A Generative Dialogue Without Illusions Part 3

Part 3 of 3.

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.”

Among the thing that I have done is recognize that Space C is no longer advisable and that all of the retail activities, including CIS, AMI, etc. should belong to a competitive entity. This is what I said then:

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.

By the way, on 1.7.06, Fred said: “Sorry José, but you'll have to take this discussion up with somebody else.” I am glad that you would like to take it from the faulty end of the deregulation spectrum.

What should have emerged in the 90s is still waiting to emerge, except that now the 2005 Energy Bill favors Demand Response. Most of the damage done seems that it cannot be undone. Experts, like Jack Casazza, claim that the agreements of the “weird sort” (Fred’s term) are like scramble eggs, which can be unscrambled. However, new developments as those reported by David Cay Johnston that says “A federal appeals court yesterday called into question the government’s efforts to change the power industry into a more competitive business, ruling that national energy officials abdicated their responsibility to ensure fair electricity markets,” may help unscrambled them.

You are really a late comer. In the past year I have written comments at length in support of EWPC in EnergyPulse. I suggest that you take your time and read as much as you can to get up to speed.

Don’t forget the most important rule of the generative dialogue: you are not your opinion. This of course applies to me and everybody else too.

Regards,

José Antonio

© 2006. José Antonio Vanderhorst-Silverio, PhD

A Generative Dialogue Without Illusions Part 2

Part 2 of 3.

On systemic risk see my answer to Fred about his expertise on risk management and his lack of knowledge hidden under engineering knowledge. I think that what I have done so far is: “cracking through the egg shell (title of a chapter of solving tough problems)” of the power industry. That is the missing side of your “world … the bone and gristle world of decisions.”

Andy started his article with the following sentence: “This is the first of a four part series of articles on the natural gas and electricity price and supply risks facing the U.S. economy. The first article provides an overview and summary.” If we apply the expected long run natural gas price and supply risks to the electricity industry, there is a big difference between the decade old debate and a generative dialogue to “reassess the likely long-term prospects for price and supply in the U.S. market,” as Andy puts it.

At the center of the decade old deregulation debate, the research and practice suggested by Fred C. Schweppe and his colleagues in the 1988 book Spot Pricing of Electricity was in general bypassed. That is exactly what PA Consulting Viepoint on Energy is saying now.

My article An Alternative Business Case for Demand Response, a rebuttal to The Business Case for Demand Response, by Thomas Brunetto, Managing Director and Jamie Wimberly, CEO, both of Distributed Energy Financial Group, was the first stake on the “ground” that led to the emerging EWPC model. As you can see from what I said to be the “Key issue” in my post you refer to, it is Mr. Wimberly who acknowledges an emergent revolution away from the continuity scenario, which the Deloitte Research Energy Study identified in the 2005-2010.

Schweppe’s insights were to be applied first to a transformation of the vertically integrated utility by developing a spot price energy marketplace. As can be seen from my comments of 12.27.05 to Mr. Martin-Giraldo under A Few More Unfriendly Comments on Electric Deregulation, written by Fred, all deregulation experiments were based on jumping to the wrong conclusions. This is part of what I posted at that time:

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.

Quote completed on next paragraph…

A Generative Dialogue Without Illusions Part 1

Thanks James for accepting the challenge of the generative dialogue. My world is that of an interdependent (systemic) consultant on electricity centered now on market design and architecture. I have “listen” closely to what you wrote and will also "listen" to any new perspective you may bring.

Part 1 of 3.

As I suggested under the article The Power Will Be There But Will It Get to Market?, please accept that the word debate has the meaning found in the suggested reading: generative dialogue paper by Adam Kahane, entitled "Changing the World by Changing How We Talk and Listen." Diagram "Four Ways of Talking and Listening," presented by Kahane in a 2003 conference.

I hope you understand now that under the generative dialogue debates based on the deregulation performance so far are completely misleading. A large part of the overcapacity is due to lack of knowledge of the utility industry by vested interests. In my opinion, debates on the decade old deregulation are over. Let’s do a generative dialogue on deregulation to create a new market architecture and design for the electricity system, without selfish components that destroy the system as W. Edward Deming would have said.

Under the article Condemned to the Fourth Quartile?, I wrote the following:

I found in the website an interesting paragraph in the introduction of the report "Viewpoint on Energy: shortages, surplus, and the search for value” of PA Consulting,” prepared by Todd Filsinger, Member del PA Management Group, to the article prepared by Edward Kee (also a member) entitled “Reaping the benefits of electricity industry reform: defining and limiting the use of price controls,” that says:

Deregulated wholesale electricity markets have come under attack for their perceived deficiencies. Edward argues that the competitive benefits of wholesale competition have never been realized because of the deleterious impact of retail market regulation and political interventions, which decouple the ultimate consumer from real-time market pricing, thwarting economically rational decisions on power consumption. He concludes that only when the retail customer is allowed to decide when and how much to consume based on the actual cost of providing that service, will the many promised benefits of competitive energy markets be realized.

I believe that the paragraph can be taken as a useful contribution to the generative dialogue I proposed earlier in the post Let's Get Out of Back Rooms to a Generative Dialogue. A generative dialogue cannot be done by looking the issues in isolation topic by topic, but as a system, cutting across topics. Please follow the links on the post.

I work under the Koestenbaum strategy that says “reality means having no illusions.” I have “convinced” Fred many times. So, only once I see results, I will change my opinion when I see the consensus. In general, to fill in the content you will need to read a lot of my comments dispersed on EnergyPulse to make sense of EWPC and the rephrased argument. I know that I should start to write my book to make it easy for readers to make sense to EWPC.

Playing With Fire and Collapse Part 22

Reference: Playing with Fire - The 10 Tcf/year Supply Gap -- Part I

Part 2 of 2.

