Market Vs. Market: When Anybody Wins, Everybody Wins

1. Please Blame the Deregulation and Regulation Fiascos Parte 19
7 May 2006
Len, think of the banking sector in the 1930’s. How in the world did they transition from chaos to an open market where the little old lady was not at the mercy of large banks? Think of Roosevelt facing a systemic crisis in which he ...

2. Please Blame the Deregulation and Regulation Fiascos Parte 18
7 May 2006
Len Gould has ask me to satisfy him with a response:. Mr Vanderhorst-Silverio: Can you describe for me how you propose to transition from the present over-regulated "model" to an open market model without placing all (esp. small ...

3. Please Blame the Deregulation and Regulation Fiascos Parte 17
7 May 2006
Dear Prof. Banks, I have taken Dick's bet as mine: "I bet the failure to deregulate would fail. I would never bet against actual deregulation. You are welcome to your opinion about deregulation, but consider Dr. Vanderhorst-Silverio’s ...

4. Please Blame the Deregulation and Regulation Fiascos Parte 16
7 May 2006
Thanks Dick, My original statement had to do with the issue that regulators are not the real winners or losers. The central idea was that we don't need them at all as intermediaries in Electricity WPC for the customer. ...

5. Please Blame the Deregulation and Regulation Fiascos Parte 15
7 May 2006
Dick Maclay has added the following comment to the EnergyPulse article Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices in response to my last post. Jose Antonio, I followed your links, ...

6. Please Blame the Deregulation and Regulation Fiascos Parte 14
6 May 2006
Prof. Banks and other Gentlemen, Ferdinand is correct about riots in the Dominican Republic. The riots came by a big misunderstanding of consultants and multilateral organizations about the impact of irrational rationing. ...

7. Please Blame the Deregulation and Regulation Fiascos Parte 13
6 May 2006
Ferdinand E. Banks added another comment to EnergyPulse on this series,. Jose, do you know the song 'I hear you knocking but you can't come in? ' Well, we've almost got the same problem here, except that although the door is open and ...

8. Please Blame the Deregulation and Regulation Fiascos Parte 12
6 May 2006
Another article can be written with the title of Avoiding the Separation Fallacy, to show that the extension of Schweppe's mental model might be the winning form of restructuring. Most of the arguments are dispersed in EnergyPulse and ...

9. Please Blame the Deregulation and Regulation Fiascos Parte 11
51 minutes ago by José Antonio Vanderhorst Silverio, PhD
Mr. Maclay and other Gentlemen, Thanks Dick for your comment. I like very much the qualifying insights to my humble posts. My response has two parts. In this one I address paragraphs 2, 3, and 4. In the second I will write about the ...

10. Please Blame the Deregulation and Regulation Fiascos Parte 10
6 May 2006
Gentlemen, I forgot to acknowledge that my previous message was also intended to Mr. Casten, Mr. Swinand, Mr. Malinowski, Mr. Pflaum, and Mr. Tanton. Today I am very busy, but to keep the ball roling I will answer Steve, and partially ...

11. Please Blame the Deregulation and Regulation Fiascos Parte 9
6 May 2006
Ferdinand E. Banks has posted another comment:. The consumers and legislators who bought the deregulation scam bought it because they were told that electricity prices would be lower. Like me, the average rate payer doesn't care about ...

12. Please Blame the Deregulation and Regulation Fiascos Parte 8
6 May 2006
Dick Maclay is suggesting that my insights be considered in the following quote:. Len, Southwest was profitable for years offering lower fares than American, while American lost money. That speaks to overall efficiency. ...

13. Please Blame the Deregulation and Regulation Fiascos Parte 7
6 May 2006
Steve Rozenman responded positively to my post on EnergyPulse as follows:. Jose Antonio I read your recent comments in the above reference. You definitely present a consistent and rational view on the prospect of successfull ...

14. Please Blame the Deregulation and Regulation Fiascos Parte 6
4 May 2006
Ref: Please Blame the Deregulation and Regulation Fiascos Parte 5 To Mr. Golden, Mr. Prof. Banks, Mr. Maclay, Mr. Gould, Mr. Rosenman, and Mr. Olivier. I suggest that the article thesis is mistaken by being based on Hogan's mental model ...

15. Please Blame the Deregulation and Regulation Fiascos Parte 5
4 May 2006
© 2006. José Antonio Vanderhorst-Silverio, PhD Interdepedent Consultant on Electricity There are 3 mental models behind restructuring: Enron's, Bill Hogan's and the one that I am proposing as an extension of Schweppe's mental model. ...

