IMF insists on eliminating subsidies

According to the IMF the Dominican government has two options to compensate for the resources that it will lose when it abolishes the exchange commission tax on dollars used to import anything into the Dominican Republic: one is to continue collecting the tax all year long, and the second is to eliminate the subsidies on propane and electricity.
A 'source' close to the government has told El Caribe that the IMF thinks that the government has to take a more "drastic" approach to the question of subsidies and that it should seriously think about ending them altogether. The source said that with the postponement of DR-CAFTA, the government has six months to keep up the exchange commission tax and obtain the finances it needs to balance out its income, but the source also questions what will happen when the time comes to enter the treaty. The source added that the government will have to ! find some way to get the money, and it is looking at cutting out the subsidies as one way to do it. While the IMF has not formally asked the Dominican Republic to eliminate the subsidies, it is obvious to the source that this will be a major theme for discussion this coming year. One of the goals set out by the IMF Stand-by agreement is the reduction of the electricity sector deficit, which is expected to reach US$800 million or RD$27.2 billion in 2006. However, this past Monday, CDEEE administrator Radhames Segura told reporters that the government had no plans to remove the subsidy. He pointed out that the subsidy was, indeed, a very important issue for the government, especially in view of the fact that what was originally set as a US$350 million subsidy, turned into a UD$502.3 million subsidy.

Retail Market Deregulation Dialogue on EnergyPulse Part 3

An updated comment to Free All Wisconsin Utilities to Make Money Helping Customer's Save Energy.

I have added new comments on the true deregulation to A Few More Unfriendly Comments on Electric Deregulation. One of them is in response to Mr. Martin-Giraldo is centered on:

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 deregulated electricity market, with retailers innovative business models, without price controls, a new value chain (generator, retailer & customer), while re-regulating the wires monopoly.

While agreeing with Harry and Kevin on the need to do without subsidies or regulation, I urge Don specially to look at it. There is no longer a need to have retail price control regulation. The theory and practice is available to support the development of innovations in retail marketing of electricity.

Some Friendly Comments on True Electric Deregulation Part 4

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 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 electric marketplace. The comments that follow are in addition to my earlier 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 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 Spot Price Based Energy Marketplace. That I suggest is the required change in firm organization that 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" deregulation is centered on those perceptions of the customers, which introduce the need for retail marketing and retail competition, which, unfortunately, is the "true" deregulation that the late Fred C. Schweepe had no time to 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.

Item 3: had a note: "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.

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) 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 <mailto:vanderhorstsr@gmail.com> 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 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.

Eficiencia Energética: Opción de Menor Costo de Electricidad

De acuerdo a la Environmental Protection Agency (EPA) de los Estados Unidos la eficiencia energética salía a 3 centavos de dólar el kilovatio-hora en el año 2002. No cabe duda que es el medio idóneo para reducir los costos de electricidad para la economía dominicana. El tiempo para lograr los beneficios es también mucho menor. ¿Porqué insisten en invertir en centrales a carbón, si tenemos una opción de mucho menor costo? En el 2006 la factibilidad es mucho mejor, dado los precios relativos de los combustibles eran mucho menores.Miren a la lámina 5 de la siguiente presentación.

Some Friendly Comments on True Electric Deregulation Part 3

Esta es la parte común de las comunicaciones que envié a los expertos en electridad que mencioné en la respuesta al Profesor Banks.

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 taht under COE 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.

Some Friendly Comments on True Electric Deregulation Part 2

Re: Felicidades

Muchas felicidades a ti Luis también en Noche Buena y Navidad y tu linda familia dominco-mexicana. Igualmente, muchas felicidades también a todos los copiados.

Espero que el año que viene los dominicanos dejemos de lado las diferencias y adoptemos un visión compartida del sector eléctrico, que sirva tanto para las empresas y las oficinas públicas, como para las residencias.

