Hello Mr. Heins,

You have given the readers a very insightful article identifying a fundamental systemic issue, which are the perverse incentives of a very old system against efficiency on the demand side. That system was designed when customers transactions costs were prohibited, which is no longer true. In essence you are saying that this old system is flawed, since "... this disincentive impairs their willingness and ability to promote energy efficiency, despite its benefits to consumers' bills, electrical reliability, national security and the environment." That is a tall order, which gives me the opportunity to present once again an alternative new system which I term Electricity Without Price Control.

It has been known for quite some time that the business of utilities is winning rate cases to the regulator, which as you mentioned is tied to profit from sales (see for instance, John Naisbitt, Megatrends, 1982). Some would say that this is how they are gaming the (very old) system, while also avoiding competition. Somehow it seems to me that monopolies will be in the same business under the approaches to “recover utility costs and establish performance rewards.”

I strongly believe that a replacement system is urgently needed to allow for the development of demand side resources, such as energy efficiency. It seems to me that your suggestion is to tinker the system with “decoupling.” System tinkering is a very dangerous thing, so it is very important to know ahead of time what will be the unintended consequences it might bring. It seems also that you already signaled an improper use of "decoupling." There are also missing opportunities as you will see next for a fundamental system solution to arrive which will reduce the need for iron as it is replaced with bits.

However, If I understand correctly, to make things worst and to keep gaming the system, the utility lobby recently won the “native load” protection case with the 2005 Energy Bill. That means that the distributed demand side resources will no be open for development yet, to compete as equal with supply side centralized resources. Jack Casazza has made an important analogy in relation to the rights of utilities - he says that it is impossible to unscramble the egg. That means that some states will keep working under the old paradigm for quite some time.

© 2006. José Antonio Vanderhorst Silverio, PhD

I believe that tinkering the old system will leave many other important flaws in place. What is needed is to understand the nature of the system and to find the leverage for an intervention. That is exactly what I have been doing in the Dominican Republic and found that what is needed is to restructure the system, letting the demand side wide open, and reintegrating the transportation (T&D) of electricity. The transportation business will be kept regulated and responsible for short and long run risk management. The new image of the industry will be changed from generation to transportation (as suggested by Richard Tabors for transmission). That is how the new system will arrive letting a robust and efficient electricity market to develop in which all stakeholders will have the potential to win.

As I said in the article An Alternative Business Case for Demand Response, “by introducing a different value chain, and by adding other environments which I believe will lead to the long run End State of the electricity industry… [T]he business case of Demand Response (DR) is enhanced under free markets, innovation, and probabilistic (risk) mindsets. DR is poised to be the demand side risk management tool to complement the traditional "LOLP" supply side risk management tool.” I don’t see how the decoupling mindset will enable those resources.

As you can infer, I have been working on the systemic issues of the power industry to come up with the new system market architecture, and design. As can be seen from the article “a Dominican strategy,” in our country “customers have invested large amounts of money to reduce shortage costs individually. This has resulted in an everyone-for-himself policy. Such installed capacities in the industrial sector have surpassed 1,500 MW. From a national point of view, there is an excess of installed electric capacity, but nonetheless, shortage costs are very high as a result of poor system reliability, due to a total lack of integration and coordination.” Said in other words, Dominicans purchase electric power “supply” security (resources available in the demand side) in a robust and totally free market. By the way, I have recently estimated that our reserve generating capacity is 77%.

© 2006. José Antonio Vanderhorst Silverio, PhD

Once again, powerful utilities will have strong incentives to use your suggestions to continue gaming. As intermediaries between generators (large customers don’t need them) and customers, I suggest to replace the monopoly and the regulator with a retailer (under competition) which has the right incentives, under free markets, to develop all the resources of the demand side, not just plain energy efficiency, under a new robust system. That I believe will lead to the End-State of the power industry for quite some time.

Under cooperation of all stakeholders, a generative dialogue (as Bill Isaacs has developed) a competition between the regulated or re-regulated markets, based on the old system, and the new, complete and fully functional, deregulated market system should be developed. I anticipate the results will be that all stakeholders will be better off under the new competitive market system, in which demand side resources are unrestrictedly available to “benefits to consumers' bills, electrical reliability, national security and the environment.” In essence, the new system creates win-win for all stakeholders, including many customers at the Bottom of the Pyramid, no just large industry and powerful agents.

Thanks for setting the stage for my humble comments.

