jueves, mayo 04, 2006

Please Blame the Deregulation and Regulation Fiascos Parte 6

Ref: Please Blame the Deregulation and Regulation Fiascos Parte 5

To Mr. Golden, Mr. Prof. Banks, Mr. Maclay, Mr. Gould, Mr. Rosenman, and Mr. Olivier.

I suggest that the article thesis is mistaken by being based on Hogan's mental model that links higher than necesary prices with deregulation. Please read Please Blame the Deregulation and Regulation Fiascos Parte 5 to find out why Electricity WPC removes rules that deny customer choices and give them low prices after all cross-subsisidies (including supply security cros-subsidies) are eliminated. If going from Hogan's mental model to the extension of Schweppe's mental model does not involves stranded costs, customers will be able to get the expected low prices.


José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 5

© 2006. José Antonio Vanderhorst-Silverio, PhD
Interdepedent Consultant on Electricity

There are 3 mental models behind restructuring: Enron's, Bill Hogan's and the one that I am proposing as an extension of Schweppe's mental model. Enron's mental model lost its case in California, so we are left with the remaining 2.

Bill Hogan's mental model is based on 4 stages, where first (stage 3) you concentrate on the wholesale market and later (stage 4) you work with the retail market. That trajectory leads to generator market power and/or excessive transmission requirement. PJM is the child of this mental model, which has maintained huge generation reserves and corresponding capacity payments.

A few days ago, PJM management announced that: "For the first time, demand response can fully compete with generation to provide ancillary services in an organized wholesale electricity market. PJM Interconnection today opened its synchronized reserves and regulation markets to demand response providers." It is very interesting to understand that those providers follow states rules, but will be operating in interstate commerce. Should they be under FERC?

Schweppe's extension mental model considers the natural transport (transmission and distribution) monopoly completely coordinated in the short and long run. It starts with both the retail and wholesale markets to create a market that has no monopsonistic behavior on the demand side, because the number of responsive customers ranges from thousands to millions.

Schweppe had envisioned such a market in 1978 for the beginning of 2000. He new, that what we call today demand response, was to be developed to make it a reality. Hunt and Shuttleworth of NERA wrote 10 years ago that "...there is a major obstacle: the high cost of installing digital meters at the residential level to provide the basic infrastructure for wide consumer choice. Consequently, universal retail wheeling probably will be delayed for many years, especially where prices are already low [1]." Electricity WPC is based on this paradigm, where alternative business models will eventually arrive.

As a conclusion: Business model based on Bill Hogan's mental model may have a need for reengineering to become the Standard Market Design that it intended. States that are considering restructuring better start with a clean slate. New technology for Customer Information Systems (CIS) and Automated Metering Infrastructure must be waiting for the opportunity.

[1] Sally Hunt and Graham Shuttleworth,”Unlocking the GRID,” IEEE Spectrum, July 1996, page 25.