Your introduction about conversational clarity on the debate of competition vs. regulation seems to be in synchonicity with the EWPC article Can the Power Industry Eliminate its Price Controls to the End Customer? The summary of the article is:

The dead-end of regulator’s capacity for price controls shows up once again, while modeling the Smart Grid business case. Under today’s EPAct, price controls are designed for simple problems, when we are facing a very tough systemic crisis. A systemic solution requires a EWPC re-regulation EPAct that deregulates wholesale and retail commercial energy transactions, while keeping regulated the Smart Grid reliable transport.

Contrary to your excellent essay, Don Giegler – a tough critic of deregulation – has claimed that the article is a “convoluted quagmire.” While respecting Mr. Giegler’s opinion, I ask for the benefit of the doubt on its conversational clarity.

I claim that EWPC market architecture and design paradigm emerged at the beginning of last year, as a result of a generative dialogue in the Energy Central Network (ECN). The ECN is like the environment and water that have recently fed the seed of the EWPC tree. I happen to be the seed, that have been taking the nutrients off the books and articles, many of which are posted in the ECN since the 1970s.

I believe that every article on the near 120 posts on the EWPC Blog can be though of as a holographic image from a different perspective of the whole EWPC market architecture and design paradigm shift. As it happens, tomorrow, the GMH Blog is three years old. I have earlier call myself the Organic Seed of the GMH, but only recently I have understood it as clear as above.

I hope that the EWPC market architecture and design paradigm gets the proper hearing from here on.

I will be on the road in the next few days.

Regards,

José Antonio Vanderhorst-Silverio, Ph.D. Systemic Consultant: Electricity Organic Seed of the GMH and EWPC

Very informative article, it should stimulate lots of discussion here. It's biggest message I think is that since our electricity industry is a very big and complex system both in material infrastructure and commerce, there will not be a simple one-size-fits-all structural or commerce change that benefits everyone everywhere the same.

If massive spending on an aging infrastructure, rising fuel prices, and global climate change now threaten our electricity system's reliability and lead to ever increasing prices, the economic pain to consumers will surely demand changes. Historically there has been little or no participation by the average consumer in making judicious choices for their electrical energy uses, nor have they had the ability to go “shopping” for energy on a daily or time-of-use basis in most places. But if they did it is well known it could have a dramatic effect on the system's economic efficiencies and costs.

Consumers generally have come to expect and do spend the effort on shopping for gasoline, and many consider fuel economy when shopping for new vehicles. It is primarily because gasoline’s price is volatile, continuously trends upwards on average making it a never-ending pain in our pocket book, and is advertised with two-foot high signs on every street corner that gives us the option of shopping for it from multiple distributors. Conversely most consumers just blindly buy electrical energy from just one seller, their utility company, whenever we turn on a switch, not giving much consideration to its effect on our utility bill or the electricity system. Electricity has been a bargain for so long that most of us simply pay our bill regularly and don't care that much about when, how much, and how efficiently we use it. Since price regulation keeps it from changing rapidly over time, and we have only one commercial source providing it to us, and it is available in almost limitless supply and is very reliable, there is no perceived need to spend time "shopping" for it.

To change the electricity system and make it more economically efficient and avoid some of the threats facing it, why not start with considering changes to the consumption end of the system first. The generation and distribution parts of the system are well understood in the fields of science and engineering, and there will always be options to implement parts of the system in different ways. If the consumer was much more engaged on the consumption side of the system, there would surely be more feedback to guide choices for changes to the other parts of the system as happens in many other areas of commerce in capitalistic market economies.

Bob Amorosi, M.Eng., Resident of Ontario Canada

Len Gould is another author on this website who has tabled a proposal for changes called IMEUC. It proposes commercial structure changes too to reach the same sort of goals but, more importantly, it gives details on how it would operate commercially, how to handle the increasing potential for distributed and renewable generation sources, and what would be needed technically for more consumer participation in shopping for electricit

1) We should be planning now for how we intend to deal with the circumstance of electrical energy replacing most current transport fuels in future. Is our current infrastructure model even able to accomodate the change? Non-competitive full regulation monopoly or fuil open real-time market for consumers? Many other issues / questions.

2) We should be planning now for the rapidly approaching, and highly desireable, condition of significant portions of end-user electricial supply being locally generated on-site or on a near neighbour's site. Natural Gas-fueled microCHP may I think be the first to upset apple carts, followed closely be economical distributed solar, both thermal and PV. The potential of this shift to dramatically influence the decisions you discuss are enormous. Are we prepared for an electrical environment where 50% of all electricity traded is generated locally in distributed generation? Certainly as Natural Gas prices rise it becomes economically infeasable to simply burn such a high-quality fuel directly in a hot water heating appliance when a properly sized microCHP unit could do the same job while converting 25 or 30% additional fuel into electricity at near 100% efficiency. And it is dreaming to assume that customers with sites which recieve enough energy to replace all their purchases free from the sun will continue to ignore that free energy when the inevitable breakthrough occurs which makes conversion economical.

Dealing with these issues should be part of the discussion. Given the present state of computer and communications technology, the solutions need not involve "customers interacting constantly (or even at all) with a realtime retail market or even a retailer-controlled one".

3) Demand response as a tool for flattening load curves down onto more efficient continuous-operation baseload units, thus eliminating costly short-run peakers and their effect on market prices. That needs to be part of this discussion as well. How will that be implemented? Paid for?

Regulator bodies need to stop utilities from wasting money on already obsolete AMI systems until all these issues are sorted out, since it is probable that the proper answer will involve significant two-way communication from each customer to the grid or market operator.

I respect, but strongly disagree with the opinion that says that "the EWPC proposal as described in bits and pieces on this website doesn't provide many details of how to implement these changes technically, and requires massive changes to the ownership of parts of the utility systems' infrastructure"

"Bits and pieces" is very misleading. EWPC is about a market architecture and design to enable competition at wholesale and retail. On the deregulation example, Item "(b) authorized competition, after a century of monopoly, still requires “regulation” for licensing, fraud prevention, access to bottleneck facilities, prevention of affiliate abuse, and assurance of last resort service" is handled with prudential regulations and market architecture and design. Under EWPC there are not utility affiliates and the transportation only utility avoids bottlenecks. Maybe that and what follows in the next paragraph is the origin of the reaction "massive changes to the ownership of parts of the utility systems' infrastructure."