16. Muy Bueno y Claro Parte 2
3 May 2006
Ref: Muy Bueno y Claro Estimado Bernardo, Para realizar mejores comparaciones de precios de electricidad aquí, en Chile y en Panamá, hace varios meses que te sugerí emplear una orientación al cliente en la comparación de las tarifas. ...

17. Reactivemos el Sector Eléctrico y Apoyemos las Exportaciones a ...
1 May 2006
Re: Muy Bueno y Claro Estimados Bernardo y Luis, 1) Si bien entiendo las conclusiones, los precios de generación no están tan mal para la coyuntura. No es posible bajar 30% como dice la CDEEE a los precios de generación. ...

18. Muy Bueno y Claro
1 May 2006
Luis Gracias Siempre hemos estado conscientes de que el problema son los cobroos Los de las plantas con menor costo de generacion siempre ha sido una vision a mediano y largo plazo Naturalmentre, luego de tantas horas en reuniones, ...

19. Please Blame The Deregulation and Regulation Fiascos Parte 4
27 Apr 2006
Re: Please Blame The Deregulation and Regulation Fiascos Parte 3 Len Gould said: It seems to need re-stating. There are many social benefits which cannot be delivered by competitive market systems. I REALLY need to hear Reaganomics ...

Please Blame the Deregulation and Regulation Fiascos Parte 19

Len, think of the banking sector in the 1930’s. How in the world did they transition from chaos to an open market where the little old lady was not at the mercy of large banks? Think of Roosevelt facing a systemic crisis in which he heard and applied sound advice, when he introduced prudential regulation to the banking industry to make it stable.

We have two competing market with their respective value chains as can be seen in the articles The Business Case for Demand Response by Thomas Brunetto, Managing Director, Distributed Energy Financial Group and An Alternative Business Case for Demand Response by Jose Antonio Vanderhorst-Silverio, Interdependent Consultant on Electricity. The value chain for Electricity WPC for the old little lady is wholesale, retail, customer. The key to Electricity WPC is to make sure true wholesale and retail competition develops as in other industries. In industry after industry where true competition is workable, the experience so far is that eliminating price controls is more effective and efficient than keeping price controls.

Competing retail marketers need to develop business models that add value to end customers. To do that, they will develop their Customers Information Systems and their Automated Metering Infrastructures.

From the above discussion about David and Goliath, what is at stake is which electricity market will lead us to the end state of the electricity business of the future. As you can learn about the fundamentals of Grupo Millennium Hispaniola, our approach is based on a customer orientation. As you can see from the top of the GMH web page it says: “Pensemos en una electricidad a minímo costo al cliente,” which means “Let’s think in electricity at minimum cost to the customer.”

On the one hand, we believe that the poor lady is much better off with Electricity WPC, as she will be able to select the service plan that adds the most value to her of a set of differentiated offerings. For example, with several supply security options she can select the one that results in minimum total cost when she adds the expected supply and shortage costs. Another example could be phrased in the options that add better value.

On the other hand, market power is not an issue under Electricity WPC. If it were, retailers’ activities in the wholesale market have the opportunity to design the right amount of energy efficiency and demand response to negotiate reduced market power from generators. In addition, and even more important, the T&D design and operation will be oriented to avoid operating the system close to capacity to guarantee high reliability. The main source of financing for generators is to have high plan factors. It is a very different ball game!

The reason I say that Electricity WPC is poised to be the winning market approach is because when anybody wins, everybody wins. That is why Electricity WPC can guarantee an infrastructure that will offer to add maximum expected value for any economy. However, under Hogan’s market approach for somebody to win, somebody else has to lose.

© 2006. José Antonio Vanderhorst-Silverio, PhD.

Please Blame the Deregulation and Regulation Fiascos Parte 18

Len Gould has ask me to satisfy him with a response:

Mr Vanderhorst-Silverio: Can you describe for me how you propose to transition from the present over-regulated "model" to an open market model without placing all (esp. small retiail) electricity customers at the mercy of corporations with excess market power? Satisfy me there and you might have the basis for a discussion.

Please Blame the Deregulation and Regulation Fiascos Parte 17

Dear Prof. Banks,

I have taken Dick's bet as mine: "I bet the failure to deregulate would fail. I would never bet against actual deregulation. You are welcome to your opinion about deregulation, but consider Dr. Vanderhorst-Silverio’s insights." I have also taken the liberty to named above a 4th restructuring mental model under your name, as Prof. Banks' mental model, given your bias against deregulation.

I don't want to fight with you. I am just testing my theories. I know that markets bring with them a lot of bad things to customers, but I don't see how we can avoid them from reality.

