Law of the Situation: the utilities did not understand.

Third update. The following comment are earlier than the first and second update, as they are the original comments on the EWPC Blog.

Comments

Mon, 12/10/2012 - 8:59am

Len Gould added a comment on 12.8.12 that says:

I think its foolish to expect a regulated monopoly business to voluntarily give up its monopoly simply to increase their likelihood of staying modern, or even of joining the current century. They'll need to be forced into their future by regulators and legislators, no doubt kicking and screaming.

Jose Antonio Vanderhorst-Silverio

Mon, 12/10/2012 - 9:00am

My comments are certainly aimed to federal and state governments, as well as for entrepreneurs. The history of railroads is a great example to emulate.

Jose Antonio Vanderhorst-Silverio

Mon, 12/10/2012 - 9:03am

Malcolm Rawlingson wrote on 12.9.12:

Jose,

Very good observations regarding companies not changing with the times. Kodak has got to be the outstanding one of recent years. They were the kings of the film camera until digital electronics, i-photo and computers wiped them out in an entirely predictable way.

Utilities are NOT providers of electricity - although they think they are. They are providers of ENERGY and energy services and they seem incapable of amalgamating the distribution of electrical energy with the distribution of all forms of energy to provide the customer with the cheapest combination.

In an era of cheap natural gas utilities still cling to the notion of burning the gas in power plants at 60% efficiency or less to make electricity, sending it along power lines and through distribution transformers to be converted into heat in hot water tanks or electric heaters.

It is better to pipe the gas into the home and make electricity there through a methane fuel cell. That technology is getting to a mature stage and will wipe out electricity only distributors. Why pay for two service charges when you can do it all with one.

Those days are not far off and it is highly probably that electricity distributors ws we known them today are done like a dinner - but they don't know it yet.

Malcolm

Jose Antonio Vanderhorst-Silverio

Mon, 12/10/2012 - 9:05am

Malcolm,

Thank you for your kind appreciation and an interesting comment. I guess the in-home electric generation market is to utilities, what cars were to railroads. But, a customer orientation is better served when customers are able to have also competitive central generation electricity, for example, backup through a T&D wires only utility in order, as you say, "to provide the customer with the cheapest combination" to in-home distributed generation.

Unlike Kodak, which was in a competitive market, utilities are being protected like railroads were. In order to do that, federal and state government's actions are required as soon as possible to open the power industry, as they did to railroads.

Jose Antonio Vanderhorst-Silverio

Second update: Is this how the electric smart market will let the new Steve Jobs connect the dots?

Is this how the electric smart market will let the new Steve Jobs connect the dots? @jonathan_soble @KateGalbraith http://t.co/9mIRzjARh5
— Jose A Vanderhorst S (@gmh_upsa) March 26, 2015

Right now there are 9 comments under the EWPC Blog post Should utilities and solar be finally exposed to the "Law of the Situation"? Japan's example, which corresponds to the first update below. For its relevance, I am selecting the last three comments, which corresponds to the second comment which Michael Cardinale added and my two comment response to him under the discussion This is one of the most important questions for the future of electricity, on the IEEE Society on Social Implications of Technology (SSIT) Group of Linkedin:

Mr. Cardinale responded:

As I understand the ensuing text, we are not really talking about law in the legal sense, but more law, as in law of nature. From a business point of view, the evolution is more along the lines discussed by Geoffrey Moore in "Inside the Tornado". For a business to survive in changing markets, it needs to leverage its cash cow - in the example given, the railroad - and put development money into a new line of business: probably a new line of transportation in this example. The problem arises in a protectionist market where a government tries to protect the incumbent business; that is, the government uses the law to protect the business. The market becomes skewed and instead of evolutionary change, we are led to a rapid uncontrollable change, and possibly in the worst case a catastrophic change. Have I understood the point?