Muy cariñosamente,

José Antonio


On 12/24/05, Luis H. Arthur. S. <luarthur@verizon.net.do> wrote:

Desde mi exilio con luz, les deseo a todos una feliz Noche Buena y Navidad, y un ano prospero en realizaciones personales y nacionales, para Uds. todos y sus familiares.

Nos volveremos ver si Dios Quiere, por el tiempo que el decida.

Luis

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No virus found in this incoming message.
Checked by AVG Free Edition.
Version: 7.1.371 / Virus Database: 267.13.13/197 - Release Date: 12/9/2005

--
José Antonio Vanderhorst-Silverio, PhDInterdependent Consultant on ElectricityBS ´68, MS ´71 & PhD ´72, all from Cornell UniversityValued IEEE Member for 35 mailto:Years.javs@ieee.orgResearchand practice areas, and interests: systems architecture, systems thinking, retail marketing, customer orientation, information systems requirements and design, market rules, contract assistance.

Some Friendly Comments on True Electric Deregulation Part 2

Thanks Prof. Banks for your humble response.

I certainly can only claim to know about deregulation in the Dominican Republic myself, which is one of the worst cases in the world. Our educational system is lousy, and our power system has been expensive and unreliable for many years. Our power sector is right now is under systemic collapse, totally unsustainable, and kept going only on very large, and unsustainable subsidies and 20-25% rotating interruptions ordered by the World Bank and the IMF. Most customers with economic capacity have backup systems. However, I am not an anti-deregulation ideologist, because I firmly believe that our power sector can be turned around with true deregulation, as can be inferred from my presentation at the Spring 2005 Peak Load Management Alliance Conference.

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 taht under COE 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.

Best regards,

José Antonio

Some Friendly Comments on True Electric Deregulation

Some Friendly Comments on True Electric Deregulation

Profesor Ferdinand Banks ha escrito el artículo A Few More Unfriendly Comments on Electric Deregulation en EnergyPulse que yo he aprovechado para defender mi hipótesis de una liberación verdadera del sector eléctrico. Esto es lo que le escribí:

Thank you, Professor Banks, for outlining the dark side of power sector restructuring (faulty deregulation). As I told you before, I have auto financed my research on Customer Oriented Electricity (COE), which becomes an entirely new paradigm that addresses the core problem identified by Jack Casazza in "Pick Your Poison." As an engineer, under the vertically integrated paradigm, I completely agreed with Jack’s article under faulty deregulation. By the way, I have followed his good work and papers with interest for some time. I agree also with Prof Banks: How did the farce happen?

However, under COE, even with oligopolies on the wholesale market, true retail competition can be organized to pursue economic efficiency (I don’t claim to be an economist), leading to maximum welfare. Please take a look at my comments (and their hyperlinks) under the following article, where I explain uniqueness of the electric industry, price reductions only after a while, the need for a new value chain, physical hedging (related to item 3 and 4 academic arguments at the end of Prof. Banks article), etc. As you can see my work is not based on ideology, but on careful insights, systems architecture and design. Below I add additional comments as an antidote to the faulty deregulation poison, which by all means are not based on ideology at all.

Jack’s assumption that there can be no product (actually service) differentiation is true under a deterministic world, but false on a probabilistic one. Every customer has a perceived supply security requirement (which can vary) that minimizes his/her costs of electricity in the long run. By developing and applying demand response technology, an opportunity to develop new competing business designs innovations can be implemented to satisfy long run least cost power sector development and benefit from increases in scale (item 1 of Prof. Banks academic arguments: is discussed in my last comment to said article). Actually, under systemic competitiveness that would change from least cost to maximum value added.

Under the old paradigm, I also agree with Jack that “Busy signals are not acceptable when a user flicks a switch to light a room.” However, under the new paradigm demand response becomes a condition of service, meaning that customers with low supply security requirements need to respond more frequently, but don’t have to pay (for something they don’t need) the same average rates as customers with high supply security requirements. The result is (or will eventually be) positive, when transaction costs are lower than the value destruction produced by the average rates (see my comments under the article, about some utilities that have justify the investment on other benefits).

