Positive Returns under EWPC

Positive returns in the power industry that existed under vertical integration are now gone. New positive returns will come from business model innovations of retailers’ enterprise solutions to be developed under strong competition.

Positive Returns under EWPC

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

Dear Prof. Banks,

Thank you for pointing out clearly where you understand the positive returns are in the power industry. I contend that the most important positive returns in the power industry were to be found in power systems interconnections, but they are no longer available.

Under vertical integration, which has demand as an externality, incremental costs decreased up to around 1970. From there on, an unstable period initiated in which incremental costs increased and sometime decreased. That is why Sweden’s old days of low costs and high reliability were to go away and went away, as it happened all over the world. I agree, however, things got away further than necessary for the worst, when the economy first, reliability second, movement got underway.

As incremental costs are no longer decreasing permanently, increasing returns in power systems (the combination of generation and transmission) can’t be guarantee either. Hence, positive returns have been lost in the vertically integrated industry since 1970.

EWPC restructuring brings positive returns to the power industry in the open market with demand integration at the retail level by the large reductions expected in transactions incremental costs under (information technology) Moore’s law, while the regulated transportation market assures a reliability first priority policy for a stable environment. Therefore, the positive returns come by letting the information revolution penetrate the industry.

Instead of state or EU country level regulated first generation retailers, the open market should allow horizontal integration of second generation retailers, at the federal level, in the U.S.; at the EU level, in Europe; and hopefully at the global level, all under federal, EU, and WTO, prudential regulation disciplines, respectively. The positive returns will be the result of software development on business model innovations of retailers’ enterprise solutions, as explained in The Future of the Power Industry in 2006, which I transcribe below:

Repeating the GMH Post The Future of the Power Industry in 2006,

The Future Utility Customer Service Model, by Jamie Wimberly, CEO, Distributed Energy Financial Group and Peter Shaw, Director of Customer Strategy, Navigant Consulting, is at the center of a generative dialogue. The article is in synchronicity with my suggestion to Let's Get Out of Back Rooms to a Generative Dialogue, being a welcome contribution to the future of the electric power sector as a whole.

Since I wrote An Alternative Business Case for Demand Response [two years ago today] as a rebuttal to The Business Case for Demand Response, which Jamie co-authored with Thomas Brunetto, Managing Director, Distributed Energy Financial Group, I have added many comments on EnergyPulse about an emerging End-State of the utility industry.

The reason that “Customers are demanding more information and control over their usage,” as the authors state, is that they want to reduce their energy costs, or, better yet, to increase the value that electricity enable for them.

Almost a [now two] year ago, under the article Strategic Perspectives on Utility Enterprise Solutions, by Warren Causey, Vice President, Sierra Energy Group, I said:

Deloitte Research made a Scenarios Study and found that the "Continuity" scenario is what is expected by most companies in the next 5 years. However, Deloitte also found out that the next five years might turn out very different from the strategic plans of many companies (read utilities). The result is a very different perspective on the interdependencies of markets and Enterprise Solutions.

On one, or both, of the other two scenarios ("Tough Times" or "Rising Expectations"), 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 [now re-regulation] of electric markets.

What the authors are calling the “incremental change scenario,” is the same as the “continuity scenario.” However, I see a lot of progress has occurred in just one year, with the insights added by Mr. Wimberly and Mr. Shaw.

While the authors are proposing to adopt an analytical approach, I am proposing a systemic approach that goes beyond trends – pattern of behavior, “responsive” explanations, as Peter Senge calls them – to generative or “structural” explanations for the discovery of the emerging system. The change is going from a mechanistic thinking to systemic thinking.

Please join the generative dialogue, that cuts across topics, which had the latest (not lasted) insight on the EnergyPulse article: Condemned to the Fourth Quartile? by Matt Chwalowski, Principal Consultant, PA Consulting. Posted on 12.9.06. At this instance out of "Active Discussion" and out of "Highly Read." The post starts as follows:

I think I found by myself, on the website of the PA Consulting Group, the answer to my question: “Should Electricity Without Price Controls (EWPC) be considered as a new paradigm of the electricity industry?”... [see the details please in the specific article]

A New Mistaken Experiment

As there are Only Two Stable Paradigms, the electricity-regulation bill approved by Ohio’s Senate is just a new mistaken experiment under economic first, reliability second, tinkering.

Mr. Paul Wilson
The Columbus Dispatch, Ohio

Dear Mr. Wilson,

On Wednesday, August 29, 2007, I wrote the article Restructuring of Ohio’s Power Industry Business. It seems that the message didn't get to the stakeholders. So, I will give a new warning to them.

Today, in the news “Electricity-regulation bill wins Senate approval,” you inform that “The bill, supported by a coalition led by manufacturers, would require utilities to prove that competition exists before moving to market-based pricing, rather than regulator-approved rates, in 2009. After tweaks in committee hearings, the bill also would require utilities to ensure that what customers pay in a deregulated system is "comparable" to rates on, 2008.”

The public needs to be aware that the approved Ohio’s Senate Bill has a big flaw: for competition to exist, utilities as we know them would disappear. For retail competition to exist there is a need to do without incumbent retailers, as the utilities need to be transformed into integrated (transmission and distribution) transportation utilities.

The central issue, however, is that the transportation utility is not a subject of congressional debate, but the subject of engineering planning, operation and control, to satisfy an ultraquality imperative, just like nuclear power plants and space flight vehicles. As there are Only Two Stable Paradigms, the electricity-regulation bill approved by Ohio’s Senate is just a new mistaken experiment under economic first, reliability second, tinkering.

In the process to allow competition, the Public Utilities Commission of Ohio should shift to prudential regulation from regulations on price controls. So one important question the House Public Utilities Committee needs to answer to go forward is: Can We Concentrate on Results? Please hit the link with the question to learn the answer.

Please forward this message to the stakeholder’s representatives.

Best regards,

José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

Already posted on November 2nd, 2007, in www.energyblogs.com.

Can We Concentrate on Results?

Can we concentrate on results? I would say YES, as the knowledge required to decide that the decade old debate between great scams and the apparently lesser and more familiar customer wallet cleaning have been over has been available for more than a year.

Can We Concentrate on Results?

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

Dear Prof. Banks, Dr. Rozenman, and other important and intelligent writers and readers,

I have learned a lot from the contributions (and to complete my research to address their inquiries) of Prof. Banks to Mr. Gould, which have accompanied me in this process for almost two years. By the same token, I have also learned a lot from others no so regular interactions with other intelligent and important writers.

I am sorry that sometimes I have been rude in some of my posts, but it is difficult for me to be as diplomatic as required. Thank you for understanding my apologies.

To go forward, I pose to all readers and writers the following question: Can we concentrate on results?

With a lot of respect, I understand that the historic processes are very important, interesting and useful, but even more important and useful, not necessarily interesting, are the results. I submit that these are the results:

1) Vertical integration regulation: wallet cleaning for customers that don’t need the average offers in their customer class.

2) Economy first, reliability second, (E1R2) deregulation: great scams, as documented by Prof. Banks.

3) Reliability first, economy second, EWPC (R1E2) re-regulation: the solution, that has recently emerged to both the customer wallet cleaning and the great scams problems, is for every end-customers to be able to choose the best service plan of the many available in the market, that will result from business model innovations without price controls under competition and prudential regulations. Great leadership is required to get EWPC implemented.