On 12.20.06, Fred wanted to restart the debate, but was unsuccessful. Len suddenly decided to take command and defend his baby project IMEUC as an emerging deregulation project, saying to Fred “I would like to submit that on de-regulation I believe you are wrong (and therefore naturally and to my regret, myself for a failing grade).”

On 12.21.06 I defused Prof. Banks argument about “NO TINKERING ON THE DEMAND SIDE CAN OFFSET THE GAMING AND LACK OF INVESTMENT ON THE SUPPLY SIDE!” He said nothing, which to the untrained eye means he accepted the arguments. However, being a great downloader he repeated it later on in response to James.

On 12.24.06 Mr. Carson came to respond Banks on the “NO TINKERING…” argument that he didn’t defend.

Trying to reframe the debate, on 12.25.06, I rephrased Fred’s “NO TINKERING…”argument in a generative dialogue sense. But, on 12.26.06, Mr. Carson’s did not “listen” as his aim was to keep debating.

Before completing my 12.26.06 response to Len, which starts with “Generative dialogue synthesis,” I said “I have ‘listened’ carefully to Len’s opinions and perceive that his interests, by going farther than necessary, go well beyond Phase One. Other parties representative of the larger whole – high social complexity - with different interests – regulators, generation of differing kinds, wholesale, retail, transmission, distribution, fuel supply, manufacturers of systems and equipments, etc. - are invited to participate in the generative dialogue.”

On 12.26.06 Len asked for a time out of “perhaps a couple of weeks…”

I hope to have taken away some of the interference that seems to exist on the generative dialogue.

Regards,

José Antonio Vanderhorst-Silverio, PhD

Playing With Fire and Collapse Part 21

Reference: Playing with Fire - The 10 Tcf/year Supply Gap -- Part I

To all readers that want to learn about the third way of deregulation

Part 1 of 2.

I am against debates on deregulation, because there is nothing we can do about the decade old debate. That is why I proposed instead to work on a generative dialogue, because we can learn about the emerging future, by considering, for example, EWPC as a candidate for such third way. Deregulation is a very complex and tough problem situation.

Adam Kahane says on page 68 of his book “solving tough problems,” that “[M]ost conventional approaches to solving problems emphasize talking, especially the authoritarian, boss or expert, way of talking: telling…” just like James Carson and Prof. Banks.

Kahane continuous saying: “In a debate, each party prepares their position and speech in advance and then delivers it to a panel, which chooses the most convincing speech. The same process is used in courtrooms and boardrooms and in parliament (except the legislators have usually made up their minds before they hear the speeches).” Fred and James seem to be excellent legislators.

Kahane concludes that “This approach works for deciding between already created alternatives, but it doesn’t create anything new… The additional element that is required to create something new, and that is ignored in most conventional approaches, is listening… [on page 70] the next step, listening openly, is even harder.”

Given that in this medium it is not possible to impose a solution by force, debates can only get stuck. With very high probability, that will be the result of Carson vs. Banks.

We need at least two people to start a debate, specially a heated debate. According to the Webster’s American Dictionary, debate means “discussion, especially of a public question in an assembly, involving opposing viewpoints.” Before Mr. Carson’s first comment, I believe that I was conducting a generative dialogue with Len (but not with Prof. Banks), since on 12.25.06 Len said “…I might add that it seems that the greatest benefit of "generative dialogue"…”

So, I will try to summarize some of the signals that have resulted so far from the electricity industry generative dialogue.

I recall that 12.19.06 was a very important synchronicity day for the generative dialogue on deregulation. While I was recalling that “it is time innovate…,” Len said he was “actually one of the strongest supporters of a pure market electricity strategy such as EWPC.” As I explained that EWPC is not a pure market electricity strategy, I found an important and strong signal: “Jamie Wimberly’s article The Future Utility Customer Service Model closure, in which he endorses systemic approach and the revolution away from the continuity scenario.” That is the key issue here!

Playing With Fire and Collapse Part 20

Reference: Playing with Fire - The 10 Tcf/year Supply Gap -- Part I

Generative dialogue synthesis:

Competition is divided in two phases: One) market vs market and Two) company vs company.

In Phase One all interested parties cooperate in the generative dialogue to select the emergent winning market. Phase Two is not part of the generative dialogue.

EWPC – an integral reform paradigm - is an open and robust emergent market architecture and design that divides the vertically integrated utility at modular interfaces. 1) Long run and short run system planning, operation and control natural monopoly functions are also kept integrated. 2) The T&D wires natural transport monopoly is kept integrated. 3) Supply - generation - natural competitive functions compete with each other 4) Demand - retail - natural competitive functions compete with each other. 5) Supply and demand – Megawatt/vars vs Negawatt/vars - compete with each other in time and space. Module 1 commitments on planning, operation and control are to be executed by the other modules.

Based on mechanistic thinking, IMEUC is one close and fractured strategy, like any other experienced deregulation efforts, that suggests retaining one of the key elements of retail business model innovations – the metering function – as a monopoly. The intermediary Market Manager is designed to contract base load units based on long run forecasting under uncertainty, arising from improper market signals.

IMEUC as a switchboard intermediary is just one of the many potential business models. It is only through execution – high dynamic complexity – of the development of the resources on the demand side that the potential will be realized. Other potential business model innovations won’t be able to be developed if IMEUC is unfairly and prematurely selected, by giving it market power over other intermediaries. It is no correct to assume how customers will behave – and evolve - beforehand. Instead, there is a need for a customer orientation.

While incremental costs might become negligible, sunk costs might be comparatively prohibitive for all customers. As a “right” solution, IMEUC becomes a strong barrier to emergent – high generative complexity - creative destruction. The best way to find out what the real overhead costs will be is in Phase Two with the right strategy and flawless execution under competition.

Module 1 is to take decisions for the health of the whole system as they unfold. The forward looking statement suggested to Prof. Banks and Mr. Carson on the generative dialogue goes in that direction. The Market Manager does not have such integral perspective.