From past experience, I know very well that your don't like to be placed in a corner. I also know that you have great means to avoid the simple response. Those gifts are in your favor.

However, with a lot respect and humility, I have come to the following hypothesis: There are only 4 restructuring mental models of real importance. I think your mental model is also a loser for the future, as the vertical integrated industry is transformed with markets arriving to allow widespread use of demand response.

The fight remaining will be between Goliath (Bill Hogan's mental model) and David (the extension of Schweppe's mental model). From your recent answers, I perceive that you prefer to be with Goliath, instead of with David.

Have I exceeded what I can get from you in writing on an internet dialogue? Have I gone to far into personal matters? Have I missinterpreted your mental model? Is my hypotheses false? Please explain!

Best regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 16

Thanks Dick,

My original statement had to do with the issue that regulators are not the real winners or losers. The central idea was that we don't need them at all as intermediaries in Electricity WPC for the customer. This is what I said:

"One of the laws of the Fifth Discipline says that “cause and effect are not closed in time and space in complex systems.” That being the case, regulators are not winners and losers: agents and customers win or lose. When regulators apparently lose, it is the customers they misrepresent that become losers, with higher than necessary (supply plus shortage) costs, or with higher taxes later on. That to me is the greatest problem of having regulators as intermediaries between the market and the customers. Customers should have choice to select the retailer or wholesaler, which offers them the minimum cost plan available to them in the long run under electricity WPC."

(Out of time sequence) Later on I have updated to maximum value addition instead of minimum costs. That is where you bring a very important point common to the 3 mental models: talking of optimizing individual decisions as opposed to the average customer prices that is the central point on Prof. Banks' mental model (the regulated vertical integrated system).

(Back to time sequence) Joseph Somsel then said that: "Regulators can also lose - lose their jobs. Just ask the former governor of California, Grey Davis, on the risks of having physical shortfalls of vital infrastructure on your watch." Which I replied with a post that included: "I like very much your answer, because it goes deep into the systemic problems that the electricity industry faces worldwide...."

Peter Senge shows that: "System structure influence behavior…" He explains that: "When placed in the same system, people, however different, tend to produce similar results." I don't know how different Brazil power sector laws and contractual arrangements is nowadays to make a real difference. That is why I say that PJM business model might be fatter than it should be leading to higher costs to customers than necessary.

My point on Gov. Davis is that he was a prisoner of the system implemented earlier which he probably didn't understand. Any other governor under the same circumstances would have produce similar results. The problem was in the structure as explained by ways of thinking which are named as mental models.

In essence what I am saying instead of firing the regulators just let them work out toll prices for the transportation of electricity. What Bill Hogan's mental model does is to open the public highway system, while keeping city streets traffic under one regulated monopoly.

Please Blame the Deregulation and Regulation Fiascos Parte 15

Dick Maclay has added the following comment to the EnergyPulse article Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices in response to my last post.

Jose Antonio, I followed your links, and it appears the U.S. is behind Latin America in some important ways. Brazil is differentiating wires prices by time of use and self generation, particularly for peaking, is coming into use. The former is reducing the amount of misinformation in regulated pricing. Studies I have done through the years suggest the latter reshapes the industry into a lower cost configuration.

In the U.S., where the air conditioning peak is a big cost driver, self generation and other tactics to evade high on-peak prices make sense. They will be used when supply costs are fully revealed through electric pricing. Available measures include gas air conditioning and cool storage. The latter is just making ice at night and melting it during the day, instead of running air conditioners on peak.

Rafael Herzberg does a good job of describing how to contract under deregulation, but he misses the cumulative affect of optimizing individual decisions with good price information. When individual customers find lower cost ways to provide energy services during peak hours, and some discover they can move activities to off-peak periods, total costs decline. Fewer generators, transmission lines, and distribution facilities need to be amortized as the industry is reshaped by consumer choice.

Jose Antonio, your emphasis on price information is very important in mitigating risk. The California PUC had an experimental real-time residential rate at one time. It was expected that participants would turn up the temperatures in their homes when prices rose. Instead, many of them shut down their air conditioners completely. In the language of an economist, price elasticity was much higher than expected. Of course, there tends to be a bias in who chooses to participate in such experiments. But that only strengthens your point that regulatory customer classes are not homogeneous. Given the opportunity, some will reduce usage in the face of high prices. So price elasticity is an important risk mitigation measure during shortage periods, including droughts. And price elasticity reduces the amount of spare capacity that sits unused, needing to be amortized, between droughts.

