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“At the mercy of forces that show no mercy”
-Former governor Gray Davis of California (about deregulation)
Several years ago the president of the Stockholm School of Economics and a colleague published an article with the provocative title "Why has the Nordic Electricity Market Worked so Well" (2005) - although in reality almost every newspaper in this country has expressed on its front or editorial page the opposite point of view. More recently a research establishment (called SNS) organized a meeting designed to sing the praises of the Swedish electric experiment, apparently hoping that the delegates have forgotten the time when Sweden not only produced the lowest cost electricity in the world (which it may still do), but also sold that electricity at a reasonable price. The discussion in this article mostly concerns Sweden, but I can note that electric deregulation as experienced in Norway was referred to in an article in Time Magazine by Wallace (2003), and he was thoroughly unimpressed.
About eleven years ago I published my first article on electric deregulation (1996), claiming at some length that this option was largely a naive attempt to rescind the laws of mainstream economics. Since then I have put at least a dozen more papers on this topic into circulation, and given even more lectures. These lectures included – just prior to the Enron scandal and California meltdown – a number of sessions in Hong Kong in which I had the opportunity to assure listeners that deregulation failure was a certainty for California.
I did not, however, predict the magnitude of the failure that actually took place. The normal generating (or ‘wholesale’) price of power in that state averaged about 50 dollars per megawatt hour (= $50/MWh) in l999, but several years later often touched $500/MWh, and occasionally spiked to $1000/MWh. ‘Gaming’ (or strategic behaviour that usually features illegally manipulating supply), together with the shortage of local generating capacity, and the absence of rain for hydroelectric installations explain much of this bad news, however it should never be forgotten that while initially deregulation was crafted to prohibit the large California utilities (i.e. ‘distributors’ or ‘retailers’) from signing long term contracts when they began to encounter very high prices, they were not allowed to pass them to e.g. households and small businesses. Why was this? It was because consumer (retail) prices could have escalated by as much as 200%, and as Governor Gray Davis made clear, the California economy might have been shocked into recession. Perhaps the largest utility (Pacific Gas and Electric Company) moved into bankruptcy – although this was after providing occupants of its executive suite with about $50 million in the form of a bonus ‘kitty’ to divide.
In the course of establishing itself as the wholesale purchaser of power for existing utilities/distributors, the California government spent somewhere in the neighbourhood of $4 billion dollars, with most of this electricity apparently originating with generating firms that on at least one occasion Governor Gray described as out-of-state criminals. Terminology of this undiplomatic nature apparently came into use when it was surmised that at least some wholesalers intentionally reduced their supply of electricity in order to help increase its price.
In examining the history of electric deregulation across the world, it appears that failure is the usual outcome, and often sooner rather than later. In the United States, as far as I can tell, electric deregulation has misfired in every state in which it has been attempted. For instance, on the important site EnergyBiz (June 21, 2007), a former state official – Kimery C. Vories – describes what happened in my former home state, Illinois, when its residents were convinced to turn their fate over to “unregulated monopolies”. There were price increases of 40 – 50%, a general neglect of transmission line maintenance, and lengthy electric outages. Despite these misfortunes, the salaries of high-level executives were substantially boosted.
In comparing the situation with regulated and deregulated power, I noted in an earlier contribution (2005) that while deregulation was an unambiguous failure in Texas, the regulated and vertically integrated firm Southern Power (with 40,000 Megawatts (MW) of generating capacity, and serving more than 4 million customers in 4 southern states) was an unequivocal success. An important energy observer, Thomas Tanton (of the Institute for Energy Research, Houston), found my comparison “silly”, pointing out the different conditions that prevail in Texas as compared to the districts in which Southern operates. In principle I consider myself sufficiently generous to wholeheartedly agree with Mr Tanton, only it happens that deregulation has failed, is failing, and will probably fail EVERYWHERE, and so while Texas is indeed a very special state, it is not so special in the context of American states and regions that its deregulation failure should be attributed to uncommon qualities and circumstances.
In the matter of transmission lines, Governor Davis made the following observation. “In a deregulated environment, investment chases the highest returns, and the highest return is not in upgrading transmission.” A former US energy minister – Mr Bill Richardson – once declared the transmission system in the US suitable for a Third World country, but not the only remaining super-power. What presidential candidate Richardson failed to make clear was that, prior to embarking upon the deregulation route, the US transmission network had never been accused by a highly vocal forum of failing to provide American residents with reliable and economical power.
Academic economists have almost always failed to provide their students and colleagues with the insight necessary to comprehend this very important topic, and so perhaps a short exposition is in order. Deregulation can bring about a rapid shift of the loads on grids (i.e. transmission lines).. Instead of a vertically integrated system with (approximately) known final demands, there can (in theory) be a shifting amount of buying and selling between (as compared to within) networks and regions. As David Buchan of the Financial Times pointed out (April 11, 2002), this was why Enron – the failed US energy trader – was such a fervent advocate of deregulation: the more trading the more income! What he did not mention was that in Europe Enron wanted comprehensive ‘liberalisation’ regardless of the cost, because expansive trading might have added enough billions of dollars to corporate profits to compensate for the embarrassing business shortcomings that were later revealed when the directors of that enterprise found themselves expressing their hopes and dreams in a court of law instead of a special edition of Fortune, Forbes or the Economist.
As for salaries, a short time after deregulation in the UK, the first page in the business section of a London newspaper displayed a gallery of power-company executives whom deregulation had been catapulted into affluence. This observation might also apply to the major Swedish company Vattenfall, although admittedly executives of that firm were underpaid before deregulation. After deregulation its management shifted the focus of their attention to Germany, where they claimed that their intentions were bolster the electric supply in all of Northern Europe. It should be stressed however that some industrial sources in Germany were unimpressed, and it has also been noticed in that country as well as Sweden that highly polluting coal now plays a key role in Vattenfall’s business strategy. This is one of the reasons why they did not protest the decision by the Swedish government to begin their nuclear retreat.
My new energy economics textbook is filled with unpleasant facts about electric (and natural gas) deregulation, but as they once said in the US Navy, “on every ship there is someone who does not get the message”. In the case of Sweden, at the present time, that someone includes the above mentioned SNS, which is tasked with providing economic research having to do with the Swedish macroeconomy as well as various industrial activities. Just a few weeks ago I received notice that they were still in the business of praising the success of Swedish deregulation efforts – a “success” that, in reality, has increased the financial burdens on households, small businesses and even some large businesses.
More is said about this in my new textbook, but for the last few years my way of dealing with this topic is analogous to the manner in which I approach the subject of ‘peak oil’. I examine the history and mechanics of deregulation in the US, and project that on the rest of the world. There are of course many notable failures elsewhere, however it seems clear to me that if successful deregulation could not be achieved in a country as rich, technically advanced, and market-oriented as the US, then it could not be realized anywhere on the face of the earth, at least in the medium to long run. By that I mean after any excess capacity that might be available has been utilized.
I would like to finish this introduction by pointing out that when I began my work on electric deregulation, there were a number of observers who politely informed me that electric deregulation was the wave of the future. Those ladies and gentlemen seem to have largely disappeared, however even if they were still on their soapboxes or in their fancy offices, their beliefs about this topic no longer receive the welcome that they once enjoyed.
SOME INTRODUCTORY THEORY
What do I mean by failed or failing when I discuss electric deregulation? Undoubtedly the most important reason for deregulation coming into fashion was the promise by various enthusiasts of lower prices and higher or unchanged reliability, all of which would be served up against a background of increased ‘choice’ for households and businesses. Choice was inevitably mentioned in academic circles, because according to charter members of the deregulation booster club, if ‘genuine’ choice as opposed to ‘ersatz’ choice entered the picture on the consumer and producer side, it would lead to the kind of optimality on electricity markets that you find in almost every chapter of your favourite introductory economics textbook.
The word ‘efficiency’ was also frequently introduced into discussions of the paradise-on-earth that would result from electric (and also natural gas) deregulation, although as far as I can tell, hardly anyone understood its scientific meaning, to include many teachers of economics. Perhaps the best clarification is one derived from financial economics, which underscores that excess profits are only available on a temporary basis in markets with free entry and full transparency. An excellent example here is the great world of hedge funds: a large percentage of these fail every year, but even many who have had some success are now taking a beating as excess profits are squeezed out for all except an elite few. Thus, in an efficient electric market in which there is free entrance, free access by all actors to existing technology, and where consumers have the right to change supplier when and as often as they choose, firms will supposedly be unable to realize excess profits for other than a short time, and therefore, given their preferences, consumers will experience the theoretically correct prices.
My reaction to all this was and is straightforward: according to the economics and finance that I study and teach, as well as the engineering that I briefly studied and practiced, there would not – nor could not – be anything resembling lower prices (or unchanged reliability) in a situation where unregulated monopolies or strong oligopolies were allowed to practice what the great American songwriter Irving Berlin called ‘doing what comes naturally’ This was essentially because of the advantages enjoyed by monopolies due to increasing returns to scale (= decreasing unit costs) for themselves, and high investment costs for actual or potential competitors. For instance, we have been permitted to enjoy a surfeit of increased choice in Sweden, but what difference does it make when it has become impossible to avoid an increase in electricity prices that until recently was considerably more than twice the consumer-price inflation rate.
This might be the right place to quote US Senator Bryan Dorgan: “I’VE HAD A BELLY FULL OF BEING RESTRUCTURED AND DEREGULATED, ONLY TO FIND OUT THAT EVERYBODY ELSE GETS RICH AND THE REST OF THE PEOPLE LOSE THEIR SHIRTS!” (Financial Times, April 22, 2003). Had the senator elaborated on this pronouncement he might have mentioned that when deregulation was being launched, it was often claimed that returns to scale did not exist, which at the alpine heights of pure theory suggested that generators/wholesalers of the ‘Mom and Pop’ – ‘Seven-Eleven’ – variety were possible.
“Now before you ask whether I am still asleep or dreaming or had something extra in my coffee this morning,” the chairman of the independent Electricity System Operator of Ontario (Canada) remarked about a year ago, “let me qualify this by noting that I have not given a timetable to arrive at this destination”, where “this destination” included a “reliable, efficient, effective, transparent, accountable, credible and competent” supply of deregulated electricity. That’s putting it mildly, because on the date when the contents of Madame Chairman’s morning coffee came into question, Ontario had less generating capacity than it possessed a decade earlier, and according to the president of the Association of Major Power Consumers of Ontario, a bungled deregulation agenda had resulted in that province being deprived of an invaluable competitive advantage.
The time has now arrived for a slightly more technical recapitulation and extension. Suppose that I was given the opportunity to clarify for the television audience why electricity deregulation was even more beautiful than love’s young dream elaborated on a video clip. I would start by dramatically insisting that every economics textbook in the world spells out in detail the advantages of a wider and more thorough competition (or what on the electricity scene has come to be called liberalisation). What I would not say is that this story-line appears in the first part of these tomes, while in later chapters – which neither students nor their teachers are in the habit of reading – we often find a detailed explanation of why we shouldn’t expect the textbook variety of ideal competition to appear in the case of industries like electricity and gas. This reduces to the following.
1) An undeniable reason is probably the presence of increasing returns to scale (i.e. decreasing unit costs) up to a certain output. The way this potentially embarrassing topic was originally handled by deregulationists was simply to state that economic – as opposed to technical – increasing returns to scale do not exist. How did they get this brilliant result? The answer is that they assumed that there would be a fall in the rate of growth in demand for electricity and gas, and so investments that were intended to take advantage of technical returns to scale would take so long to pay off that, in terms of discounted profits, they did not make economic sense! This was in some respects an unforgivable mistake.
2) Lack of investment in new capacity. As it unfortunately happens, deregulation has provided firms with an increased opportunity to engage in strategic behaviour (as it’s called in game theory), or gaming the system, as it is often termed in common parlance. Accordingly, they utilize the well known fact that the less the capacity, the higher the price, and depending upon costs, the greater the profits and bonuses. Moreover, the Swedish government is even more in favour of deregulation than the power companies that became super-rich when deregulation was introduced, because deregulation in Sweden is configured so that when prices for electricity rise, so do government tax receipts. In addition, a government that for some strange reason was systematically reducing health care for everyone from children to pensioners, as well as eliminating a range of other welfare amenities, is hardly inclined to be overly attentive to the price of electricity, particularly when one of their partners – the environmental party – feels that this price is too low.
3) As pointed out at one time by many deregulationists, and correctly, for deregulation to be successful, adequate facilities must be available for hedging (i.e. insuring against) the price risk that accompanies deregulation. Despite what these fine people believed, and perhaps still believe, facilities of this nature are not available, and they are unlikely to appear. This dilemma is constantly referred to in the business press.
4) Because of its importance, allow me to stress that electricity price risk/uncertainty cannot be hedged on conventional derivatives (e.g. futures and options) markets of the kind that function excellently for various commodities and financial assets. As we found out in California – and especially New South Wales (Australia) – the electricity market is radically different. In fact, there is a simple way to approach this difference. Professor Lennart Berg teaches financial economics at Uppsala University, and he has about 100 finance books of all types in his room. Every new book that is published on this subject comes to him. I have examined at least half of these books and estimate that there are probably less than a total of five pages on electricity derivatives in all his books, or for that matter in any collection of finance books that I have ever come into contact with. Five pages out of thousands or tens of thousands of pages. What none of them bothers to point out is that the most important derivatives exchange in the world, NYMEX in New York, delisted its electricity contracts several years ago, along with at least one of its gas contracts. They may, of course, have reinstated these in one form or another, because the memories of many people who lost money in these markets are too short for their own good, and neither the persons who use or write about platforms of this type are prepared to admit that in theory it would be in the interest of almost every household and business on the buy side of the electricity market if their political representatives began to investigate just why electricity deregulation, electricity derivatives, and the exchanges specializing in them came into existence, when these enterprises are provably detrimental to the interests of almost all consumers and small business, as well as energy intensive large industries.
