1) You confuse "flat rate fixed" pricing (eg. NOT TOU, realtime) with "regulated". Without advanced smart metering, neither system achieves ANY of the goals you claim achieved by re-regulation, and there is simply no reason in economics or elsewhere that a well "regulated" system can't implement a metering infrastructure and rate structure which exposes customers to actual costs just as effectively as "re-regulated". In fact it appears, from other articles here and elsewhere, that most of the most advanced smart-grid-to-the-meter systems are being implemented in jurisdictions where "re-regulation" has taken least hold, eg. west coast, and in others, eg. Ontario, the required TOU metering infrastructure would never likely have been implemented without OEB fiat, as the economic risks and payback to any individual retailer will be very hard if not impossible to make a business case with for the retailer, and are completely irrelevant to the pipes-and-wires distribution entity who actually owns the meters here and in pretty much all jurisdictions.

2) You appear to see no distinction between energy retailers, transporters, and producers, whereas in reality in a "re-regulated" market environment the retailers who actually send salespeople out to sign up customers simply amount to a nearly useless new layer of overhead on top of the same old monolithic entity which existed a priori, and in any jurisdiction where the distribution entity is still allowed to own and compete with generation, that is not ever likely to change beyond perhaps a minor few merchant peaking plants.

I would refer you to Economic Witholding in the Alberta Energy Market , particularly section 2.1.1 "A critical part of the equilibrium mechanism just described is the active role of consumers in determining the market price." The mechanism just described is the bidding system currently used to select generation in all re-regulated markets I know of, including Texas, and I agree with this paper (from a Harvard website) which states that without intimate continuous participation of the persons actually paying the bills, the market cannot function properly. THAT means SMART GRID, SMART COMMUNICATION TOU METERS WHICH OPERATE AS CUSTOMER AGENTS DIRECTLY INTO THE MARKET.

I refer (again) to my articles, in which I considered the need for such a system to be so apparent I spent no time arguing it, simply planning to implement it and working out a budget.

Independent Market for Every Utility Customer - Preliminary Business Case

Independent Market for Every Utility Customer - Part 2 - Market Operation

On March 13th, 2007, at the Third Annual Carnegie Mellon Conference on the Electricity Industry, I presented A Generative Dialogue to Reach the End-State of The Electricity Industry. In my comments to your article, the slides mentioned are those of that presentation, which I believe is a good companion to your paper and the report.

I find the ABACUS report you prepared for ARC very illustrating and a welcome contribution to the generative dialogue, which I suggest the End-State will be electricity without price controls (EWPC) - summarized on slide 34. In addition, the report is a hard proof that “the creative destruction to EWPC is already at work (slide 35).”

As you will see, I understand that your paper gives a strong support to EWPC as the wining market architecture and design, as discussed in Playing with Fire - Part I and – Part II.

I strongly agree with your statement that regulated pricing (also for Len) is a key barrier to retail electricity choice. This is phrased on slides 14, 16 and 43 as the “native load” barrier.

The use of 23 issues (elements) to develop the ranking of 28 US states and 2 Canadian provinces gives a good signal to understand the process towards electricity without price controls (EWPC). Only Texas (position 1) has made "excellence progress," while only New York (2) and Alberta (3) have made "good progress."

The dawn of electricity competition in Texas is about eliminating price controls on competitive activities. Difficulties experienced last year, because of lack of demand response, meant that there is not enough integration between retail and wholesale electricity markets. The Texas market is just immature.

The issue of integration of retail and wholesale markets was explained in the paper An Alternative Business Case for Demand Response, which was published as a rebuttal (I mentioned the End-State then) to your DEFG partners, Brunetto and Wimberly, article The Business Case for Demand Response (please see the comments interchange with Thomas under the article).

Texas is not a Pure-Disco state either – competitive retailers should be able to replace 100% of the old monolithic regulated incumbent’s retailers to reach 0% overhead -, so there is a space available to reach the End-State. No nonsense competitive retailers (also for Len) business model innovations are at the center of market development (slide 21).