On today’s faulty deregulations, short run spot prices do not signal correctly the lack of reserves permitting gaming. On true deregulation, competitive retailers will develop strategies to control price spikes from developing in the first place. They will do that by deploying demand response and energy efficiency investments (item 2 of Prof. Banks academic arguments).

Mr. Casazza though that customers purchasing small generators was due simply because low reliability. Today is known that the penetration of distributed resources is due to disruptive technologies that replaces in many cases efficiently costly peaking units located far from load centers, as well as to represent very well the differentiated requirements of customers supply security (reliability).

Clearly, places that have deregulated already (with agreements of the weird sort, as Professor Banks calls them) will find very difficult and costly to change to true deregulation (and very real choice) of electricity. Under true deregulation efficient generators will be able carry high power factors, but will be unable to earn the huge profits they got under faulty deregulation. So I agree with Professor Banks that to be the case for those countries he mentioned unable to migrate to true deregulation.

Closing questions to Professor Banks:

1. Do you think that Jack’s comment “The changes resulting in these massive errors were a reaction to many years of unfair regulation by often-incompetent regulators, many of whom were concerned with their political and professional futures rather than protection of the consumers” is going to go away anytime soon? It seems that Southern Company isn’t the rule. I prefer to do without with utilities winning cases to regulators under vertical integration, and limiting it only to the wires investments monopoly regulation.
2. Do you see the possibility to organize true retail competition (no price controls) under prudential regulation, even when there are generating oligopolies?
3. What do you see lacking in the approach I suggest?
4. As some retail marketers will become global companies that compete in several local markets, can they become the target for fusions and acquisitions to develop oligopolies? Do you anticipate how to mitigate it?
5. I see retail marketers’ economies of scope, by taking charge of other services, like telephone, gas, water, and even insurance. Can this be a means for mitigation under question 2?
6. Knowing that value added electricity will come from knowledge intensive coordination of highly distributed activities (some optimal percentage of demand side risk management), instead of physical investment on peaking reserves to be used just a few hours a year (100% supply side risk management). Do you still think that vertical integration is a real vision for the future?

Those are my friendly comments on true retail deregulation.

Merry Christmas to you all.

© José Antonio Vanderhorst-Silverio, PhD. 2005.

Teorizando con Francisco Méndez sobre Palos a Ciegas

Muy estimado Francisco,

Anoche, en la reunión de la CDEEE, usaste el término despectivo teorizar para referirte a las propuestas que he venido realizando a través de la Bitácora Digital del GMH. Luego de pensar cuidadosamente la razón por la que empleaste dicho término, y por la alta inteligencia que posees y el respeto que te tengo, he llegado a la conclusión que estas solicitándome ayuda. Es en ese sentido que te envío esta atenta y oportuna respuesta.

Como bien comprendes, mi trabajo teórico-práctico simplemente identifica la existencia de subsidios cruzados encubiertos por seguridad de suministro a consecuencia del irrespeto de un objetivo básico de la Ley General de Electricidad, que obliga a respetar los derechos de los consumidores discriminados a consecuencia de la gestión de la demanda a ser compensados siempre que cumplan con su obligación de pago. Sabes muy bien que no existe ninguna teoría para sustentar la discriminación sin compensación a los clientes que pagan.

Ciertamente, ustedes necesitan de una teoría que respalde sus prácticas, porque una práctica sin teoría es ciega. Evidentemente, si siguen en el 2006 con la misma práctica, lo que resultará serán más palos a ciegas. El Banco Mundial se lavó las manos diciendo que ustedes iban a estudiar la propuesta que hicimos y te sugiero que tomes el liderazgo que te han conferido al nombrarte Superintendente. Esa es una decisión institucional que debes tomar.

Esperando haber interpretado correctamente tu solicitud de auxilio.

Un fuerte abrazo,

José Antonio


--
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.

José You Are Close... José Estas Bien Cerca...

Dear VIP,

Go directly to the Index below.