An interesting turn of events has now taken place in France, where the new government has just announced that it will partially privatize Electricité de France (EdF). Nobody has ever accused Mr Sarkozy of possessing any advanced economic training or street smarts, but hopefully his government will remain in possession of a sufficient amount of EdF to prevent nature from taking its course. In theory, this should be comparatively easy to arrange, although at the present time the eventual scope of the restructuring curse is not easy to discern.
AFTER THE FALL
In the June 18 (2002) issue of the Financial Times there were two mentions of violence in connection with the deregulation of electricity. The countries involved were the Dominican Republic and Peru. The second of these was of particular interest to me because some years earlier, in Lima (Peru), I had the opportunity to deliver a keynote address at a conference that was attended by a large number of energy economists and engineers from the Caribbean and South America, and somewhere in the middle of my talk I changed lanes and launched a diatribe against what I perceived to be the intrinsic stupidity of electric deregulation. Present as an honoured guest was an important member of the international energy economics elite who, it seems, did not conclude that my presentational skills were of exhibition standard, and made this fact known to the conference arranger. This was unfortunate, because had I been invited to a later meeting in that part of the world, I would have made sure to remind participants of the kind of advice that the Brazilian government was forced to give citizens of that country when an unfortunate deregulation concept, in conjunction with a rainfall deficiency, resulted in catastrophic electricity shortages: Brazilians were encouraged to pray to Saint Peter who, according to Brazil’s frantic deregulation authorities, is in charge of the rain department.
Not too long ago a senior executive of the Nordic Electricity Exchange (NORDPOOL), Mr. Erling Mork, questioned my motives and competence in describing what I thought were the activities of his organization (2004). In some ways he was correct in doing this, because the only real insight that I have into the activities of that establishment is that it has adopted a mechanism for bleeding electricity consumers that results in some of the most inexpensive electricity in the world, cost-wise, being frequently sold at the price of some of the most expensive in Europe – e.g. that of Denmark and Germany. The mechanism to which I am referring is none other than the marginal cost pricing algorithm that you were taught in your first course in economics.
Just below that accusation was a defence of electricity liberalisation by a gentleman from New Zealand, Mr Tony Baldwin. Mr Baldwin took it upon himself to assure interested readers that in New Zealand – and presumably elsewhere – electricity restructuring is essential in order to “improve economic and environmental performance.” As in the case of Texas, I once heard someone call New Zealand deregulation the best in the world, and according to Baldwin none other than Professor William Hogan of Harvard University ostensibly went so far as to say that “…the New Zealand electricity market design has been at the forefront of best practice,” involving as it did “extensive consideration of the experience of other countries.”
Professor Hogan is a brilliant and highly productive energy economist who signed on as a poster boy for electricity deregulation almost as soon as that show hit the road, and I sincerely hope that he doesn’t take it to heart when I say that as far as I am concerned, New Zealand gave no consideration at all to the experience of other countries, because there was hardly any to examine when it initiated this “goofy” experiment, as someone in Canada once called it. Instead, the deregulators in that fair land focussed their attention on the large supply of domestic natural gas, whose price – by one means or another – was kept below the scarcity/free-market level in order to ensure the blessings of deregulation. As things often happen, that large supply has become small, which makes it likely that a number of concerned observers are going to find out that despite Professor Hogan’s bona fides and enthusiasm, the standard deregulation model is the antithesis of what Mr Baldwin mistakenly feels is an outlet for “efficient investment in new generation.” Researchers who have gone to great trouble to point this out include Professors Reinhard Haas and Hans Auer of Vienna’s Technical University (1998), and in my journeys I never miss a chance to repeat as often as possible that deregulation increases uncertainty, which in turn leads to a decline in physical investment.
And for Sweden, worse is to come, because as the journalist Fredrik Braconier notes (2005), another dark cloud in the Swedish heavens is carbon dioxide ‘emissions trading’, which apparently will also be managed by NORDPOOL. Swedish hydro and nuclear electricity generation is essentially free of carbon dioxide, but not all large firms are so fortunate, and so their costs will be increased. In addition, the trade in emissions ‘rights’ on the continent, where hydro and/or nuclear resources are scarce in most countries, will (ceteris paribus) increase the price of electricity in that region, which (via NORDPOOL) will likely impact on the price of electricity in Scandinavia. (In fact, more than likely, because as an adviser to President Putin remarked, emissions trading is about making money rather than reducing carbon dioxide.)
As should be obvious, I’m mostly concerned in this article with the fate of consumers under deregulation, and in particular consumers like myself, but the managing director of one of the largest firms in Sweden (SCA) said that his firm would not be making a planned very large investment because of the high price of electricity. Somewhat earlier, the directors of other large industries stated that they will form a syndicate in order to purchase electricity from countries in East Europe.
This is extremely interesting, because what deregulation has done by raising electricity prices is to partially eliminate the traditional and highly favorable comparative advantage that Sweden has enjoyed in some of its major export activities over the past 40 years, and which to a considerable extent accounts for the prosperity of the country. I’m especially thinking of the industries for processing forestry products. If the present situation is not remedied, these firms will not only cease to invest, but eventually move everything movable out of the country, and Sweden will find itself having to deal with the kind of unemployment and social problems that were unthinkable just fifteen years ago.
Readers who want more of the above should examine Casazza (2001) and Watts (2001). If you desire a taste of the other side of this argument, turn to the very important forum EnergyPulse (www.energypulse.net) and particularly the many comments attached to articles on electricity regulation and deregulation, as well as e.g. global warming and nuclear energy. I am thinking in particular of the consultant Jose Antonio Vanderhorst-Silverio. He admits that deregulation has been a disaster, but he also believes that somewhere out there is a magic formula for making everything right. My comment here reduces to the following: no playing games on the consumer side of the market can possibly offset the upward pressure on prices resulting from conventional profit maximizing behaviour on the supply side. Put another way, given the technological configuration of the electric sector (e.g. increasing returns to scale), deregulation invariably leads to much higher and more volatile electricity prices.
REFERENCES
Amundsen, Eirik S. and Lars Bergman (2005). Why has the Nordic Electricity
Market worked so well? Economics Department, Bergen University.
Baldwin, Tony (2004). ‘Electricity market: price volatility no flaw’. International
Association for Energy Economics Newsletter, 2nd Quarter.
Banks, Ferdinand E. (2007). The Political Economy of World Energy: An
introductory Textbook. Singapore and New York: World Scientific.
______. (2001). Global Finance and Financial Markets. Singapore, London and New York: World Scientific.
______. (2000). Energy Economics: A Modern Introduction. Dordrecht and New York: Kluwer Academic.
______. (1996). ‘Economics of Electricity Deregulation and Privatization: an
Introductory survey.’ Energy: The International Journal.
Braconier, Fredrik (2005). ‘Utsläppsrätter gör energin dyrare I Sverige’ Svenska
Dagbladet (5 October).
Casazza, Jack A. (2001). ‘Pick your poison’. Public Utilities Fortnightly, (March).
Costello, Kenneth (2003) . ‘The shocking truth about restructuring of the US’.
The Electricity Journal. [16(5): 11-19]
Haas, Reinhard and Hans Auer (1998). ‘The relevance of excess capacities for
Competition in European electricity markets’. (Stencil) Vienna University
of Technology.
Mork, Erling (2004). ‘NordPool: A successful power market in difficult times.
International Association for Energy Economics Newsletter, 2nd Quarter.
Wallace, Charles P. (2003). ‘Power of the market’. Time, (March 3).
Watts, Price C. (2001). ‘The case against electricity deregulation’. The Electricity
Journal (May).
Woo, C.K. and M. King, A. Tishler and L.C.H. Chow (2005). ‘Costs of electricity
Deregulation’. Energy: The International Journal.
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
Thank you very much for your challenge (which I found by browsing your article): "I am thinking in particular of the consultant Jose Antonio Vanderhorst-Silverio. He admits that deregulation has been a disaster, but he also believes that somewhere out there is a magic formula for making everything right. My comment here reduces to the following: no playing games on the consumer side of the market can possibly offset the upward pressure on prices resulting from conventional profit maximizing behaviour on the supply side. Put another way, given the technological configuration of the electric sector (e.g. increasing returns to scale), deregulation invariably leads to much higher and more volatile electricity prices."
I will respond in full a few days, but the key finding that will be at the center is that deregulation was and is based on the faulty concept "economy first, reliability second." If reliability first, economy second, is a magic formula that allows to restructure power sectors worldwide into an electric network (integrated transportation) and a money network (on the customer, retail, generation value chain), let so be it.
It is clear that generation and customer are also part of the electric power system and transportation is part of the money system, but the "electric network" institution still keeps the leadership of the whole real time control, operation planning and long run planning of the power system.
Casazza identified two other important networks that are helping the transformation and that are missing above. The fuel network and the communication network. Both impact restructuring to help integrate demand into power system control, operation and planning in the 21st Century.
Best regards,
José Antonio
Ferdinand E. Banks 10.24.07
I suppose that if enough money was spent on the 'power system' and various innovations, people would forget about the conspicuous failures of deregulation and take another crack at it. Being a 'bottom line' sort of person that doesn't interest me at all, because as I have pointed out any number of times, it was a mistake to buy the deregulation song and dance in the first place. Given the configuration of the electric power sector, It could only end up the way that it has ended up.
Recently Jerry Taylor at the Cato Institute informed me that he did not like the way that deregulation was carried out in the US. As I hope that I have made clear in the first chapter of my new textbook, this is a discussion that I don't want to have any part of; but Taylor also pointed out that he accepts that this industry is a "natural monopoly". It is a natural monopoly, and that just about settles the matter, because once we accept that we can bring some mainstream economic analysis into picture. What I would like now is for Taylor and others to elaborate on this topic and present their work to the EU Energy Directorate, because those ladies and gentlemen simply refuse to get the message.
Len Gould 10.24.07
I definitely agree with professor Banks "It is a natural monopoly" but believe it should have the added statement "unless effort is made to create a genuine market". All existing efforts at re-regulation and EWPC as near as I can tell make no effort to implement a genuine market in which all customers can participate, which is the core of what IMEUC (see blog on this site) does do.
Resigning yourself to operating the electrical system as a natural monopoly is a fairly safe second-best way to muddle into the future. It still leaves what is set to become the only energy source for our children's children exclusively in the hands of a few mopolists whose obvious incentives are a) to exclude as much as possible any means of electricity generation they don't own. (DG, solar thermal CHP, PV, etc.) b) to agressively capture the political process to which they respond. c) to decide your energy options for you with little if any choice left to the individual.
Imagine Excelon with some multiple of the profits presently accruing to Exon + (your largest local natural gas provider). In 40 years (+- depending on who you read) the electricity system WILL be a rolled-up aglomeration of all present energy systems (Oil, Natural Gas and Electricity). With that sort of economic power in the hand of a very few IOU monopolies or probably worse yet in the hands of governments, what will we have left to our grandkids?
With the intelligent application of a little silicon intelligence we can do better by provideing a genuine free market for every customer.
Ferdinand E. Banks 10.25.07
The business of creating an electric market in which customers enjoyed a meaningful participation was discussed by Fred Scheppe (of MIT) at a long conference in Portugal that I have mentioned a number of times in this forum. Doing this is almost certainly correct, but I stay away from this topic because I don't really understand the details, and in addition I think that the most important contribution that I can make is to emphasize that we are dealing with a natural monopoly, and that ELECTRIC DEREGULATION HAS FAILED, IS FAILING, OR WILL FAIL. I've mentioned/cited the contributions of many persons in this forum in my new textbook, but unfortunately my ability to use the computer is so pitiful that I could not reproduce many of the comments on electric deregulation that were published in this forum in the manner that they could/should have been reproduced.
Jose Antonio Vanderhorst-Silverio 10.28.07
Dear Professor Banks and Mr. Gould,
As promised, I just published the following articles in energyblogs.com in response to the article and the comments.
The Natural Monopoly Transportation System 10/28/2007 at 06:05 PM...EWPC provides a new configuration, in which the natural monopoly is reduced to the transportation system of the electric market, where the old config...
Handling Sweden’s Electric Reform Threats 10/28/2007 at 06:54 PM...Strong leadership is needed to complete the reform process in the Nordid countries to benefit end customers, by introducing a paradigm shift to EWPC...
A Futures Market under EWPC 10/28/2007 at 07:03 PM...The elements of a futures market under R1E2 EWPC to lead to an stable and competitive electric markets environment are explained. A Futures Marke...
A Little Silicon is Necessary but NOT Sufficient 10/28/2007 at 07:18 PM...There is more to markets than meter electronics. It is important to understand the need for retailers as the bridge between the retail and wholesale...
Best regards,
José Antonio
Ferdinand E. Banks 10.29.07
"Strong leadership" you say, José. You mean like Mr Hitler, who convinced the residents of Berlin that victory was at hand when the Russian army was almost in the suburbs, and the American Air Force was turning the city into rubble.
As for a futures market, we have a futures market in Scandinavia - NORDPOOL - and if there was any justice in this old world of ours, the people who set it up would be under investigation by the serious fraud squad.
