Please Blame the Deregulation and Regulation Fiascos Parte 28

Dick,

I will add that States that deregulated on Hogan's model might have created large unnecesary inefficiencies that States that have no deregulated can avoid. Also, central to the Electricity WPC restructuring is that selecting one central advanced metering infrastructure is very risky in regard to demand response evolution. Competition of complete retail marketing business models is central Electricity WPC. Schweppe's unextended mental model had those infrastructure risks.

Please Blame the Deregulation and Regulation Fiascos Parte 27

Dick,
I agree that Banks' mental model is cost of service regulation.

Schweppe's mental model is best explained by the post Some Friendly Comments on True Electric Deregulation Part 4 on the GMH blog (the original comment is under the EnergyPulse article A Few More Unfriendly Comments on Electric Deregulation by Prof. Banks ).

In the post, both Enron's and Hogan's mental models are represented in Space B, where price spikes larger than necessary are expected when the system operates close to capacity. The "system" in Space A was in fact several area systems (not necessarily control areas) interconnected by tie-lines, which in Space B become congested very easily. The shift from Space A to Space C can be centered in the many area systems avoiding the congestion of tie lines.

I am copying part of the above post that says: " ‘…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."

So, what I am saying is that Schweppe's extended mental model it is NOT what most of those commenting in this thread were agreeing is desirable from the beggining. It is much different than just simple retail. It is a win-win mental model with lower price volatility, where the end-customer is not an afterthought.

I accept that the details about the difference between Hogan's model and Enron's model might not be substantial. My point is that Hogan himself was against the final Enron’s mental model. In addition, I agree that Hogan's mental model was being pushed closer to vertical integration before accepting to include demand responsiveness.

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 26

Dick,
The most important elements of Schweppe's unextended mental model are the demand response element and the tight nature of T&D. That is a prerequisite that was bypass by Hogan's missunderstanding of the energy marketplace and the development of stages 1, 2 3 and 4. It is not just to allow a retail, but a truly responsive regulated energy marketplace. What I have been doing is working on the architecture of electricity without price controls to the customer and recognizing the need of retail market development should be an integral part of transforming the electric power sector into a regular business environment.

Today I am tied up. Tomorrow I will expand and give you some links to earlier discussions on EnergyPulse.

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 25

Dick Maclay asked for clarifications on the mental models:

Jose Antonio, I would just like to confirm the differences among your mental models, if you would be so kind. This is my understanding of the essence of the models:
The Banks model is traditional cost of service regulation.

The Extended Schweppe model is the open competition with choice for all retail customers. It is whatt most of those commenting in this thread are agreeing is desirable.

The Hogan model confines markets to the wholesale sector, while maintaining regulation for the retail sector of the market.

The Enron model is a variant on the Hogan model in which the ISO and the power exchange are separated. I am a little confused about this one because the industrial customers in California pushed hard for separation of the ISO and power exchange. They wanted to be able to bypass the power exchange in their direct access power purchases, and have the ISO clearly limited to only those activities associated with system reliability. They were concerned that if the ISO ran the power exchange they would get dragged into it, or be adversely influenced by it. So the intent was to achieve something like the Schweppe results. Unfortunately, wires and commodity prices were not properly separated. The wires prices included subsidies of power purchases by the utilities on the assumption there would be stranded costs, plus some confusion by regulators on the proper long-term separation of the two. As a result, power exchange bypass only worked for some very large customers. So is your Enron mental model a variant of the Hogan model, regardless of the unfulfilled hopes of many of its supporters? In that case does it exclude retail customer choice?

If I understand the Hogan model correctly, it does not allow generators to bid high enough to recover all of their capital amortization without periods of tight balance between supply and demand. But without the discipline of retail price elasticity, prices can soar in such periods, so some sort of oversight is soon demanded. But then a capacity market is required to collect the amortization of capital costs not fully collected in the managed spot market. Since capacity is charged to retailers on an average cost basis, I wonder why the money to be recovered in the capacity charge is not given the name ‘rate base’. In the end the Hogan model does not seem much different from the Banks model unless generators avoid the need for a capacity market by merging until they can collect money for plant amortization through monopoly power instead of administered payments. And in that event Ferdinand's concerns have some validity.

Please Blame the Deregulation and Regulation Fiascos Parte 24

Thanks Len.

The road to Electricity WPC requires many hurdles to be passed. Metering is just one of the components. A demand response system is another. Still Customer Information System an additional one. On the wires side, a clean slate reengineering is a recommended approach to integrate data coming from retailers.

My suggestion is that retail marketers compete with other retail marketers based on theirs business model innovations. There are many posible approaches to retail marketing and by selecting a given advanced metering component design will be taking the associated risk. When I participated at the last AMRA meeting there were many possibilities available, many of which were not end to end solutions.