You wondered about the culpability of those who preceded Governor Davis in California. The mislabeled restructuring that increased regulation in California was passed unanimously by the California legislature and signed by Governor Wilson years before Davis become Governor. It was passed unanimously because it was a Christmas tree with something for everyone. At least it promised something for everyone. Too bad we couldn’t fire all of those politicians retroactively.

In fairness, the politicians were duped by the California Energy Commission that promised surplus generation through the fixed price period that was to end in 2002. So perhaps in fairness we should have fired the regulators too. Then again, it was the job of the politicians to oversee the regulators, and they failed to ask any hard questions.

The failures of the badly designed re-regulation become obvious on Davis’ watch. Instead of dealing with the issues he inherited, he announced there was no shortage of power, and reiterated that as the aluminum industry in the northwest was shut down. The shut down was in accordance with the plan for a major drought published by the Northwest Power Planning Council prior to California’s passage of the restructuring legislation. Every time Davis refused to acknowledge the problem prices went up. People in a position to know tell me Davis ignored the advice of knowledgeable advisors. I have a political cartoon in which Davis brags that Schwarzenegger only destroyed Los Angeles in the movies, while he, Davis, destroyed the entire state of California in real life. Cartoons exaggerate a little bit. Still, Davis deserved worse than he got from the voters.

Please Blame the Deregulation and Regulation Fiascos Parte 14

Prof. Banks and other Gentlemen,

Ferdinand is correct about riots in the Dominican Republic. The riots came by a big misunderstanding of consultants and multilateral organizations about the impact of irrational rationing. My work has been to suggest a rational way of rationing.

The expert Vivianne Blanlot of Chile was retained by the World Bank to suggest a solution to the financial crisis of our electric sector. She proposed to manage demand starting at a level 70 to 75% of load average. Such commitment was written into an agreement with the International Monetary Fund.

The approach was to divide circuits in 4 groups in accordance with the level of cash recuperation. The source of the riots was customers with lowest level of cash recuperation were having less than 12 hours of service a day.

Underneath the approach is a misunderstanding of the value of electricity to the customers. Most of the rioting customers were getting apparently free electricity that instead of adding value was actually destroying value.

In general, the electric sector of the Dominican Republic is a textbook example of a systemic crisis. Last year I posted Getting the Power Sector out of Systemic Collapse which explains what I understand is happening in my country. System thinking is a tool that helps confront the complexity of the collapse.

For a discussion of Dominican, Brazilian and California deregulation, I suggest to look at the articles (and my comments) of Rafael Herzberg 2006: New Challenges and Opportunities in the Brazilian Electric Energy Arena and Like It or Not, Deregulated Energy Contracting Is Here to Stay. In the first one I wrote that: “We have the best example of a failed “deregulation” effort in the Dominican Republic, which I have recently characterized as a black hole. Investors came to the Dominican Republic, and in their due diligences didn’t see that a disruptive technology (on-site generation) was making an inroad. A systemic process called “the boiling frog” was at play, resulting in an exponential growth of individual solutions. However, that big problem is giving us great opportunities, as demand response can be developed to transform a very unreliable, disintegrated, and unarticulated system, into the opposite.”

I agree that Electricity WPC is a difficult sale, based on the open wounds. It is still more difficult for me to convince other Dominicans. That is the main reason why I am using EnergyPulse as a vehicle to test my findings. The taste of deregulation in the Dominican Republic is awful. The law, however, is being partially applied. The government mental model is about average prices. However, the system operator is executing monthly transactions based on a marginal wholesale market reality.

Thank you,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 13

Ferdinand E. Banks added another comment to EnergyPulse on this series,

Jose, do you know the song 'I hear you knocking but you can't come in? ' Well, we've almost got the same problem here, except that although the door is open and the invitation mat is out, only people like Mr Maclay and MrGolden are anxious to enter.

It will take a few years before the taste of failed deregulation is out of the mouths of rate-payers in California, Sweden, Norway, Brazil, Ontario and Alberta, South Australia, etc who have, are, and will be burned. But I wouldn't worry if I were you: if enough untruths and misunderstandings about electric deregulation are published, it should eventually be possible to get the deregulation swindle back on the road again.

Please Blame the Deregulation and Regulation Fiascos Parte 12

Another article can be written with the title of Avoiding the Separation Fallacy, to show that the extension of Schweppe's mental model might be the winning form of restructuring. Most of the arguments are dispersed in EnergyPulse and the Grupo Millennium Hispaniola blog.