Regards,

© 2006. José Antonio Vanderhorst Silverio, PhD Interdependent (Systemic) Consultant on Electricity Promoter of Electricity Without Price Control Grupo Millennium Hispaniola (not incorporated yet)

Electric power deregulation that separates transmission and distribution - the FERC way - is flawed, because that separation is not done at a modular interface. The interface isn't modular when most needed - when real time reserves are low - amplifying input fuel prices into output electricity prices, instead of mitigating them. True functional reform simply separates wires from the competitive activities of generation and retail, at modular interfaces with the wires. The resulting value chain of the competitive activities is wholesale, retail, customer. Supply side (watts and vars generation) and demand side (energy efficiency, demand response, distributed generation, and storage) resource adequacy responsibility should be kept by a planning (long run) and operating (short run) unit associated with the wires monopoly for the whole power system. The result is a robust, complete, and fully functional market of the competitive activities. Those are the control elements of true deregulation of electricity. That will be the electric idyll of the new era - the End-State of the electricity industry. European Union seems to be closer to that goal than the U.S. As a reference, please read "a Dominican strategy," in IEEE Power & Energy, May-June, 2006 and/or place vanderhorst-silverio at www.energypulse.net on a search engine.

1) The Regulatory Assistance Project is doing some great work on decoupling right now, getting the attention of lots of states. A key part of their realization is decoupling removes a negative incentive for efficiency, but won't be fully functional unless it's coupled with some sort of enlightened PBR to provide them with a positive incentive for greater energy efficiency in their service territory. All good stuff, and worth checking out.

2) All of this ultimately calls into question the whole structure of regulated utilities. Why do they have a profit incentive if they have a regulated monopoly? Competitive markets drive social benefit, but profits per se don't gain us anything. Decoupling perhaps gets us closer to a more rigorous line of questioning to try and resolve the core conflict between utility shareholders and utility customers that is innate in all regulated monopolies. In light of that conflict, it's worth at least noting that there are some other models (espoused most notably by John Anderson at ELCON) that says that we should recognize the fact that Discos (in unbundled states) have done a great job at managing the grid and a lousy job and managing the market. So let's change the rules to play to their strengths - let them manage the grid, compensate them for their effort, but don't let them own the meter or the billing function. Then allow bilateral contracts between customers and whoever wants to provide them with electricity (paying a fee to the Disco in the process). If the Disco is truly a "natural monopoly" then let's treat it as such, but let's stop providing it with the means (and, as you point out, the incentive) to abuse their monpoly position to squelch competition.

On the wake of the 2003 blackout, you wrote a very interesting article entitled “Ten Questions for Electric Utility Regulators,” asking them to “Answer these questions… Dig into them. Don’t shy away from uncomfortable conclusions. Use your own staff to research the answers rather than relying exclusively on the analysis of interested parties. Once you have done so, you will be positioned to craft a reasonable electricity regulatory structure. But until you have completed this exercise, you will not have the tools to credibly free yourself from the vested interests of the parties you regulate…Good luck”.

I think that Electricity Without Price Controls (EWPC) is the correct regulatory and market structure, that it seems to me – correct me if I am wrong - you are shying away from them because they are offering such uncomfortable conclusions. By looking closely to EWPC, the utility and the regulator are being replaced as intermediaries of the customer by competitive retailers on the competitive activities. I think that regulators (seem to be very happy losing rate cases) will find it difficult to shy away from the business that utilities are in. States congress does not have the conflict of interest that regulators have, so they should find and retain a system architect with the competence required to do the work of answering your ten questions and a few more. I believe I have already done just that, but remain open to be proven wrong.

José Antonio

I apologize if I sounded as if I was shying away from your proposal. I'm not familiar enough with the details to comment one way or the other - but it is always flattering to hear my own words quoted back to me!

Without any intended comment on your proposal, but responding to the specifics of your question, I would not put much more stock in state legislatures getting details right than utility commissioners. Congresses typically are "a mile wide and an inch deep", and cannot be expected to have the level of sophistication required to properly manage anything as complex as the electric grid. Moreover, they are far to prone to near-term political pressures to be expected to make responsible decisions about 20+ year capital investments in the utility grid. By contrast, utility commissioners have the advantage of deeper expertise, but have historically been hidebound by the narrow legal confines of their responsibility (e.g., they often cannot consider environmental impacts of their decisions since that's done in another department, and have done a chronically poor job at considering the macro-level impacts of their decisions - the fact that a given utility has a rate freeze underway and they have 30 days to respond to a filing has much more bearing on their decisions than the consequences with respect to global warming or long term power reliability.)

