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The whole economy is clearly striving today and its energy sector is no exception. Soaring prices together with the perception of a deteriorating service/product quality contribute to this notion. For the electric power system this trend is particularly worrisome given its vital implications to society. This industry has shown also a distinctive lack of technological innovation. The current restructuring drive has not seemed, as some policy makers expected, to improve this condition and may have actually made it worse. Indeed both existing and new players soon find themselves struggling to survive in this environment and simply cannot afford the ‘luxury’ of R&D funding.
The Baby Bells
Looking at other industries may be quite useful in order to shed light into this phenomenon. For instance the reform in telecommunications, especially in the telephone segment is a good example of a similar process that started with a well-known divesting, as the basic step towards full deregulation. That emblematic case took place in 1984 when AT&T’s Bell System had to be broken down into seven companies, artificially created, better known as the ‘Baby Bells’. Today, because of back mergers, there are only a few of them. But the point is that the referred strong antimonopoly action came in a time where technical progress had not nearly developed to the huge level we enjoy today. In this context a real maze of laws, hearings, regulation and proceedings were necessary to impose competition in long distance calling and eventually in the local services too. It is worth pointing out that a grid of wire-pair was the backbone of the system at that time. As it was widely reported the achievements were far from satisfactory. But the advent of revolutionary breakthroughs in telecommunications, including the internet, satellite transmission, cable, and wireless networks, changed the picture completely. This notable advance did enable a wide open competition in this market, irrespective and despite of the bulky normative in place. That end result ought to be born in mind by all industries.
Power-plant divesting in combination with FERC Order 888 and subsequent extensions, have been since 1992 the pillars in the pursuit of open access and choice. It however reminds us a lot of what was imposed to the telephone industry. Moreover in the power field it can be stated that grid Kirchhoff’s laws are inherently incompatible with the very nature of the market mechanism; for the latter works primarily to accommodate the interaction between supply and demand, which seeks a definite transactional path, yet causing instead a rare topological and circuital diffusion. Nevertheless the open-access policy drive has continued in full swing and, as it happened in telephony, filled with regulations, orders and proceedings which have been devised to surrogate the referred lack of structural compatibility. For example, very abstract and involved theories have emerged, seeking to reconcile the central discrepancy between physics and economics. The approach of network contracts and risk management designed to cope with the price volatility/distortions, based on transmission congestion and congestion management practices, have become a fundamental part of the business.
This, in my opinion, should be considered an unfortunate result. The counterintuitive nature of these methods has conceivably created confusion, and with it, the potential for market-power development and gaming opportunities. Some of these constitute simply advantages and barriers to entry, not to mention the quasi-discretional grandfathered rights allocation. Furthermore the number of transmission hedging instruments such as: PTR, FTR, PPR, FGTR, etc, has not turn out as simple and consistent, as it would have been desired, for the sake of player participation and inclusion. This state of affairs comes when a rampant series of mergers (possibly back consolidations with new corporate names, as happened with the Bells) appears to exacerbate the problem. All this going on when it is revealed that the electricity grid is aging near the point of obsolescence and that it has also been afflicted by a systematic underinvestment. The absence of significant T&D technological breakthroughs has not helped this proposition either. Consequently, the critical issues of plant expansion and security have become a major challenge. Undoubtedly these circumstances hardly constitute a favorable setting; after all, this crucial infrastructure is expected to be the level playing field upon which rests the fate of deregulation.
In order to address this problem DOE has been sponsoring a series of meetings and symposia with the intent of promoting both pertinent and intelligent legislation to Congress. I had the opportunity to participate in one hosted by Florida State University last year. This was an effort to support Epact05; in this occasion it was concluded that there were some promising technologies coming forth, most of them stemming from the Power Electronics field. One definite hope hinges around the evolution of FACTS devices and its impact on transmission-component controllability. This would be indeed a very useful tool in order to reconcile market dynamics with power flow physics. Still, the investment required for this continuous undertaking remains a fundamental question. The ‘invisible hand’ does not seem to be playing a significant role in this predicament, perchance the grid is perceived as a regulated social asset vital for competition, but at the same time as an unprofitable no-man’s land.
The main conclusions relate to a plausible formulation of the optimal curricular balance required to achieve an effective and timely deregulatory endeavor. Obviously this is a multidisciplinary problem statement that ought to be analyzed preferably from a tradeoff, multi-attribute standpoint. In the electric-power arena there are evidently two dominant components i.e. the socio-normative and the technological ones, both at present not working harmonically. Their marginal contribution towards a viable framework must be critically ascertained and coordinated in order for the process to be successful. It is then conceivable to postulate those marginal values to be quite comparable near the top objective, with ostensible diminishing returns away from it. Nonetheless right now it seems as though we are still in a situation, similar to the one that took place during the eighties with telecommunications, where the policy/procedural factor largely outweighs the technological one. Hopefully this unbalance will revert here too; perhaps a cause-and-effect phenomenon will occur. In any event, most of that will be necessary in order to get a much needed improvement towards a real liberalization of the electric power industrial organization.