I responded:

That's an interesting understanding that as you will see complements the several ways of what has emerged from many other sources and that I suggest can be seen from both of my blogs. The real problem is that the assumption that allowed the existence of the retail monopoly has been gone since the OPEC embargo: just as Feed-in Tariffs don't work because it is impossible to forecast prices into the future, utilities are unable to forecast fair rates to retail customers. Why should government take sides to protect either one when we can "build a new model that makes the existing model obsolete."?

The most recent understanding that emerged from the first update to the post Law of the Situation: the utilities did not understand [this post] on the GMH Blog and the post Should utilities and solar be finally exposed to the "Law of the Situation"? Japan's example on the EWPC Blog that says exactly the same thing. The understanding is that there is no difference at all for governments to protect utilities based on dirty energy than to protect renewables with clean energy, for example, solar energy in Japan, by letting utilities believe that they own forever and ever their "native load," which include the whole of retail markets.

As we can understand the Tornado from Mr. Moore there are two approaches one old and one new. The old is based on Business to Business (B2C) markets, which are a follow up from what he called The Chasm. In that sense, the Tornado would support the idea of wholesale markets.

However, Mr. Moore described this year a new Tornado that operates on Business to Customers (B2C) markets on the 3rd edition of The Chasm, which support retail markets. This different B2C Tornado explains the systemic leverage available at the end of the above mentioned 1st update that says "By the way, this might be how the smart market process will let the new Steve Jobs connect the dots." Can we say now that this is "how the smart market process will let the new Steve Jobs connect the dots?" Can this be the difference between Smart Grids that are based on regulated B2B smart meters that fail to provide whole products to retail customers and Smart Markets that will provide whole products to retail customer once the proposal of the "new model that makes the existing model obsolete."

While under B2B markets that remain exposed to price volatility of fuels and variable energy renewable production which might "becomes skewed and instead of evolutionary change, we are led to a rapid uncontrollable change, and possibly in the worst case a catastrophic change," this is not so under rapid, for example, hourly feedback available under B2C markets that make the existing model obsolete.

First update: Should utilities and Solar be finally exposed to the "Law of the Situation"? The example of Japan.

Should #utilities and #solar be exposed to the Law of the Situation? #Japan's example @jonathan_soble @KateGalbraith http://t.co/9mIRzjjfSv
— Jose A Vanderhorst S (@gmh_upsa) March 24, 2015

Contrary to the main title of this December 2012 post, "Law of the Situation: the utilities did not understand," we need to admit that utilities understood very well how to avoid the Law of the Situation, as they have been able to bypass it for more than two decades (based on the 1992 U.S. Energy Policy Act). That bypass is as simple as keeping political the electricity crisis.

Contrary to that post, that admission is based on Bucky Fuller quote "You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete," which is presented and discussed in the post The end of soaring inequality can start with "demand-side economics" on electricity here on the GMH Blog,  which has 5 updates right now. There is a slightly different alternate version of that post, which has 24 comments at this moment on the EWPC Blog.

The most recent story of the avoidance of the Law of the Situation can be seen in the New York Times story Japan’s Growth in Solar Power Falters as Utilities Balk, written by Jonathan Soble on March 3, 2015. After quoting both solar advocates and utilities representatives, Mr. Soble says:

Like other countries that have promoted the technology with generous state support, Japan is also struggling with the financial and technical consequences of its rapid solar growth. Solar power here is costly for consumers because of high state-mandated prices, and handling the fluctuating output of thousands of mostly small solar producers is tricky for utilities. Necessary improvements in the infrastructure have not kept pace, experts say.

Missing from the story is that the same generous state support is what allows electric utilities to avoid responding to the Law of the Situation, since the guarantee of cheap energy was lost back in 1972 when the OPEC embargo happened. Utilities have been protected from the Law of the Situation "because of high state-mandated prices" which are no longer possible to forecast under fuel volatility, so rates approved by utility commissions privatize profits for utilities that increase with fuel volatility, while, for example, socializing the losses to retail customers, as wholesale customers know how to protect themselves. 