In that regard, recommendation 7 of the report deals with the separation of regulated and competitive services. The generative dialogue should approach altogether the difficulties in the interaction between regulated and competitive affiliates to get to wires-only (pure-disco). There is another argument under EWPC to support a pure-disco arrangement: transportation (transmission and distribution) should be kept whole (integrated) to manage efficiently and effectively short and long run systemic risk (slide 17).

I invite the leading retailers to take a look at slides 38 to 43, to see the investment opportunities of the Dominican Republic under DR-CAFTA.

My point is, I can see no reason why I should need to remember. I happen to know enough about computer system to know for an absolute fact that a very cheap little control system could do everything for me automatically, and pay for itself in a very short time, if the market system existed.

You have followed most if not all of my comments on Energy Pulse. To my knowledge, nobody else has done that. By now you should know that EWPC is not just about lifting price regulation; it is a comprehensive paradigm on market architecture and design that is emerging as can be seen in the generative dialogue to which the above article concurs.

From what I wrote earlier on your proposal, I understand that you proposed to bypass the need for competitive retailers, which I think restricts the innovation spectrum. However, full regulation has full regulated retailers which you are happy about.

The value chain - generation, monopoly exchange, customer - a one size fits all solution, should not result from market rules, but from competition. In effect, the monopoly exchange is one kind of retailer which may fit for a market segment but not for the world wide market.

Your statement which categorizes my market design as a retail monopoly is in error, comparable to defining the market in which gasoline is presently marketed a monopoly simply because it is mediated by gasoline meters which must be certified by a regulator. In final analysis, more regulation would be required for a market of your design to function correctly than mine IF it is determined that having customers respond to real-time peaks on the grid is a societal good worth having, which IMHO it is, for these reasons:

1) It benefits society in general to encourage the use of fuel in high-efficiency CHP units over central generation whenever there is a requirement for heat. (CHP when heat is exploited can often achieve 90% thermal efficiency vs. central generation max ?60%? - transmission losses.)

2) In every situation, it is a general good to society to have as much of it's centrally generated electrical power as possible generated by continuously running baseload plants operating at or near their design loading.

The whole argument is long and complex in this direction, but in general the outcome is government, to achieve the above goals, must either

i) implement a huge list of intrusive regulations (every building must have it's environmental control system connected to a central computer operated by the power authority, it is illegal to interfere with said communication, .... etc. yadda yadda) ii) require by regulation that power providers actually do control the customer's sites. iii) get to play around with "picking winner" incentives to source suppliers etc. etc. iv) still certify the meters!!!

In my design, the one point where government regulation will ALWAYS need to be involved in, the meter, is the ONLY point of interference allowed.

Retailers’ functions are required no matter how sophisticated you can get with today’s technology. Someone have to do them.

It would be nice to have Mr. Treadway apply his 23 elements (issues) to our proposals to see how competitive they can get. Let’s wait and see what he has to say.

In the meantime, here is may take, which as you can see it posses no limitations at all to competitive retailers, while satisfying the short and long run needs and requirements of the power industry:

A1. Both want 100% residential customers’ eligible for retail electricity choice. A2. EWPC agrees with having at least 8 retailers to get the maximum rank. If the exchange is not a monopoly, generators (wholesalers) even if they don’t want the hassle of retail are forced to be retailers. A3. Both allow 100% of customers of receiving competitive rates based on spot prices. 1, 2 & 3 year contracts not clear for your system, as generators need to perform back office retail functions. A4. Both should allow market switching to the same degree.

B1. Wholesale market competition to get a 10 requires many things you disagreed earlier on. Please go to page 20 of ABACUS report, enhanced with slide 24 and 27 of my CMU presentation. B2. To get responsive demand, retailers perform a very important function that is not provided by an exchange. Many generators would like to avoid such retail function.

C1- C8. Agree are very important elements. However, there is not need to be compared, as it is a transition to competition device which could be implemented on either approach.

D1. Distribution utility structure. EWPC promotes Pure-Disco and transportation reintegration (enhancing ABACUS). What you response? D2. Competitive safeguard. EWPC same as D1.

Two comments about misunderstandings on your opinions (remember you are not your opinions) about “devise” and the defintion of retailers:

"C1- C8. Agree are very important elements. However, there is not need to be compared, as it is a transition to competition device which could be implemented on either approach," refers to "Topic C: Default Service/ Provider of Last Result" of the ABACUS as a competition device. It does not refer to meter devices.

