Herramientas para Tiempos Poderosos y el Futuro del Sector Eléctrico Parte 1

Estimados todos,

Las elecciones congresuales han demostrado el poder del populismo en esta época. El PLD aprendió de su derrota anterior y se aferró a una posición mucho más populista que la Alianza Rosada en la administración de las percepciones de los votantes. Las percepciones de las masas son todo. Eso explica los altos subsidios populistas que cada vez son más difíciles de desmontar.

La serie sobre la venta de ITABO, que Armando, Bernardo, George, y Martín han desarrollado, ha sido bien interesante, como era de esperarse, ante la incertidumbre y complejidad que vivimos aquí y también en el extranjero. En el extranjero hay un lío grandísimo también, como pueden ver en el último informe de NERA (www.nera.com) . Mi comentario, no obstante, no va a los detalles de la operación, sino a insistir en la necesidad de emplear herramientas modernas para enfrentar esa incertidumbre y esa complejidad, para comprender y actuar decididamente sobre el futuro del sector.

Luis Arthur aprovechó una parte de la serie para redactar su artículo “Viva la Patria.” Intuyo que Luís desarrolla un modelo mental nacionalista para nuestro futuro. Las percepciones de Luís son muy distintas de las de los votantes sobre la Patria. La Patria es uno de los conceptos que están en serio cuestionamiento por una de las más prestigiosas instituciones de hoy. Se trata del Global Business Network. (GBN). Eamonn Kelly (ver “The Autor” en website http://www.powerfultimes.net/ para saber quienes son GBN y el autor) redactó el libro “Powerful Times” (Tiempos Poderosos).

Luís también dijo “Espero haber interpretado bien sus ideas.”Una de las conclusiones más importantes del Capitulo 1 (gratis en el mismo website) del libro es que la gente somos capaces de espectaculares interpretaciones equivocadas de lo que está sucediendo a nuestro alrededor (en el globo). El problema principal es que nuestras percepciones nos engañan para que generemos profecías que se auto-cumplen en función de nuestros propios modelos mentales de cómo creemos que funciona el mundo. El centro del libro es que estamos en un momento histórico en que lo conocimientos que acumulamos en los últimos 500 años en que se basan nuestros modelos mentales están perdiendo todo su valor. Necesitamos entender las fuerzas que se mueven en la realidad global de hoy, de un mundo sumamente interdependiente y por tanto sistémico.

La herramienta principal del GBN para enfrentar la complejidad es la de los escenarios. Los escenarios son un instrumento maravilloso para realizar conversaciones estratégicas. En la bitácora digital del GMH he mencionado, los escenarios, el pensamiento sistémico, los modelos mentales, las 10 caras de la innovación, etc., que nos ayudarán a pasar de debates (una u otra posición) a Dialogue (una y otra posición – escenarios).

Como saben, inicialmente pensé que mi esfuerzo debía ser dedicado a mis ex-estudiantes (tres de ellos están copiados – Jonathan, Emilio y Eloy). Al no percibir interés (muchos tienen miedo de enfrentar sus mundos “coherentes” y no son solo mis ex-estudiantes) y pensar que ustedes eran suficientemente conocedores y maduros, pensé que podría desarrollar un proceso de Dialogue y aprovechar el empleo de herramientas poderosas para enfrentar la complejidad y la incertidumbre. (Algunos de mis ex-estudiantes, cuyos modelos mentales son de Capitalización, notaban que ustedes no la entendían bien y no sabían porqué). ¡Todavía hay tiempo! Esas son herramientas que los colocarían en la posibilidad de amplificar sus experiencias al máximo y servir al país como lo hacían los jefes indios. Los tres modelos mentales – CDEEE, Capitalización y Electricidad SCP – tienen cosas buenas y cosas malas. El asunto es tratar de encontrar cuál es el menos malo para el futuro.

Los invito a ustedes y a los demás lectores a aprovechar todo el acervo depositado en la Bitácora Digital del GMH para aprovechar a “Tiempos Poderosos” como guía de trabajo para desarrollar un nuevo proceso de Dialogue. Aún si no desean hacerlo, les recomiendo fuertemente leer el capítulo gratis, conseguir el libro y formar un círculo de lectura con sus allegados.

No me cabe ninguna duda, que si los líderes dominicanos entienden los mensajes de Tiempos Poderosos y aplican la sabiduría que resultará, el futuro de país (o lo que resulte) estará asegurado.

