Utilities and Regulators’ Value Destruction

Excessive marketing costs are identified by Marty Agius, under today’s regulations, which make utilities and regulators unable to add customer value as will be done under EWPC. Added to his arguments is the large value creation waiting to happen with the emergence of business model innovations, to be develop by retail marketers (2GRs) to integrate demand to power system planning, operation and control, since market research doesn’t work yet.

Utilities and Regulators’ Value Destruction

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

First posted in the GMH Blog, on April 9th, 2008.

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.

On 12.21.05 I wrote the following under the article Free All Wisconsin Utilities to Make Money Helping Customers Save Energy:

The architecture of a "true" deregulated model is centered on independent retail-marketers, and a new value chain, whose mission is to segment customers according to electricity value added services, which customers can select. The value chain is wholesale, retail, end customer, leaving the distributor as a pure transporter charging a toll. Retail-marketers then take control of the strategic Enterprise Solutions, developing innovative business models. As each customer selects what he perceives is the maximum value addition, the economy as a whole maximizes welfare.

This is just a glimpse of my insights, design, research and, humbled observations of the past 10 years. By no means am I saying that retail markets development will be easy. No; there is a lot of work needed to make it happen. Most investment in energy efficiency needs to look to the next 5 years, away from the Continuity scenario. I will be very happy if one place in the world decides to initiate the experiments required for the development of new business models on retail marketing, and I wish to be
there.

In response to the above, Len Gould wrote: “Jose: You're close, just not going quite far enough. You need to eliminate your "Retail marketers" by implementing intelligent software within the customer's meters which takes over the simple task of selecting either a lowest-cost supplier from among all available in a central electronic "marketplace", or alternatively choose to not purchase, and shut down some of the customer's less critical loads if the price exceeds customer-set limits.” As can be seen next, Len’s opinion (which he should change as soon as possible) can now be classified as the first and foremost of the many IMEUC False Facts.

Marty Agius, Executive Vice President, SKM Group, article Relevant issues affecting the utility industry today shows very clearly that utilities need to implement retail marketing, but the market architecture and design in place are totally flawed. Marty shows that utilities and the regulator controlled market rules are generating immense value destruction with excessive marketing costs because:

-- Marketing of products and services need to utilize pinpoint targeting
-- Public service commissions want all audiences treated equally
-- To enhance shareholder value, the right audience needs to be reached with a relevant message

Even more important to value creation, as can be seen in the EWPC article Market Research Doesn’t Work Yet for Demand Integration (please hit the link to read this highly recommended article), is that “Demand integration is a discontinuous innovation and the reason why the responses of customers are way off with respect to the non-trivial concept of demand response. Politics should NOT continue to play major interventions in regard to betting on outcomes in alternative energy and demand response, as the installation of AMI is developed by 2GRs under competition. Great opportunities are waiting “that promises much more value creation over time” under the EWPC paradigm shift.”

Further, as can be seen in the EWPC article EWPC Leadership (w/o links), “…the EWPC breakthrough … brings absolute clarity and direction to enable a cultural shift to the power industry of the third industrial revolution. Demand Integration by 2GRs result in large coordination savings for society as a whole, both in customers' multiyear investments and operation costs...”

As a conclusion, it is now very clear that after a lot of work, Electricity Without Price Controls (EWPC) emerged at the beginning of 2007 as the winning market architecture and design paradigm on the market vs. market competition. For a quick introduction, EWPC is contrasted with the he old paradigm in the GMH essay Electricity for the New Millennium.

Two excerpts from the essay on the new paradigm reveal, first, “In the Third Industrial Revolution that we are living today … energy costs are becoming prohibited and retail customers' transactions costs are going down year after year. The regulator as an intermediary is now an unnecessary overhead, as customers' perception on electricity's value vary widely. Both of those changes are enabling a new paradigm that allows the liberalization of electricity markets, so customers have freedom of choice, fair and efficient prices, while the power system is planned, operated and controlled effectively with the response of the customers enabled by technology.

Second, “under the breakthrough EWPC market architecture and design paradigm, "... the layers of overhead of both utilities and the regulator are removed," and a new breed of Second Generation Retailer - 2GR compete at their own risk (neither at the ratepayer, nor taxpayer) in several worldwide market segments trying to develop business model innovations, as business do in many other industries.