domingo, mayo 07, 2006

Market Vs. Market: When Anybody Wins, Everybody Wins

1. Please Blame the Deregulation and Regulation Fiascos Parte 19
7 May 2006
Len, think of the banking sector in the 1930’s. How in the world did they transition from chaos to an open market where the little old lady was not at the mercy of large banks? Think of Roosevelt facing a systemic crisis in which he ...

2. Please Blame the Deregulation and Regulation Fiascos Parte 18
7 May 2006
Len Gould has ask me to satisfy him with a response:. Mr Vanderhorst-Silverio: Can you describe for me how you propose to transition from the present over-regulated "model" to an open market model without placing all (esp. small ...

3. Please Blame the Deregulation and Regulation Fiascos Parte 17
7 May 2006
Dear Prof. Banks, I have taken Dick's bet as mine: "I bet the failure to deregulate would fail. I would never bet against actual deregulation. You are welcome to your opinion about deregulation, but consider Dr. Vanderhorst-Silverio’s ...

4. Please Blame the Deregulation and Regulation Fiascos Parte 16
7 May 2006
Thanks Dick, My original statement had to do with the issue that regulators are not the real winners or losers. The central idea was that we don't need them at all as intermediaries in Electricity WPC for the customer. ...

5. Please Blame the Deregulation and Regulation Fiascos Parte 15
7 May 2006
Dick Maclay has added the following comment to the EnergyPulse article Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices in response to my last post. Jose Antonio, I followed your links, ...

6. Please Blame the Deregulation and Regulation Fiascos Parte 14
6 May 2006
Prof. Banks and other Gentlemen, Ferdinand is correct about riots in the Dominican Republic. The riots came by a big misunderstanding of consultants and multilateral organizations about the impact of irrational rationing. ...

7. Please Blame the Deregulation and Regulation Fiascos Parte 13
6 May 2006
Ferdinand E. Banks added another comment to EnergyPulse on this series,. Jose, do you know the song 'I hear you knocking but you can't come in? ' Well, we've almost got the same problem here, except that although the door is open and ...

8. Please Blame the Deregulation and Regulation Fiascos Parte 12
6 May 2006
Another article can be written with the title of Avoiding the Separation Fallacy, to show that the extension of Schweppe's mental model might be the winning form of restructuring. Most of the arguments are dispersed in EnergyPulse and ...

9. Please Blame the Deregulation and Regulation Fiascos Parte 11
51 minutes ago by José Antonio Vanderhorst Silverio, PhD
Mr. Maclay and other Gentlemen, Thanks Dick for your comment. I like very much the qualifying insights to my humble posts. My response has two parts. In this one I address paragraphs 2, 3, and 4. In the second I will write about the ...

10. Please Blame the Deregulation and Regulation Fiascos Parte 10
6 May 2006
Gentlemen, I forgot to acknowledge that my previous message was also intended to Mr. Casten, Mr. Swinand, Mr. Malinowski, Mr. Pflaum, and Mr. Tanton. Today I am very busy, but to keep the ball roling I will answer Steve, and partially ...

11. Please Blame the Deregulation and Regulation Fiascos Parte 9
6 May 2006
Ferdinand E. Banks has posted another comment:. The consumers and legislators who bought the deregulation scam bought it because they were told that electricity prices would be lower. Like me, the average rate payer doesn't care about ...

12. Please Blame the Deregulation and Regulation Fiascos Parte 8
6 May 2006
Dick Maclay is suggesting that my insights be considered in the following quote:. Len, Southwest was profitable for years offering lower fares than American, while American lost money. That speaks to overall efficiency. ...

13. Please Blame the Deregulation and Regulation Fiascos Parte 7
6 May 2006
Steve Rozenman responded positively to my post on EnergyPulse as follows:. Jose Antonio I read your recent comments in the above reference. You definitely present a consistent and rational view on the prospect of successfull ...

14. Please Blame the Deregulation and Regulation Fiascos Parte 6
4 May 2006
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 ...

15. Please Blame the Deregulation and Regulation Fiascos Parte 5
4 May 2006
© 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. ...

16. Muy Bueno y Claro Parte 2
3 May 2006
Ref: Muy Bueno y Claro Estimado Bernardo, Para realizar mejores comparaciones de precios de electricidad aquí, en Chile y en Panamá, hace varios meses que te sugerí emplear una orientación al cliente en la comparación de las tarifas. ...

17. Reactivemos el Sector Eléctrico y Apoyemos las Exportaciones a ...
1 May 2006
Re: Muy Bueno y Claro Estimados Bernardo y Luis, 1) Si bien entiendo las conclusiones, los precios de generación no están tan mal para la coyuntura. No es posible bajar 30% como dice la CDEEE a los precios de generación. ...