I want to keep my opinions on Phase One. I am open to review the general open market design and architecture, if there are unfair elements associated with it. I have “listen” carefully to Len’s opinions and perceive that his interests, by going farther than necessary, go well beyond Phase One. Other parties representative of the larger whole – high social complexity - with different interests – regulators, generation of differing kinds, wholesale, retail, transmission, distribution, fuel supply, manufacturers of systems and equipments, etc. - are invited to participate in the generative dialogue.

© 2006. José Antonio Vanderhorst-Silverio, PhD.

Playing With Fire and Collapse Part 19

Reference: Playing with Fire - The 10 Tcf/year Supply Gap -- Part I

Merry Christmas to everyone!

Thanks Len for considering the generative dialogue. In a generative dialogue what is important is "listening" in sychronicity with other interest parties to the larger whole that is emerging. For example, a common understanding of what EWPC means as a third way not considered in the decade old debate.

I presume that large customers could be allowed to go directly to generators for their deals in the wholesale market. Then, what you are suggesting is a monopoly retailer innovation under a Market Manager. I suggest to have retail competition, so that other potential innovations are also allowed to emerge. Go to any marketing book and you will find why intermediaries are needed.

What you are proposing is to impose on everyone the Swithboard Profit Model “innovation,” which Adrian Slywosky describes on page 59 of his book “The Profit Zone.”

Some markets are characterized by multiple sellers communicating with multiple buyers, with high costs incurred by both. In many case, there is an opportunity to create a high-value intermediary that concentrates these multiple communicating pathways through one point, one channel, by creating a switchboard. The switchboard reduces the cost to both buyers and sellers. A powerful component of the switchboard model is that it builds on itself; the more buyers and sellers that join, the more valuable it becomes.

Such middleman model is perfectly allowed under the EWPC market architecture and design. That is why I said earlier "good luck!" Please say so if there are other things that still bother you.

Playing With Fire and Collapse Part 18

Reference: Playing with Fire - The 10 Tcf/year Supply Gap -- Part I

Mr. Carson initiated what seems to be a heated debate with Prof. Banks. In my most recent comment you may see that a debate centers on the typical downloading and reloading. However, if they decide to learn from the emerging future, by following my suggestion to Let's Get Out of Back Rooms to a Generative Dialogue all of us might be served better.

In that respect, I also suggest to change the debate based on the past

NO TINKERING ON THE DEMAND SIDE CAN OFFSET THE GAMING AND LACK OF INVESTMENT ON THE SUPPLY SIDE!

to an emergent generative dialogue on

IRRESPECTIVE OF LOCATION, THE BEST INVESTMENT STRATEGY FOR AN ELECTRIC POWER SYSTEM WITH THE APPROPIATE MARKET ARCHITECTURE AND DESIGN IS A MIX OF INVESTMENTS ON THE DEVELOPMENT OF THE RESOURCES OF THE DEMAND SIDE AND INVESTMENTS ON THE DEVELOPMENT OF THE RESOURCES OF THE SUPPLY SIDE THAT REDUCES SHORT RUN AND LONG RUN SYSTEMIC RISK WHILE SOCIETY RECEIVES THE MAXIMUM VALUE FROM ELECTRICITY.

The suggested forward looking statement itself is open to be clarified and refined.

Playing With Fire and Collapse Part 17

Reference: Playing With Fire and Collapse Part 16

While debating, people operate downloading and reloading rehearsed messages. They know what is true and they don’t need to “listen” to what the other writes. Some as Prof. Banks have the courage to write that “I know too much about it, and where this subject is concerned my memory is very good.”

Under a generative dialogue, the aim is different as “listening” is very important. The object is to tackle complex problems to learn from an emergent future. It is not possible to come up yet with a right solution.

On 5.12.06 – under Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices we had this interchange of opinions:

Len: I'm still waiting for anyone to acknowledge Independent Market for Every Utility Customer - Preliminary Business Case or Independent Market for Every Utility Customer Part 2 - Market Operation

José Antonio: “In other comments I have expressed that retailers’ business model innovations should be centered on AMI, CIS and demand response integration. That leads to the market winning approach, which is the first phase of competition: market vs. market, where collaboration is the critical strategy according to Geoffrey Moore in the book “Living on the fault line” … Len articles are part of the second phase of competition: company vs. company. That is a zero sum game, and so competition is the core strategy. That is why I don’t want to take sides yet. Sorry Len, I think your approach is one of several available to retailers. Good luck!”

See Avoiding the Boom and Bust Cycle in Electricity Trading and Let's Get Out of Back Rooms to a Generative Dialogue for an explanation of how under EWPC the mitigation of fuel price avoids unacceptable price spikes.

Jose Antonio today: the complex situation is similar to the one facing the gas industry that Andy has brilliantly explained. This explains why "recommendations don't quite go far enough." The complexity has three dimensions according to Adam Kahane (taken from Senge and other):

High dynamic complexity: forecasting tools should be replaced by system dynamics and scenario tools deployed by competent professionals. Fuel prices should be mitigated to produce electricity prices.

High generative complexity: an emergent market design and architecture model – a third way – is available and was not included in the decade long debate. Schweppes’s theory and practice was unable to emerge. EWPC is one candidate market design and architecture open to many competing solutions that extend Schweppes’s concepts.

High social complexity: there is a need for a customer orientation to be able to develop the resources of the demand side by market segments. As customers needs evolve, such development will empower customers only by interacting with them. Retailers’ accounts are assets that prudential regulation supervises and that customers and generators will trust if the system is designed properly.

Jose Antonio Vanderhorst-Silverio, PhD is an Interdependent [Systemic] Consultant on Electricity, whose “[R]esearch and practice areas, and interests include: [electricity without price controls], systems architecture, systems thinking, electricity retail marketing under a customer orientation, electric market rules, information systems requirements and design, contract assistance.”

