domingo, febrero 15, 2009

Propelling the Power Industry to a Superior Solution Path

To raise the competitive balance of the power industry to a superior solution path, “public utility commissions … have to let go of their authority to regulate rates at the retail level.” PUCs need to let go in order to enact an EWPC based EPAct that opens to competition a federal wholesale and retail electricity market, creating investments, innovations, and jobs with a lot future.

Propelling the Power Industry to a Superior Solution Path

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

First posted in the GMH Blog, on February 15th, 2009.

Copyright © 2009 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. This article is an unedited, an uncorrected, draft material of The EWPC Textbook. Please write to to contact the author for any kind of engagement.

This article is a follow up that reinforces the essence of the EWPC article Just as Pogo, IOUs Found the Enemy. This is done while following a set of personal opinions provided a few weeks ago by Mr. James Carson. It can be inferred that a regulation deregulation debate is a costly distraction for all stakeholders, especially for IOUs.

To support even more that IOUs met the enemy, I found strong findings that have also been made at DOE, by a team led by Steve Pullings. A key example can be found in the article How Private Investment Is Pushing Utilities to the Edge, where Mr. Pullings gives three options on the trend that innovations and investment “are turning new companies into competitors for utility customer attention and dollars:”

Utilities may choose to fight this trend when it starts to show harm to the bottom line, but the fight may be with the consumer. It is not a good plan to make an enemy of your customer base while trying to retain them.

Utilities may choose to ignore this Edge investment movement. However, this can only be a short-term strategy until revenue loss forces reconsideration of this strategy.

Utilities may choose to get involved in the Edge Movement. While risky and not a typical space for utilities, it may be the only way to stay relevant to customers. This means new business models and new unregulated (probably) lines of business. Today, internal and regulatory policies do not recognize this need. Utilities could leverage this consumer interest in ET [energy technologies] with regulators.

All three options lead to the same conclusion: Just as Pogo, IOUs “met the enemy and he is us.” If the customer is not the enemy, just as Pogo they are. If they choose to ignore the trend, sooner or later they will see that they are their own enemy. However, as they recognize being their own enemy and decide to get involved, IOUs investors need to push for regulatory policies that enable the EWPC market architecture and design paradigm.

As readers may recall, under the EWPC article Breakthrough Suggestions for Today's Utilities Environments, Warren Causey wrote: “In order to adopt EWPC, public utility commissions would have to let go of their authority to regulate rates at the retail level. This is a political issue. PUCs are political entities. Commissioners pretend to believe they are "serving the public interest" by protecting the public from nasty old utilities.”

Most of the responses to Mr. Carson that I will provide below, can be found on the interchanges we had two years ago, under the article Playing with Fire - The 10 Tcf/year Supply Gap -- Part I, by Andrew Weissman, Editor-in-Chief & Publisher, Other elements can be found on my presentation at Carnegie Mellon University a few months later.

1. Fred C. Schweepe was one of the few holders of institutional memory.

Mr. Carson changed a bit his opinion about Schweppe as he read occasionally in the past two years. But my opinion is that Schweppe held institutional memory back in the 80s. As an example of key insights, Prof. Schweppe and his team made two critical warnings, which I posted on 12.20.06 under the Playing With Fire article:

The deregulation concept of this chapter is based on a supply and demand marketplace. Most of the other deregulation literature is oriented only to the supply side i.e., to deregulating generation without altering the way users buy electricity. We believe that deregulation which considerers only the supply side of the supply-demand equation is very dangerous and could have very negative results… A second major difference between this chapter and most of the rest of the deregulation literature lies in our concern that the economics and physical security of power systems not be destroyed or compromised.

In those days the warnings should have been considered as tall orders, but they were just ignored by using the wisdom of crowds (more below). Instead, an immense value destruction, not just for the U.S., but for the global power industry, as the dangerous and negative results came true, in addition to the destruction of the economics and physical security, as the policy economy first, reliability second (E1R2) was deployed with organized markets.

2. The separation of the Anti-System Utility

Mr. Carson opinion is that IOUs have changed their opinion considerably, but forgot to talk about the key issue: about the separation of the grid and the enterprise, as Warren Causey calls them, to enable deregulation that considers the demand side of the supply-demand equation as physical distribution is kept regulated, but retail gets deregulated (with prudential regulations). Readers can take a look at the EWPC article The Anti-System Utility, by hitting its hyperlink. This is part of what the article says:

When an organization operates as a system, the value of the whole is greater than sum of the value of its parts.

Reading carefully the article by Warren Causey, I come to the following conclusion:

The sum of the potential value of the grid plus the sum of the potential value of the enterprise is greater than the potential value of the utility, meaning that the utility instead of being organized as a system, it can be though as an anti-system.

What is the problem? Incumbent’s monopoly mindsets and political interference.