Retailers under EWPC replace all the required functions - not specific purposes - to all customers performed by regulated retailers (utilities) that are needed and develop additional functions to compete effectively.

According to ABACUS:

Texas has made excellent progress to show that they are on the dawn of electricity competition. Please recall my comments above about Texas, which is not operating under EWPC.

Ontario is far from Texas, having made only medium progress (placed in position 11, after 10 other states). I agree you should not be impressed with the progress of Ontario, because Ontario is not operating under EWPC.

First, it is easy to agree with these writers that advanced meters will improve the interaction of demand and supply, and will enhance economic efficiency. Experts disagree over the timing of AMI, who will bear the risks and make the investments, and whether all customers need an advanced meter. Like any technology, AMI is a tool, not a solution, and entrepreneurs are needed to develop the products and services that deliver solutions.

With advanced meters, it may not be necessary or desirable to force all residential customers onto a TOU or RTP rate. Many residential customers want the simplicity and certainty of a flat rate, along with a standard package of services. They should get what they want. Other residential customers are willing to accept price uncertainty, different levels of reliability for each device (load control) or fewer value-added services, and they should have those choices. A menu of services will develop in a retail choice environment, and pricing and contract terms will vary depending on the selection.

For those who want it, advanced sensors and controls could provide a level of intelligence and control far beyond the simple thermostats and on-off switches in today’s homes. A typical customer should not be bothered with monitoring and managing energy usage. Many business models will be attempted and a few smart entrepreneurs will get the new package of services right.

Second, there is no confusion between “flat rate pricing” and “regulated rates.” Regulators can create any discreet number of rates. You may label these rate “innovative” if you wish. Bonbright’s rate principles will guide these rate designs. However, each regulated rate will bear very little relationship to innovative pricing in a competitive retail market. We do not expect regulators to require the utility to take risks and respond to market pressures to deliver innovative products and services at competitive prices. We expect regulators to price services in a manner that is fair and consistent with applicable laws. After a transition period, we expect regulators in restructured markets to only set prices for monopoly services.

With regard to the matter at hand – regulated pricing of default service – the issues are the specific choices made by each jurisdiction in the design of the default rate. Is the rate truly a transitional service, or does it undermine competition? Are all costs reflected in the rate, or have the regulators made decisions that shift costs from one period to another? Who bears what risks and who pays what risk premiums? ABACUS elements C.1 to C.6 address six pieces of the puzzle.

Third, I see huge distinctions among energy retailers, transporters (T&D) and producers. I am concerned that someone sees no value added by a retailer. If your retailer does not add value, then select a different retailer! I am not concerned with “new layers of overhead” because these layers are thin. Retailers who specialize in obtaining value from advanced meters, for example, will distinguish themselves from those who provide green power or those who provide traditional packages. The new retailers will aggregate customers who are willing to provide demand-responsiveness, and these customers will be rewarded for the value they provide.

Finally, I invite each reader to apply the 23 elements set forth in the ABACUS report (see Appendix A) to his/her jurisdiction and to whatever model of an ideal industry structure he/she envisions. Let me hear the results.

"Many residential customers want the simplicity and certainty of a flat rate, along with a standard package of services. They should get what they want." Flat disagree. Individuals should no more have the option to operate an electric pool heater on a hot summer day at time of peak demand when electricity is being supplied by 23% effic. simple gas turbines, than they should be free to drive their car at 100 mph through a school zone. By doing so, they are not only jacking up the real-time price / duration which must be paid by all other customers on their grid, but also causing greater waste of scarce fuel resources and increased pollution / CO2 emissions. They should be forces to heat the pool 2 hrs prior to peak with cheap nuclear power.

Len, retail business model innovations will transform public goods - i.e. RTP - into private goods. Those that try to jack up RTPs - the 100 mph analogue does not apply to the power system - will pay a penalty for it in EWPC, as other customers or generators respond to avoid getting the system close to capacity.