Un fuerte abrazo,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 42

It seems that Lens ends the series on May 20th:

Jose: In the model I propose, every transaction, (eg. supply of electricity, gas, etc. for an agreed time period) is contracted on a competetive basis, and I see no clear distinction defining a "Retail" transaction from a "Wholesale" transaction, eg. nobody cares whether you are buying for final consumption or for re-sale, and nobody cares whether you are buying 1 kwhr or 10,000 in a time interval, because (and this is critical) the transaction cost is so low as to be insignificant. Since the transaction cost itself is essentially zero (prepaid by the customers in the purchase of the meter included in the base connection monthly fee, eg $3.00 - $5.00 / month / meter) then a generator or exploration company can do just as well by selling 1 kwhr x 10,000 customers as they can selling 10,000 kwhr to one customer.

I concieve the "market manager" operating very similar to a banking transaction clearinghouse, but (and again this is critical) any point in the system where customers cannot be provided a choice of several cometeitive service providers for a required service must be managed in a way to deal with market power, eg. cost based regulation or etc. (this will certainly include operation of the regional central market software system, and pipes-and-wires local distribution).

Please Blame the Deregulation and Regulation Fiascos Parte 41

Gentlemen,

This is comment number 100 or more...

I want to understand the markets aspects of Len's proposal, not the details of the implementation. I don't understand his insistence on a pure market standpoint, I am beginning to see an important difference between his mental model and Hogan's and the extended Schweppe's mental models. If that is the case, Len's mental model is a third competing market based on short run coordination. We need to know how everybody wins in such a market, in which is not clear how system long run coordination is arrived at.

I like to learn how Len's mental model ensures long run adequacy and market power mitigation, without any regulation? In the extended Schweppe's mental model T&D remain under regulation and take on the role of system planner and operator to ensure long run adequacy and mitigate T&D congestion. Long run plans will indicate the locations where generators will be needed in the future. Retails and generators participate in the planning procedures.

Electricity WPC value chain allows generators to be installed in select locations by making a long term decision. Generator competition is more a long run decision than a short decision. That is how adequacy is developed in time and space.

Long run expected price values allow retailers to design their portfolios with demand side and supply side solutions. Retailers enter in long run contracts with generators and customers to participate in the wholesale market - competing with other retailers - to ensure long run adequacy for their customers, while mitigating market power.

It does not matter that anybody opposes Electricity WPC. What matters is that sufficient people like it so that it crosses the chasm. Hogan's mental model crossed the chasm, but it is having trouble everywhere on earth.

Comparisons with other industries should be look at in greater detail. I know that bank transactions are under prudential regulation including a clearinghouse system. Airline traveling is under traffic control. Electricity needs to have also a traffic controller to insure that there are not crashes and to allow a business as usual environment in the wholesale, retail, customer value chain. I think your model is wholesale customer value chain, and as such there is no retail competition. Please advise!

Please Blame the Deregulation and Regulation Fiascos Parte 40

On May 18th, Len Gould adds:

"the discussion on power line carrier vs. wireless standardization is ahead of the time "

Agreed. The issues goes away completely if the meter standard simply defines a "communications package interface and performance". Then any company can build and sell pluggin communications packages for a socket on the meters which can communicate to the market system in any of a broad variety of ways.

Please Blame the Deregulation and Regulation Fiascos Parte 39

Gentlemen,

First I say - sorry Dick - since in my last comment there was a lapse. I said "Steve has added a very good comment once again," when what I meant was Dick instead of Steve.

Len seems to accept that his proposal might fit the Electricity WPC restructured market, by calling retail marketers "service providers," in the first of the last two comments. This means that a metering monopoly is not good either. Certainly a standard functionality is required for meters.

If I understand it correctly, Texas is doing a real case of what Dick is explaining. Monopoly customers have a higher fix price by system design. So he talks about practice. Is Texas also under Hogan's mental model? How much demand response has occurred? Is there sufficient price volatility mitigation? Can retailers differentiate supply security risk in the offerings? Are prices increasing more than they should?

Even if we wanted to satisfy fairness as Len explains, in practice the transition is multiyear in most cases. However, if only large customers can benefit, there is a market design problem. That is the case of Hogan's mental model, which makes Electricity without price controls a better market possibility. For example, customers with supply security requirement away from the average should be able to choose the offering from the very beginning, irrespective of how large the customer is. Another way to look at it is to think about how responsive a customer can be.

As market competition develops it should be expected that retailers’ enterprise solutions will be oriented towards market segments. Some retailers might aim to the large customers’ market segments, while other retailers aim to the mass markets market segments.