18. Muy Bueno y Claro
1 May 2006
Luis Gracias Siempre hemos estado conscientes de que el problema son los cobroos Los de las plantas con menor costo de generacion siempre ha sido una vision a mediano y largo plazo Naturalmentre, luego de tantas horas en reuniones, ...

19. Please Blame The Deregulation and Regulation Fiascos Parte 4
27 Apr 2006
Re: Please Blame The Deregulation and Regulation Fiascos Parte 3 Len Gould said: It seems to need re-stating. There are many social benefits which cannot be delivered by competitive market systems. I REALLY need to hear Reaganomics ...

Please Blame the Deregulation and Regulation Fiascos Parte 19

Len, think of the banking sector in the 1930’s. How in the world did they transition from chaos to an open market where the little old lady was not at the mercy of large banks? Think of Roosevelt facing a systemic crisis in which he heard and applied sound advice, when he introduced prudential regulation to the banking industry to make it stable.

We have two competing market with their respective value chains as can be seen in the articles The Business Case for Demand Response by Thomas Brunetto, Managing Director, Distributed Energy Financial Group and An Alternative Business Case for Demand Response by Jose Antonio Vanderhorst-Silverio, Interdependent Consultant on Electricity. The value chain for Electricity WPC for the old little lady is wholesale, retail, customer. The key to Electricity WPC is to make sure true wholesale and retail competition develops as in other industries. In industry after industry where true competition is workable, the experience so far is that eliminating price controls is more effective and efficient than keeping price controls.

Competing retail marketers need to develop business models that add value to end customers. To do that, they will develop their Customers Information Systems and their Automated Metering Infrastructures.

From the above discussion about David and Goliath, what is at stake is which electricity market will lead us to the end state of the electricity business of the future. As you can learn about the fundamentals of Grupo Millennium Hispaniola, our approach is based on a customer orientation. As you can see from the top of the GMH web page it says: “Pensemos en una electricidad a minímo costo al cliente,” which means “Let’s think in electricity at minimum cost to the customer.”

On the one hand, we believe that the poor lady is much better off with Electricity WPC, as she will be able to select the service plan that adds the most value to her of a set of differentiated offerings. For example, with several supply security options she can select the one that results in minimum total cost when she adds the expected supply and shortage costs. Another example could be phrased in the options that add better value.

On the other hand, market power is not an issue under Electricity WPC. If it were, retailers’ activities in the wholesale market have the opportunity to design the right amount of energy efficiency and demand response to negotiate reduced market power from generators. In addition, and even more important, the T&D design and operation will be oriented to avoid operating the system close to capacity to guarantee high reliability. The main source of financing for generators is to have high plan factors. It is a very different ball game!

The reason I say that Electricity WPC is poised to be the winning market approach is because when anybody wins, everybody wins. That is why Electricity WPC can guarantee an infrastructure that will offer to add maximum expected value for any economy. However, under Hogan’s market approach for somebody to win, somebody else has to lose.

© 2006. José Antonio Vanderhorst-Silverio, PhD.

Please Blame the Deregulation and Regulation Fiascos Parte 18

Len Gould has ask me to satisfy him with a response:

Mr Vanderhorst-Silverio: Can you describe for me how you propose to transition from the present over-regulated "model" to an open market model without placing all (esp. small retiail) electricity customers at the mercy of corporations with excess market power? Satisfy me there and you might have the basis for a discussion.

Please Blame the Deregulation and Regulation Fiascos Parte 17

Dear Prof. Banks,

I have taken Dick's bet as mine: "I bet the failure to deregulate would fail. I would never bet against actual deregulation. You are welcome to your opinion about deregulation, but consider Dr. Vanderhorst-Silverio’s insights." I have also taken the liberty to named above a 4th restructuring mental model under your name, as Prof. Banks' mental model, given your bias against deregulation.

I don't want to fight with you. I am just testing my theories. I know that markets bring with them a lot of bad things to customers, but I don't see how we can avoid them from reality.

From past experience, I know very well that your don't like to be placed in a corner. I also know that you have great means to avoid the simple response. Those gifts are in your favor.

However, with a lot respect and humility, I have come to the following hypothesis: There are only 4 restructuring mental models of real importance. I think your mental model is also a loser for the future, as the vertical integrated industry is transformed with markets arriving to allow widespread use of demand response.

The fight remaining will be between Goliath (Bill Hogan's mental model) and David (the extension of Schweppe's mental model). From your recent answers, I perceive that you prefer to be with Goliath, instead of with David.