Ultimately, the problem is not one of Congress, or utility commissioner or any other regulatory agency, no matter how well-meaning and enlightened they may be. Fundamentally, utility regulation has always been a socialist enterprise in the best and worst sense of the term. I don't raise this to get into a debate about whether & where we should introduce competition into electric markets, but rather to point out that if it is truly a public good being offered via a "natural monopoly" why do we give sancitioned monopolies shareholders and profits? Do shareholders place any requirements of utility managers that are not in direct conflict with utility customers? Adam Smith pointed out the value of competitive markets in bringing about the public good, but somehow this idea has been corrupted in utility regulation into believing that the existence of a profit incentive creates a public good - which is not only false, but creates dangerous incentives that run counter to the public good (as Steve ably points out.) On the other hand, if there is a benefit to be gained from profit incentives, then why do we give utilities sanctioned monopolies and insulation from competition? Decades of confused utility regulation have given us the worst of both worlds - bad decisions by regulators who (no matter how intelligent) can never be expected to mimic the efficiency of a competitive market, coupled with incentives for customer abuse on the for-profit side of the utility enterprise.

At core, I think that decoupling - done properly - is a great idea, inasmuch as it acknowledges the problem with regulated monopolies and removes the incentives for customer abuse. However, it is still, fundamentally a socialist idea inasmuch as it is based on the presumption that smart regulators (and regulatory tools) can deliver the efficient outcomes we already know how to achieve with competitive markets. I can certainly see that decoupling will do a better job than the current model. My comments above only relate to the fact that it still ignores the proverbial "gorilla in the room" of conflict between customers and shareholders in any regulated monopoly.

Utilities have shareholders because utilities are capital-intensive businesses and require shareholder investments of capital to survive. Utilities must earn gross profits (EBIT) to pay interest on borrowed capital which supplements investor capital; and, to pay taxes.

Are you suggesting municipalization of all investor owned distribution utilities as a way to eliminate the profit motive from utility operations? Do you assert that the public good would be better served by this arrangement? Municipal utilities must "earn" sufficient income to cover debt service on the borrowed capital invested in the service infrastructure.

Utilities are regulated monopolies because they were judged to be "natural monoolies" as a result of of the enormous investments required to extend utility service. Municipal utilities are also monopolies, though they are arguably not regulated. (Try competing with a municipal utility, if you question this assertion.)

Some natural gas distribution utilities have a somewhat different "natural monoploy" than electric distribution utilities, in that both existing and new customers (typically large customers) may bypass the distribution system by installing direct connections to transmission systems. This typically results in excess capacity in the distribution system, the cost of which is then re-allocated to the remaining customers.

The focus in this discussion on the relationship between profit and sales is overly simplistic and misleading. Utilities, like most businesses, have two basic classifications of costs: fixed and variable. Utility rates set by regulators typically allow recovery of ~25% of fixed costs through the fixed portion of the rate (monthly service charge); the balance of the fixed costs are recovered through the variable (sales volume based) portion of the rate. Thus, achieving a certain volume of sales is essential to full recovery of fixed costs, not just to achieving desired profit margins.

Separation of all fixed cost recovery, including interest expense on debt and profit (in the case of an investor owned utility) into a fixed monthly service charge benefits utilities by separating cost recovery and earnings from economy- and weather-induced changes in sales volume, as well as efficiency and conservation impacts. Mild weather and economic slowdowns typically reduce utility sales, resulting first in reduced gross profits; and, in the extreme, in under-recovery of fixed costs. Economic booms and extreme weather, on the other hand, result in profits greater than the regulated "allowable rate of return". Regulators don't worry much about reduced utility profits; however, they pay a great deal of attention to "excess" profits. That is what passes for "balance" in a regulated environment.

Your post still carefully ignores the "gorilla in the room" of cross-subsidization of the T&D portion of the enterprise with profits from the supply activities, which is essentially what this article is all about. Telecom never worked well, and certainly couldn't have been de-regulated, until such cross-subsidization was eliminated.

Promoting utility de-regulation should be hopeless until distribution is entirely covered on customer bills by a separate fixed connection charge which reflects the utility's real capital costs of ownership and operation of the infrastructure. There is no real reason this rational step can't be taken at any time, in any present jurisdiction. It's simply an accounting effort. Claiming an a priori "need" for cross-subsidization is at best very questionable, given that it enables the distribution entity to extend the claim of "natural monopoly" from distribution to supply, which is not valid.

