following comment applies to the customers which pay average rates, of Brazil and all other countries, specially the USA. Regulators get to decide prices for customers, which they should do themselves. Instead, I suggest to eliminate price controls as soon as possible to mitigate the large value destruction that results.

I have been developing what I call Customer Oriented Electricity (COE). As time has progressed, the spread of customer's sensitivities to shortages have increased substantially, making the assumption of neat customer classes invalid. Today, there is a wide differentiation among customers in a given customer class. That means that many customers will be paying less and others paying more than required for supply security. In essence, there is an inherent hidden cross-subsidy of supply security among customers, which is significant in many cases.

Under COE many customers without firm power provide the hidden cross-subsidize to customers with firm power, as the intensity of long run shortages cannot be predicted very well. A systemic causal link develops, as follows: as the intensity of future shortages increases, many customers without firm power cross-subsidy will increase to customer with firm power. That causal link feeds back strongly on the vicious circle, mentioned earlier. Payment for the lack of electricity does not eliminate the discrimination.

Based on the above comments, it is impossible to forecast whether (many) captive and (many) free to choose customers will end up having the same costs (no only paying). The word many signifies that the differentiation of customers supply security requirements do not apply to all customers.


Regards,

2006: New Challenges and Opportunities in the Brazilian Electric Energy Arena Part 4