In the presentation A Generative Dialogue to Reach the End-State of the Power Industry (please hit link to download the presentation), I humbly suggested in March 2006, at Carnegie Mellon University that what is needed to go forward is to concentrate in the generative dialogue to introduce the transformation from today's situation to the end-state of the industry for quite some time, by adopting the EWPC winning market architecture and design.

In the post A Generative Dialogue Without Illusions Part 1, I introduced some of Adam Kahane’s ideas about generative dialogues.

Repeating, the question is: Can we concentrate on results? I would say YES, as the knowledge required to decide that the decade old debate between great scams and the apparently lesser and more familiar customer wallet cleaning have been over has been available for more than a year.

Best regards,

José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

Customer Wallet Cleaning Problem and Solution

The vertically integrated utilities paradigm has been in a NO PROFIT ZONE for quite some time, letting utilities make a profit under regulation only by the “consumer having his wallet cleaned out by ever increasing power costs.” To get the power industry in the PROFIT ZONE, there is a need to restructure with the aim to admit business model innovations to develop.

Customer Wallet Cleaning Problem and Solution

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

Dear Prof. Banks, Mr. Keller and Mr. Rozenman,

I agree with Mr. Rozenman that regulation not only have big flaws, but the most important thing is that it is just plain obsolete. It is for the obsolete fact that I disagree with him that the debate the debate is not yet settled, as EWPC has been available for over for a year. To understand the chaotic events that explain that the debate is settled please read the Conspiracy Theory Against Mr. X.

The decade long debate between E1R2 deregulation with vertical integration regulation was a real waste of time, as deregulation California style was a real scam that was based on The BIG California LIE, letting Prof. Banks repeats again and again his proper views of the scams. Now, the fixes to deregulation with re-regulation that, for example, include backwards incremental extensions, like capacity markets and NERC mandatory requirements, are just a return to a more costly kind of deregulation. That is what worries Prof. Banks.

In a second, and more responsive, effort on Mr. Keller question “…could one of you gentlemen offer a concrete and real world solution to the problem of the consumer having his wallet cleaned out by ever increasing power costs?”, electricity under regulation – (as another way of saying it is just plain obsolete) - has been for quite some time in a NO PROFIT ZONE (see Adrian Slywosky’s book “The Profit Zone”) with an outdated business model of price controls for the end-customer, in which two intermediaries, the regulator and the utility, misrepresent the real and differentiated needs of the customers. The utility with this NO PROFIT ZONE business model has the advantage to win rate case to the regulator, making a profit only by the “consumer having his wallet cleaned out by ever increasing power costs.”

The solution to Mr. Keller problem is the paradigm shift to EWPC. One of the key things that need to be done is to remove the “native load” barrier in the new Energy Bill and adopting EWPC. Removing the barrier will allow to open the demand side and introduce competition in retail and wholesale, so that new business model innovations can be developed.

To get the power industry in the PROFIT ZONE, there is a need to restructure with the aim to admit business model innovations to develop. In that respect, please read the article The Sense of Urgency for EWPC Restructuring or at least this part of the content:

Dear Professor Ramírez Orquín.

Your article [The Potential for an Effective and Timely Deregulatory Endeavor] is giving the proper emphasis for the sense of urgency on the right king of restructuring of the electric power industry, when you write: "Soaring prices together with the perception of a deteriorating service/product quality contribute to this notion. For the electric power system this trend is particularly worrisome given its vital implications to society."

I agree that “The current restructuring drive has not seemed, as some policy makers expected, to improve this condition and may have actually made it worse.” In 2004, The Cato Institute experts Peter Van Duren and Jerry Taylor recommended total abandonment of restructuring.

Electricity without price controls (EWPC) is a paradigm shift that makes the case for restructuring as explained in Rethinking Electricity Restructuring as EWPC. The new drive would make things better, as technological innovation are waiting to be integrated to power system planning, operation and control with at least six sets of disruptive technologies, as explained in The Sixth Disruptive Technology.

One of the main problems with restructuring was separating transmission from distribution to keep regulated retail together with distribution. In the article Give Engineers What Belongs to Engineers and its hiperlinks the “two dominant components i.e. the socio-normative and the technological ones, both…” will be “working harmonically.”

For more details see the Electricity Without Price Controls and the Grupo Millennium Hispaniola blogs.

Regards,

José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Dominican Republic

Switching Retailers is NOT as Important

Dear Fred (Banks), Len, Mike, Fred (Plett), Jim, Steve, and Peter

I am glad that the dialogue is getting more balanced and rich, with the participation of all of you important and intelligent people, on three fronts.

1) Vertical integration regulation,
2) Economy first, reliability second, (E1R2) deregulation, and
3) Reliability first, economy second, EWPC (R1E2) re-regulation

To get a better understanding of EWPC, the issue of switching suppliers and “energy retailers” are considered. With that in mind, I have selected as the most important comment posted, that of my friend Professor Banks that said: “We have some customer response here in Sweden because of deregulation, and my wife apparently changes suppliers from time to time.”

The second most important comment was that of my friend Len Gould: “I get to see up close and in detail exactly what "energy retailers" do, which is practically nothing (useful). The distribution company (by regulator mandate) MUST maintain all the customer care, metering, billing, etc. etc. system, at a cost to customers set by the regulator and heavily inflated as much as possible in order to maximize distribution's profits. Would that get cheaper if the retailers took over the delivery of those services, as Jose Antonio appears to be promoting in EWPC? No, because of the distinctive features of large business software, e.g. it costs millions of dollars to service the first customer, but almost nothing to service the next million customers.”

Both comments relate to E1R2 deregulation and first generation retailers (1GRs). EWPC is about R1E2 re-regulation and second generation retailers ((hit link to read about Second Generation Retailer - 2GR). Fred is probably confusing one kind of customer response that adds nothing to physical system risk management, while Len is describing what “energy retailers” do.

In the article A Little Silicon is Necessary but NOT Sufficient, which I wrote as a response to Prof. Banks article, I said: “… Under the R1E2 EWPC markets (in plural), every end customer can participate in the genuinely open retail markets and select the service plan (markets mix) contract that best meet their needs for low cost and/or high value. Such markets are the real-time balancing market, the hour, day and week ahead markets, as well as any other forward market that retailers can provide with their business design innovations. Some customers will also require physical delivery of their futures contract.”

While under E1R2 deregulation it was though that switching 1GR is a good measure of “efficiency,” under R1E2 switching is not important at all, since many customers will find a market mix that satisfies best its requirements for insured electricity for the future. Electricity contracts are similar to insurance contracts, in which customer protection will be done by prudential regulations.

So under EWPC re-regulation switching suppliers very frequently is not measure of efficiency. What is important is the contractual commitment that customers will make to respond in advanced and infrequently (but randomly) when the system might get close to its capacity limit, when for example it is known that a nearby large generator will be out of operation.

Best regards,

José Antonio

Uno Lamm is a Leader Role Model

Dear Prof. Banks and readers,

This is the quote about Uno Lamm in the article Handling Sweden’s Electric Reform Threats:

As my hero Uno Lamm proved, when he introduced High Voltage Direct Current technology (see The Sixth Disruptive Technology), facing a strong opposition by the same California IOUs referred to in The BIG California LIE, the Nordid countries don’t need to wait for the experience of the U.S. What they need, I repeat, is a strong leadership.

Nowhere in that quote can be interpreted that he had to be involved in electric markets to be an example of Swedish leadership. His example is about leadership and just leadership.

