The Natural Monopoly Transportation System

EWPC provides a new configuration in which the natural monopoly is reduced to the transportation system of the electric market, where the old configuration produces much higher and more volatile prices.


The Natural Monopoly Transportation System

By José Antonio Vanderhorst-Silverio, Ph.D.Systemic Consultant: ElectricityCopyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

In The Magic Deregulation Formula, I took the challenge to respond in full to Professor Ferdinand E. Banks article A New Lecture on Electric Deregulation Failure, and in particular the statement “No playing games on the consumer side of the market can possibly offset the pressure on prices resulting from conventional profit maximizing behavior on the supply side. Put another way, given the technological configuration of the electric sector (e.g. increasing returns to scale), deregulation invariably leads to much higher and more volatile prices.”

I read slowly the article now and the other three comments. He is right that deregulation as practiced with economy first, reliability second, (E1R2) is a failure. However, the industry as a whole is not a “natural monopoly.” Under EWPC, the transportation utility is considered a natural monopoly. Once you apply the reliability first, economy second, (R1E2), policy, all things get settled, since the centralized market can be divided into two interrelated markets:

1) The controlled natural monopoly integrated (T&D) transportation market, and

2) The open market without price controls, but under prudential regulations, on the generation, retail, and customer value chain.

Economic efficiency gets divided in two sequential steps. With the “reliability first,” the grid is planned to enable maximum welfare in the open market as explained in Free Market and Central Planning, Under R1E2. With “economy second,” actual social welfare is practiced, “as each competitive retailer develop, with business model innovations, the resources of the demand side, to integrate demand into power system planning, operation and control, [then] a robust, vibrant, and fully functional, electrical and market, power sector can evolve.”

This results in the Rethinking Electricity Restructuring as EWPC, which gives “Strong EWPC market architecture and design recommendations to restructure worldwide electricity markets, [which] supersedes those proposed in 2004 by Peter Van Doren and Jerry Taylor of the Cato Institute by resolving the "previously unknown" problem created by a flawed [E1R2] deregulation. Those recommendations are developed to support slicing the last of the regulated monopolies with a strong sense of urgency.”

In Full Retail Choice Emerges, “As distribution becomes an integral part of transportation under EWPC structuring without incumbent retailers, the [previously known] shortcomings [identified by Van Doren and Taylor] disappear and full retail choice emerges as Second Generation Retailers (see Second Generation Retailer - 2GR), not the first generation retailers of … [the] article [The Potential for an Effective and Timely Deregulatory Endeavor], compete under federal prudential regulations (which should hopefully become global prudential regulations under the discipline of the WTO). High returns to scale also appear for 2GRs which should operate under federal or better yet global prudential regulations.

Repeating the basic idea, EWPC restructures the old configuration VIUs controlled market into two markets: one controlled market of natural monopoly of integrated electric (T&D) transportation and one market without price controls, but under prudential regulations. That is the new configuration of the electric sector.

The old configuration leads to much higher and more volatile prices than the new (R1E2 EWPC) configuration. In the old configuration physical risk management (reliability) was performed only with the resources of the supply side. The failed configuration (E1R2 deregulation) leads to much higher and more volatile prices than the old configuration because of the conventional profit maximizing behavior on the supply side. In the new configuration physical risk management (reliability) is perform with a combination of supply side and demand side physical risk management.

Instead of playing games on the consumer side, EWPC develops the resources of the demand side to produce demand side physical risk management.

At least three other companion articles are being written.