Fred
Jose Antonio Vanderhorst-Silverio 10.29.07
No "strong leadership" like the one of my hero, the sweidish Uno Lamm who stood against Hitler and who also faced the California IOUs with reasoned statements like those of my articles at an IEEE meeting to reduced California customers bills.
The fraud in NORDPOOL, if there is any, is fueled by E1R2 and the lack of EWPC with strong customer involvement.
José Antonio
Jose Antonio Vanderhorst-Silverio 10.29.07
Please replace "No" witth "No!" above. It starts to read now as:
No! "Strong...
Ferdinand E. Banks 10.29.07
Once again you miss the point, José. Uno Lamm was probably a candidate for the accolade of 'the best power engineer in the world'. I mentioned him in a conference in Rome, and the important Swedish economist who was the object of my remarks looked at me as if I was talking about Genghis Kahn.
After Lamm retired from ASEA, he published an anticle on economics in one of the major Swedish newspapers - probably Dagens Nyheter. For some reason my wife was taking the first course in economics about the same time, and it almost pains me to say that he wasn't half-way to her level, and the term was far from over. Conclusion: LAMM HAS NO PLACE IN THIS DISCUSSION!
"Strong customer involvement", you say. In financial economics that is called 'liquidity', and if there was no strong customer involvement, those scammers at NORDPOOL would have closed their doors long ago. Where this topic is concerned, you need to contact the finance department at your local university for some help. If they are honest, they would tell you that in all the finance books published since Adam and Eve, you probably wouldn't find a dozen pages on an electric derivatives market.
Fred
Jose Antonio Vanderhorst-Silverio 10.29.07
It doesn't matter whether Lamm understood or not economics. Lamm was a great engineering and social leader. The IEEE instituted an Uno Lamm medal, as he was an engineer, like me, not an economist. As a great leader he has center stage in this dialogue about electric markets.
There are two kinds of strong customer participation and two kinds of rsik management, as explained to you earlier (maybe about 2 years ago) and as it is in the article on futures market. Yours is about the financial risk management - liquidity - aspect. Mine is about the physical risk management (power system reliability) contribution in the power system by the strong customers involvement, that result from the development of the resources of the demand side with EWPC to avoid getting the power system close to its capacitity limits anytime, anywhere.
Ferdinand E. Banks 10.29.07
I'm sorry José, but you've started saying things that you really dont want to say. Maybe you should have a rum and coke and take a nap before you post anything else.
According to you, Uno Lamm was a great engineer, and as a result he had the right to occupy what you call "center stage" in a discussion of electric markets. That he has a right to participate in such a discussion is correct, but unless he proves that he understands the economics issues, I think that he should be confined to the 'wings'. Incidentally, when I was working in Hong Kong, I don't think that I met or heard of an engineer who didn't think that electric deregulation was nutty. And how could it be anything else, considering that when the Enron people told Governor Pete Wilson of California that his constituents could reduce the electric price by 30-40% percent if deregulation took place, they forgot to mention - or didn't know anything about - Kirchoff's Law, which unfortunately prevented the kind of arbitrage that the blunderers running Enron had in mind. (Note, BLUNDERERS, because if Enron's top management had stayed awake, that firm would still be going strong.)
As for your comments on futures markets, well, the less said about those the better. I have taught futures and options markets all over the world, and they are very easy to understand - but still, people like you insist on NOT understanding them. I repeat, go into the finance section of a library, pull down all the books containing materials on futures, and try to find a more than a few pages on electric futures. Electric futures is a non-subject, and before you accuse me of being a communist, let me mention that hardly anybody published more on the usefulness of futures for the oil market than myself.)
As my hero Uno Lamm proved, when he introduced High Voltage Direct Current technology (see The Sixth Disruptive Technology), facing a strong opposition by the same California IOUs referred to in The BIG California LIE, the Nordid countries don’t need to wait for the experience of the U.S. What they need, I repeat, is a strong leadership.
Nowhere in that quote can be interpreted that he had to be involved in electric markets to be an example of Swedish leadership. His example is about leadership and just leadership.
My hero, the Swedish Uno Lamm and the father of HVDC, who won the Pacific Intertie Project for ASEA after facing a strong opposition by [the same] California IOUs [referred below], and later estimated to save customers more than a billion dollars a day, after negotiating a license agreement with General Electric is quoted saying something like this in an interview in 1988: “among Americans, when the heat of the combat ends and a decision has been arrived at, all the trouble disappears and the people work hard to implement the decision in the best way.” I strongly hope this will be the case of EWPC.
The BIG LIE is that retail competition is impossible in electric markets. The implementation of a competitive retail market was the center of the debate in California. Instead of cooperating to implement it, the three big California utilities, that didn't care about the end-custumers, acted very irresponsibly. EWPC is the paradigm shift to show that retail competition is not only possible, but absolutely necessary to turn the electricity industry into a vibrant value added business for all stakeholders.
All of that followed this paragraph (which responded Prof. Banks article):
Writing about that if deregulation could not be achieved in the U.S., … “then it could not be realized any where in the face of earth, at least in the medium to long run” Professor Banks states and adds: “By that I mean after any excess capacity that might be available has been utilized.” Such statement is faulty because, while the generation and transmission capacity may be utilized with respect to current demand, the development of the resources of the demand side can change the situation in the medium run. In addition, the U.S. lobby activities have led to an unacceptable extension of the VIUs paradigm.
So, Uno Lamm as a Swedish leader is a role model to follow for handling the reform needs in the Nordic countries.
On the humorous side, I will let readers decide if Fred needs a shot of Aquavit or I need a rhum and coke.
Jose Antonio Vanderhorst-Silverio 10.29.07
With respect to the future markets, I have concerned myself with satisfying the requirements of NYMEX. They delisted electricity futures because of lack of physical risk management in E1R2 deregulation. R1E2 EWPC satifies those physical risk management requirements. The books will be emerging, as EWPC gets implemented.
Ferdinand E. Banks 10.30.07
José, everything that needs to be said I have said in my article and comments. DEREGULATION HAS FAILED, IS FAILING OR WILL FAIL EVERYWHERE. As for Uno Lamm, he was a brilliant engineer - perhaps the best power engineer in the world - but as far as I know he made no contributions to the deregulation debate, and if he had made comments, publically, in English or Swedish I would know about them.
Something else. In California and Sweden deregulation was referred to as an "experiment". It was an experiment that failed because it ignored economics truths - which you are also inclined to do. And yes, there will be books about electric futures markets, and they will be read by trusting students and professionals. But MY students will not read them, because if they do and sound off about it they will be given failing grades. I don't suffer foolishness gladly or otherwise.
Finally, I do not need a shot of Aquavit. I need a rhum and coke, or perhaps more than one, and need them badly.
Fred
Len Gould 10.30.07
Professor Banks: I agree with your analysis that all present attempts at (de/re)-regulation are failures, as they must be by their design. I would just like to ask you for a few further clarifications.
1) Is it fair for me to presume that you have fallen back to the "natural monopoly" position as simply the best choice of a set of ugly options? e.g. Are you satisfied with the skewed incentives to management of a monopoly generating company (i. higher they can get costs, more profits they make ii. no way except vigilant study of huge impenetrable submissions documents to identify events of utility influence on regulators iii. politicians manipulating electricity rates for political purposes. iv. large potential for taxpaid subsidies of electricity rates if the monopoly is government owned.)
2) How much of your dislike of NORDPOOL is related to the fact it opens up the continental market to Swedish generators, therefore leaving Swedish customers exposed to competition from buyers in Denmark and Germany? Is this not a separate issue form the issue of whether generation should be a monopoly?
I am looking for a reason within your position for why you might have a negative position on implementation of a free and open market where every customer gets equal access to every generation source in their region including the smallest home CHP units, at whatever competitive price the generation might be satisfied with, e.g. IMEUC. It makes no statement regarding international / cross-border transmission, that being a separate issue. Given that, I can't see exactly why you take the position you do, unless you believe that such a system is simply impossible to implement, which I consider to be an engineering issue and not an economics issue, as the economics of implementation cost appear to be quite straightforwardly in favour of implementation.
Sorry this is so wordy, and thanks in advance for reading it.
Ferdinand E. Banks 10.30.07
It's like this, Len. I dont mind answering any of these questions because I have been answering them since my first deregulation song-and-dance in Hongkong, in 2001.
1) When they introduced deregulatioin they brought it in with lies about electric firms not being natural monopolies (or strong oligopolies), and in addition there were no returns to scale in generation or transmission. (The same treatment has been given gas.) They sold this gobbledygook with the help of a tidal wave of propaganda aimed at the decision makers. Enron was one of the big suppliers of these lies, although it is possible/likely that some ignorance was involved on the part of Enron's managers. In any event, I am a bottom line sort of guy, which means that I ALWAYS make it clear that what consumers wanted was lower prices and not blather about CHOICE - e.g. choosing suppliers and playing games with meters. They were promised lower prices because, according to the theory, regulation ALWAYS meant higher prices. My reply here was a paraphrasing of Joseph Goebbels: THE BIGGER THE LIE THE HARDER PEOPLE WILL WORK TO BELIEVE IT. Let me also point out that many myths about choice came into the picture via academic members of the deregulation booster club, who in turn received research grants and were invited to the conferences that are so dear to their hearts: conferences where they keep their mouths shut and dream about the subsidized dinners that they will enjoy that night. I can mention that here in Sweden we got choice, but along with it higher prices, and now everyone except the rich curse deregulation - at least most of the time. Naturally, some free market fanatics wouldn't have it any other way, regardless of how much money they lose.
2) And yes, NORDPOOL means that if demand jumps up relative to supply in e.g. Germany, it influences the prices at Nordpool and similar establishments, and my electric bill goes up. Accordingly, if e.g. the Germans massacre their nuclear sector as they say they will, I might lose a vacation in Paris: Springtime for deregulation and Germany means winter for Sweden and Fred. And remember this, when they were bringing in deregulation, the theory was that regulation ALWAYS meant higher prices, while under deregulation, if supply failed to keep up with demand, that would be taken care of very rapidly by the transparent prices formed on exchanges like NORDPOOL leading to an increase in supply and reduction in demand. This is Econ 101, but in the last chapters of a good Econ 101 book they would make it clear that this is a gross oversimplification of the way that certain real-world markets and industries work. Moreover, in California the theory initially was that all pricing should be done on exchanges (i.e.auction markets like NORDPOOL) where long-term arrangements would be taboo. This was the craziest idea of all.
3) Yes, I agree, we do have an engineering issue here, but why should suppliers invest in order to make it better for consumers and reduce their own profits. Deregulation has meant a reduction in investment and an increase in gaming - which makes all the economic sense in the world to me. In Sweden the largest generator Vattenfall has enjoyed record profits since deregulation, and as expected reliability has gone down. As I noted somewhere, Kimery C. Vories in his letter to EnergyBiz (June 21, 2007) said that the same thing has happened in my former home state, Illinois. Also, with Vattenfall, when deregulation came in the management said to hell with Sweden and now they spend a large part of the time in Germany enjoying their higher salaries and playing kings of the hill.
4) People in Sweden write and ask me why did deregulation increase their electric bill, and my answer is simple: profit maximization by suppliers can be taken to an extreme, which means a reduction in investment and some degree of gaming - i.e. strategic cooperation by suppliers, even if it is tacit.
Somebody from California came here and said that it was not possible to cancel deregulation. Of course he didn't say it when I was present, because I would have told the colleagues exactly what it was possible to do, using what is sometimes called non-academic language. And finally, I gave my first lecture on electric deregulation in Hong Kong, but wrote my first paper earlier. Since then I have written many papers and given many lectures, BUT IN TRUTH THEY ARE ALMOST ALWAYS THE SAME. If there is any difference it is in the number of failures: they steadily increase.
Fred
Jose Antonio Vanderhorst-Silverio 10.30.07
Dear Prof. Banks,
EWPC is not deregulation as you lecture it. EWPC emerged while you were watching in the past two years as a paradigm shift away from the vertical integration monopoly. All the E1R2 deregulation you wrote about is most probably true, but is now history. I am sorry your book is made obsolete with respect to R1E2 EWPC.
Regards,
José Antonio
Ferdinand E. Banks 10.30.07
So my book has been made obsolete. That's funny, I've been running around all over the place telling people that I've written the best energy economics textbook in human history, and now I hear that it's obsolete. Statements like that remind me of the dean of engineering (or something) at Illinois Institute of Technology in Chicago who told me that I was completely and utterly hopeless, but he was wrong. I'm not 'completely' hopeless, just...
Jose Antonio Vanderhorst-Silverio 10.30.07
I am really sorry Fred that the industry can now be restructured with EWPC, making all the talk about price spikes, which occur when the power system approaches its capacity limit at some location, totally irrelevant. The book, however, is just obsolete with respect EWPC.
I insist that a strong dosis of leadership, like that of the late Uno Lamm, is needed for Sweden and the Nordid countries to allow the end-customers the opportunity to help transform the power market for the good, as I explained in my article.
Michael Keller 10.30.07
Interesting watching the tennis ball go back and forth across the net, but ... could one of you gentlemen offer a concrete and real world solution to the problem of the consumer having his wallet cleaned out by ever increasing power costs?
Mike Keller Kansas
Jose Antonio Vanderhorst-Silverio 10.30.07
Mr. Keller: EWPC is the concrete solution. Sweden has the opportunity to be first. This is the article mentioned above:
Strong leadership is needed to complete the reform process in the Nordid countries to benefit end customers, by introducing a paradigm shift to EWPC, and making them active participants in the electric market.