Certainly no regulatory agency would permit, no less encourage, no less force cross-subsidization within integrated utilities from generation to T&D. Perish the thought! They would no more tolerate such cross-subsidization than they would permit, no less encourage, no less force cross-subsidization among customer classes, typically from industrial and large commercial customers to residential customers. Surely you jest! (Yes, I am being both cynical and sarcastic.)

The "gorilla in the room" referred to in Sean's post is the conflict between shareholders' desires for profits and customers' inferred desire to decrease utility bills by reducing consumption through efficiency improvements and conservation (and, arguably, by reducing or eliminating utility profits). Actually, in a classical regulated environment, all three components of the integrated utility are primarily concerned with maximizing investment in physical plant (capacity to meet demand, rather than actual energy production and delivery quantity) because their return is based on net investment in physical plant. The factor which gets utility managements focused on sales is the regulator-established link between sales and fixed cost recovery. What regulators have established, they can also dis-establish, should they choose to do so. The utilities, on the other hand, can influence but not control the situation.

Restructuring, in fact, isolates the T&D functions from profits on commodity sales. However, even if there were no cross-subsidization, the still-regulated T&D functions are still dependent on sales volumes to achieve their allowed rates of return, unless all fixed costs are recovered in the fixed portion of the rate. Most current approaches to restructuring and "deregulation" are the functional equivalent of being "a little bit pregnant".

1) Munis are not without their flaws, but I can say from hard-won experience that they are much more receptive to energy efficiency. This is really most true for coops, where the customer and shareholder interests are one and the same.

2) That said, I would never claim that we yet have a good model of utility regulation. Edward is spot on with the "little bit pregnant" line. There is yet to be jurisdiction that is truly deregulated, and many of those which have restructured actually have less customer choice than they used to (what used to be done through multiple utility:utility transactions is now done with a single ISO:utility transaction, and the underlying customer is still excluded from the process.

3) Fundamentally, I disagree that utilities need shareholder capital to survive. They just need capital. After all, BPA and TVA are getting by. They're not perfect, but the point is semantic: the capital intensivity of the business is not per se a justification for the profit incentive, and it a tautology (albeit an oft-overlooked one) that profits in regulated monopolies are exempt from all the good stuff that comes from Adam Smith's invisible hand.

4) All this comes back to my first comment. In unbundled markets, distribution utilites are toll collectors. Very important toll collectors, I will grant you, but still just toll collectors. They need to be compensated for their service, but they should not have access to the levers by which they can abuse their monopoly position (which they most certainly do!) Take away the metering and the billing function from the Disco, but leave in place a regulatory structure that ensures that the utility gets adequate compensation and you can solve this problem. Many devils in the details, but the devil we know is a pretty nasty one, and we're past due on looking for a better one. Consider that the electric sector is the only industry that is less efficient now than it's ever been. If we "only" went back to 1920s efficiency levels, we'd save $100 billion a year in fuel costs and reduce CO2 emissions by 1 billion tons/year. We got to where we are because of the throughput bias,and it's time to fix it - whether through decoupling, deregulation, or something else, but the status quo is costing us far too much.

Investor-owned utilities require shareholder capital. This investor capital could be replaced by government debt, used to purchase the utility shareholders' equity. The utilities debt could be re-funded as public debt. Then, there is no profit motive beyond covering debt service. However, existing investors would be entitled to fair market value for their equity investments. This could be accomplished by a public takeover attempt; or, it could be accomplished through eminent domain, in this post-Kelo world. In the first case, the investors would be fairly compensated for their equity investments; in the latter case, that result would be far more problematic, though not impossible under the Fifth Amendment.

I'm not sure I understand: " and it a tautology (albeit an oft-overlooked one) that profits in regulated monopolies are exempt from all the good stuff that comes from Adam Smith's invisible hand."

OK: I get it, no legislatures, but commissioners. Regulators are then in a catch-22 situation. But, that situation is everywhere - electricity is shifting from an old full iron system to a new mixed iron and bits system. Maybe it should be FERC's work for the U.S. Congress. The shift is from a controlled market to a free market on the competitive activities. Retailers will be under a different type of regulation: free market - not socialistic - prudential regulation.

The transportation of electricity as a true natural monopoly will remain under the old type - socialistic - utility regulation for the public goods. That center stage monopoly will be in charge of real time operation based on real commitment of resources on both sides - supply and demand. Transportation utilities will still be in the business of winning rate cases to regulators. It should be a lot simpler for regulators to conduct that work without the complication of energy sales. Transportation will inherit the obligation to serve, but on whatever retailers negotiate with each end-customer (this is a new insight that I think no one has express yet. I would love a proof to the contrary). End customers will have demand response as a condition to be served (that is not mine).

