I believe much of what Jim claims about the decline of the utility industry is rooted in the failure of regulation to maintain its financial health and permit it to grow as a business. The problem is not that regulation is a bad thing, it is that regulators and politicians have allowed the voters to keep a lid on rates because voters have come to love the bargain electricity has been, and don't want to hear about heavy rate increases.

In any other industry that is deregulated, economics in a competitive environment ultimately wins. Cost of doing business ends up being king that determines who wins and who loses. Hence the need for so many financial experts, lawyers, and computers substituting for manual analysis, instead of engineers.

In the utility industry we still have regulation but in reality they face relentless ‘phantom’ competition. They continually deal with massive pressure to avoid rate increases to fund any new technology research and development, or maintain grid capacity and reliability. It is no wonder we never hear from the utility industry people very much. Regulators determine their income, not free market enterprise like in most other industries, and regulators don't want public statements from utility people that might interfere with their efforts to keep a lid on rates.

I haven't followed deregulation much lately, or contributed as much written work as I did at one time, but this is because I came to the conclusion that everyone has learned their lesson. Deregulation has failed, is failing, or will fail everywhere, sooner or later, but this is not as important as I once thought that it was. The key thing is that deregulation was imposed with a promise that it would mean lower prices, which is the opposite of how things turned out. In other words it is not just a curse, but a scam.

Prices falling under deregulation in ANY industry eventually weed out companies that cannot compete on the cost of doing business. At first this seems the best "social welfare" (an expression Jose Antonio likes to use). But what voters and governments fail time and time again to recognize is that surviving companies cannot rely on cost cutting indefinitely, or rely on breakthroughs in technology to lower their costs to materialize out of thin air automatically year after year.

Under dropping prices, guess what suffers the most in cost cutting. R&D of new technology is often first to be cut, followed by upgrades to infrastructure, and hiring and training of new educated employees, followed by early retirement packages for existing older experienced ones. Sound familiar to the utility business yet?

At some point in time the low prices lead to a crisis when there is nothing to cut anymore, and the cost to maintain the existing services (or production of products) skyrockets to make up for all the lost past investment. The consumer ends up with substantially HIGHER prices to preserve an otherwise crumbling industry.

That does not mean however that regulation cannot remain and be reformed to make it work better. I guess you can also read between the lines and glean that better regulation would probably allow prices to increase gradually to reflect the true costs of maintaining and growing the electricity system.

I think a lot of the issues you bring up apply not only to the electrical utilities, but to much of our society in general. It is simply too expensive to do business as it was done 30 or 40 years ago, even though many of those practices had some obvious benefits, including (perhaps foremost) the natural transition of engineers to senior management positions.

Unfortunately, things are different now. I don't think millions of engineers were being minted annually in China and India 40 years ago; health care insurance was a blip on your budget; and energy costs had not received the shocks from '73, '79, and '08. In many ways, I think the title of your article is prescient of our future, but perhaps not due to problems totally from within, but from pressures from without.

The challenge seems to be to acknowledge the good from the past (much what was cited above) and integrate that with the realities of the present. I found it also interesting that Mr. Burke's no. 1 complaint is about lawmakers doing engineering. If both parties recognize that we have some heavy technical lifting tasks to do (energy, peak oil, climate change, transportation, etc.) then we probably need more engineers to become lawmakers. More engineers in Congress.

The issues aired here do indeed apply, acutely, to more than just electrical utilities. Laid-off GM workers at their plants in Oshawa Ontario making pick-up trucks will probably relate to these issues very much too for example, many complaining bitterly that GM should have had replacement vehicles in the pipe ready to replace the big vehicles consumers are abandoning in droves.

http://www.intermountainchp.org/news/chp_whitepaper.pdf http://wsrl.org/gwrm.htm

However, my economics and my gut feeling and my street smarts tell me that the latter is the only way to go. The details of course are beyond me at the present moment, but I think that there are some engineers out there who can come up with or recognize the right answers. And, let me repeat something that I have mentioned a dozen or so times in this forum. I gave a talk at the Hong Kong Institution of Engineers, and the gentleman I was working for said that when engineers heard economists and others talking about deregulation, they could only shake their heads, because what they were hearing was outright goofy with respect to engineering (and economic) logic.

And Jim, now that they are minting so many engineers in China and India and everywhere else, maybe they should just close all the American engineering schools, and import the required engineering talent. I wouldn't be surprised if the general decadence of everyday life in the so-called 'rich' countries doesn't cancel out the 'edge' needed to become a competent engineer. When I worked in Thailand last year one of my colleagues, from the UK, said that almost all of his students in the UK were 'ethnics'. His fellow Englishmen were too busy with 'daytime TV' and skin magazines to do any serious studying.

If we import all the engineers from abroad and close our engineering schools, it will put many professors out of work in our colleges and universities, including economics professors like yourself. That will render our schools to teach only arts and humanities and perhaps basic science, and I doubt basic science will get many students either when engineering is finished since by definition engineering is “applied science”.

Yes indeed our engineering jobs are threatened too by far-east imports now, just as manufacturing jobs have long been. The implementation of free trade and global markets has made all this possible in the name of social welfare, and eventually we here in North America will not be so "rich" anymore as a result.

Start saving your pennies, you're going to need them in future.

I don't think Mr. Burke was advocating DG. Just the opposite.

Fred,

That's why we have Hollywood! To export our decadence as fast as possible. Seems to be working....

But that's doesn't impact on engineering schools. The engineering students I see in Ann Arbor are all hardworking, dedicated, and focused yes on grades, but also understanding the material. Much more so than when I was in school. that's for sure. They are burdening themselves with student loans in the hopes they can get a reasonable job to make a living.

If there are too few engineers in the U.S., and we need imports, then fine, let them come. But don't use this as an excuse to provide lowball wages. Unfortunately, that's what many of the utilities (the regulated, profit insuring utilities) seem to be doing.

(We had a large pharmaceutical company, Phizer, leave the area a few years ago. They outsourced their IT department to India. But when they noticed citizens crossing the border to Canada to buy their products at a lower cost, they screamed bloody murder! Good riddance Phizer!)

I think older people think young people have it so easy these days, but that's really not the case. I'm middle-aged, so I can kinda see both generations and their thinking. People coming of age professionally in the 50's and 60's experienced unprecedented growth opportunities, and did well. They think they were brilliant business people, but it was largely the environment. Things are tougher now. There are fewer opportunities, and what ones there are need to be moved on fast. No one expect to have a single job for more than 3-5 years now.

I don't know about the U.K., but I think it's insulting to think that all the students in the U.S. are too lazy and addicted to skin magazines to become engineers! That's simplistic, and wrong. If any generation was lazy, it was the boomers. Yes, gen X and gen Y have some slacker aspects, but the portion that 'get' the education thing are brutally focused. I think we forget how youth unconsciously understands the way things are and adapts accordingly.

Old people grumble about the way things were, without given due note to the way the world has changed. Cognitive dissonance.

"I think older people think young people have it so easy these days, but that's really not the case.... Things are tougher now. There are fewer opportunities, and what ones there are need to be moved on fast. No one expects to have a single job for more than 3-5 years now."

Jim's words above describe acutely what has been happening to us the last few decades in both the US and Canada. Sustained strong economic growth from the 50s and 60s are a distant memory, and few then realized or appreciated all the benefits it provided capitalism.

When I graduated from university in the early 80s it was common for dozens of large companies to visit the school months before graduation and interview candidates for plentiful well-paying professional jobs in EVERY discipline. It was common for grads to get several job offers to pick from well before their last exam was written. That had vanished by the 90s to the point where half of good grads today cannot find jobs in their fields anymore and end up in low-paying service sector jobs flipping burgers to make a living. The one's that do get good jobs typically work very hard and not for the lucrative salaries they once commanded, and are lucky if they can hold them for more than 5 years. Heck many young people today cannot afford to move out of their parent's homes and start a family until they are well into their 30s.

The utility and energy businesses in North America have not been immune from this.

Our governments and economists love to preach in some cases that our economies have been transitioning to a knowledge-based economy, where education and high levels of skill become the norm for jobs, not the exception. Well it should be starkly obvious that knowledge and skills are useless to earn a living with unless opportunities are available to capitalize on them. I think engineers deserve a lot more credit for inventing those opportunities over the years.

Probably, but I wonder. Yes, the smart people MAY be getting smarter, and the hard workers MAY be working harder, but when you look at the numbers, I wonder if that will suffice. I'm talking about the short-term here, because in the long term the skin magazines and the scag and the open borders are going to change everything for just about everybody - especially those hard working smart people who are going to put themselves in a position to collect as many as a half dozen pink slips during their careers .