While "handling the fluctuating output of thousands of mostly small solar producers is tricky" by using politics, it calls for market innovations that are developed under the assumption of the guarantee cheap information. These are markets that self correct their failures under the Law of the Situation, as can be seen, for example, in the above mentioned blog posts The end of soaring inequality can start with "demand-side economics" on electricity. By the way, this might be how the smart market process will let the new Steve Jobs connect the dots

Law of the Situation: the utilities did not understand.

As a follow up to the GMH post Low cost power?, here's another valuable interchange under the EnergyPulse article, What to do when customers like gas rationing and politicians better than their utilities?, by Mark Gabriel, where Greg Tinfow wrote on 12.6.12 that:

Here in California, we generally have to beat a 2/3rds threshold for votes on any tax increases. Despite that high hurdle, people do vote to tax themselves--to the tune of $7 billion/year just a few weeks ago--when they know what they are getting for their money. The utility industry needs to catch up to the needs of the future, not the 1930s regulatory policy that they've operated under for 80 years. Hurricanes, renewable energy, and global warming provide the industry with an unprecendented opportunity to remake themselves into what they should have been all along, energy service providers rather than monopoly power producers. As tempting as a "tough love" strategy may be to those who believe IOUs are the root of all our energy problems, the reality is that they behave exactly like any other profit-oriented business, despite regulatory restraints stronger than just about any business. 

The future is going to require both a smarter energy infrastructure and a different kind of energy company than in the past. The transition is not going to happen overnight, and the cost of bringing the under-funded distribution infrastructure up to speed will not be cheap or easy. It is doable however, and the better utilities are at communicating both the costs and the benefits, the sooner we'll get moving forward.

That future of electric utilities is not at all doable. Jesse Berst SmartGridNews.com post Get ready! FERC spotlights 3 major challenges for utilities is introduced with “The bad news – there are big, big challenges looming for the electric utility industry. The good news – agencies and regulators are increasingly aware of these painful truths and, therefore, increasingly willing to discuss solutions. That was the message from FERC Chairman Jon Wellinghoff during a briefing on Capitol Hill this week.” But that good news is not at all for the utilities.

Instead what’s doable for utilities is in the third prediction of the EWPC article Three Smart Grid Predictions for Initiating the Global Power Industry Transformation: “Repositioning the utilities that missed the opportunities to learn the lessons of other industries is bound to be in a restricted T&D Grid space that will sooner or later be ‘painfully consolidated.’"

This is why! Ever since the 1980s, utilities have had an "... unprecedented opportunity to remake themselves into what they should have been all along, energy service providers rather than monopoly power producers," as Mr. Tinfow said. Please take a look at the article Why the Current Smart Grid Process Doesn’t Let the New Steve Job Connect the Dots in two key events where they lost that unprecedented opportunity: the Energy Policy Act of 1992 and once again in the development of the Integrated Energy and Communication Systems Architecture (IECSA) project, circa 2003.

The situation that utilities face today were clearly anticipated in 1982 in chapter 4 of John Naisbitt’s bestseller Megatrends: Ten New Directions Transforming Our Lives, on the "Law of the Situation: the railroads did not understand."

Suppose that somewhere along the way a railroad company, sensing the changes in its business environment, had engaged in the process of reconceptualing what business it was in. Suppose they had said, "Let’s get out of the railroad business and into the transportation business." They could have created systems that moved goods by rail, truck, airplane, or in combination, as appropriate. "Moves goods" is the customer-oriented point. Instead, they continued transfixed by the lore of railroading that have served the country so well - until the world change. 

Of this phenomenon Walter B. Wriston, chairman of Citycorp, in 1981 said: "The philosophy of the divine right of kings died hundreds of years ago, but not, it seems, the divine right of inherited markets. Some people still believe there’s a divine dispensation that their markets are theirs - and no one else’s - now and forevermore. It is an old dream that dies hard, yet no businessman in a free society can control a market when the customers decide to go somewhere else. All the king’s horses and all the king’s man are helpless in the face of a better product. Our commercial history is filled with examples of companies that failed to change in a changing world, and became tombstones in the corporate graveyard."