Under Electricity Without Price Controls (EWPC) reform Sean's argument "Decades of confused utility regulation have given us the worst of both worlds - bad decisions by regulators who (no matter how intelligent) can never be expected to mimic the efficiency of a competitive market, coupled with incentives for customer abuse on the for-profit side of the utility enterprise," does not exist. The structure is very simple, because the two worlds are already separated at modular interfaces. No need to mimic al all.

As for Edward, there are many other capital intensive businesses operating in the free market. I suggest reading what Walter Wriston, chairman of Citicorp said in 1981 about the rights of inherited markets (see Megatrends: ten new directions transforming our lives, by John Naisbitt). That was the lesson of the railroads - a very capital intensive business that didn’t know it was on the business of transportation. It is evident that the bypass and cross subsidies to T&D, as Len suggest, issues disappear entirely under EWPC.

Sean item 4 is right on. It is a key element of EWPC. Retailers are the required structure operating under prudential regulation, which also reintegrates the T&D wires in every system. Most of the value destruction can be found in the underdevelopment of the demand side (which retailers should develop), where investments are bits intensive - not iron intensive like the supply side. No doubt that, under such new paradigm, emissions will be reduced.

Claiming the divorse of the competitive activities from the natural monopoly, I think I covered the whole ground. If I missed something please say so.

© 2006. José Antonio Vanderhorst-Silverio, PhD.

and Antonio also I think.

The tautology referred to the fact that Adam Smith's observation on invisible hands and resulting efficiencies are the result of competitive markets, not profits. Take away the competitive markets and you lose all the benefits therefrom - including, per this conversation, the incentive for efficiency which benefits society at large. US Electric utilities are inefficient for precisely the same reason that pre-perestroika Russian bread lines were inefficient. And US Electric shareholders have seen very reliable dividends and profit growth for exactly the same reason that Gazprom shareholders have seen reliable dividends and profit growth. This is not perjorative, just a truism of the way markets work, and their absence from utility regulation.

Jose: I don't mean to suggest that commissioners are better than legislators, only that both are equally flawed. Legislatures are great places to enact change (since they're less hidebound by implementation details), and PUCs are terrible places to try and enact change, for the inverse reason. PUCs do a better job at understanding the nuances of utility structure, grid management, etc., but both do a perfectly lousy job at pursuing efficiency, especially as compared to functioning markets. The best regulatory models are those that define the goal, set the rules and get out of the way. Utility regulatory models have never fit that description.

Also note that FERC doesn't cut it, at least not without massive Supreme Court challenges. It only takes one southern congressman to (capitalize the "S" if you'd like) to cry "states rights" and unleash a political minefield, as Pat Wood can surely attest...

Thanks Sean for your comments on the extension of the Catch-22 situation that limits the U.S. to a clear vision of the End-State of the power industry. Back in 1996, I read (and quoted) that some people had clear vision, while other were foggy. The others said: go ahead and refine the vision as we go; we need to be flexible. I kept reading and learn that those people are going to start, restart, and restart, and then they will find that they are behind the game.

Just as in Dominican Republic, a 3rd world country, the real problem is systemic. The system is the problem. By tinkering the system with "decoupling," your 10 questions, and some more, will remain unanswered. Decoupling is a symptomatic solution that will lead to more symptomatic solutions in the near future. In the mean time, others will get the vision right and win the game.

In my country we are under systemic collapse similar to that experienced during the great depression. The only difference is that the U.S. was a financial depression, whereas we are under an electric power one. That is our only advantage to pressure for action. As you can see from "a Dominican strategy," by developing EWCP as described elsewhere under EnergyPulse, my people have an opportunity to follow my lead and turn around the power sector to a clear vision.

However, in the U.S. and my country, under conventional wisdom it will be impossible to get out of the dilemma. That is why they are dilemmas. Conventional wisdom is a mechanistic thinking. A need for systemic thinking is required. That is where we stand now. Divorcing competitive activities from monopolistic activities is the way to go, as transaccion costs gets cheaper and cheaper, while fuel and environmental costs keep rising.

Regards,

José Antonio

I do not disagree that electric utilities are what they are because of regulation. It would be notable if they were not! Restructuring of the industry has mostly consisted of re-regulation, not deregulation. How many regulators and regulatory agency staff lost their jobs as a result of "deregulation"? (The answer should be non-zero.)

Regulators are still trying to preserve the "natural monopoly" in telephony, where it has long outlived is usefulness and even its relevance.