EWPC is no yet about physical implementation (company vs. company competition), but about conversational clarity (market vs. market competition) to enable what the author aims: "Effective wholesale competition requires efficient retail demand signals, but those signals remain blurred when retail prices reflect embedded cost rather than current production cost. Effective retail competition requires multiple, viable entrants with economic access to bottleneck facilities; active shoppers; and the absence of unearned incumbent advantages. But the politics of retail competition often demand deviations from these principles."

Thus EWPC is a way to enable "Resist either/or, expect imperfection, show curiosity continuously. Facts, intellect, integrity and humility, not ideology. These are the paths toward "the best possible mix." In very simple terms "EWPC [is] a re-regulation EPAct that deregulates wholesale and retail commercial energy transactions, while keeping regulated the Smart Grid reliable transport."

As the competition vs. regulation generates many comments that make very difficult the conversational clarity, I prefer to concentrate on the overdue price control debate that is signaled by the question (in the EWPC article) Can the Power Industry Eliminate its Price Controls to the End Customer? (please hit the link above to get more details).

My response is part of the ongoing debate on price controls. Regulated price controls is a dead-end to the progress of the energy and water sectors in the ongoing Third Industrial Revolution.

Commercial electric service that involves the planning, operating and control for the Third Industrial Revolution is similar to that of commercial air travel that emerged in the 1930s with the DC-3. It is only when all the technologies emerged and were tightly integrated that commercial air travel became a reality. A piecemeal approach to commercial electric service is bound to fail, and fail bad.

Tinkering with fractured systems, like IMEUC, is bound to result in higher than 75% risk of failure. Integrating demand (that is now considered an externality) to power system planning, operation and control, involves recognizing that the legal and regulatory system is flawed, as it pushes regulators to make very risky bets without taking into consideration how tightly integrate all technologies. It doesn't matter how bright the regulator, they just can't face the challenge.

Jose Antonio: "Tinkering with fractured systems, like IMEUC" ?? IMEUC is revolutionary in design compared to EWPC, which is simply the existing (failed) system now used in Ontario, Texas etc. but with a very few minor modifications.

Ridiculous. How do you hope to maintain any credibility?

The center of the discussion is on the EWPC article "An Overdue Debate: Customers' Price Controls" (this article). The response fits very well that aim.

This post is self contained, so there is no need to hit the links to get the message. However, if readers want, they can confirm the reference to "...IMEUC is one close and fractured strategy, like any other experienced deregulation efforts... " (recently repeated in the article EWPC's Tipping Point,) when Len accepted to participate in the generative dialogue in 2006, under the article Playing with Fire - The 10 Tcf/year Supply Gap -- Part I, which ended when I summarized previous post with the convincing post, from which I extract the following:

"Based on mechanistic thinking, IMEUC is one close and fractured strategy, like any other experienced deregulation efforts, that suggests retaining one of the key elements of retail business model innovations – the metering function – as a monopoly. The intermediary Market Manager is designed to contract base load units based on long run forecasting under uncertainty, arising from improper market signals.

IMEUC as a switchboard intermediary is just one of the many potential business models. It is only through execution – high dynamic complexity – of the development of the resources on the demand side that the potential will be realized. Other potential business model innovations won't be able to be developed if IMEUC is unfairly and prematurely selected, by giving it market power over other intermediaries. It is no correct to assume how customers will behave – and evolve - beforehand. Instead, there is a need for a customer orientation.

While incremental costs might become negligible, sunk costs might be comparatively prohibitive for all customers. As a "right" solution, IMEUC becomes a strong barrier to emergent – high generative complexity - creative destruction. The best way to find out what the real overhead costs will be is in Phase Two with the right strategy and flawless execution under competition."

Len ended that generative dialogue participation retracting (since then, he has retracted many, many other times) with: " Jose Antonio: Your cogent discussion raises some issues with IMEUC which I hope to clarify in a third article in the series here on EnergyPulse in perhaps a couple of weeks, provided I can submit it up to the high standards of the editorial staff. Thank you."

I can see no way for EWPC to ever get customer prices down to where they would start with IMEUC, and IMEUC still maintains very strong competition incentives where it matters, which is among competing generating companies, and among competing providers of Demand Management and Efficiency systems providers. EWPC retailers would be hurting their gross sales by taking any effective steps in those directions, esp. Efficiency, and would never do anything useful.

There are many examples in other industries where it has been proven that "middleman" retailers result in higher prices to consumers as compared with being able to purchase a product directly from a manufacturer.

Competetive retailers on EWPC replace two middlemen for the customers: the regulator and the regulated retailers (utility enterprise side) of the utility. Several market segments might develop with business model innovations. By lacking demand integration to power system planning, operation aqnd control, IMEUC market manager is a retailer that makes very large risks on long term contracts together with the regulator.

Instead of a unique, universal (all customers need to participate), "perfect" market business model on a state jurisdiction to be enabled by a highly risky regulator bet on IMEUCs technology, EWPC market architecture and design paradigm allows for a diversity of business models that allow retailers to compete on the whole federal juristiction (as soon a the EWPC EPAct is enacted.)

An interesting approach, Scott. What would you say shows evidence of effective competition? That same evidence would seem to be necessary to support affirmative answers to the very pesky question 2 you pose above, if one assumes economies of scale and scope are sufficiently low. What, by the bye, is "sufficiently low"? Perhaps some of us are being a bit too strict about "confronting practice".

I would amend "too strict" as either "too shortsighted" or, worse, "too willing to waste others resources when 'confronting practice' ". You will, of course, have to refer back to Scott's article for his question 2, but that should be no problem for a master of re-entrant references.