Best regards,

José Antonio Vanderhorst-Silverio, PhD

Estimada y estimados VIPs

Vayan directamente abajo al índice.

Con mucha estima,

José Antonio Vanderhorst Silverio, PhD

--------------------------------------------------------------------------------------

GRUPO MILLENNIUM HISPANIOLA

BLOG INDEX FROM DECEMBER 15 TO 21, 2005.

INDICE DE LA BITACORA DIGITAL DEL 15 AL 21 DE DICIEMBRE, 2005

1. Retail Market Deregulation Dialogue on EnergyPulse Part 2

21 Dec 2005

Un nuevo comentario que respalda mis planteamientos, aunque asegura que me quedo corto, aparecer en seguimiento a Retail Market Deregulation Dialogue on EnergyPulse. Veamos:. Len Gould. 12.21.05 says:. Jose: You're close, just not going ...

2. Retail Market Deregulation Dialogue on EnergyPulse

21 Dec 2005

En Free All Wisconsin Utilities to Make Money Helping Customer's Save Energy (Energy Management) - Stephen Heins, VP of Corporate Communication, Orion Energy Systems, me contestó lo que sigue y le respondí ...

3. Apliquemos el Recetario de Aznar para Lograr un Centro de ...

20 Dec 2005

Anoche fue cuando tuve la oportunidad de escuchar una gran parte de las recetas para un buen gobierno que José María Aznar ofreció en la Fundación Global. Me encantó la explicación del aumento de 50% en el empleo acontecido en España en ...

4. Free All Customers Everywhere

19 Dec 2005

I have added a comment to the article "Free All Wisconsin Utilities to Make Money Helping Customer's Save Energy," by Stephen Heins, VP of Corporate Communication, Orion Energy Systems, on EnergyPulse, that reads as follows: ...

5. DR1: Business leaders want to "float" electricity

19 Dec 2005

GMH takes note of the considerations of the leading business sectors of DR. Again, we advise that the contracts should be renegotiated thinking on the future, and not just on short run competitiveness, but on real systemic ...

6. Small is Beautiful: Supporting Greater Wind Energy Usage

17 Dec 2005

I made a comment on "Energy Storage - Supporting Greater Wind Energy Usage," by Richard Baxter on EnergyPulse, that reads. Small is beautiful. It is now clear that distributed resources cannot be compared with central stations, ...

7. Letter to Dr. Alfred E. Kahn

17 Dec 2005

Dear Professor Banks, Below you may find a letter that I just sent to Dr. Alfred Kahn. If you have a comment regarding the letter, please don't hesitate to make it. Best regards, José Antonio Vanderhorst-Silverio, PhD. Dear Dr. Kahn ...

8. DR1: Leonel promotes technology

16 Dec 2005

President Leonel Fernandez wants the Dominican Republic to emulate the state of Florida in becoming a "technological corridor". He spoke yesterday at the IT Technological Forum of Florida, an activity sponsored by Governor Jeb Bush. ...

9. Power Encounter: Lessons from the Failure of U.S. Electricity Restructuring

16 Dec 2005

Power Encounter es el blog de Jesús M. Martín-Giraldo, de Madrid, España. Su introducción es: Power Industry is experiencing a deep reform. Advances in technology are seen as drivers to improve electricity business performance ...

10.
Re: Mensaje de Navidad: Solución al Problema Eléctrico de la República ...

16 Dec 2005

Muchas gracias Radhamés, porque tu aporte enfatiza y ayuda a aclarar el mensaje de Navidad. La idea de mucho material colgante se refiere a todos los funcionarios públicos de los cuatro poderes, así como los líderes del sector ...

11. Re: Mensaje de Navidad: Solución al Problema Eléctrico de la República Domin...

15 Dec 2005

Hola José. Muchas gracias por felicitarnos. Hoy ya son 7 meses de Bitácora y muchos otros esfuerzos antes de eso. Creo que realmente inicié esta fase en 1993, cuando empecé a opinar con el Proyecto de Ley General de Electricidad ...