Going into the internal reference about Uno Lamm in The Sixth Disruptive Technology you can read:

My hero, the Swedish Uno Lamm and the father of HVDC, who won the Pacific Intertie Project for ASEA after facing a strong opposition by [the same] California IOUs [referred below], and later estimated to save customers more than a billion dollars a day, after negotiating a license agreement with General Electric is quoted saying something like this in an interview in 1988: “among Americans, when the heat of the combat ends and a decision has been arrived at, all the trouble disappears and the people work hard to implement the decision in the best way.” I strongly hope this will be the case of EWPC.

The summary of the The BIG California LIE is as follows:

The BIG LIE is that retail competition is impossible in electric markets. The implementation of a competitive retail market was the center of the debate in California. Instead of cooperating to implement it, the three big California utilities, that didn't care about the end-custumers, acted very irresponsibly. EWPC is the paradigm shift to show that retail competition is not only possible, but absolutely necessary to turn the electricity industry into a vibrant value added business for all stakeholders.

All of that followed this paragraph (which responded Prof. Banks article):

Writing about that if deregulation could not be achieved in the U.S., … “then it could not be realized any where in the face of earth, at least in the medium to long run” Professor Banks states and adds: “By that I mean after any excess capacity that might be available has been utilized.” Such statement is faulty because, while the generation and transmission capacity may be utilized with respect to current demand, the development of the resources of the demand side can change the situation in the medium run. In addition, the U.S. lobby activities have led to an unacceptable extension of the VIUs paradigm.

So, Uno Lamm as a Swedish leader is a role model to follow for handling the reform needs in the Nordic countries.

On the humorous side, I will let readers decide if Fred needs a shot of Aquavit or I need a rhum and coke.

Best regards,

José Antonio

El Gran Reto

Cándida Acosta - 10/29/2007

Agenda competitividad RD debe ir hacia productividad

HAUSMANN ESTIMA GOBIERNO TIENE QUE TENER LAS “ANTENAS BIEN PUESTAS”

ALAJUELA, Costa Rica.- Ricardo Hausmann, director del Centro para el Desarrollo Internacional de la Universidad de Harvard, dijo que la agenda de competitividad de República Dominicana tiene que estar concentrada en el aumento de la productividad, y no en la transferencia de valor a los sectores productivos.

El profesional de la economía dijo que la economía dominicana ha dado un cambio de la noche al día, desde el tiempo en que visitó este país junto al actual ministro de Hacienda de Chile, Andrés Velasco, a la época actual, en el que la recuperación ha sido muy rápida.

No obstante, precisa que en República Dominicana no todo está resuelto y hay todavía muchos problemas por resolver, como por ejemplo el sector de la maquila (zona franca textil), y el nivel de crédito al de años anteriores, “pero no hay dudas que habían problemas que se veían como nubes muy negras y han logrado una recuperación impresionante”.

Con relación al tema energético, Hausmann señaló que se trata de un problema de gran dificultad. Especificó que problemas como el petróleo y el que enfrenta el sector de maquilas no le hacen bien a esta economía, pero si con todo y esto se ha logrado un crecimiento de 8,3% promedio en el PIB durante tres años es un logro sumamente importante.

Ante la pregunta de cuál sería el camino más factible para mantener el crecimiento del PIB, el director del Centro para el Desarrollo Internacional de la Universidad de Harvard dijo que esta nación debe concentrar su agenda en el tema de la competitividad, porque muchos países han cometido errores en la forma de aplicar su Ley de Competitividad. Conoce que aquí se discute una ley sobre el tema, la cual dijo que desconoce.

Explicó que los países deben concentrar su política de competitividad en “cosas que hacen más productivas las empresas, no en transferencias que las hagan más rentables a costa del resto de la sociedad, ni transferencias que hagan ventas con insumos más baratos o que otras tengan que comprarles sus productos más caros”.

Productividad

El tema central tiene que ser productividad, el Gobierno tiene que tener las antenas muy bien puestas para identificar donde están los obstáculos al crecimiento y a la actividad económica, conjuntamente con formas eficientes para eliminarlos, enfatizó.

Durante la entrevista, efectuada en una de las salas de la Escuela de Negocios INCAE, el economista recalcó que el Gobierno no podrá precisar cuales son los obstáculos si no realiza un diálogo muy profundo sobre los problemas que enfrenta el sector privado y hacer que ese diálogo se legitimice en toda la sociedad para que la política de competitividad sea percibida como una medida que busca el bien común y no como una política social para los ricos.

“Ese me parece uno de los grandes retos y las grandes dificultades”, apuntó al señalar que si se logra generar un ambiente de confianza, de transparencia, de legitimidad, entonces los países pueden lograr enormes avances en resolver problemas y obstáculos que permiten convertirse en un gran destino privilegiado de las inversiones que van a generar los empleos que el país necesita.

Sostuvo que ni las medidas proteccionistas, ni los incentivos fiscales son convenientes en una agenda de competitividad que debe estar concentrada en el aumento de la productividad, en intervenciones que aumenten la productividad, no en transferencias de valor, sino en cosas que creen más valor. Dijo que a veces las empresas no pueden ser más productivas por problemas de infraestructura, “entonces no me dés un regalo, resuelve el problema de infraestructura”.

Original del Listín Diario

Response to Professor Banks

Dear Professor Banks and Mr. Gould,

As promised, I just published the following articles in energyblogs.com in response to the article and the comments.

The Natural Monopoly Transportation System 10/28/2007 at 06:05 PM...EWPC provides a new configuration, in which the natural monopoly is reduced to the transportation system of the electric market, where the old config...

Handling Sweden’s Electric Reform Threats 10/28/2007 at 06:54 PM...Strong leadership is needed to complete the reform process in the Nordid countries to benefit end customers, by introducing a paradigm shift to EWPC...

A Futures Market under EWPC 10/28/2007 at 07:03 PM...The elements of a futures market under R1E2 EWPC to lead to an stable and competitive electric markets environment are explained. A Futures Marke...

A Little Silicon is Necessary but NOT Sufficient 10/28/2007 at 07:18 PM...There is more to markets than meter electronics. It is important to understand the need for retailers as the bridge between the retail and wholesale...

Best regards,

José Antonio

A Little Silicon is Necessary but NOT Sufficient

There is more to markets than meter electronics. It is important to understand the need for retailers as the bridge between the retail and wholesale markets.

A Little Silicon is Necessary but NOT Sufficient

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

It is important to signal that Prof. Banks properly mentioned retailers as a required institution when he wrote: “… it should never be forgotten that while initially deregulation was crafted to prohibit large California utilities (i.e. ‘distributors’ or ‘retailers’) from signing long term contracts when they begin to encounter very high prices, they were not allowed to pass them to e.g. households and small businesses. Why was that? It was because consumer (retail) prices could have escalated by as much as 200%, and as Governor Gray Davis made clear, the California economy might have been shocked into recession.”

That is only true, where lacking a proper institutional market architecture and design. As can be seen in A Futures Market under EWPC, it is no longer necessary to have regulated monopoly retailers to sign long term contracts with generators.

In that basis, I respectfully disagree with Mr. Gould in that “the intelligent application of a little silicon intelligence we can do better by providing a genuine free market for every customer,” while a necessary technological aspect is identified, it is totally insufficient in the institutional sense. A genuine free market in which all customers participate in the wholesale market as he proposes is an unnecessary administrative burden that also leads to an unreliable E1R2 market (please see IMEUC: Unreliable Service and Price Spikes).

