Friendly Comments on Deregulation Update

This is an update of Some Friendly Comments on True Electric Deregulation Part 4, posted on Tuesday, December 27, 2005, on the BMH blog. The update is in square "[" "]" brackets, some of which may be missing in order no to make it more complex by unnecessary repeating.

Thank you very much Mr. Martín-Giraldo for your timely comments.

I agree completely that Fred C. Schweppe supported regulation, but a very distinct kind of regulation, which I believe is completely unnecessary today. Experience with faulty [today E1R2] deregulation, experience with regulation, the development of new technologies, and additional insights into electric business, suggest serious consideration to the development of a "true" deregulated [now re-regulated] electric marketplace. The comments that follow are in addition to my earlier [which I believe is the seminal EWPC] article on An Alternative Business Case for Demand Response, as well as my comments dispersed on EnergyPulse.

I believe there has been a big misunderstanding of Fred C. Schweppe proposal. Trying to clarify his proposal, lets consider four general structures for the electric business: A) a traditional vertical integrated utility; B) a faulty deregulation or re-regulation that keeps a largely irresponsive and obsolete utility business model; C) Fred C. Schweppe "Regulated Spot Price Based Energy Marketplace" with homeostatic utility controls, where the utility is the only middleman; and D) a true [again changed to re-regulated under prudential regulations] deregulated electricity market, with retailers innovative business models, without price controls, a new value chain (generator, retailer & customer), while re-regulating the wires monopoly.

As you will see, moving from the regulated Space A to the regulated Space C involves a very large undertaking, while moving from Space C to Space to D no such a large one. The regulated (Space C: see page 11 of Spot Pricing of Electricity) "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."

That explains why on page 123, Schweppe, et al, conclude "that there are many similarities between the regulated energy market place… and the deregulated system." That also explains very clearly the shortcomings ( i.e. price spikes) of, Space B, faulty deregulation.

In addition, on page xvii of Spot Pricing of Electricity, Fred C. Schweppe (et al) understood that "there is a need for fundamental changes in the way society views electric energy... In general terms: …the spot price based energy marketplace involves a variety of utility-customer transactions… These transactions may include customers selling to, as well as buying from, the utility." Read "fundamental changes" not cosmetic changes in the utilities business models.

On page xviii, they add "A spot price based energy marketplace has many benefits for both the electric utility and its customers. These benefits include improvements in operating efficiency, reductions in needed capital investments, and customer options on the type of (reliability) of electricity to be bought. A spot price based energy marketplace is a win-win situation for both the regulated utility and its customers. The customer's lifestyles improve because the customers are receiving more service from the use of electric energy per dollar spent. The utility has a more controllable, less uncertain world in which to operate." That is exactly the opposite of what has been happening, by leaving the customer out in the re-regulation efforts. Demand response will change that.

My hypothesis is that time and reality are given us the opportunity to bypass Space C and go directly to Space D. It does not make any sense today to develop a Regulated Spot Price Based Energy Marketplace. It does not make any sense either to stay at Space A. Maybe my contribution, if there is one, is recognizing that a very simple restructuring, which keeps the wires utility out of the competitive business, creates an opportunity for retail marketers to develop the Deregulated [again re-regulated] Spot Price Based Energy Marketplace. That I suggest is the required change in firm organization that [delete goes] satisfies the control scheme, on the need to develop the corresponding innovative business models.

I add my response to your well documented comments with the dedication of the book "Spot Pricing of Electricity," that says: "Fred created spot pricing and proved, again, that "The forecast is always wrong!" (Unnumbered page, placed on what should be page v).

Schweppe was a feedback genious, which understood (see page 7) that "In the energy marketplace, there is a closed-loop feedback between the utility and its customers. The whole electric power system (generation, transmission, distribution, and customers) is controlled and operated in an integrated fashion, without removing the customers' freedom of choice. This is made possible by the diversity in costumer's characteristics, desires and needs… The benefits of well-designed, real time, utility customer feedback are clear, or will be after reading this book." My hypothesis of "true" [EWPC re-regulation] deregulation is centered on those perceptions of the customers, which introduce [as a key issue for full retail and wholesale competition to develop] the need for retail marketing and retail competition, which, unfortunately, is the "true" deregulation that the late Fred C. Schweepe had no time to [consider, nor]see.

