viernes, mayo 12, 2006

Please Blame the Deregulation and Regulation Fiascos Parte 35


Steve has added a very good comment once again.

I missed the ironic nature of Len's comment, if there was one. I thought he was talking about Hogan's long captivity after the death of Schweppe. I am very proud to say that I am captive of no one Yet.

Reading Steve argument about what conventional wisdom have told that only commercial and industrial are responsive, I remember that Bob Lieberman found out that convencional wisdom is wrong. Please look a the single 4 paragraph comment to Strategic Perspectives on Utility Enterprise Solutions, by Warren Causey, Vice President, Sierra Energy Group comment. This is the insight in 2 of the paragraphs:

[comment starts.] With the presentation " Ruminations on Demand Response - a view from Chicago," Bob Lieberman has given a new hope to residential real-time pricing based on the existence of a risk premium, part of which responsive customers can pocket. Bob adds that conventional wisdom regarding that real-time pricing of residential customers won’t work was proven wrong. Lieberman identifies 4 problems to be overcome develop the market: 1) Short term thinking; 2) Who's job is it?; 3) Overcoming the "DR is about protection system "mindset; and, 4) Explaining to customers what we are talking about and what's in it for them.

By taking a close look to "An Alternative Business Case for Demand Response," my comments to Why We're Selling Advanced Metering All Wrong... And How to Sell It Right and the discussions on "Energy Bill 2005 - A Waste of Time?" and "2006: New Challenges and Opportunities in the Brazilian Electric Energy Arena" all 4 problems can be addressed by competitive retail marketers, with innovative business designs under their own Retailers Enterprise Solutions. The result will be a new paradigm of the electricity industry for the new global economy, where increased efficiency will result. Every customer will be able to chosse value added from electricity and the mayority of customers will have lower prices, after a while. [Comment ends.]

My earlier comment to Steve answered issue 2 (the retailer will be in charge) and 4 (education and empowerment). Issue 1 is the restructuring issue: we need a paradigm that is trully consistent in the long run for the winning market. Issue 3 is better synthesized by EPRI's President above. This is the unconventional wisdom mental model.

Please take a look at "A Dominican Strategy" is Featured in The Business Scene Section of the IEEE Power & Energy Magazine.

I will be out of the discussions on a short vacation from tomorrow until next wednesday.


José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 34

Dick Maclay has offer more light to the discussion as follows:

Len, I am not now, and never have been, an academic. I did participate in deregulation of railroads, and set some precedents in contracts I negotiated. I learned from that experience how beneficial deregulation can be, and how it really works. I will read your references.

Steve, the problem with the Hogan Mental Model is that it does not work. Cost-of-service regulation, the Banks Mental Model, works. If regulators could be more innovative (an oxymoron) then space C, the Unextended Schweppes Mental Model, would replace the Banks model, because it would be a better form of regulation. Market competition, also called Space D and the Extended Schweppes Model, works because competition between suppliers and price elasticity discipline prices.

The Hogan model leaves peaking generators with annual losses each year. When we introduce year-to-year dynamics we see there is an incentive to close power plants, but none to build them. Shortages are inevitable with the Hogan Mental Model. When the shortages occur there is no price discipline because there is no cost-of-service regulation and no price elasticity effect.

Ferdinand suggested that I blamed California’s disaster on the drought. That is not the case. Whatever industry structure we use should cover all states of nature, and droughts are one of those. It was the Hogan model that did in California. Both PG&E and the ISO considered bringing in whatever generation could be mobilized quickly to meet the shortages they saw looming. In a cost-of-service world PG&E would have done so, and been paid for it. The ISO thought it should fill those shoes when PG&E realized it was no longer responsible for reliability. But the PUC told the ISO not to proceed. Providing generation is not its role. But without contracts, most generators were not willing to bring in generators to serve short peaks. The unregulated part of PG&E tried to bring in a barge with FT4 generators, but environmentalists kept it out of the Bay. All that was left was demand reduction. But following the Hogan model, there was no retail price signal. Governor Davis could have done what is done when water is short and called for voluntary reductions in use. Instead, he proclaimed that there was no problem. In the circumstance resulting from piling on so many stupidities, wholesale prices could rise to infinity because there was no price discipline. Unlike cost-of-service and open markets, the Hogan model is internally inconsistent. Perhaps it would be more correct to call it internally incomplete.