The vertical integrated utility was centered on the US local states markets and in other countries national markets. The resulting market should be centered on the global market. The economy of scope of services is a very important step to move from electricity without price controls to electricity, gas and water service without price controls. I think, however, that the discussion on power line carrier vs. wireless standardization is ahead of the time and as such introduces unnecessary complexity at the moment.

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 38

Len Gould responded to Dick:

Dick: My main reason for requiring a complete implementation of market-ready meters to everyone is fairness. I can't imagine any way that a market can work equitably for everyone if only the few largest customers are participating. The whole enterprise depends on providing short-time price signals to all customers. Without that, you must provide some form of regulation (affecting all customers, including those few large ones, meaning it's not really a market and I'll oppose it.)

"I would rather let retailers deploy meters meeting specified industry standards". That is all I'd intended to say in the proposal, a standards body establishes a minimum functionallity which will meet the definition of "market-ready meter", then distribution or retailer or whoever is responsible for installing the new metering system is free to purchase those new meters from any manufacturer meeting the standard. Obviously it would be a waste of resources to deploy say 15% units which communicate wirelessly in an area where powerline carrier is implemented, so likely the communication system should be standardized by geographic resion as well. A third point is integration of gas metering communication and marketing system into the same communication infrastructure. Once the electrical meter can communicate, then adding the gas meter data will cost very little. As small residential-size gas-fired CHP units develop as they should for energy efficiency reasons, gas an electricity will naturally integrate seamlessly into a single energy market.

Please Blame the Deregulation and Regulation Fiascos Parte 37

Dick Maclay added another comment as follows:

Gentlemen, I believe I have seen both Steve and Len suggest that participation in innovative deregulated markets should be optional. In that case, as customers with lower than average cost-to-serve desert the old regulated market, remaining regulated customers will see their bills rise as their concentration in the old system rises. Some object to that as unfair, but it seems those remaining in this discussion see it as fair, and as a natural progression. I agree with this view.

When we begin discussing how to open the market there is probably room for sensible people to differ. The most important thing in my mind is to avoid rushing into fallacies the way California did. Recognize that while the changes from central planning to market competition will be less drastic than the overhaul of entire economies in Eastern Europe, the challenges are similar in nature and non-trivial in degree. There is no consistent definition of fairness, for instance, in a transition from one paradigm to another. Each has its own definition, but they are different. An incumbent’s desire for exit fees makes sense in the cost-of-service paradigm, but it is poison in a competitive paradigm. There are many other examples.

The customer is the center of activity in markets. Deregulation should start with a better deal for customers who have a choice to take it or leave it. Then the pace of deregulation will be determined by how well it serves customers. It may be necessary to make some revisions in regulated service when significant numbers of customers have abandoned it. But that will only occur if deregulation proves attractive, and the essence of protecting the uninterested from serious consequences from their inattention can be preserved.

I have had the job of Market Manager in a competitive service company. Similar positions in companies selling manufactured goods are called Brand Manager. My job as a Market Manager was to come up with innovative ideas on how to increase market share and the profitability of our market share. I see that as an important role from day one in deregulation. First, take market share from the regulated incumbent. Second, defend one’s market from other competitors while stealing their customers with better ideas. I do not think this is a zero sum game so long as competitors are competing to refine their offerings to better fit the values-of-service of customers.

I am more skeptical of any central entity than is Len. I would rather let retailers deploy meters meeting specified industry standards than mass replace all meters with new ones that may turn out to lack some important feature down the line. Evolution is better than revolution. True, evolution has moved fast in some industries that have been deregulated, but it still benefits from trial and error along the way before things are rolled out en mass to all customers. I expect that Len and I will continue to differ on this point.

Steve, do you believe the Hogan model can work? If so, how does it provide adequate revenues to generators and constrain prices in shortage periods?

Please Blame the Deregulation and Regulation Fiascos Parte 36

Len Gould added a comment on May 14th that reads:

I disagree with Steves "Hogan’s model is based on the real life fact that the consumer is hardly interested in such business." It fails to acknowledge the ranges of possible interactions available given modern computer and communications technology. It is precisely the same thinking which 25 years ago would have declared "No airline customer will want to book their own ticket" or "Bank tellers will always perform the majority of retail transactions".

In my proposal, retail customers not wishing to worry about their meter market have two other options. a) ignore the meter and simply accept the demand penalties. b) contract monthly, annually or etc with a large service provider to handle their purchasing for them.

The paradigm is inevitable, only remaining when.

