Please Blame the Deregulation and Regulation Fiascos Parte 29

Dick Maclay has offered a very good response:

Jose Antonio, thanks for the clarifications. I followed the references and I think we are on the same track. Without proper price signals to customers the choice of energy services is distorted by misinformation.

I believe one of your points is that the Banks Model (space A) and the Hogan Model (space B) both fall victim to bad consumer decisions based on misinformation in regulated prices. Hogan introduces volatility by disconnecting wholesale and retail prices. All he adds are disasters like the one that befell California. (I am viewing Hogan as the dominant of the two models occupying Space B, Hogan and Enron.)

Your description of Scheppe is that of someone I consider a nieve optimist. The Banks model could incorporate good price information by differentiating retail prices over time, but it does not for political reasons. Centrally planned command and control systems from communism to cost-of-service regulation become highly politicized. And good price information is just plain inconvenient to deal with. The easy way to deal with it is political pressure to get relief from it! It would be interesting to see what Ferdinand Banks would make of the UNextended Shweppes model. He may not object to it since it can be centrally administered. In fact, during the early years of cost-of-service regulation in the U.S. regulators sought retail pricing that would encourage greater overall efficiency. But regulation is subject to entropy, and there is too little energy left in it to overcome the political pressures to ignore uncomfortable realities that need to be addressed to achieve economic efficiency. So I see space C as an idealized version of space A. It envisions a world that has faded away in political feasibility as its physical feasibility has been pretty well perfected.

Space D, the extended Schweppe Model, removes the politics of space C by removing the regulators. This is the essence of the history of successful deregulation in other industries. Removing regulators disables manipulation by political means to hide reality. In this context, considered harsh by the lazy, efficiency and low prices result. In the mid 1990s I named the emergence of real markets, Space D, the Polish Scenario. Our modeling showed muted price rises in the Polish Scenario with a major drought in a system where a third of annual energy came from hydro, and a major drought cut hydro energy in half. The scenario I named Belarus assumed enforcement of the Hogan model, and it accurately forecasted the disaster for California inherent in the Hogan model five years before the fact. We never revealed the names of our scenarios to company management when we adopted the Belarus Scenario as the base case. We did not want the rewards that went with revealing that we thought they were as smart as the Belarus.

Have I wondered from your views of the spaces?

Your note about metering is interesting. I gather that you see a centralized vision as too limiting to include the proper parameters for enabling contracts between retailers and their customers the restricted regulatory mind failed to imagine. You probably add that the centralized metering system would be designed by committee and, therefore, expensive to boot.