Come to think of it, maybe I was right after all. In one of the 'intellectual' publications that take up so much valuable space in university libraries, I read about some guy who thought that he was out of the army, but he was badly mistaken. He was told to report for duty even though he could hardly walk. If it had been me, I would have reported on crutches: Corporal Banks, reporting for duty sir. They showed a similar case on Swedish TV last night. But when you think about it, it makes all the sense in the world: soon that country of 300 million people will be sending 42 year old men on crutches into a combat zone. I mean, you can dispute the math, but not the arithmetic. (Yes, they are allowing men of 42 ito volunteer for the army now).

What about 52 year old men on stretchers? No. now that I've given it some thought, I think that - on the average - I'm COMPLETELY right.

So there.

Well there is a quote from the Science Fiction book Dune which I paraphrase as "The desert trains the faithful."

I expect Peak Oil to be a splendid desert for training.

How's that for a compromise?

The current world financial crisis, bloodletting in stock markets, recessionary economic trends, and record setting volatility declines in commodity prices like oil have led many bankers, government officials, stock traders, politicians, and yes many economists also to stop predicting the future beyond a few days or weeks out. They all say, one after another, that it's now highly unpredictable given the forecasts most of them made a year ago about their respective country's economies have been blown out of the water in the current mess.

The $200 per barrel oil predictions by 2009 have also gone the way of the dodo bird, for now.

Am I imagining things or are many economic predictions based on which way the wind is blowing? Surely all the economic theory they learned in universities isn’t all blown away too. What’s really going on?

Take ol' Fred for instance, when I was teaching finance I taught EVERYTHING - all the preliminary courses. Why, because I didn't trust the other teachers. They ______ everything they touch, and so it was best that I did it all.

About this oil thing. I believe that OPEC has the right to make as much money as they can, but oil at $150/b was too high. If it had reached $200/b then the lights would have burned much later at the Pentagon. Fortunately though their was a meltdown of the international macroeconomy, if 'fortunately' is the right word, because once those dollars started rolling in for oil at 150, the next stop might have been 200. Why not? About predictions and the like: Greespan genuinely knew a lot about energy, but as things have turned out, he didn't know much about macro. Bernanke doesn't know anything about energy, and it may turn out that he is a loser in the macro thing. And so on and so forth..

Here's an opinion or two from the TV audience:

Lo and behold, several nights ago, C-Span carried Henry Waxman's Inquisition. Greenspan, Cox and Snow were those examined. Big Al mentioned the crisis was a once-in-a-hundred-year phenomenon and all but called it a "black swan". Said that as far as he was concerned none of the econometric models came close to predicting the current mess and he doubted there would ever be such a model. He sounded like one of Mandelbrot's lectures got to him. Generally speaking, the three more than held their own in front of a very hostile, partisan committee. When Snow and Shay (Connecticut's Republican contribution to the committee) started working over the more suspect committee members about congressional pressure on Fannie and Freddie to provide loose, looser and loosest sub-prime loans to unqualified borrowers, Waxman and his henchmen nearly came unglued. I found myself trying to figure out why McCain wanted Cox to resign. Yes, he's an appeaser, but a smart one! Great entertainment. Almost makes the monthly cable fee palatable.

http://earnmostmoney.blogspot.com/2008/10/todays-daily-reckoning-masquerade-is.html

OK, so I don't have a copy of the Sunday business section from next March. But I think I know what at least one major issue will be within the next 24 months. The headlines will scream, "Power Failures, Price Spikes Plague Northeast U.S." And the same thing will also hit the Western U.S. And the Southeastern U.S. And parts of the Midwest. ...

Earlier this week, I attended a privately sponsored presentation on U.S. energy policy. The main speaker was a senior faculty member from Carnegie Mellon University. This guy has been "doing electricity" for about 40 years or so. He has written reports for the National Academy of Sciences. When the people at the U.S. Department of Energy have a question about electricity, they call this CMU professor.

The news is not good. In 2007, there were about 144 new coal-fired power plants on the drawing boards of the U.S. energy utilities. But, said the professor, "We will probably build none of them.? Indeed, ?The electric industry in the U.S. is in terrible shape," said the CMU man. So we should expect local and regional brownouts and blackouts to become common occurrences "within five years." But the first isolated instances of brownout and blackout will hit us much sooner than that. ...

Byron W. King for The Daily Reckoning emailed Tuesday October 28, 2008

All part of the big problem with tptb.

http://www.prosefights.org/nmlegal/hearing/hearing.htm#board

Jim hit the nail a glancing blow in the final paragraph of his #3. Government is still very involved in the power industry. In California, at least, much more so than it was 20 or 30 years ago. That is anything BUT deregulation. What Fred complains about is really best described as inconsistent and heavily politicized regulation replacing a consistent form of regulation.

As an economist I never have heard any real justification for engineers reinventing the power plant every time one was built under cost of service regulation. Sure enough, merchant plants are much more uniform. That not only means lower cost but also improves reliability. Of course the French (the French!) managed that with nuclear power without deregulation. Perhaps part of the problem with integrated utilities was that they were too small to achieve economies of scale in generation as plant sized scaled up to giga-watt size. It appears that many states in the U.S. are simply too small to contain an entire generating company of an economic scale. So regulation had to change. Jim is right that utilities have become quislings of politicians. Perhaps we should actually try true deregulation?

The reason we are in this predicament is that we (the engineers and scientists) have deliberately avoided getting into the political arena so to some extent we have got what we deserve. We stuck to our engineering (keeping ageing systems on line way past their due date for retirement) while others with no idea of the electricity system expounded the virtues of power systems that defy any kind of logic.

As I have said many many times in this forum.....it seems obvious to me that any system where we are not in control of the fuel source is doomed to the reliability of "nature"....which (if anyone has not noticed) does not do the things humans want. We are clearly unable to control when it is windy or how strong the wind blows, or when the Sun shines so it seems illogical to me to base a highly reliable electrical system on things that are by their very nature unreliable. Clearly solar panels can at best have a capacity factor of 50% based on the obvious but oft overlooked and readily observable fact that the Sun does not shine at night. So we invest vast sums of money in systems inherently only 50% or less reliable.

A recent documentary on Portugal took the reporter out to an offshore energy development using "snakes" to capture tidal energy. Unfortunately the sea was rather calm and no electricity was being produced. Then the reporter was flown (on the same day) to a wind energy centre in Northern Portugal (purportedly the largest in Europe)where unfortunately the wind was not blowing and no electricity was being produced. I can only assume that the portuguese had curtailed their electricity demand in accordance with the lack of production. Of course they were either importing from Spain or France or firing up fossil generators to make up the shortfall.

The reportes was also shown a vast solar energy "farm" (the soil now produces nothing) which was producing because the Sun was shining. Had she visited that place at night she would have observed the output meter as registering zero also.

We seem to have completely lost sight of common sense. Like you Jim I was brought up with slide rules where you needed to have a good idea of the answer before you did the calculation so that you could mentally verify its accuracy.

It seems obvious to me that to produce the amount of electricity required one needs to cover a very substantial portion of the planet in windmills or solar arrays and gear our society so that we only use power when it is available from nature.

I think most people prefer what we have but many do not realise it is in imminent danger of collapse.

Jim I think in our old age we should run for politics and change this nonsense.

What do you say. A top notch article I could have written myself.

Malcolm

There are 9 articles in that issue, and they contain virtually every lie that has ever been told about deregulation. What is this all about? Isn't it clear to everybody with half a brain that electric deregulation can't work, nor can partial deregulation, nor can....

Wait a minute. Lies do work, except in extreme situations. Just before the end of WW2 the Japanese high command sent the super-battleship Yamato south to interfere with US ships and personnel. It was met by a swarm of US planes and sent to the bottom. A few days later a group of kamikazies took the same southern route, and actually managed to surprise some US sailors. Those gentlemen were drinking beer, smoking Chesterields, Phillip Morrises, and Lucky Strikes, and listening to the great music that was written in the US during that war, but when they got their guns going that was the end of those intruders. You see, this was a situation where lies - in this case the lies of the Japanese high command - didn't work.

Relevant? Probably not, but when I was sitting on the train to Stockholm yesterday, thumbing through that looseleaf of lies and nonsense about deregulation, I suddenly found myself thinking of that incident - which I was informed about by an American engineer in Yokahoma a few centuries ago.

Regulation is still in practice in most places last I heard and I don’t believe it will disappear anytime soon. The big failure of regulation however is that it has not allowed utility company income to grow properly to fund the proper grid maintenance and expansion, or fund R&D for improved grid efficiencies, or fund the new capacity development, or fund the commercialization of technologies customers could use to enable more of their own energy use conservation and efficiency.

One of the abused purposes of regulation has been to keep a lid on consumer rate growth such that little or no discretionary income is available for utility companies to invest in these things significantly. I predict regulation will stay in most places because the public will never permit their governments to abandon the luxury regulation has provided us for many decades now - bargain electricity prices.

There is clearly room to improve regulation to enable the needed investments, which ultimately would keep a natural lid on everyone's energy bills down the road anyways.