Various attempts are being made to fix the Hogan model. One way to fix it is to allow mergers among generators until market power is sufficient to raise wholesale prices to levels that justify supplying all the power demanded at regulated prices. But how many mergers is one too far? I suspect a close examination of Ferdinand Bank’s complaints may reveal that he is complaining about such a system. His criticisms are applicable to such a system.

In the U.S., the favored fix for the Hogan model now is capacity markets. This creates an additional revenue stream that hopefully brings total revenues up to cost-of-service levels. My question about this approach is, why bother? We are left with something that has the underlying inefficiencies of cost-of-service regulation, without the consistency of cost-of-service regulation.

I agree with Steve that the average residential consumer is not interested in more complexity in their lives. It is the industrial and commercial customers, typically two-thirds of the load, that are interested in competition. We could reap much of the available efficiency by deregulating those who want to be deregulated. But, unlike the California fiasco, leaving cost-of-service should be a one way street. During a shortage period spot market prices probably will be higher than regulated prices. Those who choose competition and choose not to hedge should not be allowed to take the lower of market or regulated prices.

Please Blame the Deregulation and Regulation Fiascos Parte 33

Steve comment came as I was writing in this "inactive," but very active discussion. He is correct that there are no physical implementations of Electricity WPC. He is wrong in regard to customers’ active participation as envisioned by EPRI. Retailer’s business model innovations are the key to educate and empower customers, so that they can segment themselves in accordance with their needs.

Going back to the essence of the article “The fallacy of blaming deregulation for rising electricity prices,” what is evident is that the hypothesis is mistaken. The common consumer like Prof. Banks will only be very happy when they receive, as late Prof. Schweppe said, "more service from the use of electric energy per dollar spent." That is the new hypothesis!

Please Blame the Deregulation and Regulation Fiascos Parte 32

Thanks Dick for your complementary description that place us in the same track. The interesting idea about making retailers responsible for metering was borne in a discussion, in which Len participated, on the article Energy Bill 2005 - A Waste of Time?, by Amatsia Kashti, Managing Director, Olive Domestic Metering Ltd. The following is what I said:

[Comment begins.] Dr. Kashti analysis should be completed by including the Demand Response part of the bill and to look at other benefits that an AMI infrastructure will bring to the business case for such enlarged service.

I agree with Len, there is no "business case" for present businesses to implement this metering service. However, I believe that a "business case" for the enlarged service, that will lead to the End-State of the electricity industry requires a true retail deregulation, where retailers compete with each other, and where as Dr Kashti says "metering is taken out of the hands of the" distributors (utilities that will then simply transport electricity to end users).

Such "business case" is based on my article "An Alternative Business Case for Demand Response," which solves the "basic reliability control purposes" that Len left out. I believe that Demand Response is a demand side risk management tool that complements the “LOLP” supply side risk management tool. To implement the “basic reliability control,” retailers segment customers by their supply security requirements.

As can be seen, retailer’s jobs are to minimize customer’s short run and long run electricity costs. Retailers may do that by purchasing the energy requirements from energy suppliers and the spot market. Retailers will also be deploying demand response, and energy efficiency, which by the way are, respectively, their most important tools to control the spot price, and to negotiate long term contracts with suppliers. Instead of a dream, as David claims, I think this is a very clear vision of the End-State of the electricity industry.

By the way Len, I think the natural T&D monopolies will still require regulation. [Comment ends.]

In other comments I have expressed that retailers’ business model innovations should be centered on AMI, CIS and demand response integration. That leads to the market winning approach, which is the first phase of competition: market vs. market, where collaboration is the critical strategy according to Geoffrey Moore in the book “Living on the fault line.”