DR1: Systemic Competitiveness Plan under way

The Dominican Republic has embarked on the preparation of its first National Systemic Competitiveness Plan, which seeks to generate guidelines to help raise the DR's level to that of a world-class country in 15 to 20 years. Mexican competitiveness expert, Rene Villarreal said that the country is already a world-class player in cigar exports, and he envisages that more areas could be added. Villareal, who has been entrusted with drawing up the plan, says that it will be ready in eight months time and will set the strategies to increase the country's capacity to compete. The program is one of local empowerment, with the strength coming from clusters. It brings government and the private sector together, focuses on logistics, innovation, an institutional framework and the rule of the law. Locally, the counterpart for the program that will cover all economic areas - energy, agriculture, industry and manufacturing, and tourism - is the National Competitiveness Council (CNC). The CNC works through clusters that bring together all players in a community, and seeks to empower these with the strategy so that when the government changes, the local communities ensure that the program, that has been agreed upon by all, may continue. Villareal stresses that what is needed is a change in business, labor, and government culture. In President Fernandez's own words, he said that Dominicans have to understand that competition should not be between ourselves, but with the outside. "That is a fundamental aspect of the work philosophy among us Latin Americans, that needs to be changed for one of working as a team," he stressed. He said that all groups need to be competitive in their area - business, sectors, government, country, teachers and unions - and that is why the plan is called "systemic." What is necessary is to integrate a chain of trust among all. Furthermore, Andres Van Der Horst of the National Competitiveness Council explained that Dominicans have to come together within their business associations to make statements that may be beneficial to the community. He said a paradigm change is necessary both in the public and private sector. "The private sector has to understand that the way to solve competitiveness problems is not by having breakfast with the minister. That is not sustainable."

As reported in Hoy, Villareal explained the plan will\nalso propose a change in the education system to a focus on learning how to learn and be creative. He says the country has the natural resources and entrepreneurial and business capacity. He said that there is still time to make changes that will benefit the population. He commented that in his native Mexico, changes were not made on time, and now the poor resent the rich, and are aggressive and not the "contented poor" of the 1970s. He says that in the DR the poor do not have that resentment, or hate that leads them to think, "Why don't I have what you have." He said that changes needed to be made before the country gets to the point where Mexico is where the poor were marginalized for too many years, and today the population must suffer the consequences in\nthe shape of violent crime and all its effects.

Villareal is making a diagnosis of the weaknesses and strengths of the country as far as competitiveness is concerned. But he stresses that a game plan and team strategy, together with passion and commitment is needed to move ahead. "But also, if we do not believe we can become champions, we wont make it. Then we have to believe we can be world-class," he says. The program began on 29 March with a meeting between the President and his cabinet.

Please Blame the Deregulation and Regulation Fiascos Parte 35

Gentlemen,

Steve has added a very good comment once again.

I missed the ironic nature of Len's comment, if there was one. I thought he was talking about Hogan's long captivity after the death of Schweppe. I am very proud to say that I am captive of no one Yet.

Reading Steve argument about what conventional wisdom have told that only commercial and industrial are responsive, I remember that Bob Lieberman found out that convencional wisdom is wrong. Please look a the single 4 paragraph comment to Strategic Perspectives on Utility Enterprise Solutions, by Warren Causey, Vice President, Sierra Energy Group comment. This is the insight in 2 of the paragraphs:

[comment starts.] With the presentation " Ruminations on Demand Response - a view from Chicago," Bob Lieberman has given a new hope to residential real-time pricing based on the existence of a risk premium, part of which responsive customers can pocket. Bob adds that conventional wisdom regarding that real-time pricing of residential customers won’t work was proven wrong. Lieberman identifies 4 problems to be overcome develop the market: 1) Short term thinking; 2) Who's job is it?; 3) Overcoming the "DR is about protection system "mindset; and, 4) Explaining to customers what we are talking about and what's in it for them.

By taking a close look to "An Alternative Business Case for Demand Response," my comments to Why We're Selling Advanced Metering All Wrong... And How to Sell It Right and the discussions on "Energy Bill 2005 - A Waste of Time?" and "2006: New Challenges and Opportunities in the Brazilian Electric Energy Arena" all 4 problems can be addressed by competitive retail marketers, with innovative business designs under their own Retailers Enterprise Solutions. The result will be a new paradigm of the electricity industry for the new global economy, where increased efficiency will result. Every customer will be able to chosse value added from electricity and the mayority of customers will have lower prices, after a while. [Comment ends.]