Retail Market Deregulation Dialogue on EnergyPulse Part 2

Un nuevo comentario que respalda mis planteamientos, aunque asegura que me quedo corto, aparece en seguimiento a Retail Market Deregulation Dialogue on EnergyPulse. Veamos:

Len Gould

12.21.05 says:

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.

Jose Antonio Vanderhorst-Silverio says in response:

12.21.05

Thank you very much Len for the “lead” and a sharp comment.

Being conservative, I agree with you if there were only the short run market problem. However, there is also a long run problem for which retailers need to coordinate in the wholesale market. This is where I understand boom bust (long run risk management) power system behavior should be managed from the demand side by retail (and wholesale) marketers. Marketing service offerings need to be designed based on what will be coming up in the future.

In addition, while most price response marketplaces have been designed with real-time, day ahead, and hour ahead markets, I strongly believe there is an important week ahead market mainly (some industries would classify also) for the low end residential market, where retailers need to participate on the wholesale market to complete week-ahead unit commitments.

However, I don’t dismiss "just not going far enough," because I am over 60 years old now, having work through design, operation, planning, management, and research of vertically integrated and (faulty) deregulated power systems, which don’t let me see very well outside of the box. For those simple reasons, Len, maybe I missing something really important, so please advise!

Regards,

José Antonio

Retail Market Deregulation Dialogue on EnergyPulse

En Free All Wisconsin Utilities to Make Money Helping Customer's Save Energy (Energy Management) - Stephen Heins, VP of Corporate Communication, Orion Energy Systems, me contestó lo que sigue y le respondí

Jose,

While I truly favor free markets for most goods and services, I have yet to find a competitive solution to the "last mile" problems for telecommunications and energy. In addition, you certainly must have noticed that the U.S. and most of the 50 states have retreated from deregulation over the last five years, because of reckless acts of manipulation by Enron, et al.

This is a long way of saying that my article is dealing with the real world of 2005-2006 and not some hypothetical free market experiment.

As for your point about monopolies ( and the "outdated business model "), the solution lies with state regulators who establish aggressive energy efficiency standards for the utilities so that everyone benefits from meeting those requirements.

Steve

Thank you very much Steve for your kind response. I am sorry for the extended response I will give you and the readers, but I don’t have time to make it shorter, even with the addition of my earlier comments.

I understand that the telecommunication business has a problem with the last mile. However, I have proposed elsewhere that the electricity industry has a problem with the first minutes. The problem with the first minutes results when customers are not able to respond to prices, and is resolved with demand response. It was precisely the lack of demand response that lets spot prices increase beyond reasonable values, leading to generator market power and congestion.

If I understand correctly, states now are supposed to study how useful demand response is, and the most important application is precisely to implement retail deregulation. To have a real social impact, states regulators should look deeply into liberating retail markets again.

I believe to have understood what is needed to design a true deregulation model for the electric sector. Dr. Alfred Kahn said some time ago that: "I am worried about the uniqueness of the electricity markets. I've always been uncertain about eliminating vertical integration. It may be one industry in which it works reasonably well."

That uniqueness is associated with the non-lineal nature of the risk of system failure. Physical risk of system failure, linked to high prices in deregulated systems, used to be managed as a supply security risk under vertical integration. The apparently large costs of generation and transmission reserves required, under vertical integrated utilities from resulting risk management planning, became the target of inefficiency identified by economist and policy makers at the outset of deregulation.

By reducing reserves and creating congestion, here and there, long run risk of failure was thus increased by deregulation of wholesale markets and incomplete deregulation of retail markets. Associated with the physical risks was increased value destruction, and unstable markets. I believe those to be the structural reasons of the uniqueness of the electrical industry.

In the mean time, as technology has progressed, end-customers perceived sensitivity to shortages has spread sufficiently as to make invalid the assumption that customers can be classified in neat classes to pay average rates. In a sense, that sensitivity is the basis for differentiating customers, and the essence for a retail market to be developed. In addition, progress has also brought us the new technology of Demand Response together with an Automated Metering Infrastructure (AMI).