The hypothesis of the article could be what I said earlier in my last comment to the article The Gap Between Demand Response Potential and Demand Response Reality: “I repeat a restructuring mistake was made to justify open transmission access without understanding that Spot Pricing of Electricity marketplace required non monopsonistic demand responsiveness and engineering requirements for controlling, operating and planning a reliable electric power system. Instead of a stakeholder arrangement for reliability, the power system needs to be designed with ultra-quality, just as nuclear power systems are designed and operated.”

However, the extension to Schweppe’s mental model focuses also on mitigation of external shocks, like fuel volatility, and as such does not support well arguments on paragraph 5 and 6 very well. Instead, it helps generating and T&D investments financing by increasing plant factors, emulating take or pay actions without contractual arrangements. Please recall my comment of April 6, that start with “Well said Mr. Maclay!”, to the article The Gap Between Demand Response Potential and Demand Response Reality.

I repeat once again that the above is not a final word, but an architecture design work in progress.

© José Antonio Vanderhorst-Silverio, PhD. 2006.

Please Blame the Deregulation and Regulation Fiascos Parte 11

Mr. Maclay and other Gentlemen,

Thanks Dick for your comment. I like very much the qualifying insights to my humble posts. My response has two parts. In this one I address paragraphs 2, 3, and 4. In the second I will write about the separation fallacy of transmission and distribution and address paragraphs 5, and 6.

That Enron's mental model is different from Hogan's mental model can be traced to the following quote:

"The debate in California has changed remarkably over the past year or two. Discussion now focuses not on whether retail competition or direct access is possible, but on how to make it happen. The three California investor-owned utilities affected by the commission's decision convened an industry working group, called the Western Power Exchange (Wepex) to address the issues related to implementing the new competitive retail market. Its responsibility has included making three filings to FERC by the end of April 1996, seekiing:

• Approval to create a new institution - the ISO - that will provide comparable open access for wholesale and retail use of the transmission system, plus approval to transfer the control operation and control over a large share of utility transmission facilities to the ISO.

• Approval to create the PX to run a California spot market for power, plus approval for the utilities to sell into the PX at market based prices.

• A determination of the dividing line between transmission, over which the FERC has jurisdiction, and distribution, whose regulation is expected to be left to the states [1]."

The first and second bullets were opposed by Bill Hogan, as the following quote says: "For a different perspective on whether the system operator and the power exchange need to be separated, see "Avoiding the Separation Fallacy," by William Hogan, Electricity Journal, December 1995, pp. 26/37 [2]"

The last bullet is common to Enron's and Hogan's mental models. The origin can be traced to Bill Hogan, as can be seen from my post "Retail Access is Easy" above. As can be seen, Bill Hogan is the most influential person of deregulation.

© José Antonio Vanderhorst-Silverio, PhD. 2006.

Interdepedent Consultant on Electricity

Dominican Republic

[1] Barbara R. Barkovich & Dianne V. Hawk, "Charting a new course in California," IEEE Spectrum, July 1996, pp. 28-29.

[2] Ibid, pp 31.

Please Blame the Deregulation and Regulation Fiascos Parte 10

Gentlemen,

I forgot to acknowledge that my previous message was also intended to Mr. Casten, Mr. Swinand, Mr. Malinowski, Mr. Pflaum, and Mr. Tanton.

Today I am very busy, but to keep the ball roling I will answer Steve, and partially answer Ferdinand.

Steve,

Thanks for your comment. I have some answers, but not all the answers. However, as you acknowledge, I try very hard to be consistent.

"Spot Pricing of Electricity" is a seminal book about how electricity prices vary in time and space, with transactions where customers buy from and/or sell to the utility. In some days, wholesale prices vary widely when system is close to capacity unless customers respond. Those events occur randomly, when reserves become insufficient to assure an acceptable expected risk of system failures. That leads me to the next comment regarding complexity.

Ferdinand,

Thanks for your comment. I accept the remark you make to your finance students. Marketers do it even simpler. Renowned marketer guru, Jack Trout, the author of “The Power Simplicity,” entitled the first chapter of that book "Simplicity: Why people fear it so much." He concludes the chapter with the message: "Complexity is not to be admired. It is to be avoided."

However, before ending chapter 1, when developing an outstanding simple solution, Jack says: "This solution to the problem was simple, though implementing it was a complex process." Let engineers make it easy for the customers by developing the require software based on solid theory and practice, just as nukes are designed and operated. The main problem of deregulation was that economists implemented a simplistic solution - not a simple solution - to electricity deregulation.