Everyone including your TV audience knows the sun and wind aren't available 24 hours a day, 7 days a week. But finding reliable 24/7 alternative energy sources is not the main goal of investing in these renewable sources to start with. It's the opportunity for investors to make money in the energy business where power demand and energy consumption varies CONSIDERABLY over 24 hours in most places, especially when the fuels for renewable sources are free from nature.

If we had perfectly level demand curves 24/7, these renewable sources wouldn't fly without economical storage mechanisms to back them up. But we don't have level demand curves. There will be efforts to smooth them out somewhat with Time-Of-Use billing and possibly real-time pricing, but they will never likely be perfectly level. During daylight hours there will always be some need to add capacity, and since our grids and regulated consumer prices are designed to make the source to the end-user unknown, the end-user doesn't care where the source comes from, intermittent in nature or not.

Now add climate change, volatile fossil fuel prices, skyrocketing nuclear construction costs, all the easy hydro-electric sources already exploited, and renewables become even more attractive to investors, and our governments, and the public.

We engineers know fully well that renewables will never replace the conventional large generating sources we now have, but diversification with more distributed generation is the way of the future and it will include renewables. The big potential change that could come is if renewable micro-generation becomes affordable or is provided enough financial incentives for residential consumers to put one on their homes in large numbers in the future. Just imagine if even 10% of homes had one what impact it would have on peak demand from the rest of the grid during the daytime. Those daytime real-time prices from big central generating stations will surely suffer, and so will their incomes.

What you describe is rampant in many other industries besides power. A other motivating factor to farm out engineering to consultants is that long serving in-house engineers are expensive with traditionally high salaries and benefits. In the power industry where consumer prices are tightly regulated, if the prices do not grow over time to fund these engineers or hire new blood, as been the case in my view, guess what, they gradually become more and more outsourced.

The life-long learning and knowledge available from long serving engineers has also been commoditized and devalued to some extent because knowledge is doled out for free by the internet by technology vendors. In the electronics industry where I work, there is widespread availability of design knowledge over the internet, and among other things it enables rapid technological progress providing an almost free knowledge bank accessible to anyone and everyone.

One of the sad side effects is that it no longer is easy or even possible to keep trade design secrets for any great length of time to profit from them. A business ends up surviving by routinely reinventing old products or finding new ones that obsolete the old ones, to effectively stay at least even or get ahead of the competition.

There are many parallels in other big traditional industries, like steel, automobiles, etc. Today it appears renewable source generation is starting to provide more competition in the power generation industry.

Your last post above is exactly why many of our "brightest youth" today are discouraged from going into engineering, and also why many a seasoned engineer does the career change thing in mid-life. The grass is usually much greener in something else for less work. Car selling is (now "was") one, politics another, I heard Bill Clinton was a former engineer. There was at least one Premier of Ontario back in the early '80s who was a former engineer AND a car salesman too if I recall.

Back in the "good ole days", engineers could climb the corporate ladder up to and including the CEO's chair. Now you'll find those chairs held by accountants and lawyers. Since accountants and lawyers can't even "speak" engineer, they have a horrible time managing same.

I personally witnessed a group of engineers at a firm that regularly buys ads on this site, so shall go unnamed, QUIT the company, form a new consulting firm and come RIGHT BACK to the same company to do precisely the SAME work they used to do, at 3X the money. The key difference was they were now "managing themselves", something so-called management was so happy to avoid that they gladly paid the premium.

Engineering, like music, is a discipline, it takes years of practice to perfect, but unlike musical performance, is rarely recognized or appreciated. Lots of folks enjoy the i-phone, but no one says, "Wow, what excellent engineering!" The infamous TV watching public just says, "Oh look Paris has one!"

I have to completely disagree with you that distributed generation is the way of the future. It is not...unless you want the costs to skyrocket and make electricity a luxury that only the rich can afford.

If you believe in distributed energy (I did once but the economics are awful) then you will also consider that it is better to make Toyota cars from kits in your garage than it is to make them in a 20,000 unit a week mass production facility. The laws of mass production are as valid today as they were when many of the larger plants were built. Nothing has changed and it applies to electricity just as it does to widgets. Contrary to popular belief large plants produce power at far less cost that any distributed generation scheme could hope to achieve. The key to that is capacity factor. There is no renewable source that can approach the 90% plus CF routinely achieved by nuclear plants for example. If the plant cannot produce then the capital cost per megawatt (produced NOT nameplate) must increase.

The reason I keep harping on the obvious fact that the Sun does not shine at night is that the capital cost of the solar plant is producing no revenue at least 50% of the time. Even at similar capital costs per megawatt (DG is much much higher) it makes no sense at all. So I reiterate to my loyal and devoted TV audience that if you want electricity costs to go up - way up - then go for DG...it will guarantee it...and wreck what is left of the North American economy with it.

Of course if you regulate the large producer to death while letting the small producer off the hook then that is a different story.

On the topic of the engineering profession....

I absolutely agree with the notion that there is nothing to attract young engineers into the profession. It is simply not paid well enough for the work required to learn it. That is why North America graduated 50,000 lawyers and 1200 petrochemical engineers last year. Apparently we are terribly short on legal opinion and oversupplied with oil. The Saudi's understand our stupidity and attract the few engineers we do produce to work on building refineries in their nation. It does not take a genius to figure out that soon North America will be buying refined products from the Middle East whilst they turn the baps off on the crude oil supply. They are alot smarter than we are.

But the other great force of economics - supply and demand - will eventually fix that or nations that do produce engineers (China and India) will take over the technological leadership once thought to be the domain of "western" states. From what I see it is the latter that will occur and is occurring extremely quickly.

I do assure you it was not lawyers, economists, car salesmen, bankers or Wall Street brokers that launched the Indian satellite to the Moon last week...it was the engineers and scientists of India. It will be China and India that the future belongs to. Not the US or Canada...and that will be entirely our own doing (or undoing).

Apparently that is what the public wants.

Now for a TV dinner.

M

The losers of course are the general public who appear to be stupid enough to believe all the crap about lower prices. How can you get lower prices when most utilites delivered "at cost". How can you make a hydro electric plant that is automatically controlled and has almost no full time staff produce electrcity any cheaper by making it "private". It was and is pure baloney.

Unfortunately for us all the chickens are rapidly coming home to roost. Massive investments are required to replace our ageing fleet of plants and the power lines that carry it. The private sector does not have the resources to do it on the scale necessary and the result will be lights out North America.

Perhaps that is what we deserve for being such collective fools.

M

Economies of scale is what has prevented DG from being widely adopted all along, you are absolutely correct about DG being historically far higher costs per watt than large central generators. Today however there are many camps working very hard on changing that reality.

It may still be too expensive today for most residential consumers to put up their own micro-generator on their rooftop, but there is another big development that will push for more DG. There is already a consumer rate crisis brewing because of all the massive replacement costs you mention just to keep the grid where it is now. And with far higher rates, there will be that much more incentive for DGs to sell power back into the grid, even intermittently as only when the sun shines or wind blows.

I am also not a fan of deregulation, what I would rather see is regulation have taken in a least some extra money from ratepayers over the years to fund engineering, grid maintenance and new R&D, and the capacity expansion that SHOULD have been taking place all along. Selling power at cost was a death knell because there has been little or no extra income for utilities and the generator business to reinvest much sooner in these things.

I’m afraid we will all eventually have to become more TV watchers and live in our own worlds of imagination because real life in North America is going to spiral downwards and become very bleak without massive change. I predict our federal governments may have little choice but to massively spend our way back to full employment and economic growth again like it did in WWII to pull us out of depression.

Bob

The theory is that Bush and Cheney and Rumsfeld are responsibe for that mess in Irak, but I don't buy that gentlemen. No sir, I don't buy that at all. Bill Clinton is the villain, because he had the intelligence to make the people of Irak the best friends ever of the US by sending the children and elderly in that country the food and medicine they needed. And if some of that was siphoned off, well so what. Send them more.

Having said that, let me finish by saying that Bill couldn't have been an engineer because he can't add and subtract. Neither can George W., but at least he wasn't interested.

No way Bill was an engineer. Man, he played the Saxaphone, well even. Pretty sure he was a rogue artist who drifted into legal practice. Likely one of those who going thru school commonly do one the favour of offering to let you help support the arts by making a small financial donation to them. Just to help make you feel better you know. Y'know, all money is actually theirs by right, just somehow some of their money happens to have found its way into your pocket by mistake. Here, lemme fix that up a bit for you.

I see much potential in reforming electricity regulation for consumers.

In Ontario we have regulated consumer rates, but it's actually a form of dampened real-time rates with a huge dampening factor if you think about it. Real-time wholesale rates from generators fluctuate by the hour, with quite large swings over 24 hour periods. Fixed consumer rates are "reviewed" by our regulators every six months and adjusted upwards or downwards as they see necessary to guarantee the fleet of generators do not lose money based on previous year's economic performances. So what Ontario's consumers really have are real-time rates dampened out with time constants spanning many months.

