State Governments Need to Unleash the Benefits of the Next Big Thing

As the utility business model has outlived by many years its useful economic life, state legislatures need to produce as soon as possible emergent regulations that enable the Next Big Thing - business model innovations - under a market-based approach.

State Governments Need to Unleash the Benefits of the Next Big Thing

By José Antonio Vanderhorst-Silverio, Ph.D.

Creator of the EWPC-AF
Systemic Consultant: Electricity

First posted in the GMH Blog, on May 9th 2010.

Copyright © 2010 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.


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First I will write about the Next Big Thing. Under the online IEEE Spectrum energywise blog post Smart Grid Feedback (1), written by Bill Sweet, on May 5, 2010, which Mr. Sweet wrote to follow up an earlier post that he says caused “such wide and intense interest attends smart grid prospects,” I added the following comment:

… One of my arguments is that "by inaction, each State Government should be responsible to their constituencies for a very costly mistake that is being made by letting the smart grid process continue without giving State Regulators the proper mandate."

Another argument is that "... utilities’ business model are based on the century old regulatory trick of winning rate cases to the regulator, whether for the traditional energy rates or recently for adding smart meter costs to the rate base."

In response to those arguments, an expert wrote that "those consequences are, in fact, more often born by the public as taxpayers or the public as ratepayers. In the case of smart grid and other regulatory decisions the burden will fall on the utility to remedy any problems, pay the cost of that remedy and plead with the regulators to recover the costs in rates." I see a lack of the needed leadership in that statement.

The larger EWPC-AF question is: Will Utilities develop the Next Big Thing? I disagree that that is a problem of the utilities, since the Next Big Thing is about business model innovations in the power industry. To read about and/or participate in the discussion, please go to the link.

Next, and last, I will write about the need for market based approaches that enable the Next Big Thing. Many people have found to agree with the simplistic, but popular, Blooming Engineer’s view in response to the article More smart grid insight, written by Michael Giberson in the Knowledge Problem Blog. His comment says:

Smart grid technology in this study is bumping into the paradox that will afflict most market-based approaches. Market based thinking works really well when you are dealing with companies that can cost-justify analysts that can read through piles of data and choose the best energy usage plan for their organization.

When we get home from a 10 hour workday and need to get food on the table we aren’t particularly interested in wondering what effect this will have on our utility bills due to energy usage during peak hours. We also don’t want to spend what’s left of our evening reviewing energy usage statistics when we need to be helping our son with his homework, volunteering for community organizations and spending time on exercise, yard work or any of the hundreds of other things we are expected to do with our lives.

All these market-based means for reducing costs tend to assume that I have an infinite supply of time to review the data and that even if I have, that there is something that I can do with the information when I have it. I just want to pay a fair price for services rendered. I don’t want to be washing my clothes at Midnight because the meter says it will be cheaper then.

As you may see under Mr. Giberson’s article, like him, I first interpreted the Blooming Engineer's argument as if she was in favor of a heterogeneous smart grid and for customer choice, but then, after people kept agreeing with her, I came to realize that what they like is that she is just against market based approaches to favor the status quo. For that reason, I step back now to repeat part of what I had said before her post.

As Mr. Hunt will see in the post The ‘Genius’ of the Macrogrid ‘And’ Truly Fair Microgrids, it is not longer true that the business model can endure “because of its reliability and low average costs.” He will also see that microgrids are here to stay.

The conclusion of that post reiterates that: “[s]tate Legislatures need to give a new mandate to state regulators to enable truly politically correct (or better yet truly fair) microgrids. By trying to go the easy way out, microgrid proponents’ ongoing strategy won’t work; it will reveal state governments’ lack of vision that sets the poor to bid against the microgrids.”

To get the juice of that post, you need to read what Charles Peterson said that is no longer true. Regulation is not longer acceptable because it costs Americans 50 cents on top of every dollar paid to utilities. To address such huge value destruction, especially under non-market based approaches, I end the mentioned post with:

It is precisely because of that example of low reliability standard that microgrids are needed to serve those loads requiring high power quality, high reliability, high security, high availability, or any combination thereof. The central point of the article is to stress that “State Legislatures need to give a new mandate to state regulators…”

It is no doubt the Blooming Engineer argument can easily deceive readers unaware of the above facts from the reality being faced by consumers in the power industry. In addition, market-based approaches are operating everywhere except in many jurisdictions in the power industry.

The fact is that market based approaches are here to stay. The solution to such value destruction is to enable microgrids’ development, while designing truly fair competition letting customer choice, as explained in the article The ‘Genius’ of the Macrogrid ‘And’ Truly Fair Microgrids, that I had mentioned before the Blooming Engineer post.