DR technology can complement the mitigation of physical risk of system failure and spot price sharp increases, as a non-linear feedback mechanism to repositioned systems reserves, in time and space, much better than lumpy investments in generation, transmission, and distribution. By developing a market on customers differentiated supply security (sensitivity to shortage) requirements, an efficient rationing system can be developed. Investment on an AMI is apparently feasible just on the operational benefits to the distributor.

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 requiresd for the development of new business models on retail marketing, and I wish to be there.

© José Antonio Vanderhorst-Silverio, PhD

Apliquemos el Recetario de Aznar para Lograr un Centro de Producción de Primer Nivel

Anoche fue cuando tuve la oportunidad de escuchar una gran parte de las recetas para un buen gobierno que José María Aznar ofreció en la Fundación Global. Me encantó la explicación del aumento de 50% en el empleo acontecido en España en sus 8 años de gobierno. Me encantó la importancia que le dio a la confianza y a la estabilidad institucional. Me encantó la receta de dejar de lado la demagogia y el populismo. Me encantó la receta de acordar reglas que no se tocan orientadas al futuro de la nación en las contiendas electorales.

Es sobre esas reglas que cabe concentrar la atención de separar el sector eléctrico de las elecciones que están sobre el tapete. Un sistema eléctrico confiable se destruye cuando la electricidad deja de fluir sorpresivamente, no importa tiempo haya pasado con buen servicio. Los dominicanos tenemos una gran oportunidad para transformar nuestro sector eléctrico en uno tan o más confiable que el de muchos otros lugares del mundo. Al igual que Irlanda o Inglaterra, un servicio eléctrico desarrollado alrededor del mercadeo de electricidad al detalle, sin control de precios, incrementará la credibilidad y permitirá generar una confianza sin igual del sector eléctrico.

Ya en junio 17 publicamos la nota Servicio Eléctrico de Calidad Comercial y Centros de Producción de Primer Nivel, que expresa claramente el rumbo que debemos seguir. La atracción de inversión extranjera de los Estados Unidos y Europa a consecuencia de la confianza que generará el sector eléctrico, generará a su vez exportaciones dominicanas al exterior. La inversión extranjera también generará un aumento del consumo interno y el fortalecimiento de los negocios locales que los abastezcan, basados en la competitividad sistémica. En definitiva, al igual que España, el empleo no puede sino incrementarse decididamente si desarrollamos el país como un centro de producción de primer nivel. Positivamente, eso puede ocurrir si los sectores públicos y privados desarrollan un liderazgo fuerte y unificado.

Que el Señor los ilumine a todos,

José Antonio

Free All Customers Everywhere

I have added a comment to the article "Free All Wisconsin Utilities to Make Money Helping Customer's Save Energy," by Stephen Heins, VP of Corporate Communication, Orion Energy Systems, on EnergyPulse, that reads as follows:

The same situation of Wisconsin is being experimented in many other jurisdictions around the world. Regardless of the location, economic efficiency in the electric power sector results by investing in a proper mix of supply side and demand side investments (energy efficiency, and demand response). As explained by Mr. Heins, and others, both demand side investments are unnatural acts for utilities; the business models are just not designed to perform those acts very well. I think the discussion about energy efficiency on “Energy Bill 2005 – A Waste of Time?” might result useful to this discussion. Wisconsin, and other jurisdictions, should give
serious consideration to implement true retail (and wholesale) deregulation as suggested in "Strategic Perspectives on Utility Enterprise Solutions." Hopefully, Sooner or later, customers will be free everywhere.

DR1: Business leaders want to "float" electricity

GMH takes note of the considerations of the leading business sectors of DR. Again, we advise that the contracts should be renegotiated thinking on the future, and not just on short run competitiveness, but on real systemic compettiveness. Systemic competitiveness means that all customers get increased value added from electricity. To get such value additions across the board, the new paradigm of customer oriented electricity needs to be statrted, as soon as possible so that the Cluster of Retail Marketing of Electricity takes off before the effective protection is completely wiped out.