To understand how to participate in the wholesale market, in the article “Understanding Demand: the Missing Link in Efficient Electricity Markets,” Marija Ilic et al write: “the ability to expose customers to real-time pricing provides the needed incentives to create demand elasticity. LSEs [competitive retailers] through better understanding of load profiles, customer’s demand elasticities and willingness to reduce or shift load in exchange for compensation, can more effectively bid demand into the wholesale electricity markets and reduce overall market price…”

Except for the balancing real-time market, market price results from generation and load bid commitments made ex-ante under the restrictions of R1E2. Under the R1E2 EWPC markets (in plural), every end customer can participate in the genuinely open retail markets and select the service plan (markets mix) contract that best meet their needs for low cost and/or high value. Such markets are the real-time balancing market, the hour, day and week ahead markets, as well as any other forward market that retailers can provide with their business design innovations. Some customers will also require physical delivery of their futures contract.

In fact, under EWPC all end-customers can participate fully in the market. Some of them will be able to participate in the wholesale markets as they do already in many jurisdictions. Most of them will participate in a genuine retail market, being able to choose, when prepared to do so, a pure and risky balancing real-time market that contradicts Governor Davis statements. However, it is not practical, nor economic, to impose that all end-customers should participate in the wholesale market, as there are very costly procedures to follow.

A Futures Market under EWPC

The elements of a futures market under R1E2 EWPC to lead to an stable and competitive electric markets environment are explained.

A Futures Market under EWPC

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.One of the key elements to develop competition between generation, retail and both of them, without price controls, is the guarantee of the development of a vibrant future market. Electricity markets are no longer radically different after the R1E2 discoveries.

As I expressed in the Conspiracy Theory Against Mr. X “An underlying intention of the conspiracy theory is to send a strong message to investors and Wall Street, that the unstable environment of the industry is about to end, and that financial capital is set to be replaced by production capital, as the industry becomes once again very predictable with the implementation of EWPC.” A key instrument for predictability is futures contract, which facilitates power generation development and financing, without the need for contract signing by monopoly retailers.

I agree that under E1R2 deregulation it is not possible hedge electricity. However, under R1E2 EWPC re-regulation, a futures market can be developed to satisfy the original NYMEX electricity contracts, which require high physical reliability.

John Flory, at the time with Tabors, Caramanis & Associates, wrote: “To maintain the integrity of this future market, NYMEX insists that the future contract clearly provide for physical delivery,” which could never be accomplished with E1R2 deregulation. Under R1E2 EWPC, NYMEX requirement is fulfilled with the ultra-quality imperative.

Flory added: “Thus, the futures contract’s main value is providing a tool for price risk management, but, it is defined in such a way as to not jeopardize the reliability of physical delivery… Futures contracts provide another important function in addition to price risk management. That function is price discovery. That is, by following the transaction prices in the futures market, a participant discovers the market price for electricity for the next 12/18 months.”

The key to such high physical reliability is the ultraquality imperative, which was explained as follows in EWPC: People Coordinating and Cooperating with Electrons Part 2:

Eberhart Rechtin and Mark Maier, in their book “The Art of System Architecting,” explain that “social system quality… is less a foundation than a case-by-case trade-off; that is, the quality desired depends on the system to be provided. In nuclear power generation, modern manufacturing, and manned space flight, ultraquality is an imperative. But in public health, pollution control, and safety, the level of acceptable quality is only one of many economic, social, political, and technical factors to be accommodated.” [I published this insight on March this year [2006] at the Academy of Science of the Dominican Republic.]

In the first case, the experts are the engineers. For the center stage, controlled market, system engineer institution to assures that electrons and people have the same purpose, as I mentioned on 12.30.06, ultraquality is an imperative to manage short run and long run systemic risk, with both supply side and demand side resources.

In the second case, according to Rechtin and Maier, the accommodation is done by the architect with “a professional response to the public needs and perceptions.” It is such unjustified perceptions that fueled the decade long debate. Bill Hogan mistake was that he didn’t understand what Fred Schweppe meant by the fourth criterion: “consider the engineering requirements for controlling, operating and planning an electric power system,” which can only be met by ultraquality. As time has advanced and new digital technology market share becomes larger, electricity demand for quality is only increasing. A professional response is needed, however, for the remaining, non real-time, free market activities of retail and generation. EWPC for the customers is such a response.

Handling Sweden’s Electric Reform Threats

Strong leadership is needed to complete the reform process in the Nordid countries to benefit end customers, by introducing a paradigm shift to EWPC, and making them active participants in the electric market.

Handling Sweden’s Electric Reform Threats

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

The version of the article “Why has the Nordic electricity market worked so well?” that I found on Internet is written by Professor Lars Bergman for Elforsk AB, which is owned by the Swedish electrical utilities. Maybe explaining the question mark, Professor Bergman starts the conclusion of the article with: “There are two major threats to the success of electricity market reform in the Nordic countries. The first is that security of supply can not be maintained. The second is that market power prevents the potential benefits of competition to be realized.” That is a clear message for those in the ship that they are operating under E1R2 deregulation.

Peter Fritz, the Secretary of Market Design-program of Elforsk AB, starts the foreword of the article with “The development of liberalized electricity markets around the world is, partly, an experiment of applied market theory with uncertain outcome. For this paradigm to benefit customers thru efficient supply of electricity, we need increased and better knowledge on how competitive electricity markets really work and how to solve the problems that might occur.” That is the kind of knowledge that the EWPC paradigm is offering.

To handle both threats, Sweden and the other Nordic countries should complete the reform by introducing EWPC with its R1E2 policy. In the 1996 article “Lessons from the UK and Norway,” Richard Tabors, one of the authors of the book “Spot Pricing of Electricity,” and at the time with Tabors, Caramanis & Associates, wrote that “No restructuring can take place that does not guarantee system reliability. Whoever the operator may be, that entity must have a pool of resources that can be dispatched to supply balancing functions, ancillary services, and reserves… its operators must have at its disposal the short term resources needed to maintain reliability and stability.” This is an excellent synthesis of the R1E2 policy.

Professor Bergman also wrote that: “… retail electricity prices (before tax) have become strongly lined to wholesale electricity prices.” It is precisely the development of the resources of the demand side, to integrate the retail and wholesale markets under EWPC, what is needed in the Nordic market to complete the reform and reap the benefit of competition. There is, however, a need for a very strong leadership in the Nordic countries if there are contracts and regulations of the weird kind that may be in the way of such development.

Now that it is clear that the natural monopoly can be restricted to the transportation system (see The Natural Monopoly Transportation System ), I can take the first part of a sentence (not being out of context) that Professor Banks wrote to respond to Mr. Len Gould’s comment: “The business of creating an electric market in which customers enjoyed a meaningful participation was discussed by Fred Schweppe (of MIT) at a long conference in Portugal that I have mentioned a number of times in this forum. Doing this is almost certainly correct, but I stay away from this topic because I don't really understand the details,…”

It seems strange that Professor Banks “don’t really understand the details” of meaningful customer participation, since he just stated under The Old Response to Jack Casazza that “The economy that Fred Schweppe was thinking about was the economy in the first part of your econ 101 textbook. That economy is irrelevant for the deregulation discussion.”

As I responded to Prof. Banks on 4.3.06, Prof. F.C. Schweppe understood that a successful [regulated energy] marketplace require, among other elements, "No monopsonistic behavior on the demand side" and said that "monopsonistic behavior is difficult on the demand side because the number of customers ranges from thousands to millions." How many (transmission) customers are there in Sweden?”

That is why that understanding the details of a meaningful participation of customers is of the utmost importance. In addition, as can be seen in my presentation at Carnegie Mellon University, “electric restructuring is ‘fundamentally an information technology event.’” as Stanley Klein’s wrote in 1998. Writing about technological revolutions, Dr. Carlota Pérez adds “these new technologies provide the potential for modernizing the whole productive structure and for raising the general level of productivity and quality to a higher plateau.”