The version of the article “Why has the Nordic electricity market worked so well?” that I found on Internet is written by Professor Lars Bergman for Elforsk AB, which is owned by the Swedish electrical utilities. Maybe explaining the question mark, Professor Bergman starts the conclusion of the article with: “There are two major threats to the success of electricity market reform in the Nordic countries. The first is that security of supply can not be maintained. The second is that market power prevents the potential benefits of competition to be realized.” That is a clear message for those in the ship that they are operating under E1R2 deregulation.
Peter Fritz, the Secretary of Market Design-program of Elforsk AB, starts the foreword of the article with “The development of liberalized electricity markets around the world is, partly, an experiment of applied market theory with uncertain outcome. For this paradigm to benefit customers thru efficient supply of electricity, we need increased and better knowledge on how competitive electricity markets really work and how to solve the problems that might occur.” That is the kind of knowledge that the EWPC paradigm is offering.
To handle both threats, Sweden and the other Nordic countries should complete the reform by introducing EWPC with its R1E2 policy. In the 1996 article “Lessons from the UK and Norway,” Richard Tabors, one of the authors of the book “Spot Pricing of Electricity,” and at the time with Tabors, Caramanis & Associates, wrote that “No restructuring can take place that does not guarantee system reliability. Whoever the operator may be, that entity must have a pool of resources that can be dispatched to supply balancing functions, ancillary services, and reserves… its operators must have at its disposal the short term resources needed to maintain reliability and stability.” This is an excellent synthesis of the R1E2 policy.
Frederick (Fred) Plett 10.30.07
- One cannot store electricity, except at a significant loss (pumped hydro, compressed air, etc.) or at very high cost (batteries, etc.). - The capital cost to produce and deliver electricity to the consumer is some 10 times the cost incurred by other businesses. - One cannot direct flows of electricity - the flows follow basic laws of electromagnetism (Kirchoff's laws), not an economist's model.
These three points I learned as a college student in the 1960's and they haven't changed much in the interim 50 years. This differentiates the electric utility industry from others, and it is what makes the electric industry a natural monopoly. kWh cannot be compared to pork bellies because pork bellies can be stored cheaply, they follow economic routes to market, and the amortized capital cost is a small fraction of the total cost of production.
No talk about true deregulation will obviate the above points. One can cobble together, perhaps, an arcane set of rules enforcing minimum reliability standards among all of the players of a "deregulated" market, but don't pretend that this is truly deregulated.
Ergo, Professor Banks is absolutely correct in his premise.
Jose Antonio Vanderhorst-Silverio 10.30.07
Handling Sweden’s Electric Reform Threats . . . continued
Professor Bergman also wrote that: “… retail electricity prices (before tax) have become strongly lined to wholesale electricity prices.” It is precisely the development of the resources of the demand side, to integrate the retail and wholesale markets under EWPC, what is needed in the Nordic market to complete the reform and reap the benefit of competition. There is, however, a need for a very strong leadership in the Nordic countries if there are contracts and regulations of the weird kind that may be in the way of such development.
Now that it is clear that the natural monopoly can be restricted to the transportation system (see The Natural Monopoly Transportation System ), I can take the first part of a sentence (not being out of context) that Professor Banks wrote to respond to Mr. Len Gould’s comment: “The business of creating an electric market in which customers enjoyed a meaningful participation was discussed by Fred Schweppe (of MIT) at a long conference in Portugal that I have mentioned a number of times in this forum. Doing this is almost certainly correct, but I stay away from this topic because I don't really understand the details,…”
It seems strange that Professor Banks “don’t really understand the details” of meaningful customer participation, since he just stated under The Old Response to Jack Casazza that “The economy that Fred Schweppe was thinking about was the economy in the first part of your econ 101 textbook. That economy is irrelevant for the deregulation discussion.”
As I responded to Prof. Banks on 4.3.06, Prof. F.C. Schweppe understood that a successful [regulated energy] marketplace require, among other elements, "No monopsonistic behavior on the demand side" and said that "monopsonistic behavior is difficult on the demand side because the number of customers ranges from thousands to millions." How many (transmission) customers are there in Sweden?”
That is why that understanding the details of a meaningful participation of customers is of the utmost importance. In addition, as can be seen in my presentation at Carnegie Mellon University, “electric restructuring is ‘fundamentally an information technology event.’” as Stanley Klein’s wrote in 1998. Writing about technological revolutions, Dr. Carlota Pérez adds “these new technologies provide the potential for modernizing the whole productive structure and for raising the general level of productivity and quality to a higher plateau.”
Jose Antonio Vanderhorst-Silverio 10.30.07
Handling Sweden’s Electric Reform Threats . . . continued
In fact, Schweppe et al criterion for economic efficiency in the regulated energy marketplace is “Motivate customers to adjust their own electric energy usage patterns to match utility marginal costs. (See the book Spot Pricing of Electricity)” That is why EWPC concerns itself strongly with the development of the resources of the demand side.
Furthermore, the application of a marginal cost pricing algorithm as NordPool employs together with an undeveloped and unresponsive demand side is a sure “mechanism for bleeding electricity customers,” as Professor Banks explains. However, instead of the kind of the “surfeit of increase ‘choice’ in Sweden,” what is needed is developed and responsive customers on the demand side, that allow 2GRs under EWPC to set the marginal cost pricing at reasonable levels in line with individual customers set price caps (see No Need for Regulated Price Caps - I and No Need for Regulated Price Caps - II).
Writing about that if deregulation could not be achieved in the U.S., … “then it could not be realized any where in the face of earth, at least in the medium to long run” Professor Banks states and adds: “By that I mean after any excess capacity that might be available has been utilized.” Such statement is faulty because, while the generation and transmission capacity may be utilized with respect to current demand, the development of the resources of the demand side can change the situation in the medium run. In addition, the U.S. lobby activities have led to an unacceptable extension of the VIUs paradigm.
As my hero Uno Lamm proved, when he introduced High Voltage Direct Current technology (see The Sixth Disruptive Technology), facing a strong opposition by the same California IOUs referred to in The BIG California LIE, the Nordid countries don’t need to wait for the experience of the U.S. What they need, I repeat, is a strong leadership.
Jose Antonio Vanderhorst-Silverio 10.30.07
Mr. Plett,
Thank you for your interesting intervention.
Those three assumptions of the power industry are part of a larger set of assumptions that need to be questioned. The fifth technological revolution I mentioned in the article you intercepted says:
… as can be seen in my presentation at Carnegie Mellon University, “electric restructuring is ‘fundamentally an information technology event.’” as Stanley Klein’s wrote in 1998. Writing about technological revolutions, Dr. Carlota Pérez adds “these new technologies provide the potential for modernizing the whole productive structure and for raising the general level of productivity and quality to a higher plateau.”
Two assumptions that no longer hold are that demand should be an externality and that customers reliability needs are similar. As a result of the second, average rates of neat customers classes are not accurate anymore. In addition, the business model of utilities, which winning rate case to a regulator, should be replaced by business model innovations in the fifth revolution.
…electricity restructuring is not being driven by the goal of reducing residential rates. The drivers are technology and industry. New ways of making electricity, such as combined-cycle natural gas generators, and soon fuel cells, allow industrial users to produce their own power at lower cost and with less pollution. One by one they are slipping off the grid, leaving the utilities, with their huge, outmoded, unpaid-for power plants, in a panic.
To save themselves, the power companies meet in back rooms with politicians. They must accomplish three things. First, they must allow big customers to lock in low rates, so they will stay on the grid. Second, they must pay off the debt for their dinosaur plants. Third, they must sell the deal to the public by promising lower rates.
The solution to those problems is EWPC as explained in my Response to Professor Banks (please hit the link and read all 4 articles).
Ergo, both Freds need to update themselves.
Len Gould 10.30.07
Fred Plett: I respectfully submit that you are dead wrong, because your thinking is mired in how things were decades ago. Current information technology is fully capable of implementing consumption management / price responsive systems which can make the customer's reaction to market condifions change as fast as the market changes. No-one (except Jose Antonio with EWPC) is proposing implementing de-regulation with a system as outdated as futures traders calling out prices of pork bellies on a distant trading floor, with the requisite warehouses etc. To see how a genulne market for all electricity customers could work, see the EWPC blog on this site, on the menu above. The additional benefits which then emerge, and which cannot be accessed by any free market system any other way, are numerous 1) easy connection of local home CHP generation, solar thermal CHP, PV, wind, etc.. 2) support for grid-smart bi-directional PHEV systems. 3) fair compensation for those, resulting in a far greater incentive for those. 4) unlimited usage of unreliable renewables, e.g. wind generation well above the grid reserve level, and fair compensation of same. 5) all customers down to the smallest household paying only the wholesale price for their electricity same as the large industrials.
Check it out, it's worth a read.
Len Gould 10.30.07
Sorry, that's the IMEUC blog on this site, I miss-typed.
Ferdinand E. Banks 10.31.07
We have some customer response here in Sweden because of deregulation, and my wife apparently changes suppliers from time to time.
As for me, I wouldn't touch this kind of thing with a ten foot pole. When they closed two nuclear reactors and deregulated, that meant to the best academic energy economist in the world - ME - that the electric price battle was lost.
As they said in the US Navy at one time, "On every ship there is someone who doesn't get the message". The same applies to every forum, and that someone in this case is the good José. He absolutely refuses to understand. I met Fred Sweppe, a brilliant man, but who didn't live long enough for me to explain why electric deregulation was nutty if the goal was lower prices. He would have understood. Uno Lamm was a better than brilliant power engineer, but he didn't know any economics, and as far as I know he didn't have anything to say about regulation/deregulation. I could have taught him something however, and I am CERTAIN that he would have agreed, because the industrialists in Sweden who were in favor of deregulation now see it as a curse. Lars Bergmann is a big-time Swedish economics insider who is an amateur energy economist, and had never heard of Uno Lamm until I put him in his place one beautiful day in Rome.
This business of Dr Perez and Donella Meadows saying that technology....blah blah blah...,is just damned nonsense. We had the lowest cost electricity in the world here in Sweden because of nuclear energy and regulation, but the ignorant government ruined everything because they wanted higher electricity prices: higher electricity prices increased their revenues. And listen HOUSEHOLD ELECTRICITY COSTS CANNOT BE MATERIALLY DIMINISHED BY PLAYING GAMES WITH METERS AND GETTING WANNABE POLITICIANS TO INTRODUCE CRANK SCHEMES WITHOUT THE SLIGHTEST GROUNDING IN ECONOMIC LOGIC. Note - diminished but NOT MATERIALLY DIMINISHED. Anybody in this country who thinks that demand response can substitute for more nuclear energy and the abolishment of deregulation should be introduced to the gents in the white coats.
Electric exchanges/auction markets of the NORDPOOL type are a scam. They were introduced to complement that other scam electric deregulation. Let me say to Fred Plett that many engineers who were familiar with Kirchoff's laws were shouted down by know-nothings who claimed that any losses that resulted from ignoring Kirchoff's laws would be compensated for by a comprehensive deregulation. Several of the academic know-nothings even claimed that even if deregulation caused consumers some discomfort to begin with, they should smile and clap their hands because they would be the ultimate winners.
You're late José. You should have hit the conference/forum circuit seven or eight years ago when Enron was trying to make fools of California rate payers, and to a certain extent succeeded. Maybe you could have found yourself in position to enjoy some of the long green that was being passed out to charter members of the deregulation booster club.
Jim Beyer 10.31.07
It would be fun to get Fred and Len in a room together and let them go at it. I think a problem with IMEUC is that it is not really like a typical market, not really. If I flick on my 60" flat screen TV, and suck up an additional 1200 watts, that's an instantaneous request to buy power. But how much? For how long? I flick it off after 10 seconds and the energy needed is basically zero. I leave it on for 6 hours, we have some actual demand here. From the standpoint of the initial transaction (presumably begun and ended when I turn on the switch) the two events are the same. From the standpoint of the product needed, the result is very different. Even penny stocks trade in blocks of 100 shares or so, and the trade costs a few dollars for that as well. Does an instantaneous demand mean an implicit contract to buy a certain minimum amount of energy? Would the consumer be OK with that? (If so, that would give the consumer the incentive to avoid short, spurious loads, which the utility would probably appreciate.)
But regulation has its own problems as well. The biggest, as I see it, is disincentive to encourage energy saving and efficiency, though such a thing is a public good. I don't think too many people nowadays are concerned about regulation because they think prices are too high. I think they are concerned about regulation because the utilities are not doing the things they want them to do. Well, if they are regulated, one would think it should be easier to get them to comply with these wishes compared with an unregulated system.
The electric utilities and the grid were developed when fuels were cheap, the implications of carbon emissions were unknown, and the biggest problem was that electricity would be "too cheap to meter". None of that is true now. Something probably has to change. Does this mean deregulation? No, probably not. Does this mean re-regulation, something probably just a scary and risky as deregulation? Possibly.
Len Gould 10.31.07
Sorry, Professor Banks, but I must respectfully disagree. With all the faults / failures / messes of de-regulation here in Ontario, and as much as I do dislike it, it has STILL brought one huge benefit which I appreciate, which is some market discipline to the old government-run Ontario Hydro. As I have said in the past, OntH used to be technically superb in all it's areas. It's crews could do any high-tech task in the most technically perfect way possible. BIUT i also know from experience, they WERE THE MOST EXPENSIVE way to get that job done I, or anyone else, has ever seen.