I suspect many regulation schemes in other parts of North America are very similar. If what I describe here is accurate, there would be no difference if true real-time rates are extended to consumers directly since generators could still make money. But politicians and regulators in Ontario and elsewhere think real-time consumer rates are way out in the future, and are against exposing consumers to the wild fluctuations of wholesale prices today because consumers cannot deal with them efficiently. Technology in consumer's hands easily could deal with them.

It's getting the technology into consumers' hands that communicates with real-time prices where the real barrier is. Len's IMEUC proposals would depend on this technology, and this is where regulators are missing an opportunity to financially enable utility companies to commercialize the technology to consumers.

Carter was not a nuclear engineer. He was a graduate of the Naval Academy with what ever degree they give which is not nuclear engineering. He went through the navy nuclear power traing so that he could be an officier on a nuclear powered ship. He was not an engineering officer nor is he in anyway an engineer. Being an officer in the nuclear navy does not make one a nuclear engineer or even an engineer.

Ken

I do appreciate engineers. My father was and my brother is an engineer. I have worked with engineers much of my life. Engineers are generally smart, honest and straight forward. Its just that there is more to any industry than engineering. Some engineers do get the bigger picture, just as some lawyers and economists can climb out of their boxes to get the perspective needed to manage a business. But your comment is a classic example of thinking there is nothing except the engineering box. Perhaps you really know better, but the comment is still a classic.

A wonderful way to get the least from an industry would be to put engineers into their box and let lawyers make decisions about pricing. That way no one would ever consider the relationship between costs and prices and we could give the industry's customers price signals that would be a complete packet of lies. Each component in the system could be efficient, but the totality would contain many wrong components. Unfortunately, I just described cost of service regulated utilities.

Greatly muting time of use signals is an economic crime because it tells customers to avoid low cost investments that would greatly reduce peak demand. And it is a crime universally committed by regulated utilities. I demonstrated within a major utility that if we could optimize (or come half-way close) both sides of the meter we would find that we do not need all the G, T & D that we have today. We would not have one of the most capital intensive industries in the world and have the worst capital utilization in the world. Unfortunately, cost of service regulation is administered by lawyers and politicians. Regardless of how efficient each component is there is no chance of making the system efficient. When engineers celebrate the "efficiency" of regulation it demonstrates that someone else needs to bring an economic - market - perspective to the industry.

A major problem with Len's IMEUC idea is precisely that it does depend on regulators to make things efficient. Yet deregulation has increased efficiency in every industry were it has been introduced because regulators are incapable of making good economic decisions.

I was SURE that Carter would be the best US president since Harry Truman. Boy was I wrong, but I can't understand why. On the surface he had everything, but he couldn't use it.

Bill's budget and other successes don't interest me. He was a disaster for the office. I really can't understand why Obama is willing to solicit or have the support of that person, although admittedly if that's what it takes to get X more votes, it may be worth it.

Bob, I can go along with reforming regulation. My 'beef' is with deregulation, which has failed, is failing or will fail just about everywhere.

Given the gigantic economic mess the United States and the rest of the world is in - perhaps we are in need of many more people who think like engineers.

We are given to facts not fiction. Truth not lies. We allow the facts to guide our decisions not political rhetoric. When we make mistakes (and we do) bridges fall down, buildings collapse when they shouldn't and generally people get hurt.

When our economists/lawyers/accountants etc on Wall Street make the most monumental mistakes...the result is an even bigger bonus and no consequences.

Your arguments work for the manufacture of widgets. The should never be applied to electrcity or water (and perhaps) narural gas.

Would you introduce time of use rates for water? Maybe we should only flush the toilet at night when demand is lower.

Perhaps the most distinguishing feature of most engineers that I know - and probably the reason they are poorly paid - is they work primarily to enhance the lot of everyone ...with an eye to the bottom line of course.

Applying your principles to the electricity business resulted in Enron and the debacle in California. You should not be proud of a record like that. If you are - we really are in need of help.

Malcolm

You seem to believe California experienced deregulation. I was involved in the process of restructuring. Having been through a real deregulation I kept pointing out that while the wholesale market was being expanded the restructuring was actually INCREASING regulation of the wholesale market. And the new regulations for the wholesale market were completely incompatible with residual pricing for energy based on fixed overall rates in the retail market. No one who understands markets and the California restructuring mistakes the California restructuring for deregulation. It was quite the opposite. Had we made it through the first 5 year there is a chance that California might have evolved into a less regulated environment. But the regulations were so bad we never had the chance.

Enron was run by crooks. The proper comparisons in the public sector are Tamany Hall, the Chicago political machine, New Orleans, etc. Dishonesty is not pretty in any venue. It is the job of regulators to design regulations that do not allow dishonesty to prevail. One of the great sins of the California reregulation was that it ripped away the protections of cost of service regulation while blocking market discipline.

Market advocates and many knowledgeable people tried to make the California restructuring workable. But the lawyers, regulators, and power engineers who constructed it paid no attention to anyone who had relevant experience inside the power industry or elsewhere. I am ashamed of the California regulators and politicians. More of them should have lost their jobs. I am proud of what I accomplished in an environment of deregulation and gratified by what others have achieved without regulatory misguidence.

If you want to defend regulation explain what is so good about the dismal and declining capacity factors we have in one of the most capital intensive industries. Explain why technologies like gas air conditioning and thermal energy storage should not be utilized to improve efficiency. Even the California PUC recognized in the 1980s that gas air conditioning is more efficent on a social level than electric air conditioning in large buildings. But the PUC rate structure prevented it from being realized. The PUC could not figure out how to change their rates to get better results. That is the central problem with regulation. Bad, politicized, rates. And the expensive new meters in Ontario are going to be used to provide rate differences by time of day large enough to be good window dressing without offering any economic justificaiton for the cost of the new meters. Are you proud of that? The fundamental problem of regulation is not confined to California.

The problem with regulation is that it is run by lawyers. And when engineers do get involved in pricing they do not understand economic concepts of marginal cost pricing and the economic art of developing prices that recover fixed costs in an efficient manner. By the way, bad as they were, the defunct railroad regulators did understand economic concepts for allocating fixed costs far better than utility regulators do today. Regulation of electric utilities is worse than other industries experienced. So the inefficiencies we can discard when we do get to actual deregulation will be greater than in other industries.

Finally, if you want to change the subject to the credit crisis, start with its roots in Congress and its compliant beasts Fannie and Freddie who created monsterous amounts of high risk debt that drove a housing bubble. Then discuss poor regulatioin of banks and insurance companies that bought that debt, and similar debt created by supposedly regulated banks (their deregulation was partial). Then discuss the underlying factor in the hungar for risk over the last several years - Greenspan's negative real interest rates. Wall Street is not the home of angels, but it was only one player in an otherwise regulated financial system that went amok. Better to spend your time addressing the massive inefficiencies of the electric industry.

"The problem with regulation is that it is run by lawyers."

Excellent post, Dick. You've nailed a lot of it exactly.

The sole task of "regulators" in IMEUC properly implemented is to hire the software people who manage the central database. They do NOT get to interfere in pricing or in supply decisions, outside of an emergency condition clearly defined (obvious future shortages).

Honestly Dick, if you can suggest any safe way IMEUC might further reduce regulation safely I would incorporate your suggestions with credit immediately. Don't forget a) Enron, b) and present financial circumstances.

We agree on at least one point. The California electric utility restructuring experience was embarrassiing. However, the idea that we poor engineers "...do not understand economic concepts of marginal cost pricing and the economic art of developing prices that recover fixed costs in an efficient manner..." sounds an awful lot like me saying you poor restructurers don't understand the mathematics of maximizing or minimizing an objective function. Now, what did you say those "...overall rates in the retail market..." would have been had the regulation of the wholesale market been DECREASED? Or, for that matter, if I understand you, removed completely?

The latest issue of the ENERGY JOURNAL has nine collections of lies about deregulation. Read the first, by a gentleman from MIT that I encountered at a conference in Italy a few years ago. Woudn't I love to encounter that gentleman again. His American passport saved him on that occasion, but never again.

What about the railroads and the airlines. If you say that deregulation has succeeded in these two activities, I am certainly prepared to believe you. I've heard this before, and besides I don't know anything about them. But with electricity - and maybe with natural gas (in Europe at least) - forget it.

"And the expensive new meters in Ontario are going to be used to provide rate differences by time of day large enough to be good window dressing without offering any economic justification for the cost of the new meters."

Your statement above is the central big question about Ontario's smart meter initiative, no question. Our government legislated them on every utility company several years ago when Ontario's critical peaks during summer heat waves resulted in us having to import very expensive power from outside our borders because our total peak demand was increasingly outstripping supply. No new big central generators had been contracted for the last two decades, and there was no quick way of bringing lots more capacity on-line anytime soon either.

