CMU Conference Summary: The Public Needs to Know

Leonard S. Hyman, Senior Consultant Associate of R. J. Rudden Associates, prepared the summary Electric Andrew that is also posted on Third Annual Carnegie Mellon Conference on the Electricity Industry Web Page, under View Papers and Presentations. Below are a few excerpts:

Everything works so well that people assume that no problems remain in the electricity arena. Not so, said Ed Schlesinger (CMU). The public needs to know.

Jose Antonio Vanderhorst-Silverio (Grupo Millennium Hispaniola) asserted that industry restructuring went in the wrong direction. What is missing is interaction between the industry and customers. The end state should be retail competition and ultra quality service, which means electricity without price controls served up on an integrated high quality transportation system.

Putting it all together, the conference paints a picture of the electric industry that resembles the financial industry. Old players take on new forms (the demutualization of the exchanges), trading in derivatives often exceeds that of the underlying instruments, investors do not know what risk the incur (collateral based obligations), principals become agents and dump risks on unwitting consumers (sub prime mortgages), financial engineers buy whole companies and sell them later (do they improve company performance or just strip assets?), and regulators have no clue as to whether the new instruments and players make the financial system safer or less safe.

Electricity restructuring seems to have separated physical, financial, commercial and regulatory decision making, and, inadvertently, left consumers at risk. We need physical plant to deliver the goods, and putting that plant in place requires planning and long term incentives, but those in charge of the new market place seem to have only the vaguest notions of how to bridge the gap between the day ahead market and planning for three decades ahead. Regulators may stymie the development of market oriented procedures that could reduce costs and improve reliability. Furthermore, reliability seems to have deteriorated. Yet, as the presentations demonstrated, there are a lot of ideas out there that would sharpen decision making, reduce costs, align incentives with desired goals and even bring to market new products and services.

Henry James wrote of “the constant force that makes for muddlement. The great thing is indeed that the muddled state ... is one of the very sharpest of the realities...” So, will we muddle through the coming three decades, or will we do better than that? That’s the question that the conferees really asked. We need an answer.