Evidence:
1) Many years ago, I used to be sent by my employer for training courses at their facilities. One in particular was the Hockley Valey Centre. This was a gorgeously built and maintained resort facility in the most beautiful country setting available in Ontario, next to a ski hill. At the end of one of our courses, the staff hustled us out at mid-day on the last day because the facility was about to be occupied hotelng by the retinue of Queen Elizabeth II, who was touring Canada at the time.
2) In the 1990's, a dumb big-shot politician was appointed CEO, Maurice Strong. His most publicized action was to have the utility purchase huge tracts of Amazon Rain Forest in order to protect them from loggers. With ratepayer money. Huge sums of it.
3) In the late 1990's when the privatization was under way, a lot of Ont H staffers got thrown onto the open market by buyouts. I was working as independent contractor in IS for a large telecom, and some of them came on our crew. It was unbelievable. Technically superb BUT. They were signed on as private contractors, incorporated, but they interfaced with "management" of the project as if they were (still) unionized. They'd argue endlessly over having to work overtime without 1 1/2 pay, 2 1/2 on weekends, on and on. Negotiate for free meals if the work went 1/2 hr late, then negotiate over the quality of the food (which I thought was excellent). The project was in a bind, and I worked several months at 100+ hrs/ week and was happy for the opportunity (we were still being paid very well, and treated well) but these guys ended up getting dropped.
4) We used to attend user group meeting in evenings for the software I specialize in at Ont H HQ building. It's a palatial glass highrise right next to the provincial parliament bldgs, with a connecting underground passage.
5) A long endless list of others.
I'll bet the monopoly genco in Sweden was similar.
The point is, this is the sort of things you get with monopolies, because there are no market forces on them. Things can be done much better, though I agree existing de-regulation through retailers with no market system is not the correct way. TransCanada Pipelines has taken over operation of half their reactors now, and by all appearances/evidence is doing a terrific job at a much lower cost, still treating their people well.
IMEUC is not a "CRANK SCHEMES WITHOUT THE SLIGHTEST GROUNDING IN ECONOMIC LOGIC." It is a sensible system designed to get all participant's economic incentive vectors pointing is the direction society needs them pointing WRT comming dramatic changes in how electricity will be generated and used (replacing all transport fuels, perhaps becoming a significant substitute for heating fuels where efficient, e.g. ground-source heat pumps, small home CHP units like whispergen or GE SOFC's, Gen III and Gen IV nuclear, etc. etc. etc.)
No monopoly can possibly be nimble or smart enough to figure all these things out. As an economist you must know the issues there. There is no reason for your fear, and there is no stopping the technological changes so we might as well at least control how the technologies affect us, but implementing a FAIR AND OPEN market system like IMEUC.
Frederick (Fred) Plett 10.31.07
"Both Freds need to update themselves" is an ad hominem attack. If you don't like the message, attack the messenger. There is no question in my mind that advanced metering and price signals can modify demand, as can payments to get off the grid for a period of time. This is a red herring to my argument about the natural monopoly status of the utility industry. Such technology is not dependent on a deregulated market to be implemented. Nor will consumer demand response ever approach the point that unregulated wholesale oligopolies can be controlled. There is also no question in my mind that there have been advances in generation technologies over time. None of these advances are driven by a deregulated market, and have and can be adopted by vertically integrated utilities. A deregulated market may have encouraged over-reliance on some of these technologies - for instance, the rush to gas turbine generators in New England with no thought of fuel diversity, resulting in many of them going bankrupt and being taken over by banks. Now there is a growing concern about reserve margins and the lack of new generation. Deregulation has resulted in a boom and bust cycle in generation construciton. Fuel cells and microturbines represent emerging technology choices that have not at this point refuted returns to scale of larger plants. There may be niches where end user generation makes sense, especially in cogeneration situations. What this has to do with deregulation or vertical disaggregation simply escapes me.
Jim Beyer 10.31.07
Fred P.,
I think an issue with respect to the regulated markets is how reticent they are to accommodate new ideas. A good example of this is net-metering, the only way for small power producers to get compensated for generation on the grid. The problem is, if their generation exceeds their own power needs, they get paid nothing. Now I understand the economic basis of this on the face of it, the overhead of monitoring such a small power source is hardly worthwhile to a big utility. But they fail to see the larger picture on how such efforts may, over time increase energy production, and more importantly, promote energy conservation. Instead, they get bogged down in issues that are not monetarily significant (much less so than buying Amazon rainforest) but are very significant in how understanding how a future grid might work.
On the other hand, they do get pushed around by politicians, who vote for RP standards. That is a problem with big regulated monopolies; the only way you seem to be able to interact with them is by slamming them in the head with a monkey wrench -- not the best way to fine-tune a system. I'm not saying I know what the answer is, but I am saying that this is part of the problem, and what leads people to think about deregulation.
Steve Rozenman 10.31.07
Prof. Banks
I think you should not be so cheerful in your crusade against deregulation because it is quite a “Downer”. As you would agree there is no redeeming message in obliterating deregulations other than “Lets go back to the way things were 30 years ago”. Vertical Monopolies offer No Panacea or great wisdom to the electric industry. Vertical Monopolies have their own “Ax to grind” which is: Executives maintaining a structure of steady and guaranteed return to investors, and Labor seeking generous and stable employment conditions. These costs are imposed on the public with electricity prices that are set by administrative and political mechanism. Indeed this is a fairly cozy and stable system for some but they ignore totally 21-century real life issues such as rise in fuel costs, environmental problems on one hand and the potential benefits of new generation and Information technology. In deregulation, the dominant forces are those who try to make a “fast buck” in the regulated monopolies it is the executives and their politicians, both don’t care and actually hinder any traditional innovations for fear that it may alter their basic interests Deregulation is not about lower prices because we do not have a universal yardstick to compare to. The lower prices per KWhr that some States enjoy are only temporary, are tied with increased pollution and long range environmental damages and include an implicit obligation by the consumers for the debt of the utility.
Len Gould aptly stated the dilemma:
“In 40 years (+- depending on who you read) the electricity system WILL be a rolled-up aglomeration of all present energy systems (Oil, Natural Gas and Electricity). With that sort of economic power in the hand of a very few IOU monopolies or probably worse yet in the hands of governments, what will we have left to our grandkids?
So Prof. Banks, rather than basking in the seeming failure of deregulation please join the search for a better system for future generations.
Steve Rozenman Ph.D.
Ferdinand E. Banks 10.31.07
I certainly dont like disagreeing with Len or anybody else in this forum, because they know a lot of things that I dont know; but what I know I really and truly know.
You probably have heard the expression deregulation experiment - this was applied to the California and Sweden, and probably elsewhere. These experiments have failed, as Len admits.
Now lets talk about a REGULATION EXPERIMENT, and the only one of these that I know everything about is the one in Sweden before deregulation. WITH REGULATION WE HAD THE LOWEST COST ELECTRICITY IN THE WORLD (with the possible exception now and then of Norway), and could have had the lowest priced electricity for households and small businesses. Of course, heavy industry did get cheaper electricity. Had regulation continued in Sweden, and the Swedish government decided not to enter the EU nor send billions to stone age countries in the Third World so that they could buy weapons and plane tickets, it would have been possible for this country to continue to be an example for the rest of the world where things like health care, education and the quality of life is concerned. The regulation experiment worked in this country, and the deregulation experiment has failed here, there and everywhere, and those failures cannot be corrected by tinkering with meters, customer response, IMEUC, or promoting rap-is-sap music. This is the point that I attempted to make earlier, and will expand on some day because I happen to be convinced that economic logic is on my side.
There seems to have been some petty (or perhaps not so petty) corruption and incompetence in Ontario. Curing that sort of thing is simple - do the same thing with the offending parties that Hughes Aircraft in LA did with me. They showed me the door. But in truth I'm not worried about petty corruption and incompetence, which they probably have/had here too, but even so provided this country with comparatively inexpensive and reliable power. What worries me is a highly educated public deciding that their world will be better with deregulation because then they have CHOICE, AND IN ADDITION A FEW METERS AT THEIR DISPOSAL. Fred Plett says that deregulation has resulted in a boom and bust cycle in generation construction. Of course it has, because deregulation increases uncertainty. Moreover, it reduces the incentive to invest: INVESTING INCREASES CAPACITY, WHICH IN DUE COURSE WILL/MIGHT LEAD TO A FALL IN OUTPUT PRICES. When Professor Bill Hogan of Harvard went to the UK, he was surprised or shocked or something that investment had stagnated. I dont see why he was surprised. Once they deregulated it made all the sense in the world.
And finally, I'm not against meters, choice, futures contracts for electricity and all the rest of it. I'm against them in the context of deregulation because what they do is to make fools of rate payers.
Fred (Banks)
Len Gould 10.31.07
Professor Banks: You make a strong argument, with which my immediate tendancy is to agree. I would point out though, that NONE of the specific shortcomings of monopoly utilities were corruption, they were simply the logical outcome of how that system WILL ALWAYS operate. I'm again contracting now at a (semi-regulated-monopoly/semi-de-regulated) utility, and it is rife with similarities carried over from it's recent history as a full regulated monopoly. It's having a painful time adjusting. One thing that is clearly obvious is that although it collects lage sums from the regulator in order to promote energy efficiency among its customers, it never really does, and in our quarterly staff meetings the top executives continually encourage people to promote additional consumption out in the community in any way possible.
I also see it being (im)practically impossible, no doubt massively (excessively) costly, and very politically unwise vis. Canada's largest trading partner, for us to go back now. I think to progress from here, we're all going to need to get somewhat intelligently creative.
Ferdinand E. Banks 10.31.07
Steve, you want me to join in the search for a "better system". Why didn't you tell me to go to Baghdad and paint the outer walls of the Green Zone blue?
You use the term "seeming failure". You mean FAILURE, don't you. We're talking about failure here, Doctor. According to information reaching me, deregulation has failed in every state in the US if the intention was to reduce electric prices - and that, rather than giving the TV audience some meters to play with, WAS the intention.
The world that we are going to leave our grandkids! If my grandkids and their friends are dumb enough to buy deregulation, I don't care what kind of world they end up with. In case you are interested, the main reason for my disgust with dregulation is that it mirrors the kind of stupidity that led this country into the EU. Sure, 'to err is human', but colleagues, to make errors like deregulation, and then conclude (like our good friend José) that somewhere out there is a magic meter or anagram that will make things right -- no no, Steve and Len. Fred might be arrogant and obnoxious occasionally, but he aint stupid - at least not that stupid. The villain here is deregulation and not monopolies, because very large monopolies whose directors get the kind of salaries they deserve can be regulated. With deregulation the directors give themselves even bigger salaries, along with perks and bonuses, and then run off to enjoy the night life in Kabul or somewhere.
One more thing that you might or might not appreciate. I've faced a lot of people who thought that they would put me in my place on this deregulation thing. They all took a beating , because every one of them knew that they had gotten it wrong. Arguing in favor of deregulation when it has failed, is failing or will fail everywhere must be pretty depressing.
Len Gould 10.31.07
So Fred: Are you recommending re-regulating? With government buyouts? What solution do you propose?
Len Gould 10.31.07
I would also mention that in my currrent contract, I get to see up close and in detail exactly what "energy retailers" do, which is practically nothing (useful). The distribution company (by regulator mandate) MUST maintain all the customer care, metering, billing, etc. etc. system, at a cost to customers set by the regulator and heavily inflated as much as possible in order to maximize distribution's profits. Would that get cheaper if the retailers took over the delivery of those services, as Jose Antonio appears to be promoting in EWPC? No, because of the distinctive features of large business software, e.g. it costs millions of dollars to service the first customer, but almost nothing to service the next million customers.
IMEUC deals with all the issues, Fred. I suggest you re-evaluate it.
Peter Platell 10.31.07
It is amazing that there is still people who believe in plan economy. Ferdinand wouldn’t the regime in North Korea give you an interesting job. You can teach in dirigisme and plan economy. In the free world venture capital will invest in small scale renewable and Free Energy as in Free market forces will dominate.
Yes there will be problem during deregulation phase. It is always a lot of problem after communism. The problem started with regulation. The physics on the earth will force us into free energy market because the renewable is on everybody’s roof. The large centralised model is a dead end because energy resources with the necessary high energy density will soon be very expensive. You maybe have some figures in uranium resources but much of nuclear investment will be outstripped by free market forces technology. The world doesn’t need more accounting now. It is not compiling figures from existing technology the world need. The world needs a lot of new disruptive technology that harness renewable.
Peter Platell
Jose Antonio Vanderhorst-Silverio 10.31.07
Dear Mr. Plett,
I am bound to the principle that I am not my opinion. Please accept, with a lot of respect and with a positive attitude, my suggestion of the “… need to update themselves.” It is not a personal attack at all, but a sincere wish. However, time will tell.
Best regards,
José Antonio Vanderhorst Silverio, Ph.D.
Jose Antonio Vanderhorst-Silverio 10.31.07
Switching Retailers is NOT as Important
Dear Fred (Banks), Len, Mike, Fred (Plett), Jim, Steve, and Peter
I am glad that the dialogue is getting more balanced and rich, with the participation of all of you important and intelligent people, on three fronts.
To get a better understanding of EWPC, the issue of switching suppliers and “energy retailers” are considered. With that in mind, I have selected as the most important comment posted, that of my friend Professor Banks that said: “We have some customer response here in Sweden because of deregulation, and my wife apparently changes suppliers from time to time.”
