Dear Prof. Banks,
This is both a respectful apology (to show one of my humble weaknesses), and a rebuttal (from my systems training). I am sorry it is too long, but I have no time to make it shorter.
Once again, I might lose my possible allied on what I expected was the “truth” and the “decency” side (an ideology). I thought that no agendas were being promoted (I promote one to offer value added services to the Bottom Of the Pyramid - BOP), but who knows (maybe for you the nuclear industry, but only you can say so).
This time I admit to have exceeded my written language (once again - see Mr. Martin-Giraldo second response above), by careless saying, among other things, that Prof. Banks "saved face" and maybe by placing myself on Patrick side. I admit my second mistake on public, as I have no means to take it back. I thought we were supporting truth as PEST claim to do. That ends the apology, but keeps myself open to an interesting (and hopefully useful) dialog
However, I don't understand, Why do I have to take my discussion with others than the "experts" on faulty deregulation? I don't see anybody else actively discussing about deregulation, but you - this article is a great example - Power Encounter, and PEST (please advice of any others). Faulty deregulation was sold based on the existence of 4 models, under 2 dimensions in a sequence: 1) Vertical integration; 2) Sole purchaser - i.e. PURPA; 3) Wholesale competition; and 4) Wholesale and retail competition. I completely agree with you, Power Encounters, and PEST, that much wrong doing was made and is being made under models 2, 3 and 4, as the engineers were replaced by “market” economists as the leaders of the industry.
Professor Schweppe proposed a different model, which respected the accumulated knowledge of the power industry, under a new dimension, called it Model 5: Retail choice, under vertical integration. I repeat that is what his book covers, except for chapter 5 on deregulation. I repeat again (see above under my first response to Mr. Martin-Giraldo) that the new dimension is "Freedom of Choice: Provide customers with options on the costs and reliability of supply and how they choose to use energy." He made not mistake whatsoever, since his model was not implemented yet. His spot pricing of electricity was not considered at all by the "economists" that took control of the power industry, as his feedback system avoids completely the price spikes (hailed by economists as the key to the markets) experienced under faulty deregulation. The technology required to do that is now being allowed to surface: it is today's demand response.
The book of Spot Pricing of Electricity is as outstanding as any book that any economist has written. In his plenary address to the International Systems Dynamics Conference, under the title "Economic Theory for the New Millennium," another MIT professor (I hope he is no wrong too), Jay Forrester, has suggested to change economics from a social science to a system profession. I suggest that will give economist the need to file for insurance coverage on their suggestions that affect society with a large bill. I hope that will mitigate contracts of the weird kind.
Demand response is in all plausible future scenarios. It is what is called a predetermined element: What we know we know. It is the key to retail competition, and efficient electricity markets. All ambiguity is somewhere else. I believe that late Prof. Schweppe will receive the Novel Price of Economics (or Physics, or both) sometime in the future.
This is the most important remark I will make on this comment. Since demand response is a predetermined element, as “Energy Bill 2005” call for all states of the union to investigate it, we are bound to see again and again what Patrick O’Rourke has discovered (see my earlier comment above), unless we unite our efforts to avoid Model 5. The same is bound to happen in the European Union, which has committed to a July 1st 2007 complete deregulation. I see two real stable states for the power industry: 1) 2nd Wave Vertical Integration, under Model 1, and 2) 3rd Wave Complete Markets, under Model 6. On both states risk management is under complete control, which is lacking on models 2, 3 and 4. Model 5 is stable, but can turn out to be very expensive.
My humble model is Model 6: Retail-marketing competition. It develops the required marketing to produce workable retail competition. It is complemented by wholesale spot prices which signal the expected risk of system failure. That is the type of signal needed. However, if the agreements done on your part of the world were of the weird king, I am sorry for them.
Those that took the discussion on lower prices were doing something different, just not to call it completely wrong. The discussion needs to be on lower costs (as was the discussion under vertical integration for the whole power sector): supply costs plus shortage costs. See slides 4 and 5 of my Fall 2004 PLMA Presentation. I will not tell my students - the readers of my blog - to narrow their focus that anything is right or wrong. I operate under the idea that I am not my opinion. I think that way, I am open to new knowledge, can get to the (new) truth faster, and learn from the real experts.
Hoping to get a second chance from you.
Best regards to you and your relatives on 2006.
© José Antonio Vanderhorst-Silverio, PhD. 2006.
Interdependent Consultant on Electricity
Grupo Millennium Hispaniola
Santo Domingo, Dominican Republic
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