miércoles, marzo 14, 2007

Utility Deregulation and Vertical Integration Revisited... Still Bad Ideas Part 2

Hi Len,

On 1.11.07, under “Playing with Fire,” Part 2, I wrote: "Under EWPC, retail business design innovators will be on the business of electric energy service - light, heat, conditioned air, etc. - which is right after the customer end-use devices. Vested interest should start learning that they will be like the railroads very soon, as EWPC – the wining market model - gets developed and implemented." You wrote a comment on 1.19.07 and said nothing about it.

I agree that nobody else has written anything as I wrote on slide 3 of my presentation, which you are quoting. But, no one has opposed it either. So, by default, until your new comment, it was the winning market architecture and design. A lot of responses have led to that conclusion over a period that started on November 2005.

I made my final comment on 1.23.07, responding to Harold Waldock questions that follows and wrote:

"For the rest of us can we trust the market to provide?"

"Can you really trust the market to provide for you in your time of need?"

My response is about electricity, but an extension could be provided for natgas by an expert. See my post of 1.3.07.

Market Model 2 cannot be trusted, nor provide you in time of need.

EWPC market - architecture and design - Model 3 has a controlled market under a system engineer to manage short run (system crashes) and long run (boom-bust behavior) systemic risks. Those are restrictions to satisfy both questions under which a free market value chain "generation - retailer - customer "can allow businesses to operate under prudential regulation.

Systemic risk management leading to operation of the power system on the Normal Operating State - based on an integrated approach to reliability and adequacy assurance as shown on slide 27 of the presentation- is to be developed for gaming mitigation. In addition, prudential regulation of generators, similar to that developed for the banking industry will be developed, should complement said mitigation.

This is the evolution of Market Model 2, which cannot be trusted. Base load units should operate all available hours. Peaking units operate a much lower percentage of the time. When marginal costs are applied, peaking units get insufficient payments, so investments they are not available in time of need.

The solution under Market Model 2 was to develop capacity markets – going back to Market Model 1 which then gives excessive money to base load units. This is a contradiction to your statement.

The solution under EWPC is to be found on slide 24, where scarcity rents will be available when needed. However, the developed resources of the demand side will always be ready to respond in terms of the value of load lost.

Thanks Len for helping to develop EWPC as the winning market proposition.

Utility Deregulation and Vertical Integration Revisited... Still Bad Ideas

Reference: Utility Deregulation Revisited... Still a Bad Idea, 03/14/07 - By Paul Weinberger , Partner, Technology Management.

Deregulation is a very mistaken concept. I agree is is a bad idea. Vertical integration is a no longer a good idea, because it is being broken by the information technology revolution.

The power industry requires re-regulation which changes price control regulation with prudential regulations. It is a different ball game that is emerging (since the 80s), but has been blocked by incumbent utilities.

Electricity Without Price Controls (EWPC) to the customers is a third way that was not considered in the deregulation debate that involves a controlled market for transportation (integrated transmission and distribution) and system planning and engineering monopolies – a kind of bare bones utility -. Financing T&D will not be speculative, but will have long run competition, like with gas pipelines. Dormant tomatoes will probably face much more uncertainty from the weather.

The large uncertainties being experimented lead to large forecasting error. Demand is changing from inactive to active, and so a different market architecture and design is required. The development of the resources of the demand side is the key strategy to reach business model innovations by competitive retailers. Customer demand response – one of the resources of the demand side to be developed - is a means to avoid the need for power plants that operate fewer hours than breakeven.

As customers’ needs are differentiated an average price is replaced by efficient pricing that reflects wholesale pricing in time and space, letting every customer shop for the highest value proposition in the retail market. Prudential regulation similar to that in the banking industry will protect the customer. Instead of two intermediaries – the regulator and the utility – the customer will have only the competitive retailer which he can choose.

Commissions, regional or not, only know how to build camels. What is needed is a system planner and operator institution to fulfill part of the job you outlined. The remainder is performed by the free market on the wholesale, retail, customer value chain.

Yesterday, at the Third Annual Carnegie Mellon Conference on the Electricity Industry, I suggested “A Generative Dialogue to Reach the End-State of the Power Industry.” EWPC was shown to be the winning market architecture and design under Playing with Fire - Part I and – Part II on earlier discussions, which both Prof. Banks and Len Gould are aware of, that expand the idea of closing the debate based on past solutions, to a generative dialogue on the emergent solution.