The second most important comment was that of my friend Len Gould: “I get to see up close and in detail exactly what "energy retailers" do, which is practically nothing (useful). The distribution company (by regulator mandate) MUST maintain all the customer care, metering, billing, etc. etc. system, at a cost to customers set by the regulator and heavily inflated as much as possible in order to maximize distribution's profits. Would that get cheaper if the retailers took over the delivery of those services, as Jose Antonio appears to be promoting in EWPC? No, because of the distinctive features of large business software, e.g. it costs millions of dollars to service the first customer, but almost nothing to service the next million customers.”
Both comments relate to E1R2 deregulation and first generation retailers (1GRs). EWPC is about R1E2 re-regulation and second generation retailers ((hit link to read about Second Generation Retailer - 2GR). Fred is probably confusing one kind of customer response that adds nothing to physical system risk management, while Len is describing what “energy retailers” do.
In the article A Little Silicon is Necessary but NOT Sufficient, which I wrote as a response to Prof. Banks article, I said: “… Under the R1E2 EWPC markets (in plural), every end customer can participate in the genuinely open retail markets and select the service plan (markets mix) contract that best meet their needs for low cost and/or high value. Such markets are the real-time balancing market, the hour, day and week ahead markets, as well as any other forward market that retailers can provide with their business design innovations. Some customers will also require physical delivery of their futures contract.”
While under E1R2 deregulation it was though that switching 1GR is a good measure of “efficiency,” under R1E2 switching is not important at all, since many customers will find a market mix that satisfies best its requirements for insured electricity for the future. Electricity contracts are similar to insurance contracts, in which customer protection will be done by prudential regulations.
So under EWPC re-regulation switching suppliers very frequently is not measure of efficiency. What is important is the contractual commitment that customers will make to respond in advanced and infrequently (but randomly) when the system might get close to its capacity limit, when for example it is known that a nearby large generator will be out of operation.
Best regards,
José Antonio
Ferdinand E. Banks 11.1.07
Peter, you want me to go to North Korea and teach them a few things about communism. Actually I might end up there: I've taught in Hong Kong, Singapore and Bangkok, and I was a soldier in Japan. I'm also the most productive economist in the history of Uppsala University, which is an institution that is well over 500 years now, and I like to put in a claim that I am one of the best economics teachers in the world - certainly better than any in Sweden. But even so, frankly, I prefer to remain in a country in the far north of Europe and wait for its residents to install the "renewable" that is going to be on everybody's roof - according to your good self.
With thinking like yours, no wonder this country is going to the dogs.
And Len, they should very definitely reregulate in Sweden - haven't they done the equivalent in many states in the US. As for Canada and elsewhere, I don't know. What I do know however is that if the Canadians play their hand right, they could - could not will - turn out to be the richest country in the world.
Steve Rozenman 11.1.07
Professor Banks, look at the flaws in regulation.
The high costs of regulated monopolies are spread over all the consumers through average pricing plus an implicit guarantee for the long-range debt of monopolies with unrestraint investment appetite. The lag in investment in new generation or infrastructure in deregulation merely reveals the banking practice of seeking iron clad guarantees for the repayment of loans - recall “stranded cost”. Such guarantees should be figured when comparing cost of electricity. Essentially in regulated monopolies the reliability that is enjoined by some are cross-subsidized by consumers who do not need the reliability but they have no choice. Deregulation highlighted the true real time cost of electricity, which is well hidden in a regulated structure. Regulation is “business as usual” with all its cozy flaws. I do not state any position in this debate but with rise in fuel costs, environmental problems and new generation and Information technology the debate is not yet settled.
Steve Rozenman
Ferdinand E. Banks 11.1.07
Steve, we had a wonderful saying in the US once: never look a gift horse in the mouth.
Regulation in Sweden gave us the lowest cost electricity in the world - most of the time - as well as comparatively inexpensive, reliable power. As for your talk about 'regulation being business as usual', the Swedish industrial elite wanted deregulation for the kind of reasons that you give. Now they have their deregulation and are seriously mad. Given the opportunity, they will move everything that is movable out of this country.
That's the bottom line, and once you have that you can derive the rest - although in this case it doesn't matter. You've got to get yourself together, Doctor, because the argument in the post just above belongs on CNN or Fox News, and not in this forum. If I was running this show, I would have sent that post back to you. I mean some of the things you say are amateur stuff - like your comment about banking.
I'll tell you the problem with academic economics: half of it is a crock, and students spend at least half of their time with that half.
Jose Antonio Vanderhorst-Silverio 11.1.07
The vertically integrated utilities paradigm has been in a NO PROFIT ZONE for quite some time, letting utilities make a profit under regulation only by the “consumer having his wallet cleaned out by ever increasing power costs.” To get the power industry in the PROFIT ZONE, there is a need to restructure with the aim to admit business model innovations to develop.
I agree with Mr. Rozenman that regulation not only have big flaws, but the most important thing is that it is just plain obsolete. It is for the obsolete fact that I disagree with him that the debate the debate is not yet settled, as EWPC has been available for over for a year. To understand the chaotic events that explain that the debate is settled please read the Conspiracy Theory Against Mr. X.
The decade long debate between E1R2 deregulation with vertical integration regulation was a real waste of time, as deregulation California style was a real scam that was based on The BIG California LIE, letting Prof. Banks repeats again and again his proper views of the scams. Now, the fixes to deregulation with re-regulation that, for example, include backwards incremental extensions, like capacity markets and NERC mandatory requirements, are just a return to a more costly kind of deregulation. That is what worries Prof. Banks.
In a second, and more responsive, effort on Mr. Keller question “…could one of you gentlemen offer a concrete and real world solution to the problem of the consumer having his wallet cleaned out by ever increasing power costs?”, electricity under regulation – (as another way of saying it is just plain obsolete) - has been for quite some time in a NO PROFIT ZONE (see Adrian Slywosky’s book “The Profit Zone”) with an outdated business model of price controls for the end-customer, in which two intermediaries, the regulator and the utility, misrepresent the real and differentiated needs of the customers. The utility with this NO PROFIT ZONE business model has the advantage to win rate case to the regulator, making a profit only by the “consumer having his wallet cleaned out by ever increasing power costs.”
The solution to Mr. Keller problem is the paradigm shift to EWPC. One of the key things that need to be done is to remove the “native load” barrier in the new Energy Bill and adopting EWPC. Removing the barrier will allow to open the demand side and introduce competition in retail and wholesale, so that new business model innovations can be developed.
Jose Antonio Vanderhorst-Silverio 11.1.07
Customer Wallet Cleaning Problem and Solution . . . continued
To get the power industry in the PROFIT ZONE, there is a need to restructure with the aim to admit business model innovations to develop. In that respect, please read the article The Sense of Urgency for EWPC Restructuring or at least this part of the content:
Dear Professor Ramírez Orquín.
Your article [The Potential for an Effective and Timely Deregulatory Endeavor] is giving the proper emphasis for the sense of urgency on the right king of restructuring of the electric power industry, when you write: "Soaring prices together with the perception of a deteriorating service/product quality contribute to this notion. For the electric power system this trend is particularly worrisome given its vital implications to society."
I agree that “The current restructuring drive has not seemed, as some policy makers expected, to improve this condition and may have actually made it worse.” In 2004, The Cato Institute experts Peter Van Duren and Jerry Taylor recommended total abandonment of restructuring.
Electricity without price controls (EWPC) is a paradigm shift that makes the case for restructuring as explained in Rethinking Electricity Restructuring as EWPC. The new drive would make things better, as technological innovation are waiting to be integrated to power system planning, operation and control with at least six sets of disruptive technologies, as explained in The Sixth Disruptive Technology.
One of the main problems with restructuring was separating transmission from distribution to keep regulated retail together with distribution. In the article Give Engineers What Belongs to Engineers and its hiperlinks the “two dominant components i.e. the socio-normative and the technological ones, both…” will be “working harmonically.”
Prof. Banks Please let's keep this discussions without insults. Your comment about "I mean some of the things you say are amateur stuff - like your comment about banking." make me realise that you perhaps don't understand that in Regulation the Banking "amateur staff" is the resposibility of the consumer wheras in Deregulation it is part of the risk of the investors where it should properly lie. Steve Rozenman
Ferdinand E. Banks 11.2.07
I understand what you are talking about, Steve, but I wonder if you do. Even the mention of banking in the present discussion is amateur- irrelevant is perhaps a better word. Incidentally, I wrote an elementary book on international finance that you might think about looking at some day if you decide that you would like to join some of my former students on millionaire's row.
And yes, as I mentioned somewhere, I don't suffier foolishness gladly. The story of electric deregulation is right out there in the open for everybody to examine. It's a done deal. It has failed just about everywhere, and where it hasn't failed the explanation is excessive generating capacity. When that goes, then another flop. What's the point in this pretense? Maybe you should look at the letter in EnergyBiz Insider by Kimery C. Vories to see what happened in my former home state, Illinois (June 21, 2007). That sort of fiasco has, is or will take place everywhere. And I repeat: CONSUMERS WANT LOWER ELECTRIC PRICES. THEY NEITHER WANT OR NEED AMATEUR, PSUEDO INTELLECTUAL WAFFLING!. For instance a year or so ago there was some funny business in Montana that resulted in ordinary people losing thousands of dollars. They didn't have PhDs, but they immediately identified deregulation as the cause of their trouble.
Fred
Jose Antonio Vanderhorst-Silverio 11.2.07
Can we concentrate on results? I would say YES, as the knowledge required to decide that the decade old debate between great scams and the apparently lesser and more familiar customer wallet cleaning have been over has been available for more than a year.
Dear Prof. Banks, Dr. Rozenman, and other important and intelligent writers and readers,
I have learned a lot from the contributions (and to complete my research to address their inquiries) of Prof. Banks to Mr. Gould, which have accompanied me in this process for almost two years. By the same token, I have also learned a lot from others no so regular interactions with other intelligent and important writers.
I am sorry that sometimes I have been rude in some of my posts, but it is difficult for me to be as diplomatic as required. Thank you for understanding my apologies.
To go forward, I pose to all readers and writers the following question: Can we concentrate on results?
With a lot of respect, I understand that the historic processes are very important, interesting and useful, but even more important and useful, not necessarily interesting, are the results. I submit that these are the results:
1) Vertical integration regulation: wallet cleaning for customers that don’t need the average offers in their customer class.
2) Economy first, reliability second, (E1R2) deregulation: great scams, as documented by Prof. Banks.
3) Reliability first, economy second, EWPC (R1E2) re-regulation: the solution, that has recently emerged to both the customer wallet cleaning and the great scams problems, is for every end-customers to be able to choose the best service plan of the many available in the market, that will result from business model innovations without price controls under competition and prudential regulations. Great leadership is required to get EWPC implemented.
In the presentation A Generative Dialogue to Reach the End-State of the Power Industry (please hit link to download the presentation), I humbly suggested in March 2006, at Carnegie Mellon University that what is needed to go forward is to concentrate in the generative dialogue to introduce the transformation from today's situation to the end-state of the industry for quite some time, by adopting the EWPC winning market architecture and design.
Repeating, the question is: Can we concentrate on results? I would say YES, as the knowledge required to decide that the decade old debate between great scams and the apparently lesser and more familiar customer wallet cleaning have been over has been available for more than a year.
Best regards,
José Antonio Vanderhorst-Silverio, Ph.D. Systemic Consultant: Electricity
Jose Antonio Vanderhorst-Silverio 11.2.07
As there are Only Two Stable Paradigms, the electricity-regulation bill approved by Ohio’s Senate is just a new mistaken experiment under economic first, reliability second, tinkering.
Mr. Paul Wilson The Columbus Dispatch, Ohio
Dear Mr. Wilson,
On Wednesday, August 29, 2007, I wrote the article Restructuring of Ohio’s Power Industry Business. It seems that the message didn't get to the stakeholders. So, I will give a new warning to them.
Today, in the news “Electricity-regulation bill wins Senate approval,” you inform that “The bill, supported by a coalition led by manufacturers, would require utilities to prove that competition exists before moving to market-based pricing, rather than regulator-approved rates, in 2009. After tweaks in committee hearings, the bill also would require utilities to ensure that what customers pay in a deregulated system is "comparable" to rates on, 2008.”
The public needs to be aware that the approved Ohio’s Senate Bill has a big flaw: for competition to exist, utilities as we know them would disappear. For retail competition to exist there is a need to do without incumbent retailers, as the utilities need to be transformed into integrated (transmission and distribution) transportation utilities.
The central issue, however, is that the transportation utility is not a subject of congressional debate, but the subject of engineering planning, operation and control, to satisfy an ultraquality imperative, just like nuclear power plants and space flight vehicles. As there are Only Two Stable Paradigms, the electricity-regulation bill approved by Ohio’s Senate is just a new mistaken experiment under economic first, reliability second, tinkering.
In the process to allow competition, the Public Utilities Commission of Ohio should shift to prudential regulation from regulations on price controls. So one important question the House Public Utilities Committee needs to answer to go forward is: Can We Concentrate on Results? Please hit the link with the question to learn the answer.
Please forward this message to the stakeholder’s representatives.
Best regards,
José Antonio Vanderhorst-Silverio, Ph.D. Systemic Consultant: Electricity
Work out, Ohio Senate. Right on. Groovy. So another sparrow is about to fall, because proving that competition is or will take place is like proving that two plus two is equal to five. And incidentally, as long as there are increasing returns to scale in generation and transmission, competition is wrong even if it could be mandated.
Thank you José. Wake the town and tell the stakeholders.
Fred
Jose Antonio Vanderhorst-Silverio 11.3.07
Positive returns in the power industry that existed under vertical integration are now gone. New positive returns will come from business model innovations of retailers’ enterprise solutions to be developed under strong competition.