Feliz Navidad

Referencia: Columna, Sin temor ni favor. Por Luis H. Arthur S. / El Caribe. Sábado 23 de diciembre del 2006 actualizado el viernes 22 de diciembre del 2006 a las 11:15 PM

¿En qué consiste abrir nuestra mente? Significa, en última instancia, abrir nuestro corazón. Pero aquí también hay quienes descartan esta alternativa porque piensan que utilizar el corazón es sinónimo de pensamiento confuso y debilidad personal de quien toma decisiones con “eficiencia”. Sin embargo, las culturas más antiguas y los pueblos del mundo a lo largo de su historia han conectado sus decisiones a este aspecto subjetivo. El más antiguo símbolo de la mente entre los chinos es una representación del corazón.

Adam Kahane

Estimados Amigos del GMH y del Exatec Ampliado,

Agradezco y secundo cordialmente el mensaje en la nota Feliz Navidad y en especial todos los deseos que Luís envió a los piconautas.

Escribe Peter Senge en el prefacio del libro "solving tough problems," de Adam Kahane, que "La política y los políticos de hoy personifican virtualmente lo opuesto del símbolo del cual emergió su vocación - la polis griega - donde los ciudadanos venían a hablar juntos sobre los asuntos del día." La vocación de los dominicanos necesita regresar a la forma original y para ello es que sugiero consideren las bondades del diálogo generativo.

Empecé al leer el libro de Kahane y entiendo claramente que el debate sobre la solución eléctrica solamente puede producir un tranque o una solución de fuerza. Una parte de la solución de fuerza ya decidida es reducir las pérdidas de las distribuidoras con el imperio de la ley, posponiendo la reducción de las pérdidas de los clientes para más adelante. Otra parte - la renegociación de los contratos - parece estar trancada todavía. Aún otra parte es seguir regresando hacia la ley orgánica de la vieja CDE, imponiendo de nuevo también por la fuerza muchas de las prerrogativas que la LGE le quitó a la CDE, al tiempo que se abre la puerta para convertirla en un comprador único.

Kahane ofrece una tercera alternativa que no se ha explorada y que evita quedarse empantanado en el debate. Esa alternativa nos permitirá crear una nueva realidad emergente. Entiendo muy bien que no hay una sola solución emergente a este problema, a pesar de que impulso una que, hasta prueba en contrario, entiendo funciona bien. Lo que sí sé es que ni la solución CDEEE ni la Capitalización funcionan.

Hasta que no superemos la mentalidad del debate, nuestras necesidades y penurias continuarán. Necesitamos adoptar “una forma abierta de hablar, escuchar y crear nuevas realidades” - ese el subtítulo del libro de Adam Kahane.

Aunque la gente ve muy mal que les digan lo que tienen que hacer espero no tomen a mal mi regalo de Navidad. El regalo es que reitero mi sugerencia de que invitemos a Adam Kahane al país y lo escuchemos abiertamente con la mente, el corazón y nuestra voluntad para conocer su enfoque de como resolver "vaínas jodidas" (traducción de tough problems). Sugiero que si se decide trear a Kahane al país, aseguremos que venga sin términos de referencia que lo aten.

Un fuerte abrazo navideño a todos,

José Antonio

Playing With Fire and Collapse Part 16

Reference: Playing With Fire and Collapse Part 15

Part 2 of 2.

Len - 1.12.06 – On Independent Market for Every Utility Customer Part 2 - Market Operation

The Market Manager uses a public tender process to add to this baseload contract supply as load increases within their market territory. Ideally they never get themselves into a position of having to pay for more production than customers purchase, but in the event that happens they are still responsible for paying the contract, so must try to re-sell the excess into other neighboring markets. Failing that, the Market Manager must add a levy onto all market transactions to collect the amount necessary to cover the shortfall amount owed the provider above the amount collected by sales…

Vanderhorst-Silverio: After reading the article suggested and its follow up, I find that after looking closely IMEUC does not corresponds to the new integral reform paradigm. IMEUC is based on mechanistic thinking about fundamental electricity economics, as can be found under the heading “Metrics” a statement that says: “[E]very consumer of utilities will benefit from a system such as this in three ways: first…every entity at every stage in the supply chain will be constrained to making their own good investment and operating decisions or be out-competed by a more efficient operator.”

As the result of efficiency on every stage of the supply chain, any competent electric power system planner would see a repetition of the fault found in the deregulation experiments of the last decade: the system is also fractured. Hence IMEUC does not lead to the maximum value expected by society as is EWPC where the system architecture is modularized at the proper interfaces on the value chain. For example, retail marketing is an essential service for the development of the resources of the demand side that is disintegrated in the IMEUC. A fault on market architecture is evident on IMEUC that becomes a barrier to emerging retail marketing business model innovations under competition.

It was to the innovation concept that Mr. Wimberly responded to my conclusion that “instead of Utilities Enterprise Solutions, a Retailers Enterprise Solutions arrives, which will make much more business for IT suppliers than expected under the Continuity Scenario. The main reason is that current business models are at the end of there useful life, while new technology is available to be transformed into competing innovative business models, leading to true deregulation of electric markets.”

While under EWPC obsolescence risk of customer interfaces are taken by retail marketers, under IMEUC monopoly regime the bets of the Market Manager on the customer interface (including metering) are transferred to the rate payers. As customers needs evolve, retail competition should be centered on business model innovations for the different market segments. One size fit all system is also big bet.

In addition, under IMEUC the Market Manager remains as an intermediary for base load generation based on very risky forecasting. Forecasting great weaknesses that leads to playing with fire have already been delved at length earlier on under this article. The resulting market design is no robust enough, leading to either excessive costs of over-capacity or under-capacity by missing proper whole system long run risk management. A market design error has been made, as an improper market signal may lead to large levies imposed on customers when there is a large forecasting error.