Since then there has been much progress in slowly bringing on more capacity, but the smart meter initiative is proceeding anyway. There is now well over 1 million customers with smart meters but most of these are not on TOU rates yet, only a small portion are. Interestingly the province studied consumption data gathered from large samples of smart meters during their initial deployments, and decided to design their TOU rate differences such that if most average consumers did nothing to modify their TOU consumption habits, they would end up with roughly the same energy bills on average. The politicians know they would be inciting the public’s wrath if the rates weren’t close to being revenue neutral.

So you might now say the whole initiative sounds utterly pointless and a waste of time and money. But our government thinks otherwise.

They know widespread adoption of smart meters would be very costly. The province however was not prepared to fund them directly with tax revenue handouts to utilities, but by regulation our utilities are supposed to recover somehow any substantial money of their own they spend. It's not cheap, smart meter AMI system implementation is typically in the several millions of dollars for an average urban utility with a few hundred thousand customers. On top of this the regulators were not prepared to allow energy billing rates to go up to pay for them either. So regulators had no choice but to allow utilities to borrow money to finance the meters, and then pay it all back by adding a “small” separate fixed charge on our bills called a smart-meter charge to pay them back, expecting to pay off the financing over 15 years. Last I heard it was likely to come in around $3 to $4 per month, or $6 to $7 every two-month billing cycle.

Now the province knows consumers will complain about it, but we will then be told that we have a simple choice – by changing our TOU habits to load shift significant use to off-peak, we can save that extra charge and likely even much more. It will be up to each and every consumer’s discretion.

This philosophy is also compatible with the other massive tax dollars Ontario IS spending to heavily promote conservation. For the last few years consumers have routinely been offered rebates and sales tax exemptions to purchase anything that’s more efficient, like CFL bulbs, EnergyStar appliances, etc. They’ll even dispose of your old inefficient refrigerators for you for free provided they’re at least 10 years old.

Their plan is working, the take up by consumers of the financial incentives has been pretty substantial. The whole idea is to foster a widespread “culture” change in the public to adopt more conservation and efficiencies. The key feature about it all is that it is being advertised as giving consumers a real choice, they are forcing anyone to change their consumption habits. Do nothing and you won’t see much difference on your electric bills, otherwise there’s lots one can do now, and more once TOU rates kick in.

Also, consider once everyone is ON the new TOU rates in Ontario, consumer awareness alone will be heightened about the fact generators sell power at wholesale prices. In fact Ontario plans to offer consumers another choice. Consumers can opt if they wish to be billed by wholesale real-time prices with their smart meter, since all the AMI systems will have the capability to be read every 15 minutes if necessary.

It will be very fascinating to see how many make this choice down the road. IF many do sign up to real-time pricing, Len's IMEUC proposals are going to be very big on consumers' minds if they are made aware of what is possible with IMEUC. It is my belief all it will need is much publicity to get voters to ask for it from our regulators and politicians.

Don, since credibility is an issue in suggesting what prices would have been I will give you a long answer on that. While the restructuring was being developed we created a model of the western interconnect. We utilized Multi-Sim as did many others. But Multi-Sim never solved for market prices. It solved for a dispatch given the prices. So I analyzed the contribution to fixed costs and profit for each large power plant in the west and groups of smaller ones after each run. Then we modified the bids as a profit oriented company would do and ran through the process again. It took weeks to get the initial solution in which all bids were reasonably optimized simultaneously. But since we were modeling a market it was worth the effort. A high priced consultant in market power issues observed that our inputs assumed zero market power. His observations were correct.

We developed two scenarios. One included a zero price elasticity as that was a key aspect of the proposed reregulation. That scenario produced prices that tracked actual prices as they unfolded very closely given a good forecast of hydro conditions, particularly in the Northwest. We warned that if the proposed structure were enacted and there was a major drought on the Columbia River that wholesale prices would reach the vicinity of $300 per MWH on a 6*16 basis and there would be small physical shortages of power. We never modeled anything quite as sever as the penultimate drought that occurred, so while the drought did result in the prices we had warned about years earlier the physical shortages of power were a bit larger. Those shortages resulted in rotating blackouts. We did warn that in the event of a major drought PG&E would go bankrupt unless the reregulation scheme was modified. It was not modified until after PG&E went bankrupt. No one wanted to use the results of our modeling because they did not fit the decision to go ahead with the reregulation scheme. So I was allowed to take positions in the futures market that were guided by the model results. I did very well on NYMEX while my employer went bankrupt. I don’t believe a model can be vetted better than that one was.

The second scenario described what would happen if markets broke out somehow in the midst of the regulatory scheme. The key difference was that this scenario included the standard short-term price elasticity for power of -0.02. This scenario did not have any physical shortages. Wholesale prices topped out briefly at around $150 per MWH on a 6*16 basis and fell off rapidly to much more comfortable levels. We never compared the premiums for a major drought in the two scenarios, but I believe the market scenario had the premiums of 1/5 or less of the levels of the reregulation scenario that played itself out so infamously.

Now the interesting question. Is it worth the cost of maintaining reserves to avoid the premiums that occur in a market during a one in 50 event like the 2000-2001 drought? The numbers say no. The cost during the other 49 years exceeds the savings during the one year. Regulators do maintain those reserves. One of their inefficiencies.

Don, I have a great deal of respect for engineers. I cannot design a bridge or a power plant. I could design something that looked like a bridge, but I am confident that it would not have the required structural integrity. I would never cross a bridge designed by an economist. The California experience demonstrates that lawyers, regulators and engineers do not know how to design a market. The design they came up with omitted nearly every important structural element even though it looked like a market to an untrained eye. Engineering and Economics are different disciplines and I do not know anyone who is excellent at both. In no way do I intend to insult engineers, but the California experience is a warning about what can happen when engineers and lawyers step out of their area of expertise.

A good rate design would be revenue neutral at the outset of time of use rates. But as people respond to the price signals it would reduce total utility revenues over time. That is a good thing as utility costs would be falling along with the revenues. The problem in Ontario and elsewhere is that regulators just cannot bring themselves to reflect in their rates the order of magnitude difference in the cost of a kWh during a peak afternoon and during an average night. So the results of their programs are in the right direction but too feeble to justify the cost of interval meters for small customers. A good marketer could get better results without even having to incur the cost of the meters. Too little space to elaborate on that here.

Ferdinand, I do not expect to convince you. But if you are an economist you know that marginal cost pricing is the only valid pricing. It is important for others to recognize that your contention to the contrary is totally inconsistent with your belief in peak oil. If we really are running out of cheap oil and gas then we need price signals that will incent conservation and development of the more expensive replacements for cheap oil and gas. If we do not get the price signals out then the dislocations when we do run out of cheap oil and gas will dwarf those that we are experiencing with the current credit crisis. Yet that is what you advocate.

BUT NOT HERE. The reason I don't make them here is because I read the last half of the economics texts. I could go into detail on this, but I won't bother. Instead I will just say that one of the (theoretical) reasons for regulation was to bring about (something like) marginal cost pricing.

Incidentally, before I forget, electric deregulation has failed, is failing, and will fail everywhere. As for peak oil, just about everybody believes in that now, although I dont bother with the topic any longer: when the price of oil reaced $147/b, it was time to forget about when the oil peak would arrive, or even if it would arrive. By the way, as I explained to my students, if you want the story of the peak, just study what happened in the US. Let me also say to the folks in the orchestra seats that the only relevant price signals in the future will be those cooked up by OPEC, and not by some half-educated economics teacher.

The credit crisis? That's Greenspan isn't it, and his belief that THE FREE MARKET will correct incorrect price signals. Of course, a man who played on the same stage as the great jazz musician Stan Getz can't be all wrong. I'll bet that this guy has a great record collection

For this limited thinker and sometimes trespasser into the business of system optimization, the descriptions of Multi-Sim modeling were fascinating. Guess I can't disagree with dual expert observations that market power is absent if prices are model inputs. It doesn't seem unreasonable that it would take weeks to find any semblance of an optimum for the number of price vectors one would have to consider.

Interesting that the difference between zero and -0.02 price elasticity halved the wholesale rate and avoided shortages. Must be the reason demand response is such a Lorelei. Did I understand you to say that decreasing the slope of the supply curve was inefficient? How does it compare with the cost of demand adjustment? Or are the reserves needed for confidence levels between, say, half-sigma and three-sigma events of no interest? Assuming scenario 2 represents the "deregulated" situation, the retail rate and persistence that accompany a $150/MWH wholesale result would seem instructive. Perhaps many bankrupt consumers are better than a bankrupt PG&E. Then again, they could always heed the price signals and do without. Would you call this the analog to "my way or highway", that is, "do without or blackout"?

"So the results of their programs are in the right direction but too feeble to justify the cost of interval meters for small customers."

Your statement above may turn out to be true in Ontario, time will tell. Len's IMEUC reform proposal however takes the ownership of the meters away from the utility and places them with the consumer. If the consumer pays for his own smart meter, there would be much less cost to the utility company, and the consumers that do buy them would be far more likely to order them with as much functionality as possible, and then use them to their maximum potential to save themselves money on their energy bills. Today a basic smart meter for simple interval metering with no other optional capabilities costs typically under $100 in volume, and their cost is heading lower each year. An educated consumer could easily recover this cost in bill savings in a matter of months or less under Len's IMEUC.