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 9

Ferdinand E. Banks has posted another comment:

The consumers and legislators who bought the deregulation scam bought it because they were told that electricity prices would be lower. Like me, the average rate payer doesn't care about consumer sovereignty, pressing buttons, checking dials and pulling levers. They just want lower electricity prices. And Jose, didn't they have some riots in your country over electricity prices: please don't tell me that the riots were about the absence of consumer sovereignty.

In Sweden, and probably elsewhere, dumb academics accepted deregulation because it meant research money and plane tickets. On the other hand, you mentioned Bill Hogan. Hogan is a very very smart man, and IF he wanted retail markets separated from wholesale in the way that you say or think, it's because he figured out what could happen if it wasn't. Not what WOULD happen, but what COULD happen. The Enron bosses were also very smart. They just didn't go far enough into mainstream economic theory to get the entire picture.

This concentration on the so-called drought in California is pitiful. Laughable, actually. In Brazil the government asked people to pray for rain, but as the directors of the main generating companies in that country made it clear, the problem was deregulation, reinforced by a crazy belief on the part of the deregulation booster club that if electricity prices fell, there would still be sufficient physical investment. Whether you know it or not, they had the same nutty idea in California, only worse insofar as the details were concerned.

I told my finance students the following: in finance, history, intermediate economic theory and (fairly) elementary math is the way to go. All of them didn't believe me of course, but they still followed my instructions, because they knew that if they didn't, I would fail them with a smile on my face. We have the same problem here: you've taken simple economics and made it complex, and even worse you've gotten the facts wrong. But cheer up gentlemen: five more years and those sensual Californians will have forgotten all about the meltdown, and then you can foist another deregulation swindle on them.

Please Blame the Deregulation and Regulation Fiascos Parte 8

Dick Maclay is suggesting that my insights be considered in the following quote:

Len, Southwest was profitable for years offering lower fares than American, while American lost money. That speaks to overall efficiency. If American beats Southwest on one measure AFTER imitating Southwest that is amusing, but not important to the discussion. The description of how Southwest differs from the pre-deregulation airline model has been written many times, and it is too long to retell here. But if you want to understand how competition upsets inefficient old cartels, do take the time to read about Southwest. Ferdinand, the point is that when customers are no longer denied the full range of choices they choose low cost options, not high cost options.

I bet the failure to deregulate would fail. I would never bet against actual deregulation. You are welcome to your opinion about deregulation, but consider Dr. Vanderhorst-Silverio’s insights.

The great failure in California was that insulating retail customers from wholesale prices was a perfect barrier to a functioning market. When the shortage occurred there was no price signal to reduce consumption. Some described the result as giving everyone market power. It did create an opportunity for everyone to raise their prices, but that is nothing like the economic or legal definition of market power. It was a marvelous demonstration of the basic fallacy of attempting to have half a market.

Dr. Hogan was very influential in the early development of California’s restructuring, and the restructuring did follow the mental of model of isolating wholesale from retail that Dr. Dr. Hogan appears to persist in pushing. I did not locate the description of the Enron model, so I have no way of knowing how it may differ from the Hogan model.

Our modeling of the western interconnect in the mid 1990s forecast prices over $300 /MWh in the 6*16 market if there was a major draught on the Columbia River before 2003, and wholesale markets were isolated from retail customers. Unfortunately, the draught occurred and prices were as forecast. When the generally accepted short-term price elasticity of -.02 was introduced in our model, prices topped out at about $100. Too bad California did not use something along the lines of the Schweppe model.

Even $100 per MWH is high for 6*16, but high prices are part of a major shortage period. Spot prices in all years except 2000 and 2001 have been unsustainably low; too low to justify building new power plants. Some periods with high prices are needed. In context $100 is not bad. The good thing about large variations in prices is that it guides customers away from high cost periods, towards lower cost periods. That is how deregulation resturctures an industry, reducing costs and prices.

Please Blame the Deregulation and Regulation Fiascos Parte 7

Steve Rosenman responded positively to my post on EnergyPulse as follows:

Jose Antonio

I read your recent comments in the above reference. You definitely present a consistent and rational view on the prospect of successfull Deregulation. Digital metering is necessary but not sufficient. What is needed is a digital feedback to the customer of hourly price of electricity. Customer awareness and concern for cost may lead to some feedback control of consumption with set points based on hourly price of electricity

Please Blame the Deregulation and Regulation Fiascos Parte 6

Ref: Please Blame the Deregulation and Regulation Fiascos Parte 5

To Mr. Golden, Mr. Prof. Banks, Mr. Maclay, Mr. Gould, Mr. Rosenman, and Mr. Olivier.