In fact, Schweppe et al criterion for economic efficiency in the regulated energy marketplace is “Motivate customers to adjust their own electric energy usage patterns to match utility marginal costs. (See the book Spot Pricing of Electricity)” That is why EWPC concerns itself strongly with the development of the resources of the demand side.

Furthermore, the application of a marginal cost pricing algorithm as NordPool employs together with an undeveloped and unresponsive demand side is a sure “mechanism for bleeding electricity customers,” as Professor Banks explains. However, instead of the kind of the “surfeit of increase ‘choice’ in Sweden,” what is needed is developed and responsive customers on the demand side, that allow 2GRs under EWPC to set the marginal cost pricing at reasonable levels in line with individual customers set price caps (see No Need for Regulated Price Caps - I and No Need for Regulated Price Caps - II).

Writing about that if deregulation could not be achieved in the U.S., … “then it could not be realized any where in the face of earth, at least in the medium to long run” Professor Banks states and adds: “By that I mean after any excess capacity that might be available has been utilized.” Such statement is faulty because, while the generation and transmission capacity may be utilized with respect to current demand, the development of the resources of the demand side can change the situation in the medium run. In addition, the U.S. lobby activities have led to an unacceptable extension of the VIUs paradigm.

As my hero Uno Lamm proved, when he introduced High Voltage Direct Current technology (see The Sixth Disruptive Technology), facing a strong opposition by the same California IOUs referred to in The BIG California LIE, the Nordid countries don’t need to wait for the experience of the U.S. What they need, I repeat, is a strong leadership.

The Natural Monopoly Transportation System

EWPC provides a new configuration in which the natural monopoly is reduced to the transportation system of the electric market, where the old configuration produces much higher and more volatile prices.


The Natural Monopoly Transportation System

By José Antonio Vanderhorst-Silverio, Ph.D.Systemic Consultant: ElectricityCopyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

In The Magic Deregulation Formula, I took the challenge to respond in full to Professor Ferdinand E. Banks article A New Lecture on Electric Deregulation Failure, and in particular the statement “No playing games on the consumer side of the market can possibly offset the pressure on prices resulting from conventional profit maximizing behavior on the supply side. Put another way, given the technological configuration of the electric sector (e.g. increasing returns to scale), deregulation invariably leads to much higher and more volatile prices.”

I read slowly the article now and the other three comments. He is right that deregulation as practiced with economy first, reliability second, (E1R2) is a failure. However, the industry as a whole is not a “natural monopoly.” Under EWPC, the transportation utility is considered a natural monopoly. Once you apply the reliability first, economy second, (R1E2), policy, all things get settled, since the centralized market can be divided into two interrelated markets:

1) The controlled natural monopoly integrated (T&D) transportation market, and

2) The open market without price controls, but under prudential regulations, on the generation, retail, and customer value chain.

Economic efficiency gets divided in two sequential steps. With the “reliability first,” the grid is planned to enable maximum welfare in the open market as explained in Free Market and Central Planning, Under R1E2. With “economy second,” actual social welfare is practiced, “as each competitive retailer develop, with business model innovations, the resources of the demand side, to integrate demand into power system planning, operation and control, [then] a robust, vibrant, and fully functional, electrical and market, power sector can evolve.”

This results in the Rethinking Electricity Restructuring as EWPC, which gives “Strong EWPC market architecture and design recommendations to restructure worldwide electricity markets, [which] supersedes those proposed in 2004 by Peter Van Doren and Jerry Taylor of the Cato Institute by resolving the "previously unknown" problem created by a flawed [E1R2] deregulation. Those recommendations are developed to support slicing the last of the regulated monopolies with a strong sense of urgency.”

In Full Retail Choice Emerges, “As distribution becomes an integral part of transportation under EWPC structuring without incumbent retailers, the [previously known] shortcomings [identified by Van Doren and Taylor] disappear and full retail choice emerges as Second Generation Retailers (see Second Generation Retailer - 2GR), not the first generation retailers of … [the] article [The Potential for an Effective and Timely Deregulatory Endeavor], compete under federal prudential regulations (which should hopefully become global prudential regulations under the discipline of the WTO). High returns to scale also appear for 2GRs which should operate under federal or better yet global prudential regulations.

Repeating the basic idea, EWPC restructures the old configuration VIUs controlled market into two markets: one controlled market of natural monopoly of integrated electric (T&D) transportation and one market without price controls, but under prudential regulations. That is the new configuration of the electric sector.

The old configuration leads to much higher and more volatile prices than the new (R1E2 EWPC) configuration. In the old configuration physical risk management (reliability) was performed only with the resources of the supply side. The failed configuration (E1R2 deregulation) leads to much higher and more volatile prices than the old configuration because of the conventional profit maximizing behavior on the supply side. In the new configuration physical risk management (reliability) is perform with a combination of supply side and demand side physical risk management.

Instead of playing games on the consumer side, EWPC develops the resources of the demand side to produce demand side physical risk management.

At least three other companion articles are being written.

Vivir el Presente Sin Mirar el Futuro

Mientras el Secretario de Estado Temístocles Montas propone un pacto social de larga espera que se basa en un escenario de continuidad con el futuro, el Dr. Erich Kunhardt afirma que la prosperidad solo surge de la innovación. El futuro dominicano basado en la continuidad es otra forma de vivir el presente sin mirar el futuro. El Grupo Millennium Hispaniola insiste en que necesitamos desarrollar multinacionales dominicanas y que una de las más grandes oportunidades de innovación está precisamente en la electricidad, conforme a lo que dijo el Secretario Montás en 1996 “…que al margen de una reestructuración profunda de la industria eléctrica dominicana, no hay posibilidad de superar los problemas que hemos estado confrontando…”

Vivir el Presente Sin Mirar el Futuro

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

“República Dominicana debe establecer los mecanismos institucionales que garanticen la estabilidad suficiente para que su economía crezca de manera sostenida en no menos de un 5% anual. Esa es la única forma mediante la cual, al cabo de 40 años, el país obtendrá niveles de ingresos per cápita iguales a los de un país desarrollado.” Así lo expresó el secretario de Economía, Planificación y Desarrollo, Témístocles Montás, quien afirmó que el crecimiento sostenido en el mediano y largo plazos, sólo se puede lograr con el establecimiento de un pacto social que se trace objetivos para los próximos 25 años.

La única forma de obtener niveles de ingreso iguales a los de un país desarrollado es a través de la innovación y la tecnología, como sugiere Erich Kunhardt en el reportaje de Virginia Rodríguez G., publicado por el Listín Diario el 20 de octubre de 2007. Virginia pregunta ¿Qué es, entonces lo que hace un pueblo próspero? “Los innovadores. Solamente la innovación. Eso es lo que ha hecho las transformaciones. Eso fue lo que causó la industrialización, eso es lo que está pasando ahora en China, lo que transformó a Estados Unidos y a todo el mundo,” respondió el Dr. Kundhardt.

El Grupo Millennium Hispaniola le ofrece muy respetuosamente al Secretario Montás una afirmación contraria a su opinión, basado en el principio de que uno no es su opinión, lo que no le quita nada sobre su alta inteligencia, ni sobre su elevada dignidad. Crecer en no menos de un 5% anual por 40 años no solo no es la única forma, sino que es otra forma de “vivir el presente – continuo - sin mirar el futuro,” en un mundo que está sentenciado a la discontinuidad, especialmente por lo que el propio Secretario Montás expresó en marzo de 1996, al sugerir una reestructuración profunda de la industria eléctrica dominicana, que no ha sido lograda por falta de un modelo idóneo y que solo recientemente ha cobrado vida con la Electricidad Sin Control de Precios (EWPC por sus siglas en inglés).