Positive Returns under EWPC By José Antonio Vanderhorst-Silverio, Ph.D.
Thank you for pointing out clearly where you understand the positive returns are in the power industry. I contend that the most important positive returns in the power industry were to be found in power systems interconnections, but they are no longer available.
Under vertical integration, which has demand as an externality, incremental costs decreased up to around 1970. From there on, an unstable period initiated in which incremental costs increased and sometime decreased. That is why Sweden’s old days of low costs and high reliability were to go away and went away, as it happened all over the world. I agree, however, things got away further than necessary for the worst, when the economy first, reliability second, movement got underway.
As incremental costs are no longer decreasing permanently, increasing returns in power systems (the combination of generation and transmission) can’t be guarantee either. Hence, positive returns have been lost in the vertically integrated industry since 1970.
EWPC restructuring brings positive returns to the power industry in the open market with demand integration at the retail level by the large reductions expected in transactions incremental costs under (information technology) Moore’s law, while the regulated transportation market assures a reliability first priority policy for a stable environment. Therefore, the positive returns come by letting the information revolution penetrate the industry.
Instead of state or EU country level regulated first generation retailers, the open market should allow horizontal integration of second generation retailers, at the federal level, in the U.S.; at the EU level, in Europe; and hopefully at the global level, all under federal, EU, and WTO, prudential regulation disciplines, respectively. The positive returns will be the result of software development on business model innovations of retailers’ enterprise solutions, as explained in The Future of the Power Industry in 2006, which I transcribe below:
The reason that “Customers are demanding more information and control over their usage,” as the authors state, is that they want to reduce their energy costs, or, better yet, to increase the value that electricity enable for them.
Deloitte Research made a Scenarios Studyand found that the "Continuity" scenario is what is expected by most companies in the next 5 years. However, Deloitte also found out that the next five years might turn out very different from the strategic plans of many companies (read utilities). The result is a very different perspective on the interdependencies of markets and Enterprise Solutions.
On one, or both, of the other two scenarios ("Tough Times" or "Rising Expectations"), instead of Utilities Enterprise Solutions, a Retailers Enterprise Solutions arrives, which will make much more business for IT suppliers than expected under the Continuity Scenario. The main reason is that current business models are at the end of there useful life, while new technology is available to be transformed into competing innovative business models, leading to true deregulation [now re-regulation] of electric markets.
What the authors are calling the “incremental change scenario,” is the same as the “continuity scenario.” However, I see a lot of progress has occurred in just one year, with the insights added by Mr. Wimberly and Mr. Shaw.
While the authors are proposing to adopt an analytical approach, I am proposing a systemic approach that goes beyond trends – pattern of behavior, “responsive” explanations, as Peter Senge calls them – to generative or “structural” explanations for the discovery of the emerging system. The change is going from a mechanistic thinking to systemic thinking.
Please join the generative dialogue, that cuts across topics, which had the latest (not lasted) insight on the EnergyPulse article: Condemned to the Fourth Quartile? by Matt Chwalowski, Principal Consultant, PA Consulting. Posted on 12.9.06. At this instance out of "Active Discussion" and out of "Highly Read." The post starts as follows:
I think I found by myself, on the website of the PA Consulting Group, the answer to my question: “Should Electricity Without Price Controls (EWPC) be considered as a new paradigm of the electricity industry?”... [see the details please in the specific article]
I think I found by myself, on the website of the PA Consulting Group, the answer to my question: “Should Electricity Without Price Controls (EWPC) be considered as a new paradigm of the electricity industry?”
In a bilingual Spanish-English comment entitled Oferta Servicio Apoyo a Renegociación Parte 2, related to a publicly presented to support a benchmarking case by a Member of PA Management Group, in the Dominican Republic. The result of the study was that PPAs negotiated on back rooms could be placed in the first or second quartile, by normalizing them with the weighted average cost of capital, which includes country risk figures. If that is true, then all the PPAs in the sample and segment were also no competitive, as explained in the following comment.
I found in the website an interesting paragraph in the introduction of the report “Viewpoint on Energy: shortages, surplus, and the search for value” of PA Consulting,” prepared by Todd Filsinger, Member del PA Management Group, to the article prepared by Edward Kee (also a member) entitled “Reaping the benefits of electricity industry reform: defining and limiting the use of price controls,” that says:
Deregulated wholesale electricity markets have come under attack for their perceived deficiencies. Edward argues that the competitive benefits of wholesale competition have never been realized because of the deleterious impact of retail market regulation and political interventions, which decouple the ultimate consumer from real-time market pricing, thwarting economically rational decisions on power consumption. He concludes that only when the retail customer is allowed to decide when and how much to consume based on the actual cost of providing that service, will the many promised benefits of competitive energy markets be realized.
I believe that the paragraph can be taken as a useful contribution to the generative dialogue I proposed earlier in the post Let's Get Out of Back Rooms to a Generative Dialogue. A generative dialogue cannot be done by looking the issues in isolation topic by topic, but as a system, cutting across topics. Please follow the links on the post.
We can also answer the question “Is competition needed in the industry?,” once we have a system where “the deleterious impact of retail market regulation and political interventions, which…” do not “… decouple the ultimate consumer from real-time market pricing,” allowing, instead of “… thwarting economically rational decisions on power consumption,” benchmarking will make sense. I believe that such a standard will be EWPC.
The above also means that the questions: “Can benchmarking help identifiy which industries are in the NO PROFIT ZONE? Is the utility industry in the PROFIT ZONE because they are taking customers for a ride?” can be easily answered, once such an efficient system is available. Please explain if the logic is mistaken!
Regards,
Jose Antonio Vanderhorst-Silverio, PhD
Interdependent (Systemic) Consutant on Electricity
Santo Domingo, Dominican Republic
Jose Antonio Vanderhorst-Silverio 11.5.07
Dear Fred,
I finally got hold of the article “Uno Lamm: Inventor and Activist,” by Catherine Wollard, published in March 1988 on the IEEE Spectrum.
As I told you earlier, Uno Lamm has been my hero because “Working on ideas outside his field, Lamm says, ‘I can enjoy the enthusiasm built on partial ignorance.’” I had learned that statement about 1980, when I started to emulate that enthusiasm which keeps me going.
In 1955, Lamm organized – and was appointed head of – the Atomic Department… Supervising what he called ‘the work of the future’ for three years, Lamm saw Asea’s first reactors go into service… Proud of the safety record of Asea-built reactors, Lamm said he raised strenuous criticism of one government design plant, which Asea found “inherently unsafe.” Eventually, construction was halted…
Under pressure from a strong antinuclear movement [about 1988, and not because of deregulation], Sweden recently decided to phase out gradually all the country’s nuclear plants, which provide half its electricity. Unsurprisingly, Lamm thinks the decision “very wrong – there is no failure of nuclear energy, but a failure of politicians.”
My conclusion on your article is that E2R1 Deregulation is a clear failure of politicians. Whether R1E2 is a magic formula or not, power markets can now be separated into a regulated controlled transportation market and an open market under prudential regulations where vibrant competition can be developed worldwide, under EWPC market architecture and design, as explained above. My recommendation for strong leadership with Uno Lamm is a Leader Role Model is to mitigate the failure of politicians.
Best regards,
José Antonio
Joseph Somsel 11.6.07
As another long time critic of deregulation, I agree with many of the professor's points. I even did my own EnergyPulse article along the same lines.
I agree that VERY few power engineers had any expectation of deregulation working to the customers' benefit. When I left a major west coast utility to attend business school, one of my projects was to evaluate California's impending deregulation effort. My conclusions were that 1) someone would make a pile of money since 2) there would be shortages causing prices to climb through the roof, and 3) that a boom and bust cycle would make electric "markets" resemble pork bellies.
I got an "A" on that project and I think history supports my professor's evaluation.
I worked as a consultant for a short while with Ontario Hydro while their prospective deregulation was being discussed. The people there were good folk but they were overstaffed and underworked. My conclusion was that OH behaved as a classic socialist enterprise in a democracy. The workers there had unionized and used their political clout to capture many of the economic benefits arising from the well-capitalized organization. A non-unionized investor-owned utility usually operates much more efficiently than unionized socialist utility.
The point about risk management. I also looked at electric options and futures in b-school. I couldn't see how they would work. Just how does one apply the concepts of backwardization and contango to a commodity that can be neither stored nor rationed?
I will note that California today imports more of its electricity than any other state in the Union. What real new capacity has been announced within the state is almost exclusively natural gas-fired. That means that too much California juice will be fueled with LNG from Russia. We talk about breaking our addiction to imported oil while craving a bigger fix of imported LNG.
I will say a good word about customer choice - I support it IF it allows customers to pay for the more expensive and less reliable renewables AND allows other customers the choice of NOT paying for them. Here in California I would LOVE to be able to choose only electricity from Diablo Canyon or San Onofre at 2.5 cents/kWhr but that is not allowed. Instead I have to pay for wind farms and solar rooftops and "efficiency" that people have not decided to buy themselves.
To paraphrase what we American used to say about Harry Truman,
"Give'em hell, Fred!"
Jose Antonio Vanderhorst-Silverio 11.7.07
As ‘the heat of combat is over, and a decision’ about EWPC can now be reached, ‘all the bitterness disappears, and people work hard to bring’ EWPC ‘to fruition in the best possible way’ to paraphrase Uno Lamm.
Thank you very much for allowing me to complete what I understood was a challenge posed to me, by our intelligent and important common friend Fred, at the end of his article, which I initially responded with the article The Magic Deregulation Formula and whose further responses are being documented under the article Response to Professor Banks.
In the initial response I said, among other things, that “… the key finding that will be at the center is that deregulation was and is based on the faulty concept "economy first, reliability second [E1R2]." If reliability first, economy second, [R1E2] is a magic formula that allows to restructure power sectors worldwide into an electric network (integrated transportation) and a money network (on the customer, retail, generation value chain), let so be it.”
As I wrote in the 2005 [seminal EWPC] EnergyPulse article An Alternative Business Case for Demand Response, “…DR is poised to be the demand side risk management tool to complement the traditional "LOLP" supply side risk management tool. There are two sides on the DR coin. On one side, system crashes are mitigated by a least cost mix of supply and demand risk management tools that may be applied in time and space. On the other, DR is the key to the segmentation of customers supply security (a kind of insurance)... Professor Schweppe ‘envisioned a world of customer-based electrical generation and storage,’ which has been happening in the Dominican Republic, for quite some time, missing only the Demand Response System and a truly competitive retail deregulation [now re-regulation] to fulfilled the dream of a country without blackouts.”
That is why, under EWPC, electricity is a special commodity that can be rationed rationally and that can be stored by individual end-customers, as they do in the Dominican Republic and elsewhere. For more details on [physical] risk management updates, please read A Futures Market under EWPC, as “The elements of a futures market under R1E2 EWPC to lead to a stable and competitive electric markets environment are explained.” Look closely on the need to “satisfy the original NYMEX electricity contracts, which require high physical reliability.”
Jose Antonio Vanderhorst-Silverio 11.7.07
Let EWPC Come to Fruition . . . continued
With respect to your experience at Ontario Hydro, don’t forget to read in detail the general explanation of the Customer Wallet Cleaning Problem and Solution, where I said that “I agree with Mr. Rozenman that regulation not only have big flaws, but the most important thing is that it is just plain obsolete. It is for the obsolete fact that I disagree with him that the debate the debate is not yet settled, as EWPC has been available for over for a year. To understand the chaotic events that explain that the debate is settled please read the Conspiracy Theory Against Mr. X.”
On that theory you could learn that “The vertically integrated utilities paradigm has been in a NO PROFIT ZONE for quite some time, letting utilities make a profit under regulation only by the “consumer having his wallet cleaned out by ever increasing power costs.” To get the power industry in the PROFIT ZONE, there is a need to restructure with the aim to admit business model innovations to develop.”
I agree that by decoupling artificially sales and profits by “costly incremental shifts away from the VIUs [vertically integrated utilities] paradigm” makes customers pay for “‘efficiency’ that people have not decided to buy themselves,” as I explained when I wrote The Sixth Disruptive Technology. In that article I discovered: “…it should have been recognized energy efficiency as the 3rd Disruptive Technology to Cross the Chasm of Geoffrey Moore’s Technology-Adoption Life Cycle model…”
Please read also Full Retail Choice Emerges to see that“ 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.”
Just like you, I am also a long time critic of deregulation that agrees with many of the professor’s points. However, instead on placing myself on the problem side, as a power engineer I have been, since 1995, concentrated on the solution side. By “Working on ideas outside” engineering, I “can enjoy the enthusiasm built on partial ignorance,” as my hero and role model Uno Lamm suggested. Please refer to “Uno Lamm: Inventor and Activist,” by Catherine Wollard, published in March 1988 on the IEEE Spectrum, here and below.
It is such a solution that evolved into EWPC, which makes the deregulation debate totally unnecessary. In fact, such debate was a completely waste of time, which could had been avoided if The BIG California LIE (hit link to read the article about that LIE) had not been enabled, as retail competition “is not only possible, but absolutely necessary to turn the electricity industry into a vibrant value added business for all stakeholders.”
In addition, in the BIG LIE article I repeated that there is a great need to consider A Vertical Integration Conspiracy Theory for the US Judiciary (please hit link also) to provide an ordered framework with which to understand that chaotic event and process.