Now I like to respond some of your comments:

· To me is important to remark that the origins of restructuring are not in the thought of Schweppe, although many people could think so nowadays.

My response:

I believe that sufficient time has past to assign the proper credits, which I am trying to integrate in a true deregulation of electricity. However, I firmly believe that the theory and practice of restructuring of electricity originated with Fred C. Schweppe leadership. The book "Spot Pricing of Electricity" is the place to respond to Charles Maurice de Tayllerand-Périgord, argument: "When something become dark to you, go to the origins."

I believe that Schweppe proposed a "real" restructuring, when he said "New directions for the utility industry are being sought by many interested parties in the government, the private sector, and the universities. One such direction has been widespread interest in utility-customer cooperation through innovative rates characterized by broader options and better use of information on utility costs and customer needs. The goal of this book is to provide a theoretically sound, yet practical foundation for the implementation of utility-customer transactions based on today's needs. Our goal is to meet four criteria:

1. "Freedom of Choice: provide customers with options on the cost and reliability of supply and how they choose to use electric energy."
2. Economic Efficiency: Motivate customers to adjust their own electric energy usage patterns to match utility marginal costs.
3. Equity: Reduce customer cross-subsidies…
4. Utility Control, Operation and planning: Consider the engineering requirements for controlling, operating and planning an electric power system."

Commenting the criteria in reverse order:

Item 4: is what Mr. Jack Casazza, yourself, myself, and others have been asking all along, which were forgotten in the "deregulation" frenzy. [This is what I have reduced to the simple, but not simplistic, R1E2 policy.]

Item 3: had a note [on my book]: "there are other definitions of equity." I characterize a supply security (or quality) cross-subsidy, just to cross-subsidize, for example, the computer manufacturer, as Thomas Tanton has rightly pointed out. Average rates to customer classes forbid that.

Item 2: motivation underscores the need for retail marketing, which utility minded people find unnecessary. I have to admit that Mr. Schweppe didn't got that far [ and should have].

Item 1: This is the key element on the differentiation of customers. Technology for a complete market is already here. In the End-State (which is within the next five years) [WOW! 5 years – interesting opinion] price controls become completely unnecessary, given my article and the comments have made in the EnergyPulse discussions.

Your comment:

Why?. Please pay attention to the first sentence between parenthesis: "Which we do advocate". Schweppe advocated regulation. By extension, this means there is not necessarily a relationship between "deregulation" and "demand response", thus "demand response" could take place in a restructured or non-restructured environment.

My response:

While the words seem correct, the intent is not. As was seeing from my first response, Fred C. Schweppe advocated a much more different regulation than the re-regulation that California experimented. In fact, Schwepe had suggested very big restructuring effort, with the following 4 above goals. Had they follow Fred C. Schweppe spot pricing "regulation" model; the experiment would have been completely successful. That is why you need to add the sentence "The reader might be surprised to learn that the trip from regulation to deregulation need not be very long…"

Your comment:

In my opinion it is more easy "demand response", (or load management, demand side management, market transformation or whatever name adopted along last 30 years you want to call it), takes place in a regulated environment and carried out by a vertical integrated utility under the once very popular IRP (Integrated Resource Planning.)

My response:

I suggest you to read my response to Bob Lieberman in what I believe is The Birth of the Global Electric Retailer.

Best regards,

José Antonio Vanderhorst-Silverio, PhD

On 12/27/05, Power Encounter <powerencounter@gmail.com> wrote:

Dear Mr. Vanderhorst-Silverio,

I have the following comments to do:

1. Fred Schewppe supported regulation. In Chapter 5. "A Possible Future: Deregulation", page 111 of the book "Spot Pricing of Electricity" by Fred C. Schweppe, Michael C. Caramanis, Richard D. Tabors and Roger E. Bohn (Kluwer Academic Publishers. 1988 ISBN 0-89838-260-2), we can read: "This chapter shows how the establishment of a spot price based energy marketplace in a regulated environment (which we do advocate) can evolve towards or into a deregulated system. The reader may be surprised to learn that the trip from regulation to deregulation need not be very long (although it may be bumpy)." To me is important to remark that the origins of restructuring are not in the thought of Schweppe, although many people could think so nowadays. Why?. Please pay attention to the first sentence between parenthesis: "Which we do advocate". Schweppe advocated regulation. By extension, this means there is not necessarily a relationship between "deregulation" and "demand response", thus "demand response" could take place in a restructured or non-restructured environment. In my opinion it is more easy "demand response", (or load management, demand side management, market transformation or whatever name adopted along last 30 years you want to call it), takes place in a regulated environment and carried out by a vertical integrated utility under the once very popular IRP (Integrated Resource Planning.).