I suggest that the article thesis is mistaken by being based on Hogan's mental model that links higher than necesary prices with deregulation. Please read Please Blame the Deregulation and Regulation Fiascos Parte 5 to find out why Electricity WPC removes rules that deny customer choices and give them low prices after all cross-subsisidies (including supply security cros-subsidies) are eliminated. If going from Hogan's mental model to the extension of Schweppe's mental model does not involves stranded costs, customers will be able to get the expected low prices.

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 5

© 2006. José Antonio Vanderhorst-Silverio, PhD
Interdepedent Consultant on Electricity

There are 3 mental models behind restructuring: Enron's, Bill Hogan's and the one that I am proposing as an extension of Schweppe's mental model. Enron's mental model lost its case in California, so we are left with the remaining 2.

Bill Hogan's mental model is based on 4 stages, where first (stage 3) you concentrate on the wholesale market and later (stage 4) you work with the retail market. That trajectory leads to generator market power and/or excessive transmission requirement. PJM is the child of this mental model, which has maintained huge generation reserves and corresponding capacity payments.

A few days ago, PJM management announced that: "For the first time, demand response can fully compete with generation to provide ancillary services in an organized wholesale electricity market. PJM Interconnection today opened its synchronized reserves and regulation markets to demand response providers." It is very interesting to understand that those providers follow states rules, but will be operating in interstate commerce. Should they be under FERC?

Schweppe's extension mental model considers the natural transport (transmission and distribution) monopoly completely coordinated in the short and long run. It starts with both the retail and wholesale markets to create a market that has no monopsonistic behavior on the demand side, because the number of responsive customers ranges from thousands to millions.

Schweppe had envisioned such a market in 1978 for the beginning of 2000. He new, that what we call today demand response, was to be developed to make it a reality. Hunt and Shuttleworth of NERA wrote 10 years ago that "...there is a major obstacle: the high cost of installing digital meters at the residential level to provide the basic infrastructure for wide consumer choice. Consequently, universal retail wheeling probably will be delayed for many years, especially where prices are already low [1]." Electricity WPC is based on this paradigm, where alternative business models will eventually arrive.

As a conclusion: Business model based on Bill Hogan's mental model may have a need for reengineering to become the Standard Market Design that it intended. States that are considering restructuring better start with a clean slate. New technology for Customer Information Systems (CIS) and Automated Metering Infrastructure must be waiting for the opportunity.

[1] Sally Hunt and Graham Shuttleworth,”Unlocking the GRID,” IEEE Spectrum, July 1996, page 25.

Muy Bueno y Claro Parte 2

Ref: Muy Bueno y Claro

Estimado Bernardo,

Para realizar mejores comparaciones de precios de electricidad aquí, en Chile y en Panamá, hace varios meses que te sugerí emplear una orientación al cliente en la comparación de las tarifas. Hay varias notas entrelazadas que abordan ese tema, especialmente la que le envié a un consultor hace un año y que se se encuentran en Elemento de una Visión Compartida: La Dificultad para Comparar las ...20 Nov 2005.

Con toda humildad, espero que te puedan servir para hacer una comparación de precios más equilibrada en la próxima ocasión.

Saludos,

José Antonio

Reactivemos el Sector Eléctrico y Apoyemos las Exportaciones a Mediano Plazo

Re: Muy Bueno y Claro

Estimados Bernardo y Luis,

1) Si bien entiendo las conclusiones, los precios de generación no están tan mal para la coyuntura. No es posible bajar 30% como dice la CDEEE a los precios de generación. El verdadero problema es de comercialización. Lamentablemente, se dejó de tomar en cuenta el costo de desasbatecimiento que imponen los apagones a los clientes (especialmente a la industria y el comercio) en la comparación de precios. Si me perdí algo, favor aclárenme.

2) Mi propuesta es que debemos pensar en la coyuntura y también en los próximos 5 años en que el RD-CAFTA habrá desarmado las empresas no competitivas de RD. Las empresas pueden ser competitivas a base de reducción de costos de sus productos y servicios por debajo de los de la competencia o a base de aumentarles el valor a los mismos por encima de los de la competencia.

3) Los Estados Unidos tienen un segmento de 70% para compras a bajo costo donde se debe competir principalmente con los chinos y otro 30% para compras de valor agregado en que las empresas dominicanas pueden aprovechar la cercanía con USA para desarrollar ventajas competitivas. El consultor OTF dice que es en alto valor agregado donde podemos competir.

