domingo, enero 22, 2006

Questions and Answers About Reregulated Energy Contracting Part 3

This is my response to Rafael answer on Questions and Answers About Reregulated Energy Contracting Part 2:

Dear Rafael,

As the California case showed, the time delay of the boom-bust cycle in electricity without demand response, under shortage conditions, leads to excessive profits for generators which make the customers and/or distributors the real losers. That I believe will happen under case 2 in Brazil, since under those conditions the ISO will not have a "sound" system. In that situation, politicians will definitely change the rules as they did in California, where the smelters and similar exceptions were totally insufficient.

The real problem is that it takes time to build the required facilities to manage physical risk on the supply side (generating units) or the demand side (demand response system). It is better to change the rules earlier to avoid the situation in the future by restructuring the sector to be under electricity WPC (without price control). See the lengthy discussion under Ferdinand E. Banks article A Few More Unfriendly Comments on Electric Deregulation.

It is a pity that under an intense shortage all customers are required to face rotating blackouts for lack of electricity WPC. From the customer perspective (my research is about Customer Oriented Electricity) the most important risk for commercial, industrial and institutional customers is the risk of supply security, which involves large shortage costs. Among those customers the risks vary widely. It is also a pity that the shortage expectation for those customers means they should invest in individual solutions because the system is unable to offer differentiation of supply security to customers. The value destruction associated with such deregulation model is going to be very costly to your country and small customers in the long run.

In the dedication of the book "Spot Pricing of Electricity," Michael Caramanis, Richard Tabors and Roger Bohn stated ‘shortly before completion of this book Fred C. Schweppe, our friend, colleague and senior author died suddenly. Fred created spot pricing and proved, again, that 'the forecast is always wrong!’" Since it is impossible to make predictions, the demand/supply scenarios vary. So in the case 2 scenario, with the lowest rain ever experienced, the most expensive units will be dispatched and many customers will be without electricity, unless they invest in individual solutions earlier. I don't see at all the convergence you mentioned.

To mitigate such extreme case, as far I know none of the generators are willing to risk their money for a few hours of operations per year, to recoup them in the long run. This is specially so in Brazil, where case 1 scenarios mean their cash flow runs completely empty. The main reason, however, is that the future of the power industry is very uncertain today (a bet that the future will be like today is very risky). In addition, many of the original derivatives are no longer available.

One of the laws of the Fifth Discipline says that “cause and effect are not closed in time and space in complex systems.” That being the case, regulators are not winners and losers: agents and customers win or lose. When regulators apparently lose, it is the customers they misrepresent that become losers, with higher than necessary (supply plus shortage) costs, or with higher taxes later on. That to me is the greatest problem of having regulators as intermediaries between the market and the customers. Customers should have choice to select the retailer or wholesaler, which offers them the minimum cost plan available to them in the long run under electricity WPC.


José Antonio Vanderhorst-Silverio, PhD
Interdependent Consultant on Electricity

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