The point of this article is that businesses and their customers respond to incentives, whether the incentives are in the broader public interest or not. The fundamental question which must be answered, however, is whether the economically justifiable incentives are sufficient to change behaviors broadly and permanently.

Several DSM programs have failed because the incentives offered were perceived to be insufficient by those being incentivized. Arguably, the incentives were less than the economically justifiable limit in all of those cases. Conservation programs appear to offer great potential, but tend to be less durable than efficiency improvements. For example, how many people do you know who are still setting their thermostats at 66F during the winter and wearing cardigan sweaters? (We are, but our friends prefer to get together at their homes during the winter because it is warmer.)

Please look at my comment under Strategic Perspectives on Utility Enterprise Solutions, where is says: "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."

Your ode to at least two dinosaurs:

"Regulators are still trying to preserve the 'natural monopoly' in telephony, where it has long outlived is usefulness and even its relevance."

caused me to dust off a communication between the two: > Don, thanks for the thought provoking comments you took the time to generate and send to me recently. My exposure to SERVICE was a large part of my career in the old Bell System. I defended the natural monoply and our control of telephony to a fare-thee-well. Then along came our fraterniy brother, Ray , to demonstrate the error of our ways (I guess). I will be chairman of our 50th reunion in June ... > --Ron,

I'm probably not familiar enough with the old Bell System to opine on whether Ray would have been one of those who should have read "Insull". Several things I've noticed since Bell was "broken up" lead me to believe that the error may not have been in your ways. The first is my perception that the amount of social engineering forced on the regional Bells and other telecommunication firms by Uncle Sam's mandates has exploded. One of the most absurd, in my humble opinion, is surcharging all ratepayers for those who wish to switch suppliers. The first time I saw this so-called number portability charge on our monthly bill, I achieved low-earth orbit in record time. Even complained to the FCC - with predictable results. Also had the naive expectation that the annual tithes to the IRS, CA FTB, SSA taxes, Fed excise taxes and sales taxes would help take care of the less fortunate. Surcharges mandated by the Feds and CA on telephone and utility bills for this purpose completely ruined this illusion. It's probably old age, but this type of thing seemed to grow like Topsy after Bell was "restructured". Whether the "break-up" and "increased competition" lowered anything but the value of investors' portfolios is not readily apparent. To the extent that ratepayers were beneficiaries of AT&T economies of scale, I'd say we "took a bath". Another fraternity brother, Dick, before he passed away, was a member of Bell Labs, a place that spawned many wonders of the Electronic Age including some Nobel laureates. Believe what's left of the labs goes by the name of Lucent, which may someday spawn a "good bottom line". Once again it may be old age, but I mark the decline of Bell Labs with the "break-up" of AT&T. This jaundiced eye sees the expansion of federal bureaucracies, the welfare of the less fortunate, the increase of employment in telecommunications and a free-ride for the capricious as the big gains from correcting "the error of our ways". Oh yes, a few members of the ABA also might have made names for themselves! They may have a chance to do it again - I see SBC merged with what's left of AT&T.

All the best to you .

Don

Thank you for carrying on such a lively, far-reaching debate without me. While you have been theorizing and etherizing about the basic workings of markets, human nature and natural monopolies, I have been extremely busy here on the ground with my feet firmly in the grassroots.

Last week, I attended the annual Midwest Energy Efficiency Alliance meeting in Chicago. A good many of the attendees were utility commissioners, program directors, legislators, legislative staffers, EPA members, policy wonks and even a few Alliance members—like myself-- from the private sector. Among the ideas discussed were decoupling, demand response, emission reductions, climate change, emission cap and trade systems, and the linkage between energy efficiency and the reduction of greenhouse gas emissions in the atmosphere.

Then, this last Tuesday I attended a daylong Wisconsin energy conference with all of the stakeholders in attendance. We discussed the same subjects of decoupling, demand response, emission reductions, climate change, emission cap and trade systems, and the linkage between energy efficiency and the reduction of greenhouse gas emissions in the atmosphere.

Finally, I spent yesterday afternoon with 35 or 40 energy (utilities, regulators, business groups, renewal advocates, environmental groups, etc.) people at the Public Service Commission of Wisconsin offices. We discussed the administrative rules for 2005 Wisconsin Act 141, with the intention of creating a consensus while establishing the set of rules regarding Wisconsin’s energy efficiency and renewable resource programs beginning in 2007. In the main, we succeeded.