Finally, unlike the case the HVDC Pacific Intertie, in which “it was estimated that the people in Los Angeles saved $600,000 a day when Columbia River power began to flow south,” the same California IOUs were unable to come up with their BIG LIE. Like Uno Lamm, I understand that “’Among Americans, when the heat of combat is over, and a decision has been reached,’ he says, ‘all the bitterness disappears, and people work hard to bring the final decision to fruition in the best possible way.” That has been a central tenet in my work on the development of EWPC.
Best regards,
José Antonio
Ferdinand E. Banks 11.8.07
Well, gentlemen, it looks to me as if we have made some real progress here - by that I mean admitting that electric deregulation has failed. That's all that I wanted. A few years ago I encountered people who cursed me roundly for suggesting that that had happened or could happen. Remember what Enron promised Governor Wilson in California about the amount that price would fall with deregulation. And Joseph, can you give give me the exact reference to the paper you mentioned (in EnergyPulse you say) so that I can cite it in my latest rant.
Fred
Jose Antonio Vanderhorst-Silverio 11.8.07
The new lecture on the power industry is about EWPC re-regulation. With the same old lecture, Professor Banks is correct that E1R2 deregulation is a failure.
Dear Prof. Banks, Mr. Somsel and other intelligent and important writers and readers,
Thank you Fred for the challenge of your lecture. From your response, I understand that the Conspiracy Theory Against Mr. X is confirmed.
That electric deregulation of the E1R2 kind has failed is well known and accepted worldwide for quite some time.
As documented above, and this is very recent, vertical integration with a process of customer wallet cleaning by incumbent utilities, based on an obsolete business model of utilities winning rate cases to regulators, placed the power industry from circa 1970 in the NO PROFIT ZONE and has definitely failed for even more time than E1R2 deregulation.
The more than a decade old debate between E1R2 deregulation and vertical integration has been a total waste of time for the customers and the general public. The new lecture seems to be just the same old lecture, as the fundamental elements of the EWPC winning market architecture and design paradigm breakthrough that emerged in the past two years are not mentioned at all. The new lecture is about EWPC as it is documented in its first version on www.energyblogs.com.
As a synthesis, EWPC is an R1E2 re-regulation under a structure of two interrelated markets:
(1) A controlled and integrated (T&D) transportation market, and
(2) An open market in the generation, retail, customer value chain, under prudential regulation, for generation and retail, instead of price controls for the end-customer.
The above market structure is the solution to the vertical integration problem and the way to go forward with the EWPC paradigm shift, to get the power industry into the PROFIT ZONE with business model innovations. This is the real progress.
Kind regards,
José Antonio
Len Gould 11.9.07
Joseph: "I also looked at electric options and futures in b-school. I couldn't see how they would work. Just how does one apply the concepts of backwardization and contango to a commodity that can be neither stored nor rationed? "
I believe your problem is in the final assumption above, "can be neither stored nor rationed".
Rationing:
Electricity can easily be rationed simply by exposing customers to realtime prices and providing automatic means to enable them to stop using it if prices cross settable thresholds provided EACH CUSTOMER gets to set their own threshold (eg. not subject to a single unchanging threshold set by a regulator and rarely changed, = TOU metering).
Storage:
Two points. 1) a market which deals primarily in futures, e.g. the purchase and trading of "rights / options to consume in future" acts exactly as if there were storage available provided the future time period is far enough ahead to enable changes to dispatch orders. 2) the relatively near-term introduction of direct storage (batteries on fleets of PHEV's) and alternative storage (pre-heated home hot water storage, interior bulk mass storage, secondary loops for ground-source heat pumps with insulated sections of ground mass, perhaps even overnight ice-making) actually do enable significant enough levels of storage.
The only problem with getting any of these currently economical (or nearly so) technologies implemented is having them fairly rewarded by the market. Appears to be a lot of resistance. See IMEUC blog this site.
Ferdinand E. Banks 11.9.07
About electric futures and options. Don't think about them - because if you think you might come up with the wrong answer. What you do is to go to the biggest university with the biggest finance library, and examine their volumes on finance, futures and options, etc. Then count the number of pages on electric futures and options. That says everything there is to say about that subject.
A scam! Just another of the many scams that we have to put up with these days - like electric deregulation and membership in the EU. When will people wake up? Maybe you can tell me.
Fred
Len Gould 11.10.07
Ferdinand: Why is selling an option to consume in a specific time interval on the following day "a scam"? To refresh, in IMEUC, the process is that each evening, the automatic controller estimates it's customers load profile for the following day, taking into account weather forecast, day-of-week, historic load profiles and any specific information the customer may have provided, if any. It then projects their load curve forward for the following day in e.g. 15 minute or 1 hour intervals, as kwh per interval. It then, in competition with all other customers, purchases in the LMP / SMD central market "options" (property rights) at a fixed price, to consume the required kwh, an event which happens in say 3 rounds. If, after the first round, the option settlement prices for the consumption exceed the owner's pre-set thresholds for total cost etc., then it determines if it can re-schedule any of the local loads which it controls to mitigate, and modifies it's purchases in the second or third round. At the end, it owns "options to consume" specified amounts of electricity in each interval. BUT, it is not expected that the local load profile WILL precisely match the purchased options. A simple penalty mechanism adjusts billing for actual consumption v.s. options purchased, and the way things work, normal customers who ignore their system and regularly consume above or below their options wind up paying perhaps (20% to 25%, depending on market manager / regulator settings) more than the actual wholesale payments to the generating companies. The extra payments are collected by the market manager from customer who either over or under-consume their options and applied primarily to reward / incentivize customers who do "hit" their options exactly in a period, by applying all the collections as a flat subsidy to all consumption equally across the entire market.
The outcome is simply a system to reward customer who accurately predict their load profile in advance above those who either over or under consume their predicted load profile, enabling acurate advance preparation of exact dispatch orders with minimal-to-none spinning reserves etc.. It is also natural that the market exposes the customers to exactly what generation actually costs. If a monthly peak causes the LMP market price to go to $25/kwh, then that's what customers see in advance, and that's what they pay. Result is a perfectly designed incentive to accurately predict in advance the customer's load profile.
Because customers get to pay exact LMP market prices, it also naturally rewards accurately any efforts to load-shift from mid-afternoon peakers to mid-nite baseload units. As soon as exactly enough of that has happened, the incentive will go away automatically.
So why is this a "scam"?
Jim Beyer 11.10.07
So IMEUC is like playing a game of Wizard.... :)
Does this mean wind farms get hosed because they basically have no idea when they will suddenly be producing several MWatts of power? I suppose if the elasticity of demand is, well, elastic enough, then some consumers will find added loads to use the immediate energy 'windfall' (pun intended...)
I dunno. I'm sort of on the fence with this one. I can see Fred's reason for caution. Obviously, deregulation wouldn't work without some "real-time" trading mechanism, because the commodity itself is instantaneous in nature. And real-time trading mechanisms are a relatively recent invention, needing computers and stuff. And even then, they still trade in things (stocks) that are much more easily 'stored' (via market makers) compared with electricity.
I want to respectfully disagree with Len about electricity storage. It really can't be stored. The notions you cited (heating water, making ice) are really markets of opportunity. But you can't warehouse electricity in any typical sense of the word. You are really instead finding a market.
I'm starting to think electricity has two problems. First, it can't be stored. Second, the demand is probably fairly inelastic. Neither of these allow for easy market making. On the other hand, the demand is highly dependent on the time of day (outshoot of problem that it can't be stored) and large financial value is to be had with peak shaving.
Fred, it is ok for me to at least LOOK into the abyss? It's definitely an intriguing notion.
Joseph Somsel 11.10.07
Here's the link to my earlier article - "Deregulation and Nuclear Power"
One can indeed store energy as in pumped storage facilities. They typically need 4 units input to 3 units output and capital intensive. They are few and far between and usually trade on their owner's account - typically regulated, vertically integrated utilities. I suppose one could make a MERCHANT pump storage facility and I've been approached by people intending to do just that but is sure looks like a long shot to me. I might take a consulting gig to example this in more detail.
If more pumped storage was such a great idea economically, how come we don't see a swarm of applications for new ones?
As to rationing of electricity, that is a conservative marketing assumption. The market is now all you want when you want it for residential and some commercial accounts. Bigger accounts usually have a demand charge adder but you are not cut off within the amperage of your meter and input breaker.
Some people are proposing rationing schemes where some central authority sends electronic signals to kill some of your demand. We've discussed this at some length in comments on other articles. There might be some market niche for such service but it doesn't seem to be sweeping the nation. That tells me most customers are uninterested today and will likely be uninterested tomorrow.
As to electric generation being a no profit zone, this is true and desirable. If someone offers a new generation method that is substantially less expensive than today's technology, the generators will not likely benefit except for transient profits by first-adapters. For example the first new nuclear power plants built by merchant generators will likely see profits above their cost of capital until others build competing nukes selling into the same markets (some locational profits can be made.) The inventors and vendors with monopoly powers WILL be the ones to profit and more power to them! Unfortunately, there is nothing on the horizon that I know of that would make power at costs lower than the established methods, especially those with sunk costs.
Deregulation looked good in the early 90's because of two factors - 1) natural gas was cheap and 2) new CCGT designs offered efficiencies substantially higher (lower heat rates) than existing plants at reasonable capital costs and on a short schedule. That gave incentives to those who could field CCGTs in areas with adequate gas and high electric rates.
CCGT efficiencies have plateaued and are well integrated into markets and natural gas has doubled or tripled in price. Please see the bankruptcy of Calpine for a case study.
Len Gould 11.10.07
Joseph: In interpreting your post above, I come to wonder whether you've actually understood my prior one. In what way is an absence of storage a problem for the IMEUC market? The point of it is that it EXPECTS the customer to miss-consume their options. That's just fine because all penalties for missing are still returned to the customers (though proportionately according to how good they are at actually predicting, e.g. what percetage of their pre-purchased options they actually take delivery on). And because there are no retailer markups between customer and wholesaler, the worst-case consumer who ignores the market and does nothing to shunt loads to match their options or mitigate their peaking should still wind up on average over a month paying less per month than I now pay to my Ontario retailer.
I just came from an NHL hockey game where the scoreboard at the centre of the arena is sponsored by my local energy retailer, who also sponsors an entire convention centre on the local exhibition grounds and does a whole lot of other advertising. As much as the monopoly utility in the past may have wasted money on excess staffs and gold-plated facilities and purchasing patches of Amazon Rain Forest, I still doubt that the waste was as much as this retailer now spends on promotion, which in net effect for society is also simply waste. I'd rather have overbuilt transmission and generation than have to pay the wages of some know-nothing salesperson knocking on my door at dinnertime every six months offering to "analyse my energy bills for me". IMHO, in this present de-regulation system we've done two things, one smart and one much more stupid. We've implemented market competitive forces on generation (sort of) which is good, BUT THEN gone and turned most customers over to "the retailers" (though noteably NOT large industrial customers who actually instigated the change. They purchase directly from the LMP market, don't they? Yeah, wonder why that is?)
IMEUC is designed to eliminate that sort of stupidity, which BTW the competing design on this site claims would be the salvation of everyone. What's that about?
Len Gould 11.10.07
BTW, change that to "sponsored by my FORMER local energy retailer" as of last year actually. I've now switched back to the retail arm of the former Ont. Hydro.
Len Gould 11.10.07
Jim: "Does this mean wind farms get hosed " as much as their output can be matched up to peak demand and/or certain customers may be willing to pay them a premium, they'll do well. Otherwise, not so much. Actually not much different from how they presently do under any other system, as the IMEUC market price paid to generation is intended initially to be exactly what is now paid by the LMP wholesale market to generation. They can also likely benefit from having the market manager declare them able to sell into a specially reserved "green energy" market catagory, where they may be able to exact a premium from certain buyers willing to pay a premium for that.
Regarding storage: This issue is really not relevant. Actual storage (un)availability is a non-issue because the market design simulates it.
Jose Antonio Vanderhorst-Silverio 11.12.07
A textbook on electricity without price controls (EWPC) has been in the making for quite some time. The textbook will answer the paradox, “How much system reliability can you afford?” by integrating preceding work, which will include a whole chapter in physical and financial risk management.
Thank you Fred Banks, Len, Michael, Fred Plett, Jim, Steve, Peter, Joseph, and many other important and intelligent persons, like yourselves, that have questioned or helped the EWPC market architecture and design breakthrough paradigm concepts, under this article or in other physical or electronic venues.
I am happy to tell all of you, and the general public, that I have decided to write the textbook “EWPC Theory and Practice,” since I have now come full circle with the key insight of William C. Hayes Editorial, in the Electrical World magazine of April 1st, 1978, “How much system reliability can you afford?,” which signalled very clearly the need for a paradigm shift of the power industry.
This morning, after almost 30 years of keen observations and hard work in the power industry, I woke up with a strong message that is going to be the center of the EWPC book, which fully answers that engineering, economic, social, and financial paradox, that “brought the utility industry to a cross roads,” as Mr. Hayes wrote.
Most of the concepts of the textbook are already in the GMH Blog and in www.EnergyPulse.net, while the most recent are in www.energyblogs.com, needing a strong editorial and design effort to transform it into a coherent textbook.
From what I gather from Fred insistence, on the need of a textbook that covers electric derivatives, there is a need for a textbook (not necessarily financial) to cover both the physical and financial risk management aspects of EWPC. One whole chapter of the textbook will be dedicated to it. Since my Ph.D. training is in Information Theory, where random variables and random processes are everyday work, I will take that challenge very seriously.
Readers are advised to read very carefully the recent rebuttals posted, before making any conclusions.