No, I think the only fair system is the one I've proposed above, or perhaps even a further refinement of it which adds even greater penalties than the actual cost of the generation, to on-peak consumption, and with no hedging allowed. (Hedging is simply a means of defeating an imperative market signal which customers should be required to respond to, through at minimum, default automatic market access / response algorithms provided as pre-installed on their new meters). Creative third parties can then, rather than masking necessary market signals as present retailers, make a business selling customers more advanced market access / response software systems installed onto their meters.) And don't worry about "supplier of last resort". The only method of dealing with desdbeat customers which the energy market should need to provide is a convenient "Prepaid" system, which my meter-centred market design does. Any further support for the poorest deemed necessary should be handled by the government from general revenue directly to the individuals, not through any formation of the utility as charity.

To keep it simple, let's only look at generator variable cost only and ignore all the other stuff like generator fixed cost, transmission fixed costs & line losses.

My question is this.... what's an appropriate price for a single residential customer who has the option of avoiding energy usage by turning off his A/C and saving money? Many would say it's the avoided cost of the most expensive running generator (or the most expensive stated generating price). You guys feel that way or do you have an alternate method? If you don't mind, please keep answers simple & brief.

"Those that try to jack up RTPs - the 100 mph analogue does not apply to the power system - will pay a penalty for it in EWPC, as customers or generators respond to avoid getting the system close to capacity."

a) If the customer is connected to a monopoly system where prices are set by a regulator, not by a bid system among generating companies, then the appropriate price is whatever the monopoly utility / regulator chooses to set.

b) If, in a bid wholesale price system, the load reduction was initiated by the customer simply to avoid a high price, then the appropriate price "paid" or "rebated" should be the current wholesale market price at the time.

c) If, in a bid wholesale price system, the load reduction was made by the customer in a time-responsive manner at the request of the market manager to avoid exceeding available capacity, then the price should be higher by some amount, perhaps a calculated escalator extrapolating the resulting price linearly out to where it (would/might) have been without the reduction. (of course with all reductions in a time period aggregated). Some form of "transfer payment" from other customers would then be necessary, however, and some formula for collecting it. Also some form of validation of the reduction. My articles on this site provide one effective method, by effectively "pre-selling rights to" all energy in 15 minute intervals to all connected customers a day in advance at pre-agreed prices (using computerized programmable meters on each customer site). Customers are then allowed to trade in these "rights" (again automatically via the meters) with other customers for credit rather than consuming the power.

b) and c) are presently unavailable to anyone other than those who, by regulatory fiat, are priveleged to access the wholesale markets.

In my message above, "you are right" applies only to my changed opinion.

I've worked nearly 30 years in the electric utility industry including distribution, transmission and generation. I've never worked in Marketing or Sales, but I've marketed utility services and products directly to hundreds of customers including residential, commercial and industrial. I've lived in the service areas of three different electric utilities as well.

Finally, I've lived and worked through the deregulation debacle in California and have direct experience of the deregulation of industries such as telecommunications and airlines. Now you know the basis for my opinions.

The rationality and content of arguments submitted to support a position or theory is rarely at question. At the very least facts, data and supporting documentation have been carefully researched and/or culled to provide the best possible support. Each of the submitters have long histories of work in their area and are well prepared to make their arguments, as well as contest with each other any pertinent points of disagreement.

Good for you guys. It's fairly entertaining and it's educational.

So what? All the talk of "market competition", "retail choice", "smart metering" and any other terms you want to use is a product of each of you hustling your own deal in public. There is nothing wrong with that and I attribute to each of the three of you nothing but the best interests of humanity at large in expressing your beliefs. That and an opportunity to make a few shekels while doing so, of course.

The expressed theme of the article is that competition makes for efficient prices and efficient choices. Would that be like the efficiency of the market in health care?Certainly my choices available are efficient for the providers (actually the middlemen, the HMOs - none of the physicians I've discussed it with find it "efficient" when it comes to giving quality care). And the pricing seems efficient in ensuring that the HMOs and drug companies do very well. Again, the physicians seem a tad unhappy, as well as many of the customers regarding costs.