Decía el Secretario: “Hace alrededor de dos años [1994] era prácticamente un mito y, diría yo, casi hasta un delito hablar sobre la reestructuración de la industria eléctrica en los términos que se está concibiendo hoy. Pienso que hemos llegado a un punto en el cual se reconoce, salvo los que estén en la luna, en Marte o en Venus, que al margen de una reestructuración profunda de la industria eléctrica dominicana, no hay posibilidad de superar los problemas que hemos estado confrontando a lo largo de los últimos 25 años.

Desde que se impuso la capitalización, ha sido un mito y también un gran delito hablar y escribir sobre una propuesta innovadora que nació en esa misma ocasión, como se comprueba en el Libro “Electricidad y Desarrollo: El reto Dominicano,” que contiene las ponencias del 1er. Simposio Nacional de Energía Eléctrica.

En mi ponencia, en el mismo evento en INDOTEC, en la sección “Nueva Teoría del Negocio de la Industria Eléctrica,” dije:

Recientemente se está desarrollando una nueva teoría del negocio de la industria eléctrica, la cual está siendo puesta a prueba en varios países y que presagia una nueva época. De moda en los organismos internacionales, esta nueva teoría del negocio se basa en conceptos sólidos de una importante teoría económica del negocio eléctrico. La misma cambia radicalmente las suposiciones que definen las reglas de juego, especialmente tratando de reducir el horizonte de planeamiento e introducir la competitividad de acuerdo a las nuevas fuerzas de la globalización y la apertura de los mercados. Todos los nuevos modelos que nos presentó Temístocles Montás surgen de las mismas fuerzas predominantes, siendo sus diferencias más notables las adaptaciones a la realidad particular de los países.

A seguidas agregué: “De implantarse universalmente, después de varios años de esfuerzo, se puede esperar que la teoría sirva para el muy largo plazo (por decir algo, otros 50 años más por lo menos). Dentro de su ciclo de vida esa teoría del negocio se encuentra en su período de infancia, por lo que es de esperarse muchos refinamientos en los procesos de implantación, como los que están ocurriendo ya…”

El Dr. Kunhardt argumenta que “… es precisamente inversión en investigación e innovación lo que le hace falta a los países en desarrollo. “La ciencia y la tecnología en Latinoamérica no existen. Nadie les pone atención,” denuncia. Desde hace mucho tiempo, las oportunidades de innovar con la electricidad sin control de precios han estado disponibles a los dominicanos, aunque he invertido mucho tiempo y dinero en el desarrollo de la EWPC aparentemente aquí nadie les pone atención para seguir viviendo el presente sin mirar el futuro.

Sin embargo, basta mirar el nuevo sitio www.energyblogs.com del Energy Central Network para ver que el artículo más leído es Financing and Developing Wind Projects, con 343 lecturas a las 7:51 PM del sábado 20 de octubre de 2007. En adición, otros 10 artículos sobre EWPC tienen más de 100 lecturas como sigue:

Conspiracy Theory Against Mr. X - 239

Engineers Needed for Lower Prices - 184

The Sixth Disruptive Technology - 156

Slicing the Last of the Regulated Monopolies - 132

Free Market and Central Planning, Under R1E2 - 126

2nd Disruptive Technology Crossed Chasm - 117

Wind Integration: An Emerging Paradigm - 114

Give Engineers What Belongs to Engineers - 113

EWPC Superiority in Carbon Emission Reductions - 108

Demand Integration Under EWPC - 102

La conclusión de todo esto es que la EWPC es el futuro que debemos mirar.

Los últimos artículos y sus síntesis que he colocado en el Electricity Without Price Controls Blog, como resultado de intercambios en www.energypulse.net son los siguientes:

1) Disruptive Technologies Convergence
Now that EWPC has emerged, it is to too little, too late, to try to extend the VIUs paradigm beyond its capabilities to integrate the grid and the enterprise. The availability of at least six disruptive technologies, waiting to be tightly integrated to provide commercial quality electricity service under EWPC, offers the needed sense of urgency to restructure electric power sectors.

2) No Need for Regulated Price Caps - II
Customers’ price caps are the key to the infrequent rational rationing of service. During a transition to EWPC that ends with every customer defining its own price cap, it is important to understand that most of the customers need to make load commitments well in advance of real time operation. They will do that by participating in hour ahead, day ahead, week ahead, and futures markets. Any system with a larger than optimal balancing, real-time market, is bound to become an unreliable market.

3) No Need for Regulated Price Caps - I
Missing in the discussion under the article "Meeting Our Need for Electric Power," up to the 19th of October, 2007, are the huge coordination problems of short run unit commitment and long run system adequacy, which involve the opportunity for demand integration. Reliability First, Economic Second, is the approach to solve those problems. No longer will regulated price caps will be issued by regulators, as customers themselves have negotiated individually their price caps with Second Generation Retailers.

4) Full Retail Choice Emerges
As customer value migrates a paradigm shift of full retail choice emerges under EWPC from R&D discoveries that allows retail and wholesale competition without incumbent retailers.

5) The Sense of Urgency for EWPC Restructuring
There is a strong sence of urgency for the implementation of EWPC. Professor Alberto Ramírez Orquín writes "Soaring prices together with the perception of a deteriorating service/product quality contribute to this notion. For the electric power system this trend is particularly worrisome given its vital implications to society."

Disruptive Technologies Convergence

Now that EWPC has emerged, it is to too little, too late, to try to extend the VIUs paradigm beyond its capabilities to integrate the grid and the enterprise. The availability of at least six disruptive technologies, waiting to be tightly integrated to provide commercial quality electricity service under EWPC, offers the needed sense of urgency to restructure electric power sectors.

Disruptive Technologies Convergence

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

Dear Mr. Finamore,

Your article identifies very important applications of the AMI technologies, such as outage detection and network load monitoring, in addition to Demand Response and ToD shifting applications as key drivers for implementation.

However, it seems that you are making an effort to justify the integration of the grid with the enterprise, now that it is too little, too late, to keep extending the IOUs vertically integrated utility (VIUs) paradigm beyond its usefulness.

As can be seen in the article The Anti-System Utility: “… Most, if not all, of the issues identified by Mr. [Warren] Causey [of the Sierra Energy Group], a very objective observer of recent industry activity, are the results of maintaining the native load requirement that IOUs have imposed on the electric industry, which keep the utility grid and the enterprise under the control of VIUs. Mr. Causey calls for integrating the grid and the enterprise, which means that IOUs have not been able to integrate both dissimilar functions, so it is easier to go forward with EWPC.”

As I explained in my [seminal] article An Alternative Business Case for Demand Response, “Demand Response is no just load shifting and conservation, but a demand side risk management tool for the whole power system.” As such, Demand Response integrates the retail and wholesale markets, making the business case of AMI much better.

Under that same [seminal] article I also wrote: “… electric power systems will also “fly” reliably (a very low frequency and duration of crashes) and experience commercial quality electricity under complete deregulation [read now as re-regulation], when Demand Response gets tightly integrated with AMI and other existing technologies under a proper market design. DR will enable the system to operate within the Normal Operating State, returning back as soon as possible from the Alert and Emergency States with Demand Response actions. This is poised to be the End-State of the electricity industry for the long run.”