Len articles are part of the second phase of competition: company vs. company. That is a zero sum game, and so competition is the core strategy. That is why I don’t want to take sides yet. Sorry Len, I think your approach is one of several available to retailers. Good luck!


José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 31

Steve Rozenman is not convinced, but it seems he will never be convinced like Prof. Banks.
I have been following the exchange between Dick Mclay and Jose Antonio
Vanderhorst-Silverio and sensed a religious-like fervor and faith in what is
still basically a concept. This comment should not be taken as criticism, but
rather as a way of calling for a back step unto reality. The premise here is
that the common consumer is just waiting to be provided with all the information
and proper metering so he can engage in the retail business of electricity. In
my opinion, Hogan’s model is based on the real life fact that the consumer is
hardly interested in such business. Is it probable that the business of
electricity ranges between a regulated utility and wholesale trade, not beyond
that? . If this is correct, than Deregulation has to be examined and adapted for
such a constellation.

Please Blame the Deregulation and Regulation Fiascos Parte 30

Above sequence illustrates why captive academics are so valuable to entrenched interests. The academics are masters of techniques such as appearing to discredit ideas they'd prefer go away by simply refusing to acknowledge them while taking sidelong swipes at them in their memo's to each other.

eg. "You probably add that the centralized metering system would be designed by committee and, therefore, expensive to boot." What's the ideal alternative? Everybody installs whatever meter they like *<}

I'm still waiting for anyone to acknowledge Independent Market for Every Utility Customer - Preliminary Business Case or Independent Market for Every Utility Customer Part 2 - Market Operation

Please Blame the Deregulation and Regulation Fiascos Parte 29

Dick Maclay has offered a very good response:

Jose Antonio, thanks for the clarifications. I followed the references and I think we are on the same track. Without proper price signals to customers the choice of energy services is distorted by misinformation.

I believe one of your points is that the Banks Model (space A) and the Hogan Model (space B) both fall victim to bad consumer decisions based on misinformation in regulated prices. Hogan introduces volatility by disconnecting wholesale and retail prices. All he adds are disasters like the one that befell California. (I am viewing Hogan as the dominant of the two models occupying Space B, Hogan and Enron.)

Your description of Scheppe is that of someone I consider a nieve optimist. The Banks model could incorporate good price information by differentiating retail prices over time, but it does not for political reasons. Centrally planned command and control systems from communism to cost-of-service regulation become highly politicized. And good price information is just plain inconvenient to deal with. The easy way to deal with it is political pressure to get relief from it! It would be interesting to see what Ferdinand Banks would make of the UNextended Shweppes model. He may not object to it since it can be centrally administered. In fact, during the early years of cost-of-service regulation in the U.S. regulators sought retail pricing that would encourage greater overall efficiency. But regulation is subject to entropy, and there is too little energy left in it to overcome the political pressures to ignore uncomfortable realities that need to be addressed to achieve economic efficiency. So I see space C as an idealized version of space A. It envisions a world that has faded away in political feasibility as its physical feasibility has been pretty well perfected.

Space D, the extended Schweppe Model, removes the politics of space C by removing the regulators. This is the essence of the history of successful deregulation in other industries. Removing regulators disables manipulation by political means to hide reality. In this context, considered harsh by the lazy, efficiency and low prices result. In the mid 1990s I named the emergence of real markets, Space D, the Polish Scenario. Our modeling showed muted price rises in the Polish Scenario with a major drought in a system where a third of annual energy came from hydro, and a major drought cut hydro energy in half. The scenario I named Belarus assumed enforcement of the Hogan model, and it accurately forecasted the disaster for California inherent in the Hogan model five years before the fact. We never revealed the names of our scenarios to company management when we adopted the Belarus Scenario as the base case. We did not want the rewards that went with revealing that we thought they were as smart as the Belarus.

Have I wondered from your views of the spaces?

Your note about metering is interesting. I gather that you see a centralized vision as too limiting to include the proper parameters for enabling contracts between retailers and their customers the restricted regulatory mind failed to imagine. You probably add that the centralized metering system would be designed by committee and, therefore, expensive to boot.