Mr. Jack Casazza,
President
American Education Institute
Distinguished Fellow of the IEEE
Thank you very much Jack for your very valuable, although free, contribution and advice. I am honored for the pleasure of your remarks, which I believe will be taken very well by all of the stakeholders of the power sector of the Dominican Republic and the world.
While I plan to use them for other contexts, the initial and most relevant context is a message, about the deregulation that has taken place here, to all of the power sector agents in the Dominican Republic, its government officials, the multilateral institutions that are aiding us, and our private sector representatives.
I can tell you first hand that our faulty deregulation has made more damage than many other places, because of the lack of institutions that has kept the vicious circle of financial unsustainability alive. The damage here has led to 20 to 25% rotating blackouts, basically by the widespread misunderstanding of many experts that the electric power sector ends at the customer's meters.
Under an IMF program, the Dominican government bought the idea from an expert economist contracted by the World Bank (WB), that (suggested incorrectly) financial sustainability meant to ration customers according to how much is collected from the circuits, without suggesting (I believe) to compensate paying customers. The lack of compensation has distorted even more the situation, increasing unnecessarily the need for subsidies in the year 2005 from 350 million dollars programmed to near 600 million dollars executed. A much stronger vicious circle underlies the situation now.
The government has scheduled over 800 million dollars for subsidies in 2006, which the WB and the IMF have not accepted. Starting before 2005, I advised freely in many occasions that paying customers should be compensated to complete the necessary feedback to turn the vicious circle into a virtuous circle. I believe that the value destruction in our economy is the largest per capita in the world, the power infrastructure cost us more than two or three times what it should cost. Most of the value destruction is not captured by any party, as it becomes lost food and materials, a lot of noise, and smoke, and inefficiently burnt fuels, etc., because of the lack of coordination of un-programmed rotating blackouts.
The most important aspect of coordination is to balance risk of system crashes and the cost to the economy in a well designed system. As a system planner, at the beginning of the 80s, I learned first hand from Puerto Rican planners, which had made a terrible mistake of installing 2 oversized units, how to use probability theory (LOLP ideas) to plan the expansion of generation and transmission system. Later at the end of the 80s I made an expansion plan myself. I have been recently synthesizing that idea as supply side risk management.
As you know perfectly well, the same basic ideas apply to power system operation, using contingency planning to avoid risk of system crashes. A robustly designed system has no substitute. However, deregulation investor looking to gain market power was moved to develop oversize units. For example we have a 300 MW unit for a system operating at 1,200 MW after 25% "demand management." Total lack of coordination has increases as a result.
Recently the Dominican government had a plan to develop 2, 1 x 600 MW coal based remote sites. After complains I made, they change to 2, 2 x 300 MW coal based remote sites. I believe they are still too large for our system, but no probabilistic minimum cost simulations have been made by the government office in charge.
In our country we use incremental cost for generation dispatch (short run marginal energy cost). However, oversized units, and many transmission restrictions, and very high costs generating units have made dispatch very inefficient. In addition, the lack of short run marginal supply security cost, I believe, is the reason why gaming the market was and is so easy, here, and everywhere. Professor Schweppe recommended that, but as far I know nobody took it into account.
We have an institution named the "Coordinating Body (CB)," which is not doing at the right level the coordinating and cooperating job it should be doing. It was borne with a contract signed by all market agents, under private decision making which the regulator may overturn. I was on the board of director of the initial CB administration, but were unable to sell my cooperation and coordination suggestions most of the time.
Today the CB is controlled by the government and its politics, although the agents as contractual parties are free to take your bright suggestions an amend it. Although I may be wrong, I perceive that the new foreign managers of the CB, instead of being the leaders, as the first foreign managers try to, are following and "respecting" the regulations, which needs a lot of updating. I hope the agents and the government takes your wise advice and greatly reduces the harm done by the lack of coordination and cooperation.
On September 2004, I decided to become an Interdependent Consultant on Electricity. The reason of being "interdependent" is, as Steven R. Covey says, because interdependence is much more valuable than independence. Interdependence is systemic, not based on simple cause and effects, just like coordination and cooperation are. I have been available, but have not landed one consulting job yet from the CB.
I was contracted on 1996 to offer a solution to the power sector problems of the Dominican Republic. My conclusion was that electricity could be transformed into a business just like most businesses (wholesale, retail, customers), and that Dominicans had the opportunity to become leaders on underdeveloped countries on retail marketers of electricity. In 1998, I identified the emergence of a vibrant retail marketing cluster. This year I made the following
presentation to the PLMA, which can turn around the electricity business of the country, by making it very reliable with the complement of demand side risk management to the supply side risk management.
I completely understand your message to concentrate on the power system, but I tell you that I am actually doing a balance effort on both counts. A true deregulation as I am suggesting takes care entirely of the coordination and cooperation difficulties of faulty deregulation. Retailers become in essence very knowledgeable customers that participate in both the wholesale and retail markets, for the long run (centered on energy efficiency) and short run (centered on demand response). The T&D Companies concentrate their effort with the help of CB on the implementation of the new regulations, for planning and operating the system.
Thank you again,
José Antonio
CC: Power system agents
Government of the Dominican Republic
Multilateral institutions
Private sector representatives
On 12/29/05, Jack Casazza wrote:
Dear Jose Antonio,
I have been reading the discussions between you, Prof. Banks and others and did not comment previously because I did not have anything to add. I thought perhaps I could be helpful at this time by providing a few comments, as follows:
- The restructuring and deregulation of the electric power industry was a serious mistake in the USA and in many countries, harming the general public.
- Competition has produced some benefits, particularly in the improvement in the operation of generation plants, but caused a severe decline in the coordination needed between the participants in the planning, design and operation of the generation and transmission systems of electric power grids. The reduction in the number of companies involved can produce some future savings.
- Generation dispatch is based on quoted prices rather that incremental production costs, increasing total production costs.
- Present and long range costs have been increased significantly since each company made decisions based on its own profits and not what was best for the overall grid in the long run, i.e., the overall public interest. (In the USA past studies have shown that the savings from coordination exceeded $20 billion a year before restructuring. Many of these prior benefits have been lost.)
- In most cases the changes that have been made in the industry structure and procedures cannot be undone, so we have to proceed by trying to use what is good from restructuring and removing or correcting the many harmful things that have resulted.
- I believe the greatest harm has been the loss of cooperation and coordination between those involved in the power industry. A way to correct this learned from the past is through "coordination contracts" signed by the participating companies that provide for the planning, design and operation to be performed as if they constituted a single company. In such contracts the long range lowest total cost solution and lowest cost operation procedures were selected even if it meant that one company had to spend extra funds or give up some profits, as long as it resulted in a lower overall cost or was necessary to preserve reliability, even if in another system. These contracts provided for the compensation of a company for its extra costs or profits foregone plus a share of the overall benefits resulting to the public. (I have negotiated such contracts as far back as 50 years ago.)
There is much more analysis needed, but perhaps the comments above will get you thinking about the power system, not the markets.
Best regards,
Jack Casazza
Note to others receiving this message. Please feel free to quote or use it as you wish.
Jack Casazza