4) Por más que se bajen los costos de electricidad y se logre que todo los clientes la paguen, no hay forma humana de que la gran mayoría de las empresas dominicanas exportadoras estén en capacidad de competir a base de bajo costos en el mercado global. Pero peor aún, la reducción de costos de abastecimiento de electricidad podría ser negada por el aumento de costos de desabastecimiento de electricidad, especialmente por la dependencia de nuevas tecnologías.

5) Para desarrollar el mercado de aumentar valor la inversión en tecnologías de información es tan imprescindible como encontrar nichos de alto valor agregado donde lograr una separación grande de la competencia global hacia los Estados Unidos. Por demás está decir que las empresas que no exportan y se concentrar en el mercado local de bajo costo podrán "vender" seguridad de suministro al sistema interconectado si sus unidades de emergencia son relativamente eficientes.

6) La Electricidad SCP sería un gran aporte logístico a las empresas que encuentren esos nichos. La Electricidad SCP permitiría reducir al mínimo posible el costo de desabastecimiento a la economía acelerando la reducción de los escapes en la comercialización y creando los incentivos correctos para la inversión en eficiencia energética y respuesta de la demanda antes de que pasen 5 años.

7) Las inversiones mínimas en sistemas de medición para conjurar los problemas de comercialización cierran el paso a los beneficios de la respuesta de la demanda y con ello a la Electricidad SCP. Los beneficios que ofrecen inversiones en una infraestructura automatizada de medición, aunque es más costosa, se pagan a sí mismas aún sin incluir los grandes beneficios de la Electricidad SCP.

8) La Electricidad SCP enfrenta la gran inercia del sector eléctrico haciendo que en el menor plazo se respeten los derechos de los consumidores y no tan solo los derechos de los suplidores. Al enfrentar la inercia se aumenta grandemente la oferta de empleo digno en el sector, al tiempo que se reducen las decisiones centralizadas. La eliminación paulatina del control de precios debe iniciarse con la introducción de los cambios de normativa que permitan a la mayor brevedad que se liberen a los clientes de 200 kW en adelante como lo indica la Ley 125-01.

9) Mientras mayores exportaciones logran las empresas dominicanas mayor es el empleo digno y mayor la capacidad para pagar la electricidad con la calidad y confiabilidad que cada cual necesite. Eliminemos la inercia y reactivemos el sector eléctrico con la Electridad SCP y con ello a la economía antes de que el DR-CAFTA nos arrope.

10) La estrategia de bajo costo es una estrategia suma cero que a la larga resulta miserable, mientras que la estrategia de alto valor se nutre de la abundancia y en el aumento del pastel económico de la República Dominicana.

Ese es tan solo un humilde decálogo en este Día de los Trabajadores.

Saludos,

José Antonio

Muy Bueno y Claro

Luis

Gracias Siempre hemos estado conscientes de que el problema son los cobroos Los de las plantas con menor costo de generacion siempre ha sido una vision a mediano y largo plazo

Naturalmentre, luego de tantas horas en reuniones, debates que obligan a uno a investigar y profundizar mas sobre el tema, al final como dice el refran "todos los caminos conducen a Roma" y en este caso Ronma es y siempre ha sido las altas perdidas en la comercializacion

En este proceso de reflexion, los analisis yu discusiones han permitido ir despejando mejor el fruto de la maleza, la verdad de la mentira y creo que el diagnostico y solucion es claro Hay que cobrar y eliminar las distorsiones que hoy presenta el mercado electrico inducido por las restricci0nes en la demanda

Nos vemos pronto y un abrazo a todos

Saludos

Bernardo

Luis H. Arthur escribió:

Bernardo, muy bueno. Después de tantos meses analizando, llegamos a la misma conclusión que Armando presento en nuestra primera reunión. La diferencia es que lo parimos nosotros con muchas horas de esfuerzo y somos más totalmente concientes. Reconocimiento a Armando.

Felicidades, es un bonito análisis. También felicidades en el picoteo. Nos hace falta.

Luis

Please Blame The Deregulation and Regulation Fiascos Parte 4

Re: Please Blame The Deregulation and Regulation Fiascos Parte 3

Len Gould said:

It seems to need re-stating. There are many social benefits which cannot be delivered by competitive market systems. I REALLY need to hear Reaganomics / NeoCon proponents agree with that statement before I'll grant they any further time or interest.

José Antonio responded:

Len,

Social benefits that can be delivered by markets.

We need a system that mitigates fuel volatility.To do that the perceptions of the end-customer enter the equation. Marketing is the tool to learn and segment end-customer needs. Central planning and price controls don't work in those situations.

Social benefits that cannot be delivered by markets.

Central planning and price controls are required for T&D and system control.

Regards,

José