My earlier comment to Steve answered issue 2 (the retailer will be in charge) and 4 (education and empowerment). Issue 1 is the restructuring issue: we need a paradigm that is trully consistent in the long run for the winning market. Issue 3 is better synthesized by EPRI's President above. This is the unconventional wisdom mental model.

Please take a look at "A Dominican Strategy" is Featured in The Business Scene Section of the IEEE Power & Energy Magazine.

I will be out of the discussions on a short vacation from tomorrow until next wednesday.

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 34

Dick Maclay has offer more light to the discussion as follows:

Len, I am not now, and never have been, an academic. I did participate in deregulation of railroads, and set some precedents in contracts I negotiated. I learned from that experience how beneficial deregulation can be, and how it really works. I will read your references.

Steve, the problem with the Hogan Mental Model is that it does not work. Cost-of-service regulation, the Banks Mental Model, works. If regulators could be more innovative (an oxymoron) then space C, the Unextended Schweppes Mental Model, would replace the Banks model, because it would be a better form of regulation. Market competition, also called Space D and the Extended Schweppes Model, works because competition between suppliers and price elasticity discipline prices.

The Hogan model leaves peaking generators with annual losses each year. When we introduce year-to-year dynamics we see there is an incentive to close power plants, but none to build them. Shortages are inevitable with the Hogan Mental Model. When the shortages occur there is no price discipline because there is no cost-of-service regulation and no price elasticity effect.

Ferdinand suggested that I blamed California’s disaster on the drought. That is not the case. Whatever industry structure we use should cover all states of nature, and droughts are one of those. It was the Hogan model that did in California. Both PG&E and the ISO considered bringing in whatever generation could be mobilized quickly to meet the shortages they saw looming. In a cost-of-service world PG&E would have done so, and been paid for it. The ISO thought it should fill those shoes when PG&E realized it was no longer responsible for reliability. But the PUC told the ISO not to proceed. Providing generation is not its role. But without contracts, most generators were not willing to bring in generators to serve short peaks. The unregulated part of PG&E tried to bring in a barge with FT4 generators, but environmentalists kept it out of the Bay. All that was left was demand reduction. But following the Hogan model, there was no retail price signal. Governor Davis could have done what is done when water is short and called for voluntary reductions in use. Instead, he proclaimed that there was no problem. In the circumstance resulting from piling on so many stupidities, wholesale prices could rise to infinity because there was no price discipline. Unlike cost-of-service and open markets, the Hogan model is internally inconsistent. Perhaps it would be more correct to call it internally incomplete.

Various attempts are being made to fix the Hogan model. One way to fix it is to allow mergers among generators until market power is sufficient to raise wholesale prices to levels that justify supplying all the power demanded at regulated prices. But how many mergers is one too far? I suspect a close examination of Ferdinand Bank’s complaints may reveal that he is complaining about such a system. His criticisms are applicable to such a system.

In the U.S., the favored fix for the Hogan model now is capacity markets. This creates an additional revenue stream that hopefully brings total revenues up to cost-of-service levels. My question about this approach is, why bother? We are left with something that has the underlying inefficiencies of cost-of-service regulation, without the consistency of cost-of-service regulation.

I agree with Steve that the average residential consumer is not interested in more complexity in their lives. It is the industrial and commercial customers, typically two-thirds of the load, that are interested in competition. We could reap much of the available efficiency by deregulating those who want to be deregulated. But, unlike the California fiasco, leaving cost-of-service should be a one way street. During a shortage period spot market prices probably will be higher than regulated prices. Those who choose competition and choose not to hedge should not be allowed to take the lower of market or regulated prices.

Please Blame the Deregulation and Regulation Fiascos Parte 33

Steve comment came as I was writing in this "inactive," but very active discussion. He is correct that there are no physical implementations of Electricity WPC. He is wrong in regard to customers’ active participation as envisioned by EPRI. Retailer’s business model innovations are the key to educate and empower customers, so that they can segment themselves in accordance with their needs.

Going back to the essence of the article “The fallacy of blaming deregulation for rising electricity prices,” what is evident is that the hypothesis is mistaken. The common consumer like Prof. Banks will only be very happy when they receive, as late Prof. Schweppe said, "more service from the use of electric energy per dollar spent." That is the new hypothesis!

Please Blame the Deregulation and Regulation Fiascos Parte 32

Thanks Dick for your complementary description that place us in the same track. The interesting idea about making retailers responsible for metering was borne in a discussion, in which Len participated, on the article Energy Bill 2005 - A Waste of Time?, by Amatsia Kashti, Managing Director, Olive Domestic Metering Ltd. The following is what I said:

[Comment begins.] Dr. Kashti analysis should be completed by including the Demand Response part of the bill and to look at other benefits that an AMI infrastructure will bring to the business case for such enlarged service.