On page 8 of the article “Rethinking Electricity Restructuring,” Peter Van Duren and Jerry Taylor, wrote that “…the pursue of innovation and dynamic efficiency (how to organize a business) is as important – if not more so – than the pursuit of static efficiency (how best to deliver a service within a set organizational structure). Market agents are simple far better at discovering innovative organizational structures, manufacturing practices, product lines, pricing regimes, and retail service arrangements than are state regulatory officials or the incumbent monopolies they regulate.”

Please recall the article Rethinking Electricity Restructuring as EWPC to see that “Strong EWPC market architecture and design recommendations to restructure worldwide electricity markets, supersede those proposed in 2004 by Peter Van Doren and Jerry Taylor of the Cato Institute by resolving the "previously unknown" problem created by a flawed deregulation. Those recommendations are developed to support slicing the last of the regulated monopolies with a strong sense of urgency.” Recall also that Fred Banks are based only on that flawed deregulation.

Enabled by the EWPC market architecture and design paradigm, effective competition is economically desirable, as EWPC introduces dynamic efficiencies with 2GRs that will develop business model innovations for the corresponding market segments.

Don Giegler on 1.3.08

Jose,

I think you'd better hurry up and find those resources because the longer you make unsupported assertions like: " It was precisely the large capacity investment and the end of power system economy of scale that led to the restructuring efforts…"

Jose Antonio Vanderhorst-Silverio on 1.3.08

The assertion "It was precisely the large capacity investment and the end of power system economy of scale that led to the restructuring efforts" is supported by the Cato Institute 2004 report statements. Van Duren and Taylor statement was "Electricity restructuring was initiated in the 1990s to remedy the problem of relatively high electricity costs in the Northeast and California... Economist wanted reform to eliminate regulatory incentives to overbuild generating capacity and spur the introduction of real time prices." (Please see Rethinking Electricity Restructuring as EWPC).

Under EWPC, economies of scale and scope will be the result of shifting from state jurisdiction of regulated “static efficiency” market business model to federal jurisdiction for 2GRs market business model that will enable competitive innovations under “dynamic efficiency.”

Economies of scope are highlighted in the EWPC article Breakthrough Suggestions for Today's Utilities Environments, whose summary says: “Business model competition for retail services is the key to a breakthrough in utilities services. Economies of scale and scope of electricity, gas and water will enhance their business models. The general public should be aware of the harm of extending utilities business model of winning rate cases to the regulator as we enter the Third Industrial Revolution.”

The problem with the deregulation policy was the large systemic diseconomies of scale (see the three problems below) that led Van Doren and Taylor to “recommend total abandonment of restructuring.” See the EWPC article Rethinking Electricity Restructuring as EWPC, from where I copy the following:

EWPC restructuring with its R1E2 (Reliability First, Economy Second) priority will remedy such problem while satisfying economist wants and enabling maximum social welfare through an open market in the generation, retail, customer value chain under prudential regulation. For details please read Free Market and Central Planning, Under R1E2 and Engineers Needed for Lower Prices.

In the conclusions of the [Van Doren and Taylor] paper, it is stated: “While restructuring does not have quite as bad a record as the anti-market factions would maintain, it has created problems previously unknown in the electricity industry. Those problems generally arose because electricity restructuring:

o Focused on generation competition and ignored the pricing and incentives issues involved managing the transmission system and its public commons characteristics. o Grafted a relatively free wholesale market onto a heavily regulated retail market; and o Established artificial market institutions that invited manipulation and abuse. The end result has proven far from satisfactory."

Those "previously unknown" problems arose because of the non-trivial nature of the vertically integrated utilities (VIUs) paradigm which is preserved under EWPC with R1E2, which is one of the important discoveries which I claim to have made with EWPC. Please read also Only Two Stable Paradigms.

“The poor track record stems from systemic problems inherent in the reform itself,” was the argument that led to Van Doren and Taylor to “recommend total abandonment of restructuring.” I agree with their conclusions about restructuring with E1R2 priority. As the systemic problem is solved under EWPC by R1E2 ultraquality transportation, as it gets implemented by a system engineer in charge of short run and long run systemic risks, the argument doesn’t hold as systemic issues disappear.

The paradigm shift to EWPC is a breakthough that is not resolved by extending the VIUs paradigm adding that "Smart electrical meters hold the key to lower costs, and increased reliability," as Burnett and Shurtleff wrote. As can be seen in The Sixth Disruptive Technology, the automated metering infrastructure (AMI) is just one of the disruptive technologies that need to be tightly integrated into a superior systemic solution in the coming years under the electricity without price controls (EWPC) market architecture and design. The problems Mr. Rawlingson identifies can be solved with the smart grid disruptive technologies as explained in the article Solving Smart Grid Cost Recovery.

The conclusion is that there is now a sense of urgency to introduce competition policy under EWPC in the power industry is strongly supported in the article Slicing the Last of the Regulated Monopolies.

Given that VI has outlived by about two decades its useful life, it is very important that … you take into consideration how the fuel feedback mechanism operates in the pure VI. As fuel costs increases, customers pay the increment, with no reduction of fuel consumption at all…

In the deregulation paradigm, fuel costs increases lead to an amplification of fuel use, which means that there is a perverse incentive to use more fuel. That is one way to see the scam, because as costs increases, reliability decreases too, making customer expected costs to raise a lot.

Finally, in the EWPC non-trivial paradigm as fuel costs increases lead to a mitigation of fuel use, as demand is no longer an exogenous variable. This results as demand elasticity is increased with the development of the resources of the demand side.

Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer.

Would you say regulator pressure is a price control, Jose?

The Power to Choose website in Texas has the following conditions: "A fixed electricity rate will generally remain the same throughout the term of a contract (with minor exceptions) and a variable electricity rate can go up or down based on the monthly changes in the electricity market. If you choose a plan with a long contract period and a fixed rate, you will have certainty that your price will not change during that time. While this may help your household budgeting, if market prices fall you may have to wait until your contract expires to enjoy a lower price."

If there were no exceptions, regulator pressures can be read as doing their job until the contract expires. If there were legal "minor" exceptions to allow for the price hike the regulator would not be able to pressure.

Demand integration to power system planning, operation and control is where the breakthrogh EWPC market architecture and design paradigm new economy of scale is available at the federal level with market business model innovations. The result is maximum social welfare.

Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer.

Lens’s question about how to finance peak reductions in a competitive market is easily answered. The cost of generation alone is so much higher during peaks than at night that IF the cost differences were reflected in rates a standard part of commercial AC systems would be gas chillers and/or ice storage. The problem is how to get the regulatory rates replaced with economically efficient rates. By the way, the way things like that have happened in other industries is through the introduction of new retailers who are skilled at introducing change.

Finally, there is one additional refinement I think Scott Hempling would have done well to have included in his article. It is easy to demonstrate that a mature competitive system is more efficient than the regulatory system we have in the U.S. The big problem the electric industry faces is the same one faced by eastern Europe at the end of the Soviet era: How to transition from inefficient central planning to a market system? There is no systematic paradigm for such a transition. The transition is necessary, but cannot be fair to everyone along the way. I think a refined discussion requires not only a description of a viable market structure in the new end state. It also requires a distinct description of the phases proposed for getting from here to there. The countries in Eastern Europe have had varied success with varied approaches. Perhaps we should study them to inform ourselves about such transitions. The extent of central planning in the electric industry today is more akin to that of Eastern Europe's past than other industries in the U.S., such as transportation, that have gone through deregulation.

Thank you for your post.

The idea of introducing retailers to compete with incumbent retailers, aka structural separation, has been found to be dead end for regulators, as they are already making incredible bets on market business models.

EWPC is different from the English system and is based on recent insights that call for the tight integration of transportation (transmission and distribution) to enable the smart grid as a separate controlled market from the open (retail and wholesale) commercial transactions market. So, under EWPC there are no incumbent retailers.

The analogy of the transition from Soviet era is great: "How to transition from inefficient central planning to a market system?" However, conversational clarity demands that under EWPC is just for the commercial transactions market, and not for the central planning of the transportation market. The transition should start with a EWPC EPAct.

"Lowest cost electricity generation" [lacks conversational clarity of a concept that seems to be true and non-trivial] is a good statement to get many readers on the same page. It is also good for Joseph, because his "reality check" that I quoted above is mistaken and it also stresses even more that he might not be representing ordinary folks well. I repeat, Joseph Rosenthal said before: "It is better to just do one big thing, in my view, like build a nuclear plant, and then do your best to regulate the cost using traditional rate principles. If you try to do 10 good small things, you'll wind up doing 90 bad small things for campaign contributors. That's the reality check."

The idea of a system with just one big thing is very, very costly, because the parts are unreliable and the load is variable. That is why peaking units are required [under vertical integration] and they are the marginal units.

Lowest cost electricity generation does not make any sense to a system engineer, nor to the end customers that pay for it. As an old system planner, I will tell facts and the origin of the idea.

Under vertical integration, systems engineers made long run least cost expansion plans and as a result came up with a generation mix adapted to the forecasted long term demand. Such optimization was to minimize the costs of investments, operation, maintenance and outages [of the whole power system for many years] to produce reliable electricity.

To produce reliable electricity is a property of the whole system not of the parts. To have 24 hours of loss of load probability [in ten years] - as many systems were designed - generation reserves of 20 or 25 percent resulted for many systems.

I read that PJM had recently more than 30 percent reserves. That is one of the main reasons that demand response is not attractive, because it makes obsolete a lot of generating units.

That is also why retail customers get rates which are way above the cost of base load generation. They [PJM] have a lot of coal units, but ask what is the retail rate residential customers are paying for.

Hydro and nuclear seems a good mix. However, with a very uncertain future demand and with a lot of climate changes working out, I would not bet on it and have some gas installed. Or better yet, [under EWPC] I would develop the resources of the demand side to integrate it as active demand, or said in other words develop an effective rationing system [what I later called rational rationing] or still in another way change demand from inelastic to elastic. [The EWPC breakthrough economy of scale from 2GRs comes from demand integration to the whole power system in planning, operation, and control, and not just by retail which is only a part]

Sorry for the class. But I fell it was needed for some of the people posting their ideas without sufficient understanding [change “without sufficient understanding of” to “lacking conversational clarity about”] electric power system planning.

In my first post above I wrote “I hope that the EWPC market architecture and design paradigm gets the proper hearing from here on.” More than 30 posts have been written under your fine article and it seems that the hearing produced enough conversational clarity.

You started your article by quoting A. Kahn, The Economics of Regulation: Principles and Institutions, Vol. I, Introduction at xxxvii; Volume II at 114 (1970; 1988 edition), that says "central, continuing responsibility of legislatures and regulatory commissions [is] finding the best possible mix of inevitably imperfect regulation and inevitably imperfect competition."

To complement your quote and the proposed statement “Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer,” below you can find an specific guide in an update of the EWPC article Ohio Should Focus on EWPC, in reference also to Alfred E. Kahn and the other prestigious economists Paul L. Joskow, William W. Hogan, Peter Cramtom, Howard J. Axelrod and Vernon L. Smith that signed the June 26, 2006, Open Letter to Policymakers.

The conclusion of the letter states: “… despite the recent increases in electricity prices, policymakers should stay the course and continue to support restructuring and the evolution of competitive wholesale and retail markets for power. Competition is the very foundation of our nation’s economy. Competitive electricity markets are relatively new and will continue to evolve. We urge policymakers to focus on making the necessary improvements in market design and resist the temptation to reject competition for a return to heavy-handed regulation. We are persuaded that competition in electricity markets will stand the test of time and continue to provide visible customer benefits.”

It is important to highlight the suggestion to “… focus on making the necessary improvement in market design and resist the temptation to reject competition for a return to heavy-handed regulation,” since EWPC market architecture and design emerged as the key to such improvements.

[We could generalize that some utilities are stating that] “… if we fail to preserve the market-based option for utilities and customers, we create a number of legal problems that won’t easily or quickly be resolved.” Such argument, however, contradicts the conclusion of the prominent economists, since the utilities grid and enterprise need to be separated to make the necessary improvements to allow competition to emerge in the enterprise without incumbent retailer.