Competitive retailers regulation should be changed to prudential regulation,similar to that of the banking industry. Regulation for T&D should stay as is .

Please Blame the Deregulation and Regulation Fiascos Parte 23

Len Gould says:

I agree with Mr. Vanderhorst-Silverio that advanced metering can provide a true market in electricity if combined with open access for all to an electronic central market of offers from generators, and provided all generation, including the smallest residential CHP or etc. generating equipment can participate fairly in that market without exhorbitant connection fees or standby fees etc.
Distribution should be compensated a flat rate based on amortization of capital invested + O&M (or perhaps max. service load capacity), regardless of customer consumption.

One interesting possibility at

http://www.energypulse.net/centers/article/article_display.cfm?a_id=1176

http://www.energypulse.net/centers/article/article_display.cfm?a_id=1181

With this in place, then feel free to completely remove all regulation.

Please Blame the Deregulation and Regulation Fiascos Parte 22

Yes Steve,

Retail competition under Electricity WPC is a viable business. The metering infrastructure leading to demand response will pay for itself just on the other operational benefits. Bringing together sellers and buyers is the job of the retail marketers business models.

Electricity WPC is not a scam. I knew Prof. Banks' mental model would be kept on the losing side, together with the other losers: Enron's and Hogan.'s mental models.

Please Blame the Deregulation and Regulation Fiascos Parte 21

Steve Rozenman questions whether retail is viable:

Jose Antonio

This has been a long discussion with excellent feedback from everyone. But no one questioned the fundamental premise, upon which the entire deregulation rests namely,

Retail Competition! . The question is:

Is retail of electricity a viable business? Can it bring together Sellers and Buyers? Is the common consumer of electricity interested in spending his time in engaging in such activity?. If the answer is hardly!, than all this deregulation in electricity is a big waste for the short duration of humans on this planet

Please Blame the Deregulation and Regulation Fiascos Parte 20

I said I didn't want to fight with Prof. Banks. This is what he wrote when he flew out the dialogue:

Dick Maclay tells us that the deregulation fiasco in California was caused by the weather. Some people ascribe General Custer's troubles on the Little Big Horn to the same source.

As for myself, I don't intend to believe Mr Maclay on this or any other matter, nor do I intend to take any of the half-baked advice that he so generously offers, most of which is based on a distortion of the facts. I suggest though that he and Jose and others of the same persuasion offer their services to the California state legislator who got the deregulation swindle on the road, but who later went over to the other side. US senators Byron Dorgan and Ernest Hollings might also need some help, since they have been running around telling people that electric deregulation is a scam. Honorable senators and others, it's worse than a scam.

Thank you for your time, gentlemen, but as for myself I'm going back to considering the great world of oil. However if we find ourselves in the same conference or seminar venue discussing this electric deregulation rip-off, I'll be only too glad to show you a thing or two.

Electricidad SCP y la Estratregia de Competitividad

Las exportaciones al mercado americano pueden aprovecharse de una electricidad, que si bien no sea de precios aparentemente bajos, apoye la estrategia de competitividad basada en la agilidad y la cercanía. Esa estrategia es la Electricidad SCP que produce la electricidad al menor costo posible para cada consumidor, el cual no es necesariamente el de menor precio. La diferencia estriba en que el costo de la electricidad para cada consumidor depende de la suma de los costos de abastecimiento (la factura) y el costo de desabastecimiento (ocasionado por los apagones).

En tal sentido, Diario Libre ofrece la siguiente noticia: "Dice RD debe aprovechar su posición geográfica"

SD. República Dominicana tiene que aprovechar las ventajas comparativas que le ofrece su estratégica posición geográfica para obtener beneficios de los tratados de libre comercio que ha firmado, pues en términos de costos de producción nunca será realmente un país competitivo, dijo ayer el Secretario Ejecutivo del Consejo Nacional de Competitividad.

Andrés Vanderhorst hijo reconoció las quejas del empresariado nacional por la vigencia de un servicio eléctrico deficiente y de alta facturación, un régimen tributario inadecuado y otras situaciones colaterales que incrementan los costos de producción.

“Pero independientemente de que tenemos el reto de resolver el problema de la energía eléctrica, su calidad y su alto costo, por nuestra estructura de costos y nuestra economía de escala nunca seremos un país competitivo en costos”, advirtió Vanderhorst.
Dijo que en el Consejo Nacional de Competitividad, un organismo con participación del sector privado y adscrito a Industria y Comercio, se tiene la convicción de que la prioridad del país en el marco de la apertura mundial “es apostar para diferenciarnos por la agilidad y el tiempo de entrega” de la mercancía.

Destacó que nuestra cercanía al mercado de EEUU le ofrece ventaja en relación a países altamente competitivos como China Continental, Singapur.

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.