The End of Electric Monopoly Retail

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

Copyright © 2008 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. This article is an unedited, an uncorrected, draft material of The EWPC Textbook. Please write to javs@ieee.org to contact the author for any kind of engagement.

The EWPC article PCT One of Many Business Model Innovations reveals a very important precedent for any potential business model innovation of utility retail service: they should be voluntary. As electric utilities monopoly retail discriminates against customers that don’t require the full system reliability needed by the most demanding customers, regulators are no longer able to ensure compliance of fair rates and prevent free riding. As customers reliability needs can be differentiated, believe it or not, this is finally the beginning of the overdue end of electric monopoly retail.

Once again, California takes the leadership in the U.S. in a very important issue. This time the decision on the proposal for "Programmable Communicating Thermostats" (PCT) should have wider implications on electricity retail. According to Claudia Chandler, assistant executive director of the commission, PCT “will be written to ensure it is completely voluntary… It is not going to be required . . . It will always be used in a voluntary mode, if it's used at all." This precedent can apply to other potential retail business model innovations.

Joseph Somsel article “Who Will Control Your Thermostat?” was apparently instrumental in the decision, by pointing out the discrimination behind the proposed mandate which I summarized with his statements “Your desires and needs can and will be overridden by the state of California through its public and private utility organizations. All this is for the common good, of course . . . But the discomfort of compliance will fail unevenly across the state. Come the next heat wave, the elites might be comfortably lolling in La Jolla’s oceans breezes or basking in Berkeley by the Bay, while the Central Valley’s poor peons are baking in Bakersfield and frying in Fresno. California’s coastal climate, where the elites live, seldom requires air conditioning . . . How will the state ensure compliance and prevent free riders? . . . Sweating for the common good is for the chumps.”

From there on, Somsel was on to defend the vertically integrated industry and nuclear power using as evidence of reality his own 2003 EnergyPulse article Deregulation and Nuclear Power. The article is already obsolete as a lot of progress has developed since then, especially on EWPC.

But, how a regulator ensures compliance and prevents free riders under yesterday and today’s utilities, when every customer is forced to pay for the same ideal reliable service. Regulators don’t; they have been unable to do so since reliability needs of customers have become widely spread everywhere in the world.

It is a fact that every customer, like Central Valley’s, or any third world country, poor peons have a level of reliability that is optimal for him or her. However, the power system needs to offer high enough reliability to satisfy the most demanding customers, a limit which is no longer able to do and the basis for the need to develop a smart grid. But anyway, let’s assume the power system can operate at 99.99 percent reliability. In this case all customers whose optimal level of reliability is below 99.99 percent are subsidizing the rest and thus being discriminated upon by the utility and the regulator. Also, every customer that needs 99.99 percent or more reliability is thus free riding.

Since rates are designed for neat customers’ classes, and all customers are supposed to receive the same reliable service, many customers are forced to pay for investments they don’t need. Hence, utilities the world over have been unfair with many customer by discriminating them for quite some time. This is the end of monopoly retail and the beginning of retail competition of several business model innovations.