I agree with Len, there is no "business case" for present businesses to implement this metering service. However, I believe that a "business case" for the enlarged service, that will lead to the End-State of the electricity industry requires a true retail deregulation, where retailers compete with each other, and where as Dr Kashti says "metering is taken out of the hands of the" distributors (utilities that will then simply transport electricity to end users).

Such "business case" is based on my article "An Alternative Business Case for Demand Response," which solves the "basic reliability control purposes" that Len left out. I believe that Demand Response is a demand side risk management tool that complements the “LOLP” supply side risk management tool. To implement the “basic reliability control,” retailers segment customers by their supply security requirements.

As can be seen, retailer’s jobs are to minimize customer’s short run and long run electricity costs. Retailers may do that by purchasing the energy requirements from energy suppliers and the spot market. Retailers will also be deploying demand response, and energy efficiency, which by the way are, respectively, their most important tools to control the spot price, and to negotiate long term contracts with suppliers. Instead of a dream, as David claims, I think this is a very clear vision of the End-State of the electricity industry.

By the way Len, I think the natural T&D monopolies will still require regulation. [Comment ends.]

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!

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 31

Steve Rozenman is not convinced, but it seems he will never be convinced like Prof. Banks.

I have been following the exchange between Dick Mclay and Jose Antonio
Vanderhorst-Silverio and sensed a religious-like fervor and faith in what is
still basically a concept. This comment should not be taken as criticism, but
rather as a way of calling for a back step unto reality. The premise here is
that the common consumer is just waiting to be provided with all the information
and proper metering so he can engage in the retail business of electricity. In
my opinion, Hogan’s model is based on the real life fact that the consumer is
hardly interested in such business. Is it probable that the business of
electricity ranges between a regulated utility and wholesale trade, not beyond
that? . If this is correct, than Deregulation has to be examined and adapted for
such a constellation.

Please Blame the Deregulation and Regulation Fiascos Parte 30

Above sequence illustrates why captive academics are so valuable to entrenched interests. The academics are masters of techniques such as appearing to discredit ideas they'd prefer go away by simply refusing to acknowledge them while taking sidelong swipes at them in their memo's to each other.

eg. "You probably add that the centralized metering system would be designed by committee and, therefore, expensive to boot." What's the ideal alternative? Everybody installs whatever meter they like *<}

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

Please Blame the Deregulation and Regulation Fiascos Parte 29

Dick Maclay has offered a very good response:

Jose Antonio, thanks for the clarifications. I followed the references and I think we are on the same track. Without proper price signals to customers the choice of energy services is distorted by misinformation.

I believe one of your points is that the Banks Model (space A) and the Hogan Model (space B) both fall victim to bad consumer decisions based on misinformation in regulated prices. Hogan introduces volatility by disconnecting wholesale and retail prices. All he adds are disasters like the one that befell California. (I am viewing Hogan as the dominant of the two models occupying Space B, Hogan and Enron.)

Your description of Scheppe is that of someone I consider a nieve optimist. The Banks model could incorporate good price information by differentiating retail prices over time, but it does not for political reasons. Centrally planned command and control systems from communism to cost-of-service regulation become highly politicized. And good price information is just plain inconvenient to deal with. The easy way to deal with it is political pressure to get relief from it! It would be interesting to see what Ferdinand Banks would make of the UNextended Shweppes model. He may not object to it since it can be centrally administered. In fact, during the early years of cost-of-service regulation in the U.S. regulators sought retail pricing that would encourage greater overall efficiency. But regulation is subject to entropy, and there is too little energy left in it to overcome the political pressures to ignore uncomfortable realities that need to be addressed to achieve economic efficiency. So I see space C as an idealized version of space A. It envisions a world that has faded away in political feasibility as its physical feasibility has been pretty well perfected.

Space D, the extended Schweppe Model, removes the politics of space C by removing the regulators. This is the essence of the history of successful deregulation in other industries. Removing regulators disables manipulation by political means to hide reality. In this context, considered harsh by the lazy, efficiency and low prices result. In the mid 1990s I named the emergence of real markets, Space D, the Polish Scenario. Our modeling showed muted price rises in the Polish Scenario with a major drought in a system where a third of annual energy came from hydro, and a major drought cut hydro energy in half. The scenario I named Belarus assumed enforcement of the Hogan model, and it accurately forecasted the disaster for California inherent in the Hogan model five years before the fact. We never revealed the names of our scenarios to company management when we adopted the Belarus Scenario as the base case. We did not want the rewards that went with revealing that we thought they were as smart as the Belarus.

