Jose,
While I truly favor free markets for most goods and services, I have yet to find a competitive solution to the "last mile" problems for telecommunications and energy. In addition, you certainly must have noticed that the U.S. and most of the 50 states have retreated from deregulation over the last five years, because of reckless acts of manipulation by Enron, et al.
This is a long way of saying that my article is dealing with the real world of 2005-2006 and not some hypothetical free market experiment.
As for your point about monopolies ( and the "outdated business model "), the solution lies with state regulators who establish aggressive energy efficiency standards for the utilities so that everyone benefits from meeting those requirements.
Steve
Thank you very much Steve for your kind response. I am sorry for the extended response I will give you and the readers, but I don’t have time to make it shorter, even with the addition of my earlier comments.
I understand that the telecommunication business has a problem with the last mile. However, I have proposed elsewhere that the electricity industry has a problem with the first minutes. The problem with the first minutes results when customers are not able to respond to prices, and is resolved with demand response. It was precisely the lack of demand response that lets spot prices increase beyond reasonable values, leading to generator market power and congestion.
If I understand correctly, states now are supposed to study how useful demand response is, and the most important application is precisely to implement retail deregulation. To have a real social impact, states regulators should look deeply into liberating retail markets again.
I believe to have understood what is needed to design a true deregulation model for the electric sector. Dr. Alfred Kahn said some time ago that: "I am worried about the uniqueness of the electricity markets. I've always been uncertain about eliminating vertical integration. It may be one industry in which it works reasonably well."
That uniqueness is associated with the non-lineal nature of the risk of system failure. Physical risk of system failure, linked to high prices in deregulated systems, used to be managed as a supply security risk under vertical integration. The apparently large costs of generation and transmission reserves required, under vertical integrated utilities from resulting risk management planning, became the target of inefficiency identified by economist and policy makers at the outset of deregulation.
By reducing reserves and creating congestion, here and there, long run risk of failure was thus increased by deregulation of wholesale markets and incomplete deregulation of retail markets. Associated with the physical risks was increased value destruction, and unstable markets. I believe those to be the structural reasons of the uniqueness of the electrical industry.
In the mean time, as technology has progressed, end-customers perceived sensitivity to shortages has spread sufficiently as to make invalid the assumption that customers can be classified in neat classes to pay average rates. In a sense, that sensitivity is the basis for differentiating customers, and the essence for a retail market to be developed. In addition, progress has also brought us the new technology of Demand Response together with an Automated Metering Infrastructure (AMI).
DR technology can complement the mitigation of physical risk of system failure and spot price sharp increases, as a non-linear feedback mechanism to repositioned systems reserves, in time and space, much better than lumpy investments in generation, transmission, and distribution. By developing a market on customers differentiated supply security (sensitivity to shortage) requirements, an efficient rationing system can be developed. Investment on an AMI is apparently feasible just on the operational benefits to the distributor.
The architecture of a "true" deregulated model 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. Retail-marketers then take control of the strategic Enterprise Solutions, developing innovative business models. As each customer selects what he perceives is the maximum value addition, the economy as a whole maximizes welfare.
This is just a glimpse of my insights, design, research and, humbled observations of the past 10 years. By no means am I saying that retail markets development will be easy. No; there is a lot of work needed to make it happen. Most investment in energy efficiency needs to look to the next 5 years, away from the Continuity scenario. I will be very happy if one place in the world decides to initiate the experiments requiresd for the development of new business models on retail marketing, and I wish to be there.
© José Antonio Vanderhorst-Silverio, PhD
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