Some Friendly Comments on True Electric Deregulation

Profesor Ferdinand Banks ha escrito el artículo A Few More Unfriendly Comments on Electric Deregulation en EnergyPulse que yo he aprovechado para defender mi hipótesis de una liberación verdadera del sector eléctrico. Esto es lo que le escribí:

Thank you, Professor Banks, for outlining the dark side of power sector restructuring (faulty deregulation). As I told you before, I have auto financed my research on Customer Oriented Electricity (COE), which becomes an entirely new paradigm that addresses the core problem identified by Jack Casazza in "Pick Your Poison." As an engineer, under the vertically integrated paradigm, I completely agreed with Jack’s article under faulty deregulation. By the way, I have followed his good work and papers with interest for some time. I agree also with Prof Banks: How did the farce happen?

However, under COE, even with oligopolies on the wholesale market, true retail competition can be organized to pursue economic efficiency (I don’t claim to be an economist), leading to maximum welfare. Please take a look at my comments (and their hyperlinks) under the following article, where I explain uniqueness of the electric industry, price reductions only after a while, the need for a new value chain, physical hedging (related to item 3 and 4 academic arguments at the end of Prof. Banks article), etc. As you can see my work is not based on ideology, but on careful insights, systems architecture and design. Below I add additional comments as an antidote to the faulty deregulation poison, which by all means are not based on ideology at all.

Jack’s assumption that there can be no product (actually service) differentiation is true under a deterministic world, but false on a probabilistic one. Every customer has a perceived supply security requirement (which can vary) that minimizes his/her costs of electricity in the long run. By developing and applying demand response technology, an opportunity to develop new competing business designs innovations can be implemented to satisfy long run least cost power sector development and benefit from increases in scale (item 1 of Prof. Banks academic arguments: is discussed in my last comment to said article). Actually, under systemic competitiveness that would change from least cost to maximum value added.

Under the old paradigm, I also agree with Jack that “Busy signals are not acceptable when a user flicks a switch to light a room.” However, under the new paradigm demand response becomes a condition of service, meaning that customers with low supply security requirements need to respond more frequently, but don’t have to pay (for something they don’t need) the same average rates as customers with high supply security requirements. The result is (or will eventually be) positive, when transaction costs are lower than the value destruction produced by the average rates (see my comments under the article, about some utilities that have justify the investment on other benefits).

On today’s faulty deregulations, short run spot prices do not signal correctly the lack of reserves permitting gaming. On true deregulation, competitive retailers will develop strategies to control price spikes from developing in the first place. They will do that by deploying demand response and energy efficiency investments (item 2 of Prof. Banks academic arguments).

Mr. Casazza though that customers purchasing small generators was due simply because low reliability. Today is known that the penetration of distributed resources is due to disruptive technologies that replaces in many cases efficiently costly peaking units located far from load centers, as well as to represent very well the differentiated requirements of customers supply security (reliability).

Clearly, places that have deregulated already (with agreements of the weird sort, as Professor Banks calls them) will find very difficult and costly to change to true deregulation (and very real choice) of electricity. Under true deregulation efficient generators will be able carry high power factors, but will be unable to earn the huge profits they got under faulty deregulation. So I agree with Professor Banks that to be the case for those countries he mentioned unable to migrate to true deregulation.

Closing questions to Professor Banks:

1. Do you think that Jack’s comment “The changes resulting in these massive errors were a reaction to many years of unfair regulation by often-incompetent regulators, many of whom were concerned with their political and professional futures rather than protection of the consumers” is going to go away anytime soon? It seems that Southern Company isn’t the rule. I prefer to do without with utilities winning cases to regulators under vertical integration, and limiting it only to the wires investments monopoly regulation.
2. Do you see the possibility to organize true retail competition (no price controls) under prudential regulation, even when there are generating oligopolies?
3. What do you see lacking in the approach I suggest?
4. As some retail marketers will become global companies that compete in several local markets, can they become the target for fusions and acquisitions to develop oligopolies? Do you anticipate how to mitigate it?
5. I see retail marketers’ economies of scope, by taking charge of other services, like telephone, gas, water, and even insurance. Can this be a means for mitigation under question 2?
6. Knowing that value added electricity will come from knowledge intensive coordination of highly distributed activities (some optimal percentage of demand side risk management), instead of physical investment on peaking reserves to be used just a few hours a year (100% supply side risk management). Do you still think that vertical integration is a real vision for the future?

Those are my friendly comments on true retail deregulation.

Merry Christmas to you all.

© José Antonio Vanderhorst-Silverio, PhD. 2005.