On the End-State of the Power Industry

Stephen Heins, VP of Corporate Communication, Orion Energy Systems, has written the article Divorcing Electricity Sales from Profits Creates Win-Win for Utilities and Customers, published today, September 29, 2006, on EnergyPulse. Below are the comments that I have posted under his article, waiting for comments from Mr. Heins and other parties. If you as a reader have any comment, please placed them here or on EnergyPulse.

Hello Mr. Heins,

You have given the readers a very insightful article identifying a fundamental systemic issue, which are the perverse incentives of a very old system against efficiency on the demand side. That system was designed when customers transactions costs were prohibited, which is no longer true. In essence you are saying that this old system is flawed, since "... this disincentive impairs their willingness and ability to promote energy efficiency, despite its benefits to consumers' bills, electrical reliability, national security and the environment." That is a tall order, which gives me the opportunity to present once again an alternative new system which I term Electricity Without Price Control.

It has been known for quite some time that the business of utilities is winning rate cases to the regulator, which as you mentioned is tied to profit from sales (see for instance, John Naisbitt, Megatrends, 1982). Some would say that this is how they are gaming the (very old) system, while also avoiding competition. Somehow it seems to me that monopolies will be in the same business under the approaches to “recover utility costs and establish performance rewards.”

I strongly believe that a replacement system is urgently needed to allow for the development of demand side resources, such as energy efficiency. It seems to me that your suggestion is to tinker the system with “decoupling.” System tinkering is a very dangerous thing, so it is very important to know ahead of time what will be the unintended consequences it might bring. It seems also that you already signaled an improper use of "decoupling." There are also missing opportunities as you will see next for a fundamental system solution to arrive which will reduce the need for iron as it is replaced with bits.

However, If I understand correctly, to make things worst and to keep gaming the system, the utility lobby recently won the “native load” protection case with the 2005 Energy Bill. That means that the distributed demand side resources will no be open for development yet, to compete as equal with supply side centralized resources. Jack Casazza has made an important analogy in relation to the rights of utilities - he says that it is impossible to unscramble the egg. That means that some states will keep working under the old paradigm for quite some time.

I believe that tinkering the old system will leave many other important flaws in place. What is needed is to understand the nature of the system and to find the leverage for an intervention. That is exactly what I have been doing in the Dominican Republic and found that what is needed is to restructure the system, letting the demand side wide open, and reintegrating the transportation (T&D) of electricity. The transportation business will be kept regulated and responsible for short and long run risk management. The new image of the industry will be changed from generation to transportation (as suggested by Richard Tabors for transmission). That is how the new system will arrive letting a robust and efficient electricity market to develop in which all stakeholders will have the potential to win.

As I said in the article An Alternative Business Case for Demand Response, “by introducing a different value chain, and by adding other environments which I believe will lead to the long run End State of the electricity industry… [T]he business case of Demand Response (DR) is enhanced under free markets, innovation, and probabilistic (risk) mindsets. DR is poised to be the demand side risk management tool to complement the traditional "LOLP" supply side risk management tool.” I don’t see how the decoupling mindset will enable those resources.

As you can infer, I have been working on the systemic issues of the power industry to come up with the new system market architecture, and design. As can be seen from the article “a Dominican strategy,” in our country “customers have invested large amounts of money to reduce shortage costs individually. This has resulted in an everyone-for-himself policy. Such installed capacities in the industrial sector have surpassed 1,500 MW. From a national point of view, there is an excess of installed electric capacity, but nonetheless, shortage costs are very high as a result of poor system reliability, due to a total lack of integration and coordination.” Said in other words, Dominicans purchase electric power “supply” security (resources available in the demand side) in a robust and totally free market. By the way, I have recently estimated that our reserve generating capacity is 77%.

Once again, powerful utilities will have strong incentives to use your suggestions to continue gaming. As intermediaries between generators (large customers don’t need them) and customers, I suggest to replace the monopoly and the regulator with a retailer (under competition) which has the right incentives, under free markets, to develop all the resources of the demand side, not just plain energy efficiency, under a new robust system. That I believe will lead to the End-State of the power industry for quite some time.

Under cooperation of all stakeholders, a generative dialogue (as Bill Isaacs has developed) a competition between the regulated or re-regulated markets, based on the old system, and the new, complete and fully functional, deregulated market system should be developed. I anticipate the results will be that all stakeholders will be better off under the new competitive market system, in which demand side resources are unrestrictedly available to “benefits to consumers' bills, electrical reliability, national security and the environment.” In essence, the new system creates win-win for all stakeholders, including many customers at the Bottom of the Pyramid, no just large industry and powerful agents.

Thanks for setting the stage for my humble comments.

Regards,

© 2006. José Antonio Vanderhorst Silverio, PhD
Interdependent (Systemic) Consultant on Electricity
Promoter of Electricity Without Price Control
Grupo Millennium Hispaniola (not incorporated yet)
All rights reserved.