Playing With Fire and Collapse Part 15

Reference: Playing With Fire and Collapse Part 14

In addition to the comments under this article, please find further comments on a generative dialogue about Independent Market for Every Utility Customer (IMEUC) and Electricity Without Price Controls (EWPC).

Part 1 of 2.

Jose Antonio – 11.21.06 – on AMI Services Solutions for Alberta's Deregulated Market:

Deregulation on a piecemeal basis leads to the outcome you are pointing out. Transmission and distribution is fractured; the customer interface is fractured; the value chain is fractured. I suggest that ADOE (and other energy departments) retain a consultant for advice on electricity without price control (EWPC).

The result should be a robust market, where retailers business design innovation (with AMI) should develop the resources on the demand side (with water and gas as well). Reintegration of T&D should assure short run (price elasticity demand response) and long run (boom-bust mitigation) risk managements, with a different standard market structure and design. In simple terms, the result should be the End-State of the Electricity Industry.

The benefits of AMI in the new integral-reform-paradigm will be larger than in the fractured-high/volatility-paradigm, as growth and development towards the new economy will result from real creative destruction.

Energy departments worldwide should look closely to the article issues in the making. As electricity deregulation is a very complex subject matter, debate will prove insufficient. There is a need for a generative dialogue that will help see the presence of the emergent solution. I strongly believe EWPC is the way out of those issues.

Len – 11.22.06 – on AMI Services Solutions for Alberta's Deregulated Market:

Agree with Jose generally, though I think your recommendations don't quite go far enough. Given the meter communications infrastructure you propose, your final "Benefits" graph misses entirely the largest potential benefit by far, that of providing genuine real-time pricing and intelligent interaction with the markets from every customer's meter. It would provide a large block of added benefits at only a very low incremental cost.

Len - 1.12.06 – On Independent Market for Every Utility Customer Part 2 - Market Operation

The most basic operation of the market is to:

· Resell to customers the electricity or natural gas produced by large baseload suppliers under very long-term fixed price contracts negotiated by the Market Manager entity based on their projections of future demand.

· Provide means for merchant generators of all sizes to contract with customer load in excess of this baseload to provide additional power in excess of the baseload.

Continued on next post…

Síntesis: Jugando con Fuego y con el Colapso Parte 2 Grupo 0

Referencia: Síntesis: Jugando con Fuego y con el Colapso

Feliz Navidad a todos los Amigos del GMH y demás lectores,

Ayer, el Editorial El Día: El País Eléctrico trajo un mensaje que refleja el poco avance en la solución de la crisis del sector eléctrico en la opinión pública, pero esperando una solución para el próximo año. La opinión pública merece conocer el progreso acontecido en esta Bitácora Digital y en esta segunda parte aparece cada vez más clara y contundente la tercera vía que nos sacará del debate hacia el diálogo generativo. Seguimos jugando con fuego y las cosas están muy calientes en esta entrega de la primera hasta la última nota.

Por la íntima relación con el proceso de colapso que vivimos en la economía dominicana, sigo concentrando mi atención en un artículo muy oportuno e interesante, que aparenta ser excesivamente leído (7,458 veces en menos de 6 días), sobre los riesgos de precio y suministro en la crisis emergente de gas natural. Aunque insisto en poner cuidadosa atención al artículo Playing with Fire – The 10 Tcf/year Supply Gap -- Part I, de Andrew Weissman, Editor-in-Chief & Publisher, EnergyBusinessWatch.com, y muy especialmente a los 44 comentarios colocados ya al respecto, esta es una breve e incompleta síntesis de la segunda parte a este momento del dialogo generativo que he impulsado:

Playing With Fire and Collapse Part 6

En respuesta a la propuesta de Arvid Hallén de realizar una expansión a base de energía nuclear para resolver la crisis del gas natural, le expliqué la existencia de la tercera vía emergente diferente aquí de los modelos de CDEEE y de Capitalización. Le hice una pregunta para confirmar su modelo mental.

Playing With Fire and Collapse Part 7

Defendí las grandes oportunidades del desarrollo de los recursos del lado de la demanda basándome en informaciones del Electric Power Research Institute (EPRI).

Playing With Fire and Collapse Part 8

Len sugiere aprovechar las economías de alcance de otros servicios públicos para expandir la ESCP. Digo que sería los servicios públicos sin control de precios – SPSCP. El agua aquí y en otras partes es un serio problema emergente que el GMH tiene en su mira. Explico que la ESCP no es una solución pura de mercado como sugiere Len: T&D y la operación del sistema seguirán siendo monopolios y deberán satisfacer el cuarto criterio de Schweppe.

Playing With Fire and Collapse Part 9

Identifico que el modelo mental de Arvid es de la industrial verticalmente integrada. Explico que esa industria - como la CDEEE - es cada vez más ineficiente, pero que la liberación defectuosa de los mercados – como la capitalización - es mucho más ineficiente para la mayoría de los clientes. Adelanto serios problemas en la liberación anunciada de los mercados de Europa en el 2007.

Playing With Fire and Collapse Part 10

Respondo a comentarios calientes del Prof. Banks, quien dice saber demasiado y tener buena memoria. Lo cito y le doy la oportunidad para reconocer el aporte de Schweppe.

Playing With Fire and Collapse Part 11

Respondo otra solicitud de Arvid y lo oriento sobre como poner al día con la tercera vía.

Playing With Fire and Collapse Part 12

Respondo otros comentarios calientes del Prof. Banks quien insiste en una opinión fija. Le cito de nuevo sus propias expresiones y le explico como los ingenieros de la industria eléctrica administran el riesgo – uno de sus fuertes a nivel externo a la industria – y muestro como la respuesta de la demanda es la clave para hacerlo en el modelo emergente de la industria eléctrica. Agrego los comentarios muy favorables de Jamie Wimberly el CEO de Distributed Energy Financial Group al esfuerzo que he venido realizando sobre la solución emergente.