Regards,

José Antonio Vanderhorst-Silverio, Ph.D. Systemic Consultant: Electricity Organic Seed of the GMH and EWPC

The fact that doing that transition through retailers is the only model which has been tried to this point doesn't mean it is the only possibility, especially since most if not all current attempts at that transition are in various stages of failure. The proper method of transitioning is to open up the (present) wholesale market for all customers to participate, and provise each customer as part of their basic service with an automated agent which will act for them in their interests, in that market. Independent companies can then compete to provide a) better agents, b) services which can help customers load-shift from peak to off-peak c) efficiency services d) distributed generation CHP equipment e) etc. etc.

This would enable a fair and equitable transition, and be fair to everyone along the way, provided provision is made to reimburse incumbent VIU's for any REAL losses incurred due to poor regulatory decisions made prior. All other entities (competitive generation, any incumbent retailers with long-term supply contracts,, etc.) can simply participate in the new market at the point which most suits their resources.

Readers need to concentrate on all the post above on one thing: the basic debate underneath the explanations is that of the overdue price controls. Regulators should not be allowed by legislative action to make the technology bets they are currently doing.

Competetive retailers on EWPC replace two middlemen for the customers: the regulator and the regulated retailers (utility enterprise side) of the utility. Several market segments might develop with business model innovations. By lacking demand integration to power system planning, operation and control, IMEUC market manager is a retailer that makes very large risks on long term contracts together with the regulator.

Instead of a unique, universal (all customers need to participate), "perfect" market business model on a state jurisdiction to be enabled by a highly risky regulator bet on IMEUCs technology, EWPC market architecture and design paradigm allows for a diversity of business models that allow retailers to compete on the whole federal juristiction (as soon a the EWPC EPAct is enacted.)

"It is easy to demonstrate that a mature competitive system is more efficient than the regulatory system we have in the U.S."

Seems to presume you've answered Scott's question 2 and have shown that "...economies of scale and scope sufficiently low that competition will not damage 'static efficiency' ". I, for one, look forward to demonstration of your claim, preferably in the present or past tense.

Don, as I am sure you know there is no definitive proof that will satisfy everyone as to the merits of centrally planned systems vs. market systems. But if central planning really worked we would be emulating the successful Soviet Union on a broad scale, and China’s market reforms would be a huge failure. The failure of central planning in the electric industry can be seen in the abysmal utilization rates of generation and delivery systems as compared with competitively organized industries. Electric generation, transmission and distribution are highly capital intensive and one of the major criteria in capital industries is capital utilization. We get an F. A micro analysis shows that technologies such as ice storage and gas AC are highly economic, but regulatory pricing hides that truth from decision makers. Politically driven, anti-economic retail prices may be the largest unavoidable Achilles heel of regulation. Jose points to a central planning system that implicitly assumes retail prices are optimal, and minimizes costs on only one side of the meter. Having participated in that planning system I thoroughly understand how much the omission of considering changes on the customer side of the meter limits the ability of utility planning to achieve decent results at a societal level. Time and space do not allow a complete list of the industry’s failures and the alternatives. But some of those who post here have laid out skeletons of more viable market based approaches.

There are no restrictions on market business models to bridge generation and customers. If there are middlemen that are not retailers let them compete on the federal market without state regulators needing to make bets. Once again, “Readers need to concentrate on all the post above on one thing: the basic debate underneath the explanations is that of the overdue price controls. Regulators should not be allowed by legislative action to make the technology bets they are currently doing.”

Dick wrote "Jose points to a central planning system that implicitly assumes retail prices are optimal, and minimizes costs on only one side of the meter," introducing conversational obscurity.

In the first post under this article says “A systemic solution requires a EWPC re-regulation EPAct that deregulates wholesale and retail commercial energy transactions, while keeping regulated the Smart Grid reliable transport.” I don't think anyone has participated on the EWPC mixed market system that only emerged last year.

Under EWPC, the transportation utility has a responsibility to transport that minimizes the investments on T&D taking in consideration the power system as a whole. Such least cost expansion of transportation enables maximum social welfare in the open market.

During real time operation, the system operator has complete control of the whole power system as supply and demand is committed. All commercial transactions at retail and wholesale are done in the open market on both sides of the meter. The open market and the central planning mutually reinforce each other.

My premise is we need to get regulators out of the business of setting up price tables and into the business of setting up competitive markets.

Only with the advent of current state-of-art digital electronics has a real solution to that problem become available. A smart computer agent working full-time for each customer to optomize their purchases and consumption by interacting with a computerized regional market solves the problem, and is in fact the only possible solution. Putting lipstick on corner gas station operators and calling them pretty "electricity retailers" doesn't make them so, and I've seen no system proposal, including EWPC, which provides and market-based incentives to change that.

Once the regulators implement an intelligent

As NERC is now enforcing mandatory requirements, such least cost expansion plans are not being done. When I wrote in my last post "minimizes the investments on T&D taking in consideration the power system as a whole," what is meant is the same expansion plan, but for only making decisions on T&D. As demand gets integrated to power system planning, operation and control, the expansion plans can be modeled for demand, generation and T&D for every control area.

Any proposed "system" which doesn't explicitly show how it integrates all these items into it's system of grid management, is not a real system. What incentives will customers with a micro-CHP furnace see when grid frequency drops 0.5%? When grid voltage falls in one neighbourhood? or rises? etc. etc.

"Since every other industry except water delivery seems to do better with a market based approach approach then must be capable of doing better too with a market paradigm. It takes a real pessimist, or ignorance of how far short the electric industry falls in efficiency, to believe that we cannot surmise that the answer to Scott's question 2 is settled."

Since we are assigning grades here, let me congratulate you on an "A" for expert application of what used to be known as the "fallacy of composition" (minus the water delivery white crow) and answer evasion. In my opinion, comparison of economies of scale and scope achieved by regulated VIUs not suffering from restructuring to the centrally planned economies of the former U.S.S.R, et. al. is not an answer. Nor is market reform in China. Nor is a litany of industry failures and lessons learned. I believe we've gone around and around on this question before and I've stated application of some of those optimization techniques promoted by Rand Corporation in the '50s and '60s for airline scheduling and trajectory optimization might improve the "abysmal utilization rates of generation and delivery systems". But competitive electric retailers to eliminate "spinning reserve" and provide economic retail prices? Where? Now how far short do regulated "unrestructured" VIUs fall in efficiency and what measure do you propose that will show how that shortfall is or has been overcome by "more viable market based approaches"?