Under EWPC there is a need to consider the utility as the wires only (T&D integrated) transportation utility. Such utility will operate the power system under an ultraquality imperative by developing the smart grid as envisioned in the article Solving Smart Grid Cost Recovery. As the transportation utility provides the delivery services to customers, all of the principles identified in your article can be applied to the delivery network as they interface with the customers and Second Generation Retailers.

In addition, AMI, the Smart Grid and Demand Response can be considered three of sixth disruptive technologies innovations waiting to be integrated into power system control, operation and planning, as can be seen in the article The Sixth Disruptive Technology. So at least six technologies will be participating in a much larger convergence, by reinforcing each other, to get then “tightly integrated” as I envisioned in my [seminal] article.

Best regards,

José Antonio Vanderhorst-Silverio, Ph.D.

Reference and context: Convergence of Smart Metering And the Smart Grid, by Ed Finamore, President, ValuTech Solutions Inc.

No Need for Regulated Price Caps - II

Customers’ price caps are the key to the infrequent rational rationing of service. During a transition to EWPC that ends with every customer defining its own price cap, it is important to understand that most of the customers need to make load commitments well in advance of real time operation. They will do that by participating in hour ahead, day ahead, week ahead, and futures markets. Any system with a larger than optimal balancing, real-time market, is bound to become an unreliable market.

No Need for Regulated Price Caps - II

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

In response to the content of my article No Need for Regulated Price Caps - I, Mr. Len Gould wrote:

Jose Antonio: "customers themselves have negociated individually their prices caps with Second Generation Retailers." - I can see no way to assure reliability fairly without a large percentage of running reserve except if all customers participate continuously in a real-time price market. If only a few participate, e.g. through only one or two of several copmpeting retailers in a distribution region, they wind up subsidizing all the competing retailer's customers as "free-riders". Why on earth do you expect ANY retailer to go that route when they can never recover the costs because the rewards are distributed equally to all customers, including their competitors customers? So the key question is, once you have applied real-time market price metering to all customers, as necessary, what use are retailers?

Below is my response:

Dear Mr. Gould,

Thank you for your question about retailers, which is a repeat of many earlier interventions which I responded almost two years ago in the first intervention which came as a result of the Letter to Dr. Alfred E. Kahn (hit link please):

Len Gould on 12.21.05 wrote:

Jose: You're close, just not going quite far enough. You need to eliminate your "Retail marketers" by implementing intelligent software within the customer's meters which takes over the simple task of selecting either a lowest-cost supplier from among all available in a central electronic "marketplace", or alternatively choose to not purchase, and shut down some of the customer's less critical loads if the price exceeds customer-set limits.

Jose Antonio Vanderhorst-Silverio on 12.21.05 responded:

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

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

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

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

Regards,

José Antonio

The advice on how to tackle the large non-real time non balancing market segment never came.

Now think of two extremes: perfect vertical integration and perfect EWPC. In the first case, reliability requires an excessive reserve in both generation and transportation. In the second case, all customers will have their own price caps, but there will be a penetration (sufficiently small) that will result optimal in the real-time balancing market. There are other markets identified, such as day ahead, week ahead (very important when a low probability rationing is foreseen to know ahead customers price caps), and future markets, which will allow demand integration development, which is a lot of work for 2GRs.

In practice, however, there is need for a transition from today’s situation to EWPC. As there will be no incumbent retailers, 2GRs will need to carry the default service customers during the time limited transition period.

Nat Treadway, wrote in the article The Dawn of Electricity Competition: Efficient Prices and Efficient Choices that, “The design of default service (also called basic or standard service or provider of last resort) was identified as the most significant determinant of the success of retail electricity choice. A poorly designed default service undermines competition. If default service is designed to satisfy all residential consumers’ needs, or if it bundles and spreads risks among all consumers, or if it is priced below market, then it is unlikely that new retail electricity providers will enter the market. With few choices, consumers are left with only the poorly designed default service, and with limited benefit.”

During such a transition, 2GRs will have both types of customers (as there is no incumbent retailer), with increasing development of the resources of the demand side, as the default service will have essentially all the “free riders” being subsidized by peers. Hence, a systemic incentive to non-free riders will result, as they get the pressure for efficient prices and efficient choices. So, if only one or two retailers are truly competitive (2GRs), they will end up with the whole market.

No Need for Regulated Price Caps - I

Missing in the discussion under the article "Meeting Our Need for Electric Power," up to the 19th of October, 2007, are the huge coordination problems of short run unit commitment and long run system adequacy, which involve the opportunity for demand integration. Reliability First, Economic Second, is the approach to solve those problems. No longer will regulated price caps will be issued by regulators, as customers themselves have negociated individually their prices caps with Second Generation Retailers.

No Need for Regulated Price Caps - I

By José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

In addition of my comment on 10.15.07, about the emergence of at least 6 disruptive technologies, some of which Len and Todd want to integrate to power systems, but which Joseph think not, there is a prerequisite need of Rethinking Electricity Restructuring as EWPC, as I wrote above on 10.12.07.

"Meeting our need for electric power" has offered a very good interchange environment, mainly between Joseph on one side and Len and Todd on the other.

ToD stupid meters (for deterministic events) were used with specific ToD hours in the 90s. ToD smart meters (for probabilistic events) are to be used mainly anytime to avoid beforehand getting the system close to capacity at a given location, as peak pricing is a random variable. The idea of ToD meters is assumed to be under an Economics First, Reliability Second, approach, as it suggests US$1,250 dryer bills. That is exactly the theme of IMEUC: Unreliable Service and Price Spikes.

In addition, Joseph has discussed difficulties on the marketing and financing. EWPC is developed under a customer orientation as value migration has occurred and at least 6 disruptive technologies (some mentioned by Len and Todd) are available that will satisfy low personal intervention. Please look at Full Retail Choice Emerges, under prudential regulations to respond to Joseph opinions.

There are several market segments. Every customer should shop in the market to find the best fit for his needs, in terms of the mix of the six disruptive technologies. Some customers, for example, with high reliability need, might find out that demand side energy efficiency and distributed generation are the key investments need they have, which could be repaid in part or in full through competitive electric pricing. As the grid become unavailable at their location, the size of the DG could be fitted to an efficient load.

Missing in the above discussion are the huge coordination problems of short run unit commitment and long run system adequacy, which involve the opportunity for demand integration. Reliability First, Economic Second, is the approach to solve those problems. No longer will regulated price caps will be issued by regulators, as customers themselves have negociated individually their prices caps with Second Generation Retailers.

Full Retail Choice Emerges

As customer value migrates a paradigm shift of full retail choice emerges under EWPC from R&D discoveries that allows retail and wholesale competition without incumbent retailers.

Full Retail Choice Emerges

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

Dear Professor Ramírez Orquín,

The R&D you envisioned in your article The Structural Shortcomings of Retail Provider Choice in Distribution have resulted in my discoveries of EWPC as a paradigm shift (away from vertical integration) to where customer value has migrated.

The EWPC paradigm essence (from Synthesis Proposal Agreement of EWPC) is retail competition without incumbent retailers, demand integration (see Demand Integration Under EWPC) and ultraquality (T&D integrated) transportation.

As distribution becomes an integral part of transportation under EWPC structuring without incumbent retailers, the shortcomings disappear and full retail choice emerges as Second Generation Retailers (see Second Generation Retailer - 2GR), not the first generation retailers of your article, compete under federal prudential regulations (which should hopefully become global prudential regulations under the discipline of the WTO).