2. Since its inception, the control scheme of a power system is hierarchical. Id est: a vertical one. This vertical control scheme observes a time scale which comply with the power system states: electromagnetic, transient, and steady states, and short term and long term planning. And this vertical scheme control obeys the organization of a vertical integrated utility as well. With restructuring and unbundling the utility lost verticality and become horizontal. To enlarge my view in this point it could be interesting for instance you pay a view to the Economics book "Markets and Hierarchies: Analysis and Antitrust Implications", by Oliver E. Williamson, Free Press. 1983 ISBN: 0-02934-780-7). There has been a change in the firm organisation, but there has NOT been the corresponding change in the control scheme. Now, the point here is whether the classical control scheme affords horizontal utilities. The facts seem to tell no. Then, how to add to the present vertical control scheme a new full horizontal one such the required by "demand response" without provoking clashing?. Neither the multi-agent systems technology is still ready, nor the Agent-based Computational Economics has been developed. See http://www.econ.iastate.edu/tesfatsi/aelect.htm .

3. In present times I remember a quote of Charles Maurice de Tayllerand-Périgord, that argued French politician who once said: "When something become dark to you, go to the origins".

Posted in Energy Pulse.

Sincerely yours
J Martín-Giraldo

On 12/24/05, José Antonio Vanderhorst-Silverio, PhD wrote:

Estimado Dr. Martín-Giráldo,

Perdone mi insistencia sobre mi propuesta de un Mercado eléctrico liberalizado verdadero, con el cual su contribución espero. Cambio al inglés ahora.

Professor Ferdinand E. Banks wrote a timely article in EnergyPulse entitled A Few More Unfriendly Comments on Electric Deregulation, to which I made an initial comment and posed some questions regarding my hipothesis of a true electric deregulation. Prof. Banks has said, among other things that: "Almost as important, I think that the arguments of Jack Casazza, and the people at the Carnegie Mellon Electricity Industry Center are unbeatable. They also have all the evidence on their side, which helps. (And here I can suggest examining the blog of Jesus M. Martin-Giraldo.) I certainly respect the knowledge and interest of Vanderhorst-Silverio in this matter, and I hope that his ideas receive a wide circulation, but in terms of the economic theory that I study and teach, I would really be surprised if I were able to endorse those suggesting that there is an acceptable deregulation agenda out there somewhere if only we take the time to find it. "

Thanking Prof. Banks for his suggestion that my ideas receive a wide circulation, I responded in part as follows:

"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 1) a misunderstanding of Fred C Schweppe's Homeostatic Utility Control in the literature review he posted; 2) my blog in which I have posted well over 900 notes, most of them in Spanish, related to what I believe is my meaningful aim of true deregulation (which started on 1995); and 3) CME Industry Center (CMEIC) admission of incomplete (=faulty) deregulation and lack of physical demand side risk management, and referring him to the link of my comments under the article " Strategic Perspectives on Utility Enterprise Solutions," by Warren Causey on EnergyPulse."

"I have received no reply from them yet. I agree that under the old paradigm, CMEIC and Mr. Casazza are unbeatable, because they are based on "facts" of the faulty deregulation. However, I humbly think that under COE [Customer Oriented Electricity was what I now call EWPC] hypothesis many of the arguments just don't hold. However, I received a kind reply from Dr. Alfred E. Kahn, but I am not allowed to forward it yet (the email has some legalese at the bottom)."

"I will send all of them, including the CMEIC the link of this article to see if they may have answers to the questions I asked you. "

Deseándole una feliz Navidad y esperando sus comentarios, bien sea en su bitácora digital, en EnergyPulse o por esta misma vía.

Muy cordialmente,

José Antonio Vanderhorst-Silverio, PhD
Interdependent Consultant on Electricity
BS ´68, MS ´71 & PhD ´72, all from Cornell University
Valued IEEE Member for 35 Years
javs@ieee.org
Research and practice areas, and interests: systems architecture, systems thinking, retail marketing, customer orientation, information systems requirements and design, market rules, contract assistance.