As many of the customers become prosumers (producers and consumers) they are suppliers with there own rights. As consumers invest to become prosumers they, as a whole new class of investors, would spend billions of dollars, which makes available a great opportunity to coordinate the savings that would lead to the maximum social welfare for the whole power system with demand now integrated. In order for each customer to know how much to invest in energy efficiency, in demand response, in distributed generation, etc., a middlemen is required to coordinate the process to the breakthrough demand integration.

The point is that it is not just a short run problem, but more importantly also a long run problem that requires all the coordination savings that can be extracted in the most effective and efficient way. Second generation retailers will integrate the resources of the demand side to the power system planning, operation and control to produce the necessary economy of scales and scope on the federal jurisdiction.

State regulators and a business model based on short run activities are thus very limited. The idea that all of the activities to service customers can be programmed in a computer is faulty, since individual customers have their own perceptions of the service they need, which are subject to change as customer get to experience innovations as they arrive.

Now readers can see how people get ignored to come up with “Once the regulators implement an intelligent computer-based competitive market for ALL customers to buy from AND sell into, and then concentrate on managing the rules in order to keep the grid up and running, then we'll have a solution… It IS a large software project, but the requirements are easily identified and stated, so in fact does not require a lot of competitive market input to develop, and what works for region A also works for all other regions. It's a problem which belongs with the regulators not some disparate bunch of retailers competing on false marketing department parameters.”

That was precisely the mistake of many reengineering projects that forgot to understand that people do not behave as machines do. The toll was 75 percent of project failure. William Isaacs wrote in the page 186 of his book “Dialogue and the art of thinking together,” that “despite growing to a $51 billion industry, the reengineering movement ‘ignored people,’ which is to say, it ignored the systemic effects that the interaction between people create within organizations.”

The response to Don can be found in the above post that also supports your statement "I have not seen examples of automated interfaces between retail customers and producers in any industry that I can think of. I suspect that is due to specialization of skills. Those who are best at large scale production are not the best at devising interfaces for retail customers. So the role of devising interfaces for retail customers would seem to fall to entities we could call retailers. Having one mandatory design has yet to work anywhere, so it seems that we will need competing interface designs."

No system that is applied only on the utility side of the meter can cure the biggest problem in the electric industry – customers optimizing to misleading retail prices. Unfortunately, regulators are proving incapable of fixing their prices. The same problem existed in transportation to a lesser degree until Jimmy Carter appointed commissioners who ordered staff to LET change happen instead of trying to make change happen. The regulatory problems in the electric industry are much more extensive than they were in transportation. That makes it very easy to point out on a micro scale how to improve efficiency by removing the influence of regulators. When macro and micro analyses reach the same conclusions that increases confidence in the results.

Unlike purists such as Jose, I tend to think we should phase in deregulation. That will allow people like yourself see what it can do, and early market experiments in new arrangements can be done by those volunteering to participate without disturbing your grand mother’s equanimity.

Sounds reasonable to me. Now all you have to do is find a bunch of folks with a helluva lot more money a helluva lot less sense than grandma!

I will tell you where we agree and where we need to inquire further on your last post.

We agree that “Regulated rates misrepresent the costs of providing service. Therefore, we find customers installing equipment that makes sense given the rates, but that often is clearly not the economic choice when both customer and utility costs are taken into account… Unfortunately, regulated prices are so misleading that it is impossible to correct the effects of bad price signals on a significant scale. This is what is depressing capacity utilization and it is limiting our ability to reduce air emissions as well … No system that is applied only on the utility side of the meter can cure the biggest problem in the electric industry – customers optimizing to misleading retail prices” In a sense, we need a way to maximize social welfare.

We also agree that “Unfortunately, regulators are proving incapable of fixing their prices. … The regulatory problems in the electric industry are much more extensive than they were in transportation. That makes it very easy to point out on a micro scale how to improve efficiency by removing the influence of regulators. When macro and micro analyses reach the same conclusions that increases confidence in the results.” That is just another way of saying “Readers need to concentrate on all the post above on one thing: the basic debate underneath the explanations is that of the overdue price controls. Regulators should not be allowed by legislative action to make the technology bets they are currently doing.”

Both of those agreements suffice to support the statement “Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer.” Next this is where we differ. I suggest that we dialogue to inquiry to get in balanced with advocacy. Your comments are invited for a generative dialogue.

Phasing in deregulation is to enable the E1R2 policy (see earlier posts and their links), which leads to a systemic crisis (when the power system gets into its limits on E1 events that disrupt R2 – most price spikes are correlated with low reliability - like that of the 2003 blackout arise that reduce stakeholders confidence) and as a result a vicious circle. All the complexity introduced for example by capacity markets and NERC mandatory requirements need to be dismantled by going back to the essence which is on what EWPC is based on.

One of the most important benefits of the EWPC approach, which you consider purist, is the R1E2 policy. See on my post of 5.19.08 that Van Doren and Taylor “… ‘previously unknown’ problems arose because of the non-trivial nature of the vertically integrated utilities (VIUs) paradigm which is preserved under EWPC with R1E2.” In practice, the implementation of the open and the closed ideal markets reference will be impacted by the reality of its approximations.

The R1E2 policy is required to develop a futures market, which is not possible with the E1R2 policy, as just one critical event might disrupt them. The futures market will be enabled by the smart grid transportation only utility. Instead of the vicious circle that the E2R1 policy produces, the systemic interaction of the open and closed market should aim to a virtuous circle.

Regards,

José Antonio

For the directors of the utility companies, deregulation was an answer to their prayers. This was OK with me, because to my way of thinking these directors were underpaid. What was not OK was that the largest utility/generator - Vattenfall - immediately turned their attention to Germany, and so when the ignorant politicians in Sweden began a nuclear retreat, the big generating companies didn't bother to protest. Why should they: supply down, price up, and besides, they preferred to work in Germany rather than Sweden.