Playing With Fire and Collapse Part 13

Len reitera que tenemos diferencias sobre la solución emergente; el cree que no se necesitan detallistas. Le explico las razones institucionales que entiendo justifican a los detallistas.

Playing With Fire and Collapse Part 14

Ultima, pero la más caliente de todas. Una corte de Estados Unidos abre la puerta para la invalidez de los contratos de la industria eléctrica y el posible pago de grandes multas. Esta noticia debe ser la clave para una reforma con visión de futuro de la industria eléctrica. Hagamos que exista un país eléctrico y esa sea su marca-país.

Playing With Fire and Collapse Part 14

Reference: Playing With Fire and Collapse Part 13

Historical news on deregulation scams: "Court Says U.S. Oversight of Power Industry Was Lax," by DAVID CAY JOHNSTON, The New York Times, December 20, 2006.

"A federal appeals court yesterday called into question the government’s efforts to change the power industry into a more competitive business, ruling that national energy officials abdicated their responsibility to ensure fair electricity markets."

Playing With Fire and Collapse Part 13

Reference: Playing With Fire and Collapse Part 12

This is my most response to Len Gould - see his comment below

Len,

My opinion about having a middleman - the retailers under competition - between the generators and the customers to replace two middlemen - the regulator and the distributor under monopoly - is related to long run risk management for the development of the resources of the demand side. I just don't see yet the institutional arrangement to avoid the middleman. Rate of return regulation or performance based rates are avoided for the commercial competitive activities. Instead, retailers operate under prudential regulation / similar to the financial industry - to protect the public. Retailers also perform physical risk management on the demand side.

Len's comment

Jamie Wimberly's comment, quoted by Jose Antonio

"In fact, many utilities also are moving in that direction and attempting to more tightly integrate their systems, platforms and practices. Technology such as AMI is allowing for this progress in a way that simply did not exist five years ago"

simply indicates how poorly Mr Wimberly understands the concept I, and to a lesser extend Jose Antonio, advocate. Anyone with my experience in IT hardware and software would know that the ideal deregulated system which I advocate has been easily achievable and economical for at least the past 20 years, if fact ever since the development of the economical embedded digital computer. (How old is the digital wristwatch, the industrial barcode printer, portable barcode scanner, etc.? All these systems use esentially the same technology with similar economics. We were buying smart communications-capable thermal barcode printers and installing them in washdown industrial environments in the mid 1980's). We and many others were also connecting multiple very large databases all across Canada since 1990.

There is currently simply no technological or economic barrier to implermenting the smart metering infrastructure I advocate.

And Fred. I agree with you that the system cannot be fully implemented safely as long as many areas are served by only a few monopolistic generation entities. But I ask you, regarding your hate for "deregulation" and "energy free markets", how much of that is the result only of the experience of Sweden, where local prices were held artificially low because the generating companies were arbitrarily barred by law from seeking markets in other countries where electricity was more valuable? I grant that you may have a case, but I think it may not be an example which applies broadly to economics of electricity marketing outside of Sweden. I am convinced that the marketing model I advocate could safely be applied to most distribution regions in North America with only minor re-structuring of generation, esp. where the ISO - RTO model for transmission and market operation has been adopted, a significant proportion.

And given that the meters I advocate would inherintly include a connection for the customer's local CHP generation to tie in, and a communication pathway for the ISO to broadcast requests for their startup in urget peak situation (simply by offering a high enough price), I think it shouldn't take too long for a significant proportion of total generation to be provided by eg. small CHP generating units "topping the energy quality" of most natural gas now burned for heating fuel, which would then be able to keep the large generators honest.

Playing With Fire and Collapse Part 12

Reference: Playing With Fire and Collapse Part 11

Prof. Banks,

Everybody needs to agree with that you know what happen in Sweden: it is a scam in which the government makes the most. You are a brilliant man with fixed opinion that got everything right, except some humble engineering things (about physical electric power risk management for example) as you mentioned last year – “I don't know as much of the engineering as I should and could know…” (see my post of yesterday).

Prof. Banks - 10.4.05 – on Electric and Gas Deregulation: Not-So-Cold Cases:

… in my journeys I never miss a chance to emphasize that deregulation increases uncertainty, and according to mainstream economic theory, uncertainty leads to a decline in physical investment.

In addition, where Europe is concerned, I happen to know that with both electricity and gas, the decision makers of the EU once entertained the thought that they could make deregulation work by strong-arm methods, by which I mean constructing additional pipelines (and power lines) for billions of dollars, and thereby obtaining what DeVany and Wall called “connected networks”. Personally, I prefer seeing this money going into high-quality health care and personal security, because as far as I can tell almost everyone who wants to buy gas and electricity has access to it, even though they may have to buy it from regulated monopolists.

The fact that the theory supporting natural gas and electricity deregulation is internally inconsistent, blatantly unrelated to reality, grossly incomplete, and to a certain extent amateurish, is not likely to keep this particular wolf away from the door.

Prof. Banks – 6.28.05 – On Econimic Theory and Some Disobliging Aspects of the Swedish Deregulation Experience:

The problem is not the theory, but the people using it.

The most valuable risk management tools in the electric market are still long term contracts in a regulated or deregulated environment.

Vanderhorst-Silverio – 11.3.05 - On An Alternative Business Case for Demand Response:

The business case of Demand Response (DR) is enhanced under free markets, innovation, and probabilistic (risk) mindsets. DR is poised to be the demand side risk management tool to complement the traditional "LOLP" supply side risk management tool. There are two sides on the DR coin. On one side, system crashes are mitigated by a least cost mix of supply and demand risk management tools that may be applied in time and space. On the other, DR is the key to the segmentation of customers supply security (a kind of insurance). Because of its fine grain nature, DR can help mitigate delays (intended or not) of lumpy investments in generation, transmission, and distribution.