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The observation by the author that Kirchoff's laws are incompatible with the market system needs to be made clear to colleagues in the faculties of economics. When Enron's big-wigs went to the governor of California and informed him that electricity was 30-40 percent too expensive in his state, what they meant was that the way to get the price of electricity down in California was to string wires between 'nodes' in states where power was inexpensive and 'nodes' in California. In economics we call this arbitrage, and it has to do with 'The Law of One Price'; but thanks to Kirchoff's law it's not that simple (as Professor Orquin indicates).
Now, about reconciling "market dynamics" with "power flow physics", and thus making it possible for physicists and economists to converse and fraternize with smiles on their faces. Personally I'm against it, because the most technical journals in economics are mostly unread, and this is a good thing, since to a considerable extent they are filled with junk (or 'voodoo' economics). Encouraging economists to pick up a knowledge of physics mere provides them with another device to trick the foundations into giving them money to do things that shouldn't be done, and which they will never learn how to do anyway. But in any case would find a way into unread journals where they would be career makers.
Finally, about a "real liberalization". Once again let me refer to the article in the New York Times (on August 30, 2007) by Jerry Taylor and Peter van Doren of the very conservative Cato Institute. For reasons alluded to there and elsewhere, a real liberalization cannot take place as long as there are such things are returns to scale and a few other complex realities.
Jose Antonio Vanderhorst-Silverio 10.15.07
There is a strong sence of urgency for the implementation of EWPC. Professor Alberto Ramírez Orquín writes "Soaring prices together with the perception of a deteriorating service/product quality contribute to this notion. For the electric power system this trend is particularly worrisome given its vital implications to society."
Your article is giving the proper emphasis for the sense of urgency on the right king of restructuring of the electric power industry, when you write: "Soaring prices together with the perception of a deteriorating service/product quality contribute to this notion. For the electric power system this trend is particularly worrisome given its vital implications to society."
I agree that “The current restructuring drive has not seemed, as some policy makers expected, to improve this condition and may have actually made it worse.” In 2004, The Cato Institute experts Peter Van Duren and Jerry Taylor recommended total abandonment of restructuring.
Electricity without price controls (EWPC) is a paradigm shift that makes the case for restructuring as explained in Rethinking Electricity Restructuring as EWPC. The new drive would make things better, as technological innovation are waiting to be integrated to power system planning, operation and control with at least six sets of disruptive technologies, as explained in The Sixth Disruptive Technology.
Jose Antonio Vanderhorst-Silverio 10.15.07
The Sense of Urgency for EWPC Restructuring . . . continued
One of the main problem with restructuring was separating transmission from distribution to keep regulated retail together with distribution. In the article Give Engineers What Belongs to Engineers and its hiperlinks the “two dominant components i.e. the socio-normative and the technological ones, both…” will be “working harmonically.”
Jose Antonio: "One of the main problem with restructuring was separating transmission from distribution to keep regulated retail together with distribution. " Another clear error further indicating a lack of knowledge. In e.g. the Ontario "re-regulated" environment, the retailers are independent of the distribution, though a few of them are still owned financially by distribution entities. Some of the largest and most agressive retailers, certainly, such as one I used to deal with Direct Energy, have no relationship with any distribution. It helps nothing. Retailers are NOT either interested or capable of implementing intelligent integrated demand control as that will reduce their sales.
EWPC is just existing de-regulation with lipstick, but still just as ugly.
Thanks for the comments; I will post some thoughts later on. But regarding Len’s and Jose Antonio’s viewpoints on retail choice may I suggest my 2004 Energy Pulse article The Structural Shortcomings of Retail Provider Choice in Distribution.
Jose Antonio Vanderhorst-Silverio 10.19.07
As customer value migrates a paradigm shift of full retail choice emerges under EWPC from R&D discoveries that allows retail and wholesale competition without incumbent retailers.
As distribution becomes an integral part of transportation under EWPC structuring without incumbent retailers, the shortcomings disappear and full retail choice emerges as Second Generation Retailers (see Second Generation Retailer - 2GR), not the first generation retailers of your article, compete under federal prudential regulations (which should hopefully become global prudential regulations under the discipline of the WTO).
Please read The Sixth Disruptive Technology to understand 2GRs role on business model innovations and to get a feel of the paradigm shift value migration and my suggestion of WTO discipline.
Jose Antonio: By what fiat or coersion will you turn Direct Energy into this theoretical 2GR type of retailer?
Jose Antonio Vanderhorst-Silverio 10.20.07
Thank you very much Mr. Gould for an interesting question regarding the importance of 2GRs.
No fiat, nor coercion, is required at all. As any company trying to become a 2GR under EWPC restructuring, Direct Energy will need to develop business model innovations (not only once, but as required) to compete as a 2GR in the (global) horizontally integrated open market under (hopefully global) prudential regulations, to get a segment of the market or else fold as a retailer. That is a very practical theory to break once and for all the existing barriers in "distribution" and to allow many existing and emerging innovations to be integrated into the global power industry.