Dick: I do not agree with your assertion that only the marginal price really matters. In the power industry what is the marginal price? It sounds like the kind of market design that utilities would like. All utilities would want to have a cheap generation mix that relied heavily diesel peakers to set the incremental price. The incremental price could easily be $200/MW when the average system price is $60/MW. I am sure most utilities would agree to put in smart meters and charge everyone $250/MW. If everyone pays the marginal price a windfall profits tax might also be in order. I think that both average and marginal costs are relevant. Even this is an extreme over simplification incremental cost is not marginal cost. Systems are not homogenous they consist of peakers with low capital and high fuel, some high capital and low fuel cost, and other medium capital and medium fuel and of course the fuel prices vary. Were would new nuclear capacity fall in? Its incremental cost of production would be low but its average cost would be much higher. My guess would be its average cost would most likely be higher than Coal or current Nat Gas but less than diesel peakers. The capital spent is a sunk cost so it would be dispatched at its incremental cost so the Nukes would stay fully loaded even on the off peak. However, the Nukes would not truly be needed on the off peak, so should off peak cost ignore the high capital cost of Nukes as they do currently and recover against whatever incremental block is running. If so, would all the capital cost for a Nuke be recovered across a shortened period: if so how short, a 4 hour super-peak, or 8 hours, or 16 hours? Broad abstract concepts are easy to form concrete answers and opinions about. I always liked terms like supply and demand. In the US energy complex what is supply and what is demand? Both can be somewhat fluid and demand is very weather dependent. Additionally to add more uncertainty and what is the value of reliability. I would think it has greater value for a Hospital than a Citrus farm. However, on a very cold night that might not even be true. I do not see how ignoring average price can be justified on utility assets when the capital costs are also are being or have already been recovered from the ratepayers. If one wants to ignore average cost so high peak prices act as a disincentive to consume power during that period so be it, but the excess revenues in my opinion should funneled back into shoulder hours to encourage more level consumption and make the total period charge reflect the true average cost. If it is being used as an incentive then the marginal cost is not relevant if the goal is to do meaningful peak shaving set artificially high prices consistently not just on occasional very hot afternoons. Then consumers can justify investments again like thermal storage to carry them in comfort though the peak without the AC running.

Then we get to fines. Because my friend figured out roughly what Enron was up to, HE was fined not $4000 but $50,000!!! The government's logic was that since he knew something was up he was supposed to report it to the appropriate authorities. Notice that your friend got a get out of jail free card because he was WORKING for the bad guys, so wasn't as obligated to blow the whistle on himself. Personally I believe this to be utter crap and a typical abrogation of justice and logic, which of course lawyers are past masters at.

Plain Jane meters have tamper seals on them because any electrician knows that you can take one off, put it back in upside down and the meter runs backwards, giving you your power for free. Pinkertons proved years ago that something like 70% of the population will steal given the opportunity (40% if they think they won't get caught and another 30% if they think they could get caught but might get away with it). This is the world we live in. So you are precisely correct when you say that any system needs to be fortified against crooked behavior first. Years past, when I designed and wrote point of sale systems, that effort consumed 80% of the code space. You see, the biggest source of shrinkage in a store occurs between the cashier and the cash drawer. That's one of the reasons you have to have a manager's approval when you do a return, especially for cash back on a purchase. But don't believe that an employee standing there 8 hrs per day isn't figuring out ways around the system. And of course this neglects those customers roaming the isles placing knick-knacks in their pockets...

About the comments on the California problem. Great, absolutely great. But once again, don't forget to read the pack of lies in the special issue of the Energy Journal, especially the opening article by Professor Paul Joscow of MIT. As I mentioned somewhere, when I saw the literature list for students of energy economics at MIT, I offered to provide - gratis - the boss of the economics department an alternative list, but later I came to the conclusion that going down to Stockholm on one of those sensual Swedish summer nights and getting drunk and listening to some jazz would be a superior allocation of my time and gusto.

By the way, Jerry, I seem to remember giving a lecture a couple of centuries ago in which I demonstrated that when more than one kind of generating equipment is being used, the average cost of electricity has little or no (theoretical) sígnificance, and the same probably applies to the marginal cost.

Obama wants to bankrupt the coal industry. Here is the link, I wonder what the utilities think of this. What should Americans think? Considering we get over one half of our electricity from coal.

http://media.newsbusters.org/stories/hidden-audio-obama-tells-sf-chronicle-he-will-bankrupt-coal-industry.html?q=blogs/p-j-gladnick/2008/11/02/hidden-audio-obama-tells-sf-chronicle-he-will-bankrupt-coal-industry

BTW, if you want to create a fancy link the way I and some others do here, you need to type it up like this:

[a href="http://tinyurl.com/68oyz4">here is your link [/a>

Now substitute this character "<" for this character "[" above and you get the following:

here is your link

Get this info out to as many people as possible. Not sure about other Americans but I like reliable electricity. Thanks for the advice.

Watching the recent price of oil, I'm considering concluding that my proposal for IMEUC must be revised to specifically exclude speculators from the market no matter how useful forward hedging may have appeared at some points. I'm now of the opinion that there is enough fiat currency sloshing around in the world to effect at least a $60/bbl volatility in world oil markets, and to attack the economies of fairly large nations head-on. That granted, what hope to avoid manipulation would a market for the electricity of 5 or 10 million customers have? None. It is likely therefore necessary to impose rules which would require that only original generating entities may offer electricity for sale (eg. no re-selling) and every contract must take delivery on the day it is made. If the gamblers want to set up a futures market to bet in, let them do it among themselves in a Vegas casino, completely isolated from the customer's market. No doubt there's some flaw with that plan, but we'll need to work on it until its solid.

Jude: Re: your link. It MUST be true, I heard it on the web!

As for whom that somebody might be, I have two candidates. The first is Governor Palin, who could mercifully be called somewhat confused, while the other is the gentleman who offered a million dollars to anyone who could prove that the SWIFT BOAT commanders were wrong about John Kerry. If in fact he had paid a million dollars to everyone who was able to prove that those Swift Boat people were wrong, he would have gone from a billionaire to a welfare case.

At the same time let me say that if Senator Obama wins this election, he should ask Senator McCain to explain to him that he - Senator Obama - needs to wake up where energy economics is concerned.

Ohio: wake u. Obama wants to bankrupt the coal industry. He specifically said it. The media has hidden it up because he is their Messiah.

It's true the US and Canada both have governments and politicians wanting to shutter coal plants. Ontario plans to close them all in less than a decade, replacing them with more renewables, NG, and nuclear. However given the US has so much of their generator fleet in coal, I wouldn't worry they will go bankrupt anytime soon in spite of Obama's economic plans should he win tomorrow. The public outcry to keep the lights on would be too deafening for him to allow it without massive replacement capacity on-line first, and that will cost a huge sum of money invested or spent by the government, not seen since the massive government spending in WWII.

Consumer rates in the US are likely to skyrocket soon anyways regardless of whether Obama wins or not. The looming rate crisis stems from the massive investments the grid needs to avert the growing demand-supply disconnect and maintenance of its aging infrastructure.

In the 1980s many U.S. regulators adopted the used & useful test, effectively abandoning the fundamental bargain of cost-of-service regulation. Utilities have done really stupid things in attempts to get out of the resulting system in which heads they do not win and tails they lose. If you want to keep regulation you need to convince the regulators to keep their end of the old bargain or come up with a new regulatory system. So which one do you want to take on while teaching regulators to approximate marginal cost pricing?

I am not challenging the concept of peak oil. Futures prices for oil in out years are higher than near-term prices, reflecting an expectation that low cost oil supplies will be inadequate. My only point is that the end of cheap oil should be, and is, affecting your utility bill. Before railing about deregulation raising your bill please specify how much it was going to go up with continued regulation.

Enron was dishonest. We cannot paint other players in Enron colors without being dishonest ourselves. We need to look a little deeper. One of the major violations of the spirit of the California restructuring was withholding of load from the day ahead market by the major utilities. It began on day one. If withholding from the day ahead market is an exercise of market power rather than a marketing tactic, then the utilities were the major market power offenders. In fact the generators have the grounds for successfully pleading self-defense for any withholding they did, since it was necessary to defend themselves from the unfair practices of the monopsony utilities. Flinging market power accusations at generators was taken up by politicians and regulators when their restructuring baby turned out to be Frankenstein. You have to give the politicians due credit. They succeeded in shifting blame from those who deserved it, themselves, to the generators who for the most part played the role assigned to them. Keep in mind the point made by Sevren Borenstien, head of the U.C. Berkeley energy practice. Merchant generators have a fiduciary responsibility. They have a responsibility to make as much profit as they legally can for their shareholders. Failure to uphold this fiduciary responsibility can get them sued. Regulators and politicians deciding after the fact that some practices are illegal is just an irresponsible way of admitting that the restructuring was deeply flawed. And ignoring the actions of the utilities was just downright dishonest.