Have I wondered from your views of the spaces?

Your note about metering is interesting. I gather that you see a centralized vision as too limiting to include the proper parameters for enabling contracts between retailers and their customers the restricted regulatory mind failed to imagine. You probably add that the centralized metering system would be designed by committee and, therefore, expensive to boot.

"A Dominican Strategy" is Featured in The Business Scene Section of the IEEE Power & Energy Magazine

The Institute of Electrical and Electronics Engineer published my article A Dominican Strategy in the May-June issue of Power and Energy Magazine.

This is what the editor Mel Olken said to introduce the article in With Age, Some Wisdom:

In the previous issue of IEEE Power & Energy Magazine, Hyde Merrill articulately broached the subject of electricity supplies in the poorer nations of our world. "The Business Scene" column in this issue continues the discussion on that same subject. The contributor, Dr. José Antonio Vanderhorst-Silverio, is from the Dominican Republic and the subtitle of the column is "Customer-Oriented Risk Management." Dr. Vanderhorst-Silverio describes an electric system that has an excess of supply but because of poor reliability, a very expensive individual cost to allay the inevitable shortages that result. He then makes the case for voluntary demand responsiveness as a possible solution and links the program to the economic benefits that demand response resources (DRR) could produce for the Dominican Republic. It is of interest to note that the Dominican Republic has been invited to participate in an upcoming round of demand responsiveness discussions with nations that include China, India, Kenya, and Thailand—certainly a most diverse gathering.

I take it as a great present for the first anniversary of the BMH blog.

Editorial Periódico Hoy: Reto Permanente

Encontrar solución para el problema del sistema eléctrico de este país es un reto con carácter de permanencia.

No importa lo que digan el FMI, el Banco Mundial o el BID, siempre habrá voluntades obstaculizando las soluciones.

Uno de los más graves obstáculos para el avance de un negocio de venta de algún bien o servicio es la falta de vocación de pago por parte de una proporción muy alta del sector que demanda.

Si a esto se suma el fracaso de un modelo de capitalización de la empresa eléctrica estatal por no haber previsto medios para hacer que la gente pague la energía, veremos que habrá reto por mucho tiempo.

Nuestros problemas no son de capacidad de generación instalada. En términos nominales se sobrepasa con mucho la demanda, y en términos netos también.

Lo que ha sumido en un permanente déficit al sector eléctrico es la falta de pago para cubrir los costos de la capacidad instalada.

El precio del kilovatio hora en nuestro país es abusivo, porque, entre otras cosas, para poder cubrir parte de los costos del sector se recurre a la práctica cuasi delictiva de hacer que los clientes solventes paguen el consumo de los morosos y tramposos.

Es un "remedio" que ha hecho mutar de solvente a moroso a mucha gente que era puntual en sus pagos de la energía utilizada. Por eso el déficit del sector eléctrico está en constante crecimiento.

No se entiende cómo un servicio estratégico como el suministro de energía eléctrica, que mueve el motor de la economía en todos los sentidos, puede llegar a estos niveles de calamidad.

Hay fallas de origen en el modelo de capitalización y lograr resolverlas será siempre un reto permanente, a menos que el Estado cuelgue la túnica política con que se ha estado presentando ante el problema.

Clarifications About the Electricity WPC the Market Winner

1. Please Blame the Deregulation and Regulation Fiascos Parte 28
10 May 2006
Dick, I will add that States that deregulated on Hogan's model might have created large unnecesary inefficiencies that States that have no deregulated can avoid. Also, central to the Electricity WPC restructuring is that selecting one ...

2. Please Blame the Deregulation and Regulation Fiascos Parte 27
10 May 2006
Dick, I agree that Banks' mental model is cost of service regulation. Schweppe's mental model is best explained by the post Some Friendly Comments on True Electric Deregulation Part 4 on the GMH blog (the original comment is under the ...

3. Please Blame the Deregulation and Regulation Fiascos Parte 26
10 May 2006
Dick, The most important elements of Schweppe's unextended mental model are the demand response element and the tight nature of T&D. That is a prerequisite that was bypass by Hogan's missunderstanding of the energy marketplace and the ...