This is a long way of saying that my modest decoupling proposal is just the first step in a process that tries to deal with all of the energy complexity you have so thoroughly discussed above. Until further notice, we will all have to work within the utility framework of the U.S., which we have cobbled together over the last 125 years.

Given the patchwork of utility authorities from the municipals/coops/IOU’s through regulators/legislators through customers/citizens all the way to FERC/DOE, I am hoping we can build a coalition around the notion of creating a practical path to energy sanity and environmental stewardship, without the usual name-calling and partisanship. Using the one brick at a time method, this democratic approach may be a little messy, but that is the nature of a democracy. Each of your voices is proof that we need to listen to all the best ideas first and then act.

Steve Heins

1) Thanks you for your explanations after a busy schedule. I hope the attendees at your meeting were told by you to take a look at your paper, even though it has a lot of theorizing added. If you didn’t, I hope they will have a chance to read this. My comments, however, do not have any etherizing. I hope I am not being as rude with you in the following comments. I also hope not to bore you either. This is not a fight, but an attempt to shed some light, which I hope may come from your side or of any of the other readers.

2) I have my feet very well placed in the ground. This is a glimpse of my story. I have been in the power industry since 1965, when I got a scholarship to go to Cornell. I worked on every corner of the industry with a PhD (in Information Theory - where I developed my probabilistic mindset) since 1972. I was head of planning of a 3rd world country, where I worked hard to do high tech simulations of a least cost probabilistic expansion plan, to guarantee commercial service to customers. Politicians didn't follow the advised, as they always know better. I proposed a vision in 1996 to deregulate the way that is now become EWPC, based on the research at MIT by the group led by Professor Schweppe, as is discussed here and elsewhere on the EnergyPulse website. When our country deregulated the power sector in 1999, without following my advise (designed in accordance with our reality - which is now becoming the End-State of the Power Industry), I became a member of the board of the Coordinating Body (operations planning and market transactions), representing IPPs. It has been a real mess here, as 2 of the 3 Discos went broke and were repurchased by the government in 2003. That is when I decided to become an Interdependent (Systemic) Consultant on Electricity. Actually I have work hard to transformed myself into a system architect in the last 15 years or so.

3) Even though you may think you are not theorizing, I am sorry to tell you that you are just one of many theorists going to many meeting. The old name calling of theorist is not longer effective on the new world. I won't tell you where I found the quote that says: "...every time managers take an action, and every time they look into the future, they use a theory to guide their plans and actions - because a theory is a statement of what causes what, and why." I am very sure that the theory you are proposing with your article is not sound, but politicians love that. They love symptomatic solutions.

Unless I see a discussion on the practical-theory of EWPC I won’t interfere with your closure.

Best regards,

© 2006. José Antonio Vanderhorst-Silverio, Ph.D.

The old Bell monopoly was a license to gouge, as are electrical distribution utility monopolies if they're allowed to get involved in the supply market. Maybe Ed is right, and they don't take advantade of their market power, and maybe there is a tooth fairy...

Don't throw the old Princess away. It still detects the dialtone at your service entrance. When a landline to the house goes bad it can be used to determine which side of the entrance has the fault. Else for about 11 of your former monthly rent premiums, a provider will troubleshoot for you. And for about 20 of your former monthly rentals per hour the provider will repair any trouble on your side of the entrance. Service policies are available, but they can make one nostalgic for the old monthly group insurance premiums. It's probably old age - the grandkids say landlines and dial-up are for dinosaurs.

Regulators set fees for non-standard phones, touch tone service, etc. as a way to "tax" those who could afford "equipment and service upgrades" to support low cost single black rotary dial service. Don is right about service as well. It costs about $75 US to put a service person and a truck at your front door. It gets more expensive after that.

I don't recall claiming that utilities did not exercise market power, even though it is part of the regulators' responsibility to control/prevent that behavior. For example, the myriad of interconnection requirements for on-site generation across the country was a massive effort to exert market power; and, an eggregious regulatory failure.

There is a need for some consistent thinking about "natural monopolies" in the US. It makes no sense, as was the case with "Ma Bell", to: decide that the Bell System was a natural monopoly; regulate it as a monopoly; accuse it of functioning as a monopoly; find it guilty of functioning as a monopoly; and, break it up. The one thing restructuring of the Bell System into a number of smaller regulated monopolies accomplished, albeit over several years, was eliminating the long distance subsidy of local exchange network service created by regulators.

At the end of the day, the telcom monopoly was broken by intermodal competition from wireless, cable and even utility lines. Until we have that kind of competition for electrons, we are stuck with the natural monopoly for electricity, suffused with state's rights issues, legislative timidity and policy imperfections.

