Letter to Dr. Alfred E. Kahn

Dear Professor Banks,

Below you may find a letter that I just sent to Dr. Alfred Kahn. If you have a comment regarding the letter, please don't hesitate to make it.

Best regards,

José Antonio Vanderhorst-Silverio, PhD

Dear Dr. Kahn

I am a Cornell graduate, who believes to have understood what is needed to design a true deregulation model for the electric sector. I am told you have said sometime ago: "I am worried about the uniqueness of the electricity markets. I've always been uncertain about eliminating vertical integration. It may be one industry in which it works reasonably well."

The uniqueness is associated with the non-lineal nature of the risk of system failure. Physical risk of system failure, linked to high prices in deregulated systems, used to be managed as a supply security risk under vertical integration. The apparently large costs of generation and transmission reserves required, under vertical integrated utilities from resulting risk management planning, became the target of inefficiency identified by economist and policy makers at the outset of deregulation.

By reducing reserves and creating congestion, here and there, long run risk of failure was thus increased by deregulation of wholesale markets and incomplete deregulation of retail markets. Associated with the physical risks was increased value destruction, and unstable markets. I believe that to be the structural reasons of the uniqueness of the electrical industry.

In the mean time, as technology has progressed, end-customers perceived sensitivity to shortages has spread sufficiently as to make invalid the assumption that customers can be classified in neat classes to pay average rates. In a sense, that sensitivity is the basis for differentiating customers, and the essence for a retail market to be developed. In addiction, progress has also brought us the new technology of Demand Response together with an Automated Metering Infrastructure (AMI).

DR technology can complement the mitigation of physical risk of system failure and spot price sharp increases, as a non-linear feedback mechanism to repositioned systems reserves, in time and space, much better than lumpy investments in generation, transmission, and distribution. By developing a market on customers differentiated supply security (sensitivity to shortage) requirements, an efficient rationing system can be developed. Investment on an AMI is apparently feasible just on the operational benefits to the distributor.

The architecture of a "true" deregulated model is centered on independent retail-marketers, and a new value chain, whose mission is to segment customers according to electricity value added services, which customers can select. The value chain is wholesale, retail, end customer, leaving the distributor as a pure transporter charging a toll. Retail-marketers then take control of the strategic Enterprise Solutions, developing innovative business models. As each customer selects what he perceives is the maximum value addition, the economy as a whole maximizes welfare.

This is just a glimpse of my insights, design, research and, humbled observations. I will be very glad if I receive a comment from yourself on this matter.

Best Regards,

José Antonio Vanderhorst-Silverio, PhD

Interdependent Consultant on Electricity

BS ´68, MS ´71 & PhD ´72, all from Cornell University

Valued IEEE Member for 35 Years

javs@ieee.org

Research and practice areas, and interests: systems architecture, systems thinking, retail marketing, customer orientation, information systems requirements and design, market rules, contract assistance.