In 2000 and 2001 there were times when we ran out of generation. At that point the supply curve becomes vertical. The demand curve was vertical by regulatory fiat. When we ran short of power the demand curve was slightly to the right of the supply curve. They did not cross! In that circumstance there is no defined market price. All we know is that it should be extremely high. But how extreme is undefined. The perpetrators of the California restructuring did not want to admit that prices should by very high as we approach the vertical section of the supply curve. And reservoirs in the northwest were so empty that they effectively stored the shortage of energy from the ensuing summer back into the preceding winter, so the duration of shortage was months. Nor did the perps want to admit that the shortage existed since they were responsible for the product of a decade of bad resource planning and zero price elasticity that created the shortage. The amount of the physical shortage was actually tiny, so almost anything that addressed demand was sufficient to eliminate the physical shortage. And supply prices ramp up steeply approaching the vertical, so reductions in demand produce dramatic reductions in prices. That is why prices would have been dramatically lower if there had been a market.

It is a fundamental principle of economics that prices should reflect short-run marginal costs. Failure to do so is taken as an indicator of market power of one sort or another. The one deficiency in this principle is that it does not explain how large capital investments are paid for. But that is covered by the principle that prices should reflect value.

At 0400 the short-run marginal cost can be the cost of coal or uranium fuel. More often in the WECC it is the cost of natural gas. (If the environmentalists have their way maybe in the future it will be the cost of wind fuel.) The fascinating thing is that we have seen generators bid below fuel cost to stay on all night. It is less costly than a shut down and restart. Market prices are much lower during low demand periods than regulatory prices because there is no to limited capital recover at such times. Over the course of a year the only difference in revenues between regulated and market plants reflects higher operating costs of the fat and happy regulated plants. At 1600 on a hot day your diesel generator may set the short-run marginal cost, and therefore the appropriate market price. But there is a need to pay of the capital cost of that diesel, so prices should rise above the cost of diesel fuel. Note that markets favor the lowest possible capital cost generators for super peakers and high fuel costs are almost immaterial because they are incurred for such a short period. Utility planners have followed the same principles. But markets send a price signal that reflects the extremely high cost of meeting a system peak whereas regulators have declined to do so. In a market environment a nuclear plant riding the spot market is at risk of a very bad year if it goes off line during a system peak. The owners should pursue a portfolio of sales that includes significant amounts under long-term contracts.

You raise an important point about value of service. Entities with low values of service should be strongly incented to avoid using power when it is scarce. Extreme prices that reflect the real cost of generating on peak provide that incentive. Regulated prices never have. Therefore, it is obvious that market pricing does not require as much G, T & D capacity as regulatory pricing. Total costs, and therefore total prices, can be lower. Combine this insight with the fact that many regulators reneged on the cost-of-service deal a quarter century ago and you begin to see how difficult it is to maintain the old regulatory system into the future.

Now take value of service thinking a step further. Engineers told me 15 years ago that it would not be expensive to build the ability to drop in response to low frequency into retail meters. Given the opportunity, a million homes may offer to respond when a transient on the transmission system reduces frequencies. And the discount for doing so could be in accordance with the frequency setting avoiding over reacation. I was told the hard part was getting the meter to come back on. Technology has advanced in the meantime, so there is probably a variety of ways for customers with lower values of service to reduce their utility bills by contributing to system reliability.

Incidentally, where natural gas deregulation was concerned, President Dwight Eisenhower turned thumbs down on that because he pictured it victimising 'ordinary people'. It so happens that somewhat later that argument was wrong, but General Eisenhower's reasoning applies to electric deregulation today. By the way, I don't see how it is possible to read Professor Borenstein's description of the California deregulation farce without coming to the conclusion that it should never have been undertaken. One of his colleagues though - a man who is at least as brilliant as Professor Borenstein - told a conference in Sweden that although electric deregulation was a disaster, it was impossible to recall. This contention, quantitatively, is as much a lie as the collection of lies in the special edition of the Energy Journal, in which several of the biggest liars and phonies in academic economics are featured.

Peak oil and the futures market. THERE IS ALMOST NO LIQUIDITY IN THE OIL FUTURES MARKET PAST 6 MONTHS, OR OFTEN LESS, and so futures prices for oil "out years" are WORTHLESS. Go down to your nearest university and ask the people in the finance department to explain this simple truth. I informed the grand Philip Verleger and some of his colleagues of that sad fact at a conference in Washington some years ago, but while I am sure that he got the message, he made it is business to get huffy, though not at that moment when I was prepared to make myself clearer if he had insisted.

OBAMA AND COAL. If the senator had been standing in church next to Reverend Wright with a bible in his hand, on which he swore that his plan would bankrupt the coal industry, and ELECTRIC RATES WOULD SKYROCKET, and if I had been sitting in the front row of the church, I STILL WOULDN'T BELIEVE IT. No intelligent man would make a damned fool statement like that unless he was flying high in the friendly sky with the help of a controlled substance. Bragging that he would bankrupt the coal industry and electric rates would skyrocket! Oh no...Fred might be crazy, but he ain't stupid enough to believe something like that. Jude, I think that you should check out the chapter on coal in my new energy economics textbook.

In the U.S. utility generation is equated with cost-of-service regulation and that in turn has come to be equated with average cost pricing. So if we throw the regulatory bums out all of the replacement bums come with the same mind set. If regulators would get the message about the need to at least approximate marginal cost prices then the case for deregulation would lose much of its strength. Maybe you should go into the business of educating regulators in the fundamentals of economics.

Your reference to Eisenhower is interesting. Regulation of natural gas in 1954 created the illusion of a shortage of natural gas in the 1970s because the regulated price was just enough below levels needed to justify exploration that there was little exploration. So when the Arabs rattled their oil wells at us we did not know that we could tell them where to stuff their oil because we would start converting cars to natural gas. Further, the fuel use act banned natural gas for electric generation, so utilities had to chose from coal and nuclear. Engineers over sold the idea that nothing can go wrong with nuclear, so when it did the public rebelled. Regulators invented the used and useful cop out for reneging on the cost-of-service regulatory principle, and utilities started looking for ways out. Costs rose and customers began looking for a way out. To some significant degree electric deregulation is one of the unintended consequences of bad natural gas regulation half a century ago.

Len, as was the case in natural gas regulation the devil is in the details any time regulators or politicians get involved. So when they mess up some of your principles things can go very wrong. Worse yet regulators do not learn from their mistakes in a timely manner. So while I find the core principles of your proposals attractive, I continue to believe we need to implement them in a manner that will allow a market to evolve without depending on regulators to get anything right. Just setting up generation and distribution as you suggest requires more than we can expect from regulators, so the best hope is that the wires businesses will evolve over time in response to market forces. Far from perfect but the best I believe we can expect. So we differ primarily in our expectations regarding regulators.

Oh and just to make things easy, they uploaded the ENTIRE interview, hoping that the TV viewing public will give up (or have insufficient bandwidth) to wade through the whole thing, thereby continuing on in their blessed ignorance. Of course they are right to think so. Here's a shorter video, even here you have to wait about 2 minutes for the "money shot".

Of course I had already voted by the time I got to see all this, as have millions of Americans, almost by design wouldn't you say?

As for the governor's clothes bills, that sort of thing doesn't interest me, since as far as I am concerned the important thing about the governor was keeping her away from the Pentagon, and the Field Marshall's uniform that she probably would have had tailored for her appearances in the War Room. What does interest me is why somebody decided that McCain and Palin was a better combination than McCain and Romney. That might have turned me from a Democrat to a Republican.

Dick, about the regulation of natural gas. Given the gas glut (or 'bubble' as it was called in some circles), I was against that regulation, but I also remember the 'research' by ____ and ____ which claimed some completely absurd figures for exploitable gas reserves if deregulation was lifted. That soured me on both deregulation and econometrics, which I was teaching at the time.

As for the charms of regulators, at the Washington conference that I mentioned somewhere, I got a load of their technical skills, which sent me back to my humble room in the Marriot for some alcohol and TV. But, the textbooks don't deal in personalities, and so I don't really understand how an intelligent person who reads the textbooks could have concluded that the kind of electric deregulation they launched in California was anything except what they called it in Canada - that is to say "GOOFY".

President-Elect Obama President-Elect Obama :)

Actually, both Obama and McCain advocated similar cap-and-trade targets for carbon, so I think that horse had already left the barn.

I found Obama's comments about coal plants very naive, but I've also seen his views on energy policies evolving fairly quickly. I think that's a good thing.

If he surrounds himself with Clinton-era energy people, it might not be so bad. They were reasonably pragmatic -- the main trick at this point is to get him more on-bound with nuclear power, but I don't think that's going to be difficult to do. (Heck even the grist.org people are pro-nuclear at this point! That's kind of like seeing a dog walking around on two legs....)

