Utility Deregulation and Vertical Integration Revisited... Still Bad Ideas

Reference: Utility Deregulation Revisited... Still a Bad Idea, 03/14/07 - By Paul Weinberger , Partner, Technology Management.

Deregulation is a very mistaken concept. I agree is is a bad idea. Vertical integration is a no longer a good idea, because it is being broken by the information technology revolution.

The power industry requires re-regulation which changes price control regulation with prudential regulations. It is a different ball game that is emerging (since the 80s), but has been blocked by incumbent utilities.

Electricity Without Price Controls (EWPC) to the customers is a third way that was not considered in the deregulation debate that involves a controlled market for transportation (integrated transmission and distribution) and system planning and engineering monopolies – a kind of bare bones utility -. Financing T&D will not be speculative, but will have long run competition, like with gas pipelines. Dormant tomatoes will probably face much more uncertainty from the weather.

The large uncertainties being experimented lead to large forecasting error. Demand is changing from inactive to active, and so a different market architecture and design is required. The development of the resources of the demand side is the key strategy to reach business model innovations by competitive retailers. Customer demand response – one of the resources of the demand side to be developed - is a means to avoid the need for power plants that operate fewer hours than breakeven.

As customers’ needs are differentiated an average price is replaced by efficient pricing that reflects wholesale pricing in time and space, letting every customer shop for the highest value proposition in the retail market. Prudential regulation similar to that in the banking industry will protect the customer. Instead of two intermediaries – the regulator and the utility – the customer will have only the competitive retailer which he can choose.

Commissions, regional or not, only know how to build camels. What is needed is a system planner and operator institution to fulfill part of the job you outlined. The remainder is performed by the free market on the wholesale, retail, customer value chain.

Yesterday, at the Third Annual Carnegie Mellon Conference on the Electricity Industry, I suggested “A Generative Dialogue to Reach the End-State of the Power Industry.” EWPC was shown to be the winning market architecture and design under Playing with Fire - Part I and – Part II on earlier discussions, which both Prof. Banks and Len Gould are aware of, that expand the idea of closing the debate based on past solutions, to a generative dialogue on the emergent solution.