Vanderhorst-Silverio: As can be seen, with the development of the resources on the demand side there is no need to develop “connected networks.” The decline of physical investments, the increase in uncertainty, etc. are certainly about the people using it, but also to a large extend a problem with the theory. The old vertical integrated utility does its risk management physically by investing in reserves. Schweppe disclosed how the new vertical integrated utility could develop a market with demand response to decrease uncertainty. Vanderhorst-Silverio envisions the development of the resources of the demand side by way of a suggesting a third way that promises lower costs and/or enabling higher value from electricity to the customers, instead of lower prices, but open to change his opinion to make electricity without price controls an emergent reality in a public generative dialogue.

There was one way for one person to know too much and get stuck in debates: learning from the past. There is another way to learn: several people learning from the emergent future in a generative dialogue. The electric power industry is being exposed to new realities that were thought out by late Prof. Fred Charles Schweppe in the decade 1978-1988. That research he led is only recently being flesh out in what is a creative destruction – not tinkering. Jamie Wimberly DEFG CEO, in synchronicity with my comments in support to the emerging power sector reform paradigm revolution, said the following in a sharp closure of his article The Future Utility Customer Service Model:

Thank you to Dr. Vanderhorst-Silverio for his interesting comments and citations. We also agree that a systemic approach is required to envisioning the future. In fact, many utilities also are moving in that direction and attempting to more tightly integrate their systems, platforms and practices. Technology such as AMI is allowing for this progress in a way that simply did not exist five years ago.

At my firm, the Distributed Energy Financial Group LLC, we believe the changing utility customer service model is simply one manifestation of a technological revolution akin to the industrial revolution that promises much more value creation over time. Building off of the advances in information technology and network management begun decades ago, those advances are now being incorporated into complex systems and the management of assets that form the bedrock of any economy, namely, energy, transportation, water, telecommunications, etc. Greater levels of efficiency and productivity are leading to new product and service generation.

And what do customers want? Most customers are not buying “alternative” or “green,” but are more interested in cheap, reliable energy sources. In fact, I would argue that they are not even buying energy per se, but rather comfort, convenience, light, entertainment, mobility, etc. Greater levels of efficiency allowing for greater levels of consumption of what people desire have the virtuous impact of being “cleaner and greener.” One must be careful to not confuse cause and effect.

Jamie

Jamie Wimberly DEFG CEO

Playing With Fire and Collapse Part 11

Reference: Playing With Fire and Collapse Part 10

Hi Arvid,

I suggest that you read the whole thing since it is a complex subject. That is why I said go as deep as possible. However, if you only want to look superficially, search for "Electricity WPC," "EWPC," and "electricity without price controls."

The third way is only in the article on the "future..." Above is another explanation on the historical notes. They use deregulation coming from "most of the other literature..." and the result was playing with fire...

Instead of playing with fire, it is better to develop simulation scenarios and to run system dynamics applied to water, gas and electricity – in a sense play with energy dynamics.

Arvid's comments,

José Antonio,

I will look into your articles about the, shall we call it, "third way"? ;)

And I note that we both agree that the old monopolies were better than the current system of deregulation. Concerning the EU pushed power and gas deregulation I have a rule; if they say something in Bruxelles, do the opposite.

( Spirits and liquor deregulation excluded ;) )

By the way, it's funny that no matter what the article we comment is about, we end up discussing power deregulation.

Playing With Fire and Collapse Part 10

Today Prof. Banks made some comments see below.

Response to Prof. Banks:

Prof. Banks -12.20.06 - On this article: “I had intended to drop out of the deregulation discussion for a very good reason: I know too much about it, and where this subject is concerned my memory is very good.

Prof. Banks - 12.24.05 - On A Few More Unfriendly Comments on Electric Deregulation. “I'm afraid however, that I cannot tell Jose Antonio Vanderhorst-Silverio exactly what he wants to know, because everything considered, my knowledge of this subject is relatively limited. For instance, I don't know as much of the engineering as I should and could know. What I do know, however, is the academic economics, and more important I know when people who know the economics as well as I do, or better, have decided to depart from the truth because it pays them to do so. And when I say "pays" I'm talking about real money, and not cigar store coupons or feelings of relief.

Prof. Banks -12.20.06 - On this article: “… the late Fred Schweppe - a brilliant man who also got everything wrong… he had made the mistake of reading the elementary economics books, and unfortunately concluded that the people who wrote them mostly knew what they were talking about, which they might or might not, but usually not in those few paragraphs where they discuss electric/gas deregulation - where the emphasis here should be on 'few'.”

1988 - On the book Spot Pricing of Electricity: On page 111, introducing Chapter 5 “A Possible Future Deregulation,” it can be read that: “This chapter only presents a set of basic ideas; it does not analyze their impacts because such analyses have not yet been done. Since the advantages and disadvantages have not been quantified, we are not advocating deregulation (i.e. we do not know whether there is “a lady or a tiger” behind the door).” Fred Schweppe died before the book was published. If Prof. Banks opinion is correct, then Prof. Schweppe changed his opinion.

1988 - On the book Spot Pricing of Electricity: On page 126, under Historical Notes and References – Chapter 5, “The deregulation concept of this chapter is based on a supply and demand marketplace. Most of the other deregulation literature is oriented only to the supply side i.e., to deregulating generation without altering the way users buy electricity. We believe that deregulation which considerers only the supply side of the supply-demand equation is very dangerous and could have very negative results… A second major difference between this chapter and most of the rest of the deregulation literature lies in our concern that the economics and physical security of power systems not be destroyed or compromised.”

Prof. Banks - 12.20.06 - On this article: “Unless I am mistaken, Jose is suggesting that there is something beautiful for deregulation scholars…”

Vanderhorst-Silverio: Only one dead scholar; the late Fred C. Schweppe.