Will deregulation lead to an efficient market system? As I have pointed out a couple of dozen - or more - times in this forum, if you really believe that you should read the last half of your favorite intermediate microeconomics textbook. If you did read it, and understand it, you would find out that the answer is NO. That, gentlemen, is the bottom line, and I hope that somebody here remembers it when these crazy deregulation experiments once again receive the kiss of life.

Fred

What Fred wrote is only for you. That is what the Cato Institute came up with. No more deregulation experiments should be allowed.

EWPC will lead to a non-real time efficient retail and wholesale market system. The real-time market is a controlled transportation only market that is developed at least costs transportation for the whole system with demand integrated.

R1E2 non-triviality is based on the last half of the microeconomics textbooks. Stock and flows of supply and demand committed in time and space is the key to solving the "previously unknown" systemic problems of deregulation.

Grandma concurs.

SPIKE IN ENERGY PRICES PROMPTS EMERGENCY PUC MEETINGTexas regulators have called an emergency meeting this morningafter unexpected spikes in wholesale energy prices began drivingup rates charged to Texans who have been involuntarily switched toother electric companies. - (Knight-Ridder)--> http://www.energycentral.com/global/news_text.cfm?id=10394222

Jose,

Do you think EWPC will be easily sold to Robin Williams?

That is a great example of the E1R2 policy fueling a systemic crisis that reduces stakeholders' confidence, which is also for Dick to explain deregulation to Robin Williams. I repeat what I wrote to Dick without getting a response yet:

... those agreements suffice to support the statement "Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer." Next this is where we differ. I suggest that we dialogue to inquiry to get in balanced with advocacy. Your comments are invited for a generative dialogue.

Phasing in deregulation is to enable the E1R2 policy (see earlier posts and their links), which leads to a systemic crisis (when the power system gets into its limits on E1 events that disrupt R2 – most price spikes are correlated with low reliability - like that of the 2003 blackout arise that reduce stakeholders confidence) and as a result a vicious circle. All the complexity introduced for example by capacity markets and NERC mandatory requirements need to be dismantled by going back to the essence which is on what EWPC is based on.

One of the most important benefits of the EWPC approach, which you consider purist, is the R1E2 policy. See on my post of 5.19.08 that Van Doren and Taylor "... 'previously unknown' problems arose because of the non-trivial nature of the vertically integrated utilities (VIUs) paradigm which is preserved under EWPC with R1E2." In practice, the implementation of the open and the closed ideal markets reference will be impacted by the reality of its approximations.

The R1E2 policy is required to develop a futures market, which is not possible with the E1R2 policy, as just one critical event might disrupt them. The futures market will be enabled by the smart grid transportation only utility. Instead of the vicious circle that the E2R1 policy produces, the systemic interaction of the open and closed market should aim to a virtuous circle.

On 5.20.08 I wrote the concepts to easily convince Robin Williams:

Given that VI has outlived by about two decades its useful life, it is very important that … you take into consideration how the fuel feedback mechanism operates in the pure VI. As fuel costs increases, customers pay the increment, with no reduction of fuel consumption at all…

In the deregulation paradigm, fuel costs increases lead to an amplification of fuel use, which means that there is a perverse incentive to use more fuel. That is one way to see the scam, because as costs increases, reliability decreases too, making customer expected costs to raise a lot.

Finally, in the EWPC non-trivial paradigm as fuel costs increases lead to a mitigation of fuel use, as demand is no longer an exogenous variable. This results as demand elasticity is increased with the development of the resources of the demand side.

Since we have achieved conversational clarity, the power industry can eliminate its price controls to the end customer.

As a result, Austin rates will make customers pay the fuel adjustment clause, while National Power was unable to charge more than their fix rates that they were unable to finance when wholesale prices were amplified (by the lack of demand elasticity mixed with marginal costs). In fact, from his experience in other commodity markets, Robin Williams will easily understand that introducing demand elasticity would result in lower prices relative to those of Austin's. I think that by now every reader should accept that Dick will not respond anymore. As simple as that.

Conversational clarity on the above post enables a movement to stop regulators by legislative action from making the technology bets they are currently doing by introducing the EWPC EPAct.

To refresh readers on the EWPC EPAct, they should consider again the EWPC article Leadership Answers What to do First. The article's summary says:

The answer to the question of what to do first is for the global power industry to get out of the wrong jungle to produce a EWPC based EPAct as soon as possible. That is the kind of leadership needed to face the inevitable fundamental changes required to significantly reduce today’s legislative and regulatory uncertainty.

"In fact, from his experience in other commodity markets, Robin Williams will easily understand that introducing demand elasticity would result in lower prices relative to those of Austin's."

At least Dick allowed for the existence of precisely one white crow.

Once again Jose, I see your idea of clarity misses just what the opposite to a remedy for high electricity costs is. As I remember, the opposite required federally imposed price limits. Just another indication, Jose, that demonstrates "power system economy of scale" before restructuring was "alive and well". I've got to hand it to you, though, the idea that someone beside the consumer will bear increasing fuel costs is unique. Of course, there's always "rational rationing". I'm sure Robin would be glad to pay a higher rate for using less electric energy.

(QUOTE) application of some of those optimization techniques promoted by Rand Corporation in the '50s and '60s for airline scheduling and trajectory optimization might improve the "abysmal utilization rates of generation and delivery systems". But competitive electric retailers to eliminate "spinning reserve" and provide economic retail prices? Where? Now how far short do regulated "unrestructured" VIUs fall in efficiency and what measure do you propose that will show how that shortfall is or has been overcome by "more viable market based approaches"? (/QUOTE)

In order to confuse readers, now Don adds “the idea that someone beside the consumer will bear increasing fuel costs is unique.” Demand elasticity reduces marginal costs and the most expensive generating units of VI don’t need to get dispatched or better yet considered at the planning stage, as economies of scale of VI are long gone. Conversational clarity stands as nobody else needs to bear increasing fuel costs.