Some of the leading business sectors of the Dominican Republic, including the Federation of Industrial Associations (FIA), the Dominican Chamber of Merchant Businesses and the National Young Business Association (ANJE), consider that the IMF's idea that the price of electricity should be allowed to "float" on the local market is a good one, as long as the costs of generation and distribution are clear and transparent. The different representatives agreed that as long as the current contracts are re-negotiated and the costs are transparent, they felt that the IMF demands were "reasonable." Most believed that if this were to come about, the costs of electricity would drop from the current 23c a KWh to about 10c or 11c the KWh (kilowatt-hour). The key point is that the contracts have to be renegotiated, since with the current contracts in place the price of electricity would reach 40! c a KWh under current conditions. According to the superintendent of electricity, Francisco Mendez, the World Bank is requiring the DR to "float" the price of electricity as part of the prerequisites for the disbursement of the US$150 million loan to shore up the energy sector. The low reliability and the high cost of electricity in the Dominican Republic is a major factor working against the competitiveness of most business that rely on the public electricity grid.

Small is Beautiful: Supporting Greater Wind Energy Usage

I made a comment on "Energy Storage - Supporting Greater Wind Energy Usage," by Richard Baxter on EnergyPulse, that reads

Small is beautiful. It is now clear that distributed resources cannot be compared with central stations, because of generation, transmission, and distribution capital investment requirements and corresponding losses, and differences in reliability. Germans are using the statistical firm capacity that is available from widely distributed wind projects, which make better use of system capacity. Large wind farms need to be looked at very carefully, because the local efficiency of strong wind farm may block many not so efficient, but effective, widespread wind projects close to the loads, which may eventually result in less total costs.

Letter to Dr. Alfred E. Kahn

Dear Professor Banks,

Below you may find a letter that I just sent to Dr. Alfred Kahn. If you have a comment regarding the letter, please don't hesitate to make it.

Best regards,

José Antonio Vanderhorst-Silverio, PhD

Dear Dr. Kahn

I am a Cornell graduate, who believes to have understood what is needed to design a true deregulation model for the electric sector. I am told you have said sometime ago: "I am worried about the uniqueness of the electricity markets. I've always been uncertain about eliminating vertical integration. It may be one industry in which it works reasonably well."

The uniqueness is associated with the non-lineal nature of the risk of system failure. Physical risk of system failure, linked to high prices in deregulated systems, used to be managed as a supply security risk under vertical integration. The apparently large costs of generation and transmission reserves required, under vertical integrated utilities from resulting risk management planning, became the target of inefficiency identified by economist and policy makers at the outset of deregulation.

By reducing reserves and creating congestion, here and there, long run risk of failure was thus increased by deregulation of wholesale markets and incomplete deregulation of retail markets. Associated with the physical risks was increased value destruction, and unstable markets. I believe that to be the structural reasons of the uniqueness of the electrical industry.

In the mean time, as technology has progressed, end-customers perceived sensitivity to shortages has spread sufficiently as to make invalid the assumption that customers can be classified in neat classes to pay average rates. In a sense, that sensitivity is the basis for differentiating customers, and the essence for a retail market to be developed. In addiction, progress has also brought us the new technology of Demand Response together with an Automated Metering Infrastructure (AMI).

DR technology can complement the mitigation of physical risk of system failure and spot price sharp increases, as a non-linear feedback mechanism to repositioned systems reserves, in time and space, much better than lumpy investments in generation, transmission, and distribution. By developing a market on customers differentiated supply security (sensitivity to shortage) requirements, an efficient rationing system can be developed. Investment on an AMI is apparently feasible just on the operational benefits to the distributor.

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. I will be very glad if I receive a comment from yourself on this matter.

Best Regards,

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.