A Generative Dialogue Without Illusions Part 9

Gentlemen, [posted on 4.2.06 under What a surprise: Prices move both ways]

With all my respect for Prof. Banks, I will kindly respond to his comments:

As it might be inferred from my comments, late Prof. Fred Charles Schweppe did not need to take “the early chapters of his favorite economics book literally.” Prof. Schweppe “was regarded as an individualist, almost a renegade, with new and highly creative ideas, someone who was determined to bring these ideas to fruition.” He understood very clearly the feedback requirements of a power system and new that the customer was key to his market proposal. However, as far as I know, his suggestions have not been implemented anywhere.

If there is someone to be questioned (among many others which were part of "the system" of course), it has to be the JFK School of Goverment economist W.W. Hogan, which according to Fernando Alvarado, "in 1992 (Fred was dead) introduced the concept of contract networks as a practical extension to these early notions (of using prices to control the system) because it permitted the establishment of property rights within networks and allowed (approximately) efficient prices to be determined from a dispatch that was influenced by the judment of human operators [1]."

In Fred Schweppe proposal, the end customer was an integral and active part of the market which were supposed to respond to prices. If I understand it correctly, it is Prof. Hogan who did not understand very well how important the end customer was as an active “empowered customer” as EPRI is suggesting. Professor Hogan did not find mistakes in "Schweppe et al., when he said that they "argue for the robustness of spot pricing even when the perfect optimal solution is not available:”

Hogan quotes them saying "The fact that the true (prices) may not be calculated does not destroys the value of implementing a spot price based energy marketplace. The actual value calculated will be much closer to the true values than the present-day flat or time-of-use tares, etc. The goal of implementing the spot price based energy marketplace is to improve the coupling between the utility and its customers, no to achieve theoretical optimality [2]."

By looking at Hogan’s paper, I understand that the big mistake was replacing the price responsive end customer with the non-responsive transmission customer. " As I explained in my comments to Prof. Banks article, where I said: “Recently, I have sent an email to Mr. Casazza, and have gone to Jesus M. Martin-Giraldo, Power Encounters blog, where I posted comments in Spanish about a misunderstanding of Fred C Schweppe's Homeostatic Utility Control in the literature review he posted…”

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 [4].”

Ádditionally, when I talk about risk management of system failure, please be advised that I am talking about physical risk management of reserves in the power system, by system elements, mostly generators, and costumer responsiveness.

Best regards,

José Antonio Vanderhorst-Silverio, PhD

Interdependent Consultant on Electricity

[1] Fernando Alvarado, "Is Systems Control Entirely by Price Feasible?" Proceedings of the 36th Hawaii International Conference on Power Siences - 2003,

[2] F. C. Schweppe et al, Spot Pricing of Electricity, Kluwer Academic Press Publishers, 1998, p. 97.

[3] Homeostatic Utility Control Vol. IEEE PAS-99, No.3 May/Jun 1980, page 1151.

[4] F. C. Schweppe et al, Spot Pricing of Electricity, ... p. 11.