Finally, I'd like to note the healthcare industry "market" approach to serving those customers who don't have prepaid plans or insurance - i.e. where they can't afford the "choice" of having insurance. About a quarter of the $100 billion per year for uninsured health services is paid out of pocket at the full rate that a hopsital emergency room or strip mall urgent care facility can charge. The other $70+ billion comes out of everybody else's pocket. And that only encompasses those uninsured who actually seek medical care. I leave it to you to imagine what quality of service that choice leaves those unfortunates who don't.

Spare me the argument that health care is different from electricity. Both are about the quality of life in a modern industrialized civilization.

It should be obvious I could go on with this rant, and I could stack data and facts if I were inclined to do so. I am not. I really don't expect these comments to have an impact here. I don't trust "the market" to do anything but what markets have always done and that is sell. It is not human so it cannot be humane.

Those businesses who began the rush toward deregulation did so to profit, not make things better for customers. The people who jumped on the bandwagon with efficiency and price reduction in mind did so thinking that breaking up the monopolies would lead to their particular idea of nirvana. It didn't for the airlines, phone service, and it won't for electricity.

Yes, prices and services weren't perfect under the old regulated electric utility regimes. In some places things were downright bad for the customers and ratepayers. But there is only one thing worse than the old days of the regulated utility industry.

The deregulated, market-based and "competitive" industry being created today.

Micheal: "If not, they don't have to pay for spot price meters that do not give them enough worthwhile information they chose to act on." Why should a few customers be allowed to freeload on the demand responses of other customers?

Michael Rothkopf is giving another insight to all of us very clear that Len's proposal should compete for one segment of the market. It is very expensive for some customers to finance the metering costs, which are still relatively high for most parts of the world. However, in the Dominican Republic (DR1) and other low power reliability countries, where many people have gensets and/or battery inverters, the feasibility of Demand Response (DR2) and spot price plans are much easier to amortize the investments.

Michael Magaletti is concerned with pricing (better yet, tinkering as explain in the post On the End-State of the Power Industry with regard to “decoupling” sales from revenues without introducing of competition) in California, which has an “unsatisfactory progress” assessment in the ABACUS report. In relation to it, one of the key contribution Nat’s article is that it is now understood how to price default service that does not undermine competition during a transition to competition.

Progress towards EWPC allows the mix of flat rate, RTP, and combinations thereof, as a transition to help generate a large worldwide mass market, which will transform system costs like they have in the telecom industry. Today poor people the world over can access cell phones - whose costs go in some cases to the service plan. This is where competing retail market innovations will play their roles.

James says that "...there is only one thing worse than the old days of the regulated utility industry...The deregulated, market-based and "competitive" industry being created today." As can be seen in the post CMU Conference Summary: The Public Needs to Know, I claim that industry restructuring went in the wrong direction - similar to other industries which are unsustainable - and that EWPC is the right sustainable approach.

Len, proper LMP (remember an earlier dialogue) is the signal. Some retailers and customers make money when they respond at a give time and place, when and where the system would otherwise attempts to get close to capacity.

All of you guys have wonderful ideas and I agree with most of the sentiments expressed. It is not a contradiction because new technologies are becoming available that deliver on much of what we are asking for.

Some of you would know of my article titled The Holy Grail of Mass-Market Demand Response in Pool Type Energy Markets” in The National Regulatory Research Institute - Volume 3, December 2005, where I describe the working of an Australian patented technology (patent pending in USA, Canada & Europe) that uses computerised control system, half hour smart meters and is connected with always on broadband communications. These are relatively cheap nowadays and many homes already have them in Australia, USA, Canada, Europe. The underlying problem it addresses is that retail competition has not delivered the essential of free markets as postulated by Adam Smith's 'invisible hand' ie the fact that the supply and demand curve meeting point sets the true free market price. If the customer (retail market and wholesale pool markets deal in one commodity that is produced and consumed at the same instant) cannot decide whether to consume (buy decision) or not at the going price (pool price being the ultimate determinator) there is no movement of the 'invisible hand' so no real free market. In Victoria (Australia) we introduced the first TOU rates for residential customers before industry restructuring. It was optional and very successful. The problem is that pool prices are way too unpredictable and volatile for effective price management. Retailers resort to price hedges costing around 10%, thereby locking in retail customers to an extra cost and a freeze on demand response. Marginal bid sets pool price but that is dependent on market power, network conditions and previous investment decisions. In Texas previous investment decisions regarding new generation were radically altered by private equity group that bid to take over TXU (they bought our company to learn about electricity markets). As explained in my article the customer who opts out if the pool price is very high contributes to resolving market clearing and should be able to gain a financial reward - the described process allows for that. If such a customer oriented technology gets off the ground, regulators need not worry, infact they have to be thankful, that the custoemrs are now happy with their outcomes. This technology unlocks the high cost components that otherwise represent negative consumer surplus (pays out more than what the customer values at that specific instant of consumption). This fixes a perennial problem in the industry - what level of reliability do we design the system, higher than what residential customers would be prepared to pay (if they had the option) and les than the level busines customers want. Remember to deliver high reliability there is a need for high level of reserves.