Prof. Banks comment

I had intended to drop out of the deregulation discussion for a very good reason: I know too much about it, and where this subject is concerned my memory is very good.

I was at the NATO sponsored meeting in Portugal where a collection of cranks and fly-by-nights from both the US and Europe came to the conclusion that electric deregulation was the way to go, which was the main reason that they had been invited. The stars of that conference were Professor (of physics) Arthur Rosenfeld of the University of California (Berkeley), who got EVERYTHING wrong, and the late Fred Schweppe - a brilliant man who also got everything wrong. Why was this? In the case of Rosenfeld he thought - as I thought at the time - that any physicist probably knew more about electric deregulation than any economist, which may or may not be correct, but as I discovered a few years later when I climbed up on my anti-deregulation soapbox, is definitely not true where yours truly and a few others are concerned..

As for Dr Schweppe (from the electronics lab at MIT), he had made the mistake of reading the elementary economics books, and unfortunately concluded that the people who wrote them mostly knew what they were talking about, which they might or might not, but usually not in those few paragraphs where they discuss electric/gas deregulation - where the emphasis here should be on 'few'.

All of this took place about 20 years ago, and is no longer relevant, because now we see how the deregulation scam has turned out: it has failed, is failing or will fail just about everywhere. Sweden is one of the countries which the deregulation booster club designated a deregulation role model, and the last time I looked the consumer price of electricity had increased 70% since deregulation was initiated. The thing to remember here is that deregulation was sold to the voters in this country on the basis of efficiency (and not equity). The point was that the price to consumers was to fall, and even though there might be a few losers, most households would be winners. Instead the price has not only increased for households, but also for the energy intensive industries - which is very very bad news in a country where borders have unfortunately been opened to an absurd extent. I can also mention that in the case of France, deregulation would likely favor the good citizens of Paris while increasing the miseries of about half of the remaining country.

Unless I am mistaken, Jose is suggesting that there is something beautiful for deregulation scholars as well as the deregulation booster club in the published work of X, Y, Z...whoever. Assuming that I ever teach a course in economics again where deregulation is a main topic, any student who mentions even en-passant any of this literature during my lectures becomes a candidate for a failing grade. I don't have to mention I hope what happens to any scholar or pseudo-scholar appearing in a seminar room at this university with a deregulation song-and-dance. As I explained to Prof David Newbery of Cambridge University, he has received his warning that clown time is over, and from now on it's going to be real business.

Editorial El Día: El País Eléctrico

Editorial del 20 de diciembre de 2006.


En términos prácticos, por lo que significa la generación y venta de electricidad verdaderamente servida, no existe un país eléctrico. O sea, no somos un país con autoridades preocupadas por el desarrollo, ya que la falta de energía cierra todos los caminos del desarrollo y la competitividad.

Todo luce que el año, en términos energéticos, va a terminar como empezó. Sin grandes avances para resolver el problema de la generación suficiente para suplir la demanda nacional.

No hay mejor indicio que la situación que vivimos por la renegociación de los contratos eléctricos. Las partes hablan de “sostenibilidad del sector eléctrico”, plantean la necesidad de una “estabilidad en el mercado” y quieren “beneficios reales para el sector de distribución”.

Además, plantean el respeto que debe mantenerse ante cualquier iniciativa de negociación entre el sector privado y el Estado, el cual demandan que se haga “con apego a la ley y a los acuerdos internacionales” asumidos por el país.

El alegato de las autoridades es que ninguna de las empresas que operan bajo el Acuerdo de Madrid ha cumplido con lo estipulado en los contratos de compra y venta de energía. Y como prueba al canto hicieron público un informe que detalla la cantidad de megavatios que contrataron y los que efectivamente suministran. Hay en todas las empresas –EGE-Itabo, Dominican Power Partner, EGE-Haina– un déficit en perjuicio del Estado y los clientes finales, que reciben apagones constantes fruto del déficit de origen.

Se trata de un problema eterno, que, desafortunadamente, no tendrá solución en diciembre de 2006. De nuevo nos esperanzamos y abrazamos a una solución. Por delante tenemos, esperanzadoramente, los 365 días de un nuevo año.

Playing With Fire and Collapse Part 9

Reference: Playing With Fire and Collapse Part 8

Arvid, thanks for your humble response about the mental model related to the wikepedia quote about EDF Finances. It is clear from your response that it is a vertical integration controlled market mental model. As you can infer from my writing something else is emerging to solve the efficiency of electric power markets.

Uncertainty is a very complex issue. I accept that nuclear power could be part of any scenario, but it should compete with other technologies. Energy efficiency should be in all scenarios – as a predetermined element. Market rules should eliminate the barriers to the resources of the demand side to allow for the full competitive development of energy efficiency, demand response, energy storage, distributed generation, etc.

Electric power monopolies - vertical integration – have become increasingly inefficient since the 70s. Physical risk management on vertical integration was done with supply side - generation and transmission reserves for system coordination. The emerging market changes iron system coordination to bits system coordination, as information and control transaction costs that were prohibitive years ago are getting cheaper and cheaper as time goes on.

Deregulation was sold by people that apparently didn't know about electricity (maybe knew a lot) but knew a lot about making money. The “decade old debate” was about vertical integration versus a flawed reform paradigm that is more inefficient than vertical integration for the majority of the customers. Please read about electricity without price controls starting with The Future Utility Customer Service Model to understand the third way. Go as deep as possible into the links until you feel satified.

The European Union agreed to liberalize electricity and gas for all customers on July 1st, 2007. France, Germany, and Spain are being pressured to unbundled retail and other changes. However, the problem is that the market design and architecture is the flawed one. The third way was not considered at all. Unbundling and other changes, although required, are insufficient to develop a true competitive market.

Regards,

José Antonio