The monopoly utility operates a cash cow and so the priority is the enterprise, not the grid, nor customer service. In addition, the utility is also a political target. So grid’s investments are postponed, over and over.

What’s the solution? To restructure by a paradigm shift from VIUs to EWPC.

In order to make the industry robust, competitive and fully functional, EWPC separates the utility grid from the enterprise, with the former integrated to transmission and the latter open to competition. When that is done, the new utility becomes the transportation grid and several 2GRs (see link Second Generation Retailer - 2GR) take over a segment of the market by adding to their part of the enterprise the non-trivial functions of competition and integration of demand to the industry. Incumbents IOUs should decide whether they select one and only one of three activities (no Chinese walls allowed) of the restructured industry: generation, transportation, and retail.

As the grid is integrated with transmission, the resulting transportation utility budget is applied entirely to the modernization of the greater grid in a given area. As the regulated enterprise is transformed into several competing enterprises (aka Second Generation Retailers), the political target disappears, and investments, innovations, and jobs with a lot future are created.

So, as nasty old IOUs became regulated anti-utility they have no longer a chance to get involved. To get involved, IOUs investors will need to compete as 2GRs under an EWPC energy policy act (EPAct). Otherwise, they shoul become regulated wires only utilities.

3. Center attention in the essential systemic elements of the transformation.

While the devil is in the details, we can forget them as I explain now. Any professional system architect, which knows how to get the true systems’ requirements, will agree with me. The practice of system architecture is powerful because it allows separating the essential systemic elements from the many different incarnations. To restructure the power industry under EWPC only the true requirements are needed. In fact, active demand calls for active distribution. Passive demand and distribution was a hidden underlying assumption made by William Hogan when he claimed that “Retail Access is Easy, It’s Getting Wholesale Access that is Hard.” In slide 7 of the my presentation says:

The death of Fred Schweppe in 1988 and a misunderstanding by William Hogan in 1992 of Schweppe’s work on the energy marketplace were “small chance events early in the history of” deregulation that “tilt[ed] the competitive balance, ”to an inferior solution path, as W. Brian Arthur explained in general in his Scientific American, February 1990, article “Positive Feedbacks in the Economy.”

4. The policy reliability first, economy second (R1E2) is based on the essential ultraquality imperative

In the first point above, Schweppe and his colleagues had the “…concern that the economics and physical security of the power systems not be destroyed or compromised.” Just as the architeture and design of a nuclear power plant or a deep space vehicle, which needs to meet the ultraquality imperative, power system (R1) architecture and design can not be done by the wisdom of crouds as should be done polically for money system (E2) of the open market. To address the concern, there is a need for the R1E2 policy to lift the competitive balance to a superior solution path. Positive feedbacks are actually to be enabled by customer utility interactions.

5. Active Demand is another essential systemic element not considered at the outset of deregulation.

As explained in point 3, Dr. Hogan claim that retail access because he misunderstood Schweppe. In a post under the “Playing with Fire…” Energy Pulse article I quoted Schweppe et al saying that:

It turns out, that Schweppe’s said: "conventional metering is replaced by a Marketing Interface to Customer (MIC) which, in addition to measuring power usage, multiplies the usage by posted price and records the total cost [3]," which means that Homeostatic Utility Control was what we are now calling demand response.

The regulated “energy marketplace involves the utility and its customers operating as partners… Utility implementation concerns include real-time calculation/prediction of hourly spot prices, metering-communication-billing, and system control center operation using the new control signal called price… customers who choose to exploit the energy marketplace potentials must implement the appropriate response systems (today demand response), which could range from simple manual response to sophisticated digital controls…”

It is really a pity that Hogan misunderstood that Demand Response had been around longer than deregulation. That means that wholesale deregulation without retail deregulation has destroyed “the economics and physical security of the power systems.” In addition, under EWPC article Demand Integration is NOT the Province of Politics, it is only in the "2007 Assessment of Demand Response and Advanced Metering," that “the Federal Energy Regulatory Commission (FERC) has issued the incorporation of demand response to transmission planning.”

6. The excessive complexity of organized wholesale markets is the result of the restructuring mistake.

The way to avoid the extremely destructive and uncertain method is to apply system architecture to find the true requirements, as mentioned in point 3. By discovering the essential systemic elements it is possible to apply the lesson that Dee Hock, CEO Emeritus VISA International, gave us: “Simple, clear purpose and principles give rise to complex and intelligent behavior. Complex rules and regulations give rise to simple and stupid behavior.”

7. To forget distracting details, a system architect is needed

DOE and IOUs will agree that with the system architecture approach, we can forget the details by selecting a system architect to lead the effort of developing an attractive open federal market as suggested in the EWPC article To Dr. Chu: Align Stimulus to Clean Energy Reform.