4. Please Blame the Deregulation and Regulation Fiascos Parte 25
10 May 2006
Dick Maclay asked for clarifications on the mental models:. Jose Antonio, I would just like to confirm the differences among your mental models, if you would be so kind. This is my understanding of the essence of the models: ...

5. Please Blame the Deregulation and Regulation Fiascos Parte 24
10 May 2006
Thanks Len. The road to Electricity WPC requires many hurdles to be passed. Metering is just one of the components. A demand response system is another. Still Customer Information System an additional one. On the wires side, ...

6. Please Blame the Deregulation and Regulation Fiascos Parte 23
10 May 2006
Len Gould says: I agree with Mr. Vanderhorst-Silverio that advanced metering can provide a true market in electricity if combined with open access for all to an electronic central market of offers from generators, and provided all ...

7. Please Blame the Deregulation and Regulation Fiascos Parte 22
10 May 2006
Yes Steve, Retail competition under Electricity WPC is a viable business. The metering infrastructure leading to demand response will pay for itself just on the other operational benefits. Bringing together sellers and buyers is the job ...

8. Please Blame the Deregulation and Regulation Fiascos Parte 21
10 May 2006
Steve Rozenman questions whether retail is viable:. Jose Antonio This has been a long discussion with excellent feedback from everyone. But no one questioned the fundamental premise, upon which the entire deregulation rests namely, ...

9. Please Blame the Deregulation and Regulation Fiascos Parte 20
10 May 2006
I said I didn't want to fight with Prof. Banks. This is what he wrote when he flew out the dialogue:. Dick Maclay tells us that the deregulation fiasco in California was caused by the weather. Some people ascribe General Custer's ...

10. Electricidad SCP y la Estratregia de Competitividad
8 May 2006
Las exportaciones al mercado americano pueden aprovecharse de una electricidad, que si bien no sea de precios aparentemente bajos, apoye la estrategia de competitividad basada en la agilidad y la cercanía. ...

Please Blame the Deregulation and Regulation Fiascos Parte 28

Dick,

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

Please Blame the Deregulation and Regulation Fiascos Parte 27

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

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

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

I am copying part of the above post that says: " ‘…A spot price based energy marketplace is a win-win situation for both the regulated utility and its customers. The customer's lifestyles improve because the customers are receiving more service from the use of electric energy per dollar spent. The utility has a more controllable, less uncertain world in which to operate.’ That is exactly the opposite of what has been happening, by leaving the customer out in the re-regulation efforts. Demand response will change that."

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

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

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 26

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

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

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 25

Dick Maclay asked for clarifications on the mental models:

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

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

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

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 24

Thanks Len.

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

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 23

Len Gould says:

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

One interesting possibility at

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

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 22

Yes Steve,

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 21

Steve Rozenman questions whether retail is viable:

Jose Antonio

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

Retail Competition! . The question is:

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

Please Blame the Deregulation and Regulation Fiascos Parte 20

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

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

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

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

Electricidad SCP y la Estratregia de Competitividad

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

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

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

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

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

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

Market Vs. Market: When Anybody Wins, Everybody Wins

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 19

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

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

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

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

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

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

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

© 2006. José Antonio Vanderhorst-Silverio, PhD.

Please Blame the Deregulation and Regulation Fiascos Parte 18

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 17

Dear Prof. Banks,

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

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

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

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

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

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

Best regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 16

Thanks Dick,

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

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

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

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

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

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 15

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

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

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

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

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

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

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 14

Prof. Banks and other Gentlemen,

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

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

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

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

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

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

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

Thank you,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 13

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

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 12

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

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

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

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

© José Antonio Vanderhorst-Silverio, PhD. 2006.

Please Blame the Deregulation and Regulation Fiascos Parte 11

Mr. Maclay and other Gentlemen,

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

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

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

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

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

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

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

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

© José Antonio Vanderhorst-Silverio, PhD. 2006.

Interdepedent Consultant on Electricity

Dominican Republic

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

[2] Ibid, pp 31.

Please Blame the Deregulation and Regulation Fiascos Parte 10

Gentlemen,

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

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

Steve,

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

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

Ferdinand,

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

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

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 9

Ferdinand E. Banks has posted another comment:

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

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

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 8

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

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

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

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

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

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

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

Please Blame the Deregulation and Regulation Fiascos Parte 7

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

Jose Antonio

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

Please Blame the Deregulation and Regulation Fiascos Parte 6

Ref: Please Blame the Deregulation and Regulation Fiascos Parte 5

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

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

Regards,

José Antonio

Please Blame the Deregulation and Regulation Fiascos Parte 5

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

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

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

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

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

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

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

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