Fuel use mitigation is possible by the development of the resources of the demand side as retailers integrate demand to power system planning, operation and control. It is at the planning stage that generation and transportation investments can be reduced to satisfy customers demand.

Retailers’ main job is to integrate demand to power system planning, operation and control. That is the breakthrough fueled by the Third Industrial Revolution to increase scale at the federal level. The process of such integration requires retail marketing and customer education.

UTILITIES TRY TO AVOID DISCONNECTIONS: RELIANT, TXU OFFER ALTERNATIVE PAYMENT PLANS AND WAYS TO STAY COOL

Some Reliant Energy customers who cannot pay their bills may avoid having their electricity disconnected this summer if they participate in a recently announced program. - (Knight-Ridder) --> http://www.energycentral.com/global/news_text.cfm?id=10406785

Is this what you had in mind for "demand response"? Or is it "rational rationing"? Or "...a way to maximize social welfare..."? Apparently for demand in Texas to become elastic the "virtuous circles" need cooling centers. To what level will rates decrease as the cooling centers are utilized?

In my opinion, the key questions that remain unanswered are:

But competitive electric retailers to eliminate "spinning reserve" and provide economic retail prices? Where? Now how far short do regulated "unrestructured" VIUs fall in efficiency and what measure do you propose that will show how that shortfall is or has been overcome by "more viable market based approaches"?

Also skip the "R1E2 non-triviality" , Jose, and try to answer, "Which rates would you say are suffering from Dick's 'misrepresented costs', Robin's or Austin's?"

As the impact of demand elasticity starts on the planning stage, demand elasticity takes time under clear and simple market rules like the EWPC market architecture and design paradigm. Had the USA started to develop the resources of the demand side 20 years ago, when Fred C. Schweppe lead the research on spot pricing at M.I.T., demand elasticity development would had avoided those investments in high marginal cost generating units. Had Texas deregulation, which started about 6 years ago, consider EWPC market rules that provided incentives for demand elasticity an integral part of its development, the issues being discussed would have disappear.

Since Texas retailers have not done the homework that takes time, for lack of EWPC, the idea that letting "critical-care residential customers, qualified low-income seniors and other low-income customers can take advantage of a payment plan that allows them to pay installments over five billing cycles," seems reasonable under the circumstances. I also agree that "The best alternative right now going into summer months ... is efficiency -- trying to find ways to use less…"

Conversational clarity on R1E2: R1E2 means that service is reliable and takes precedence on economic decisions. So, whether you like it or not, R1E2 is the key to the avoidance of the price spikes involved in the Texas situation. That R1E2 is non-trivial is not a problem for the customers, but for intelligent and important people that want to understand EWPC.

As you may recall, I wrote last year that Paul Samuelson said that a doctrine is non-trivial when “it is attested by thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them. The EWPC doctrine is logically true, coherent and non-trivial. Reform should be based on knowledge and facts, not only on the political processes. This statement does not mean that I claim to know everything, as I operate under the generative dialogue principle that I am not my opinion.”

Your other questions need not answers to develop demand elasticity and to eliminate regulators power to make incredible technology bets.

As I recall, Samuelson was also ambivalent on the question of regulated monopolies, particularly w.r.t. electric utilities and economies of scale and scope. It might be time for you to look more closely at the "non-triviality" of his ideas.

TEXAS GRID OPERATOR TWEAKS REGIME THAT LED TO RECORD HIGH POWER PRICES

The operator of Texas' biggest electricity grid voted Friday to make changes designed to ease the congestion that recently led to record electricity prices across the state. - (YellowBrix) --> http://www.energycentral.com/global/news_text.cfm?id=10448889

Is this "prudential regulation", Jose?

It doesn't look like Texans Jones and Smith go along with your premise that "Lowest cost electricity generation does not make any sense to a system engineer, nor to the end customers that pay for it."

CAMPAIGN FOR FAIR ELECTRIC RATES, COALITION OF BUSINESS, CONSUMER AND UTILITY GROUPS LAUNCH MAJOR INITIATIVE TO REFORM ELECTRICITY MARKETS

A diverse coalition of industrial electricity users, public-interest organizations, consumer groups and publicly-owned electric utilities, representing the interests of millions of consumers, today launched the Campaign for Fair Electric Rates. - (YellowBrix) --> http://www.energycentral.com/global/news_text.cfm?id=10478482

Do you suppose these folks would be susceptible to EWPC?

On the first post you missed part of the story on the Start-Telegram.com Tom "Smitty" Smith, who heads Public Citizen's Texas office in Austin, said the problem "fundamentally shows that no matter what kind of deal you make, it's a one-way ratchet for the generators' profits and bankruptcy for the (retail electric providers) and their customers." He said the state should immediately lower the maximum prices generators can charge [I suggest the complete market overhaul instead] in the wholesale market while adopting "some aggressive energy-efficiency policies [EWPC will enabled those policies]."

Retail electric providers [First Generation Retailers – 1GRs] sell electricity to homeowners and businesses. Four have gone out of business or declared bankruptcy in the past month because of their inability to pay high wholesale prices.

Rob Minter, vice president of government and regulatory affairs at Suez Energy, a Houston-based generator, said "everybody's watching very carefully" how ERCOT deals with the issue.

Although rising natural gas prices are pushing up electricity prices in the state and unexpectedly warm weather has contributed to congestion problems, "the best guess is that the congestion-management protocol needs to be tweaked" rather than a complete market overhaul, he said.

End of the story on the Start-Telegram.com

ERCOT has 1GRs and thus lacked the proper development of the resources of the demand which will be done by 2GRs which takes time and thus is not the subject of an emergency meeting. "... a complete market overhaul" is needed so that ERCOT doesn't need to control prices.

On the Campaign for Fair Electric Rates, I take that "According to John Anderson, president of the Electricity Consumers Resource Council (ELCON), "Today's organized markets are not competitive, are anti-consumer, and are likely to remain that way without significant action by FERC or Congress." That is why we need an EWPC EPAct, as soon as possible, to enable a highly competitive, pro-consumer, complete and fully functional market architecture and design paradigm shift.