Please read The Sixth Disruptive Technology to understand 2GRs role on business model innovations and to get a feel of the paradigm shift value migration and my suggestion of WTO discipline.

Regards,

José Antonio

Reference and context: The Potential for an Effective and Timely Deregulatory Endeavor, by Alberto Ramirez Orquin, Associate Professor of Electrical Engineering, University of Puerto Rico at Mayaguez.

The Sense of Urgency for EWPC Restructuring

There is a strong sence of urgency for the implementation of EWPC. Professor Alberto Ramírez Orquín writes "Soaring prices together with the perception of a deteriorating service/product quality contribute to this notion. For the electric power system this trend is particularly worrisome given its vital implications to society."

The Sense of Urgency for EWPC Restructuring

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

Dear Professor Ramírez Orquín.

Your article is giving the proper emphasis for the sense of urgency on the right king of restructuring of the electric power industry, when you write: "Soaring prices together with the perception of a deteriorating service/product quality contribute to this notion. For the electric power system this trend is particularly worrisome given its vital implications to society."

I agree that “The current restructuring drive has not seemed, as some policy makers expected, to improve this condition and may have actually made it worse.” In 2004, The Cato Institute experts Peter Van Duren and Jerry Taylor recommended total abandonment of restructuring.

Electricity without price controls (EWPC) is a paradigm shift that makes the case for restructuring as explained in Rethinking Electricity Restructuring as EWPC. The new drive would make things better, as technological innovation are waiting to be integrated to power system planning, operation and control with at least six sets of disruptive technologies, as explained in The Sixth Disruptive Technology.

One of the main problem with restructuring was separating transmission from distribution to keep regulated retail together with distribution. In the article Give Engineers What Belongs to Engineers and its hiperlinks the “two dominant components i.e. the socio-normative and the technological ones, both…” will be “working harmonically.”

For more details see the Electricity Without Price Controls and the Grupo Millennium Hispaniola blogs.

Regards,

José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant: Electricity
Dominican Republic

Reference and context: The Potential for an Effective and Timely Deregulatory Endeavor by Alberto Ramirez Orquin, Associate Professor of Electrical Engineering, University of Puerto Rico at Mayaguez.

Give Engineers What Belongs to Engineers

Engineers no longer have any possibility to take back the whole industry for themselves. EWPC is a market architecture and design breakthrough discovery that gives engineers what belongs to engineers - the reliable planning, operation and control of the machine and the transportation system - and that gives business people what belongs to them - the money (no the electrical) activities of the value chain

Give Engineers What Belongs to Engineers

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

In the good old days engineers didn't need mandatory standards. Today they don't need them either, especially when they are an afterthought to fix convoluted incremental extensions away from the vertically integrated utilities paradigm.

As Tracy Rolstad wrote, standards compliance by fines is misplaced. The problem is there are important systemic delays which system planners need to approach several years earlier.

However, the good all engineering days are gone forever. Engineers no longer have any possibility to take back the whole industry for themselves. EWPC is a market architecture and design breakthrough discovery that gives engineers what belongs to engineers - the reliable planning, operation and control of the machine and the transportation system - and that gives business people what belongs to them - the money (no the electrical) activities of the value chain. Please read the article Engineers Needed for Lower Prices where many important questions about a reliable and cost effective power system formulated several years ago by Jack Casazza are responded with the EWPC paradigm.

The reason why lawyers remain in control is because they control a business model of winning rate case to regulators. As the industry is opened to competition they no longer will have that power.

For more details on EWPC please read the Electricity Without Price Controls Blog in the Energy Central Network where 28 other articles are already posted.

Reference and context: NERC-CIP: 'Critical' or in 'Critical Condition'?, by Warren Causey, Vice President, and Mike Smith, Senior Vice President, Sierra Energy Group.

Rethinking Electricity Restructuring as EWPC

Strong EWPC market architecture and design recommendations to restructure worldwide electricity markets, superseed those proposed in 2004 by Peter Van Doren and Jerry Taylor of the Cato Institute by resolving the "previously unknown" problem created by a flawed deregulation. Those recommendations are developed to support slicing the last of the regulated monopolies with a strong sense of urgency.

Rethinking Electricity Restructuring as EWPC

By José Antonio Vanderhorst-Silverio, Ph.D.

Systemic Consultant: Electricity

Copyright © 2007 José Antonio Vanderhorst-Silverio. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, without written permission from José Antonio Vanderhorst-Silverio. Please write to javs@ieee.org to contact the author for any kind of engagement.

Professor Ferdinand Banks suggests that H. Sterling Burnett and D. Sean Shurtleff “should read the article by Jerry Taylor and Peter Van Doren (of the Cato Institute) that was published in the Wall Street Journal, August 30, 2007…” to learn that deregulation is a malicious farce.

In the Executive Summary of the full paper, Van Doren and Taylor write: “Electricity restructuring was initiated in the 1990s to remedy the problem of relatively high electricity costs in the Northeast and California... Economist wanted reform to eliminate regulatory incentives to overbuild generating capacity and spur the introduction of real time prices." EWPC restructuring with its R1E2 (Reliability First, Economy Second) priority will remedy such problem while satisfying economist wants and enabling maximum social welfare through an open market in the generation, retail, customer value chain under prudential regulation. For details please read Free Market and Central Planning, Under R1E2 and Engineers Needed for Lower Prices.

In the conclusions of the paper, it is stated: “While restructuring does not have quite as bad a record as the anti-market factions would maintain, it has created problems previously unknown in the electricity industry. Those problems generally arose because electricity restructuring:

o Focused on generation competition and ignored the pricing and incentives issues involved managing the transmission system and its public commons characteristics.
o Grafted a relatively free wholesale market onto a heavily regulated retail market; and
o Established artificial market institutions that invited manipulation and abuse. The end result has proven far from satisfactory."

Those "previously unknown " problems arose because of the non-trivial nature of the vertically integrated utilities (VIUs) paradigm which is preserved under EWPC with R1E2, which is one of the important discoveries which I claim to have made with EWPC. Please read also Only Two Stable Paradigms.

“The poor track record stems from systemic problems inherent in the reform itself,” was the argument that led to Van Doren and Taylor to “recommend total abandonment of restructuring.” I agree with their conclusions about restructuring with E1R2 priority. As the systemic problem is solved under EWPC by R1E2 ultraquality transportation, as it gets implemented by a system engineer in charge of short run and long run systemic risks, the argument doesn’t hold as systemic issues disappear.

The paradigm shift to EWPC is a breakthough that is not resolved by extending the VIUs paradigm adding that "Smart electrical meters hold the key to lower costs, and increased reliability," as Burnett and Shurtleff wrote. As can be seen in The Sixth Disruptive Technology, the automated metering infrastructure (AMI) is just one of the disruptive technologies that need to be tightly integrated into a superior systemic solution in the coming years under the electricity without price controls (EWPC) market architecture and design. The problems Mr. Rawlingson identifies can be solved with the smart grid disruptive technologies as explained in the article Solving Smart Grid Cost Recovery.

The conclusion is that there is now a sense of urgency to introduce competition policy under EWPC in the power industry is strongly supported in the article Slicing the Last of the Regulated Monopolies.

José Antonio Vanderhorst-Silverio, Ph.D.
Systemic Consultant

Reference article and context: Meeting Our Need for Electric Power, by H. Sterling Burnett, Senior Fellow, and D. Sean Shurtleff, Graduate Fellow, National Center for Policy Analysis.