miércoles, octubre 31, 2007

Switching Retailers is NOT as Important

Dear Fred (Banks), Len, Mike, Fred (Plett), Jim, Steve, and Peter

I am glad that the dialogue is getting more balanced and rich, with the participation of all of you important and intelligent people, on three fronts.

1) Vertical integration regulation,
2) Economy first, reliability second, (E1R2) deregulation, and
3) Reliability first, economy second, EWPC (R1E2) re-regulation

To get a better understanding of EWPC, the issue of switching suppliers and “energy retailers” are considered. With that in mind, I have selected as the most important comment posted, that of my friend Professor Banks that said: “We have some customer response here in Sweden because of deregulation, and my wife apparently changes suppliers from time to time.”

The second most important comment was that of my friend Len Gould: “I get to see up close and in detail exactly what "energy retailers" do, which is practically nothing (useful). The distribution company (by regulator mandate) MUST maintain all the customer care, metering, billing, etc. etc. system, at a cost to customers set by the regulator and heavily inflated as much as possible in order to maximize distribution's profits. Would that get cheaper if the retailers took over the delivery of those services, as Jose Antonio appears to be promoting in EWPC? No, because of the distinctive features of large business software, e.g. it costs millions of dollars to service the first customer, but almost nothing to service the next million customers.”

Both comments relate to E1R2 deregulation and first generation retailers (1GRs). EWPC is about R1E2 re-regulation and second generation retailers ((hit link to read about Second Generation Retailer - 2GR). Fred is probably confusing one kind of customer response that adds nothing to physical system risk management, while Len is describing what “energy retailers” do.

In the article A Little Silicon is Necessary but NOT Sufficient, which I wrote as a response to Prof. Banks article, I said: “… Under the R1E2 EWPC markets (in plural), every end customer can participate in the genuinely open retail markets and select the service plan (markets mix) contract that best meet their needs for low cost and/or high value. Such markets are the real-time balancing market, the hour, day and week ahead markets, as well as any other forward market that retailers can provide with their business design innovations. Some customers will also require physical delivery of their futures contract.”

While under E1R2 deregulation it was though that switching 1GR is a good measure of “efficiency,” under R1E2 switching is not important at all, since many customers will find a market mix that satisfies best its requirements for insured electricity for the future. Electricity contracts are similar to insurance contracts, in which customer protection will be done by prudential regulations.

So under EWPC re-regulation switching suppliers very frequently is not measure of efficiency. What is important is the contractual commitment that customers will make to respond in advanced and infrequently (but randomly) when the system might get close to its capacity limit, when for example it is known that a nearby large generator will be out of operation.

Best regards,

José Antonio