Steve.

If this were done and metering became a bit smarter, it wouldl then open up a tremendous opportunity for creative and energetic service providers to begin marketing "energy and market efficiency" packages to all customers right down to individual homes, where the opportunities are much larger because it's been so ignored up to now, as you often point out.

We agree! An interesting occurance in its own right.

Actually, I was referring to a total transformation of the electricity market in the U.S. Smart incremental changes can go a long way to creating a more competitive marketplace. As you point out, I have often pointed out that fact. Thanks for the clarification.

Steve

Making incremental changes is a way to extend the useful life of an outdated business model. What is needed is "tunneling through the cost barrier" to avoid altogether unnecessary expenses. I copy a comment I made last year on the New York Times.

Nukes vs Energy Efficiency and Demand Response

The argument that nuclear power is green needs to consider nuclear waste costs to be complete. Natural Capitalism, the book written by Hawken, Lovins and Hunter Lovings, has enough insights about waste reduction to develop different and solid arguments, even without considering nuclear power. Performing whole-systems engineering of the electric power system will lead to the preservation of ecosystem services through the integration Energy Efficiency (EE) and Demand Response (DR) to other existing technologies to sharply increase economic efficiency. The book recommends starting to solve the problem from the demand side with EE, in such an aggressive way as to avoid capital investments, in generation, transmission, distribution and utilization, by what they name as "tunneling through the cost barrier". DR is a risk management tool, based on information technology and advanced metering, which leads to fully functioning, and the integration of, wholesale and retail markets. DR is like the glue to integrate distributed generation and storage resources, and the means to mitigate short run price volatility, and long run boom-bust behavior. Just as the DC-3 designers had to integrate 5 technologies, to ushered in the era of commercial air travel (see The Fifth Discipline of Senge), the last of which was wind flaps, so are DR and EE the needed technologies to start the era of reliable and cost effective commercial electric power system.

I would like the author, Sean, Len, Edward, Don, and any interested reader to learn that "the ultimate impact of the source failure was compounded by 'long-standing institutional failures and weaknesses that need to be understood and corrected in order to maintain reliability.'" Those long-standing institutional failures are the result of a piecemeal approach - "incremental changes" - that Steve is promoting. The result is also that “we still have a very complex system that is subject to possible mechanical and human failure,” as U.S DOE Energy Secretary Samuel W. Bodman admits.

Adding to complexity, the mandatory approach that is being pursue contrasts with the systemic, and integral approach under EWPC, where the T&D monopoly will be in charge with short and long run systemic risk, "to minimize the likelihood of future blackouts, reduce the scope of those that do occur, and improve the security of the North American (or any other) power grid." Below is the humble comment I posted on Tech Talk:

Blackouts are inevitable. In the 1980s, many integrated utilities used to plan generation capacity using probabilistic techniques to allow 24 hours of loss of load in 10 years. That can be said to be a measure of supply side risk management, based on the development of resources on the supply side. Lets name that as an "iron" short run strategy to mitigate systemic risk, which involve costly reserves and fuel consumption.

I am suggesting that there is a complementary "bit" short run strategy - demand side risk management - to mitigate systemic risk, which I introduced in an article entitled "An Alternative Business Case for Demand Response (www.energypulse.net)” and complemented in the article "a Dominican strategy (Power & Energy Review, May-June 2006)." Such strategy should be based on what I termed the development of resources on the demand side, which requires a complete and fully functional deregulation reform, as re-regulation - with just open transmission access - has been shown to be very costly or lead to an unstable state.

The "bit" short run strategy should be considered in two of the reliability research suggested in the blackout report, which are: "Investigation of protection and control alternatives to slow or stop the spread of a cascading power outage, including demand response initiatives to slow or halt voltage collapse, and "Study of obstacles to the economic deployment of demand response capability and distributed generation."

The main obstacle to demand response initiatives and economic deployment is the dynamic structure of the power system arising from a mistaken restructuring that separates transmission from distribution - open transmission access - at an interface that is not modular in real time. The obstacle is based on the "native load" concept that was kept in the 2005 Energy Bill. Deployment will involve large and continuous retail marketing efforts, as customers requirements will evolve. The new structure that supports the new value chain - wholesale, retail, customer - is a T&D utility that handles only wires and takes care of short run and long run systemic risk and market administration. For further information see my comments under the article "Divorcing Electricity Sales from Profits Creates Win-Win for Utilities and Customers"(www.energypulse.net)"