The Purpose Retailers Serve Customers

The following is to show that Len has received, from the very beginning, many answers to his question "What purpose do the retailers serve then?" I answer because that statement is very sharp. The response is mainly for readers which have not followed the dialogues and discussions on as many 19 energypulse articles. Here is another very patient response to the question that repeats and repeats itself about an apparent dilemma on the need or not of retailers.

In the post Letter to Dr. Alfred E. Kahn is a detailed explanation on the uniqueness of the electricity markets, where I expressed elements of EWPC as it was emerging at the end of 2005. After reading it on energypulse.net, Len wrote on 12.21.05:

Jose: You're close, just not going quite far enough. You need to eliminate your "Retail marketers" by implementing intelligent software within the customer's meters which takes over the simple task of selecting either a lowest-cost supplier from among all available in a central electronic "marketplace", or alternatively choose to not purchase, and shut down some of the customer's less critical loads if the price exceeds customer-set limits.

Len’s central electronic marketplace is a middlemen which is not able to fulfill its promises. As he has accepted recently, centralized locational marginal prices (LMPs) are required. So the intelligent meters cannot take over that role to replace the proposed retail competition to develop the resources of the demand side. It is because of the uniqueness of the electricity markets that it does not work like the gasoline model. Unless customers have a contract with a supplier (could be a generator), LMPs will generate free riders that see lower LMPs without actually responding.

I the letter to Dr. Kahn, updated within brackets, you can read: “The architecture of a "true" deregulated model [now is re-regulated with prudential regulation] is centered on independent retail-marketers, and a new value chain, whose mission is to segment customers according to electricity value added services, which customers can select. The value chain is wholesale, retail, end customer, leaving the distributor as a pure transporter charging a toll [transportation integration is required]. Retail-marketers then take control of the strategic Enterprise Solutions [customer facing systems], developing innovative business models [investments by customers and/or retailers in AMI, DR, distributed generation, distributed storage, EE, etc. are not independent decisions in the long run]. As each customer selects what he perceives is the maximum value addition, the economy as a whole maximizes welfare.

The last phrase states another purpose of retailers and is the essence of the long run contractual relationship of a customer and what is now known as 2GRs. For more details on my response to Len the reader is advised to go over near 19 energypulse articles in which I patiently responded that his short run electricity market model does not work, as electricity markets are unique.


Retailers replace the two middlemen of the vertical integrated industry: the utility and the regulator which negotiate prices for the customer.

To integrate demand into power system planning, operation and control, retail customers that invest to respond to real time prices need to advance their plans, to a 2GR when in the future the system is about to operate close to capacity. After investments are done system adequacy studies require what customer capacity is in place to perform when required under a contractual relationship with the 2GR. That information and more is required in advance to plan system expansion and operation. Many retail customers will not find it attractive all the red tape and cost that goes along to become themselves 2GRs, as it is just totally inefficient and ineffective. That is another purpose of retailers.

© 2007. All rights reserved by José Antonio Vanderhorst Silverio, PhD.