Have I exceeded what I can get from you in writing on an internet dialogue? Have I gone to far into personal matters? Have I missinterpreted your mental model? Is my hypotheses false? Please explain!

Best regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 16

Thanks Dick,

My original statement had to do with the issue that regulators are not the real winners or losers. The central idea was that we don't need them at all as intermediaries in Electricity WPC for the customer. This is what I said:

"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."

(Out of time sequence) Later on I have updated to maximum value addition instead of minimum costs. That is where you bring a very important point common to the 3 mental models: talking of optimizing individual decisions as opposed to the average customer prices that is the central point on Prof. Banks' mental model (the regulated vertical integrated system).

(Back to time sequence) Joseph Somsel then said that: "Regulators can also lose - lose their jobs. Just ask the former governor of California, Grey Davis, on the risks of having physical shortfalls of vital infrastructure on your watch." Which I replied with a post that included: "I like very much your answer, because it goes deep into the systemic problems that the electricity industry faces worldwide...."

Peter Senge shows that: "System structure influence behavior…" He explains that: "When placed in the same system, people, however different, tend to produce similar results." I don't know how different Brazil power sector laws and contractual arrangements is nowadays to make a real difference. That is why I say that PJM business model might be fatter than it should be leading to higher costs to customers than necessary.

My point on Gov. Davis is that he was a prisoner of the system implemented earlier which he probably didn't understand. Any other governor under the same circumstances would have produce similar results. The problem was in the structure as explained by ways of thinking which are named as mental models.

In essence what I am saying instead of firing the regulators just let them work out toll prices for the transportation of electricity. What Bill Hogan's mental model does is to open the public highway system, while keeping city streets traffic under one regulated monopoly.

Please Blame the Deregulation and Regulation Fiascos Parte 15

Dick Maclay has added the following comment to the EnergyPulse article Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices in response to my last post.

Jose Antonio, I followed your links, and it appears the U.S. is behind Latin America in some important ways. Brazil is differentiating wires prices by time of use and self generation, particularly for peaking, is coming into use. The former is reducing the amount of misinformation in regulated pricing. Studies I have done through the years suggest the latter reshapes the industry into a lower cost configuration.

In the U.S., where the air conditioning peak is a big cost driver, self generation and other tactics to evade high on-peak prices make sense. They will be used when supply costs are fully revealed through electric pricing. Available measures include gas air conditioning and cool storage. The latter is just making ice at night and melting it during the day, instead of running air conditioners on peak.

Rafael Herzberg does a good job of describing how to contract under deregulation, but he misses the cumulative affect of optimizing individual decisions with good price information. When individual customers find lower cost ways to provide energy services during peak hours, and some discover they can move activities to off-peak periods, total costs decline. Fewer generators, transmission lines, and distribution facilities need to be amortized as the industry is reshaped by consumer choice.

Jose Antonio, your emphasis on price information is very important in mitigating risk. The California PUC had an experimental real-time residential rate at one time. It was expected that participants would turn up the temperatures in their homes when prices rose. Instead, many of them shut down their air conditioners completely. In the language of an economist, price elasticity was much higher than expected. Of course, there tends to be a bias in who chooses to participate in such experiments. But that only strengthens your point that regulatory customer classes are not homogeneous. Given the opportunity, some will reduce usage in the face of high prices. So price elasticity is an important risk mitigation measure during shortage periods, including droughts. And price elasticity reduces the amount of spare capacity that sits unused, needing to be amortized, between droughts.

You wondered about the culpability of those who preceded Governor Davis in California. The mislabeled restructuring that increased regulation in California was passed unanimously by the California legislature and signed by Governor Wilson years before Davis become Governor. It was passed unanimously because it was a Christmas tree with something for everyone. At least it promised something for everyone. Too bad we couldn’t fire all of those politicians retroactively.

In fairness, the politicians were duped by the California Energy Commission that promised surplus generation through the fixed price period that was to end in 2002. So perhaps in fairness we should have fired the regulators too. Then again, it was the job of the politicians to oversee the regulators, and they failed to ask any hard questions.

The failures of the badly designed re-regulation become obvious on Davis’ watch. Instead of dealing with the issues he inherited, he announced there was no shortage of power, and reiterated that as the aluminum industry in the northwest was shut down. The shut down was in accordance with the plan for a major drought published by the Northwest Power Planning Council prior to California’s passage of the restructuring legislation. Every time Davis refused to acknowledge the problem prices went up. People in a position to know tell me Davis ignored the advice of knowledgeable advisors. I have a political cartoon in which Davis brags that Schwarzenegger only destroyed Los Angeles in the movies, while he, Davis, destroyed the entire state of California in real life. Cartoons exaggerate a little bit. Still, Davis deserved worse than he got from the voters.