Why have I taken the patenting route - to make it worth while for the innovating firm (still looking for The One) to develop the market by giving exclusive use for a agreed period (hopefully reach non-exclusivity before the end of the patent life).

Part of Brent's question on marginal cost of generation is very pertinent when marginal bids set pool price. We know co-generation increases efficiency and distributed generation reduces losses. Around 30% saving. this becomes important when a prospective carbon tax adds another significant cost (around A$40 /MWh almost doubling average cost). So my next bit of technology (patent granted in Australia and pending in many other countries) tries to emulate the PC revolution - put a generator into almost every home, office, hospital, hotel, etc. etc.

I hope to visit USA and Canada in August and if there are people interested to talk about these technologies, I will try to fit them into my program. As I am unable to read this column (it is wonderful and I wish I could do more) on a regular basis, appreciate if Nat or James keep me posted by Email.

Lasantha Perera, Electricity Markets Research Institute

Steve Rozenman

Steve: The Market Design articles I referenced at the top of these comments (first item) does a decent job of dealing with your issues fairly and equitably for both rich and poor, at least in "developed nation" markets, and likely could be adapted for places where the initial cost of the metering and data systems might be prohibitive.

You said that "The underlying problem it addresses is that retail competition has not delivered the essential of free markets as postulated by Adam Smith's 'invisible hand' ie the fact that the supply and demand curve meeting point sets the true free market price."

It would be nice to make a summary of Australians retail competition applying the ABACUS report, just as the authors applied to the states of the US and the provinces of Canada.

"If the customer ... cannot decide whether to consume (buy decision) or not at the going price (pool price being the ultimate determinator) there is no movement of the 'invisible hand' so no real free market."

"markets deal in one commodity that is produced and consumed at the same instant"

The timliness issue of the market in electricity makes it entirely unique as a market, and to date, market designers are simply fumbling about with experiments which clearly cannot work, as the design which is currently in use, and which you apparently think is adequate, completely isolates a large portion of end-use customers from timely price signals. Without fixing that, no market can ever work.

If price is to be the key to balancing supply and demand, it should respond just as fast as the determining factors. Placing an artificial delay in there is analogous to an automation task I once had. They wanted me to control the level of a tank via a slow communication link (10 minute polling) when the tank inflow rate-of-change could overflow the tank in under 5 minutes. Can't be done.

As far I know, Australia has tried to develop an “energy only” market, which as Lasantha explains is not working properly for retailers, as i.e. “The problem is that pool prices are way too unpredictable and volatile for effective price management,” and “Marginal bid sets pool price but that is dependent on market power, network conditions and previous investment decisions,” means that important activities mentioned above went missing from the Victoria design.

The result is that the system does not operate on the normal state as high prices are correlated with low reliability. On slide 23 of my presentation I conclude that “power systems should be operated on the normal state.” It seems that the demand side does not participate in the remaining four activities which remain as supply side activities.

In reference to section B of ABACUS – wholesale competition – there are two elements: B1 – wholesale market competition – and B2 – demand response. In my comment above on 6.9.07, about the B1 and B2 elements, I mentioned slide 27 of my CMU presentation, under EWPC the competitive retail functions (including DR and Demand Side energy efficiency) complement each of the corresponding 5 activities within the time frames with: 1 - investments plans, 2 - resources available, 3 - outage coordination, 4 - load commitment and 5 - DR execution. As part of the generative dialogue, I propose adding the insights to upgrade section B of the ABACUS report.