What to cap and what to trade eh? Maybe just bankrupting them is the best idea after all, who needs that power anyway?

But I guess that won't matter to the new super majority in Congress, we can all just sing Kumbaya to keep warm in the winter and cool in the summer. :)

The key to understanding California's restructuring is precisely that those who made the decisions had no familiarity with economics text books. They were politicians, regulators, lawyers, operations researchers, and power engineers. They knew they knew more about what would work than mere economists. And please stop calling their ridiculous regulatory construct deregulation. You may not like electric markets, but that is no reason to bad regulatory schemes deregulation.

Len, you are dependent on politicians to get things right and then the successful conversion of regulators into market managers. California attempted to have regulators manage a market. That should scare you. I agree that legislation is required to facilitate markets by breaking up the combination wirecos and retailcos. Beyond that I trust market forces far more than any political or regulatory dependence. So I would emphasize the principles you lay out and allow more than one path for getting them implemented. If my experience with regulators is not indicative of what they can do in the future the principles can be implemented as you suggest. But think about an alternate just in case the past is prolong to the future.

However even so, I recognize that there is probably a lot that I don't know about the subject that I should know. But about the so-called deregulation in California, I took the liberty of obtaining all the details. It was purely and simply a raid on the pocketbooks of the rate-payers, with the assistence of academics like those LIARS AND PHONIES who contributed to the special issue of the Energy Journal in tribute to one of the biggest ______ and ______.

If regulation were really well done it would work OK. I believe it would still be inferior to a market, but no one would ever know because it would be working well enough that there would be no support for taking the risks inherent in making a change. The problem is that regulation has been subject to serious institutional entropy over the last half century. And the regulators doing the worst job are labeled "progressive" because they are changing things more than other regulators. But when the changes are for the worse one needs to examine where it is they are progressing to in order to initiate a major course change. Right now the only course correction under consideration to address the problems of bad regulation is deregulation. Perhaps you want to examine the differences between current "progressive" regulatory practices and good regulation to propose a course correction to better regulation.

Electric regulation inferior to a market? Markets should always be resorted to when possible, but maybe not here. The people of this country (Sweden) have been badly served by the deregulated electric market, but maybe they deserve it. If they hadn't closed those two nuclear plants and joined the European Union, deregulation or some kind of partial deregulation may have worked.

If we turn a group of marketers loose on the electric market they will begin segmenting the market. In England the segmentation became finer with each annual round of pricing just as one would expect. Marketers are experts at figuring out things like load profiles. Nice to have interval meters so they could just read the profile, but there are many indirect ways to get first and even second order estimates without interval meters. The smaller and more mundane the customer the fewer variations a marketer has to deal with, so the easier it is to figure out a load pattern without an interval meter. That is why I think we are at least a couple of decades away from justifying them on residential customers.

Marketers are not constrained to look only at electric use. They can price based on an electric load profile, but they can also offer alternative approaches to provide energy services. There are alternatives to using air conditioning compressors in real time that chop the peak.

I do agree the market for energy services, including electricity consumption, should be segmented. The most productive segmentation will vary from user to user and time to time, so we should turn the marketers loose to find the best baskets of segmentation techniques and apply them in the most innovative ways they can. That is the beauty of a market. We can discover the best answers and refine them to infinity because the transaction costs for refinements are low.

A regulatory proceeding to make even small modifications to prices or other terms brings out entire armies of protagonists and it is conducted with all the efficiency of a murder trial. It is so expensive that we cannot afford to make many changes. As a result we pretty much have to know the answer to what is the best approach to segmenting markets before we take the first stab. So finding a good way to apply marginal cost pricing in a regulatory environment is hopeless.

Fred, there have been experiments on college campuses that demonstrated that economics students are more honest than the average college student, but even economists follow the Willy Sutton principle - go where the money is. So when I see academic economists aiding and abetting stupid regulators and politicians I am a little more understanding than you seem to be.

Len, I have done marketing. Marketers are the creative force in our economy who bring together an understanding of what is valuable to customers and what engineers can accomplish to improve the value offered to customers and the efficiency with which it is delivered. Only in the electric realm is marketing associated with the outlaw gang named Enron. If someone insists on judging all marketers by the actions of Enron then we should judge all regulators and legislators by those in place in California in the same past era. That would leave us with no one qualified to do anything.

Every industry selling to end use customers needs retailers to define products and man the cash registers. Think about all the variations of electric service available if we would use them. Super reliable service, heavily discounted service that is curtailed from to time, etc., etc.

What I have rambled about is only the tip of the iceberg not addressing anything demand side assumes the grid is even more completely regulated than is currently the case. I also completely left out Marketing and Trading functions and all its impacts. I think no matter how or who does it will be re-regulation rather than any semblance of free market. However, I think the market could be improved to function more efficiently and produce a level playing field for new generators and technologies. I do not believe the energy market will ever or can ever be a free market and maintain reasonable reliability. But I think there are massive efficiency and market incentive improvements possible, even though I doubt they will happen in the foreseeable future.

Dick: I think your concerns regarding getting the 2 hr / year and 20 hr / year peaker built are unfounded. The whole premise of IMEUC is eliminating such, by using demand control to match load up with supply, incented by advance or real-time pricing. One main difficulty implementing IMEUC is the screaming caused by owners of such finding their market is eliminated. Of course our response is that their market is not really eliminated, it simply moves to assisting unreliable mandated renewables make their market commitments firm, which is how that market aspect should work anyway.

In the western US interconnect hydro supplied over 30% of the annual energy a few years ago and in a sever drought half of that energy is not available. (Go ahead and try to prosecute God for withholding!) Reserves of some kind are needed for this. Some could be from mobile generators on barges, rail cars and trucks. Higher prices should dampen demand in drought years. But we probably will want to to keep some reserves planted on the ground. At least we have to allow for that as a possible outcome in a fully optimized solution in a market arrangement.

Changes in this industry are slow because both utility and customer assets are long-lived. When prices begin to reflect marginal costs there will be a long lag before there is a substantial reduction in short peaks. Any market arrangement must be robust enough to function in the mean time, which will be counted in years.

An efficient market may eventually become so automated that it will not require any sort of human central dispatch to manage transmission congestion, forced outages of generators, unexpected ramping up or down of demand or renewable resources, etc. In the meantime (at least decades) all markets I am aware of use products similar to those Jerry described to insure system stability. I suspect that as with airlines there will always need to be a traffic controller. As long as the various services used by the traffic controller are offered at market prices there will be good incentives for loads and generators to operate efficiently.

I forget the details but the California ISO had some foolish policies for those who offered ancillary services such as ramping up or down. I think one bit of foolishness was that when a generator ramped it incurred an imbalance charge determined by the real-time price of energy because that put it out of balance with the schedule it had submitted to the ISO. The result was that ramping was a risky product to offer, especially when it was needed most. So it was offered at prices that compensated for the risks the ISO had fatuously created for those offering the service. In have not followed the details for some time, but I believe the ISO eventually learned from the resulting high prices that it is important to limit risks for generators to those that cannot be avoided. Jerry's point about avoiding creation of unnecessary risks is important. It is a key to efficient markets.

"Do you believe the wind and solar folks can exactly predict there outputs?" -- The solar thermal-with-storage folk, yes, pretty much. Even wind folk can predict some time into the future with good reliability.

On further to the question of risk assignment, let me jut say that risk needs to be assigned to the entity which is capable of mitigating it. Its incorrect to assign the risk of outages caused by turbine bearing failures to customers, as they can do nothing to mitigate it. They need to pay a risk premium build into market prices by generation, which can mitigate, and set the premium competitively ans accurately.

A lot of the preceding two posts appears to be attempts to establish prior benfit to incumbents.

A key point is made by Dick, "As long as the various services used by the traffic controller are offered at market prices there will be good incentives for loads and generators to operate efficiently." -- especially important are prices to all customers.

Peakers are constructed to meet that excess demand, or the utility rolls the dice and hopes it can be purchased on the open MARKET during peak demand periods. Sometimes that looks brilliant, other times it looks incredibly stupid. Dick is right, MARKETING is mandatory to analyze historical demand and factor in such vagaries as new growth and changes in weather patterns. This concept of marketing as epitomized by Madison Avenue is not the kind of marketing I'm talking about. That "marketing" is crap. Real marketing means thoroughly understanding your market to the extent that you can predict using stochastic methods, with reasonable accuracy what the market will demand, therefore telling your management what they need to do to prepare for said demand.

IMEUC and other concepts exist in an imaginary world where everyone is an honest broker and demand is fully predictable based on cost signals. However, the real world is far different. I was there in California during the rolling blackouts. I was stunned to walk past a furniture store in the Bay area that had over 60,000 sq ft of LIT floor space, this at 11:30 at night, long after the store was closed, the better to "display" their product. There's marketing and there's marketing, unfortunately. I was out walking that evening because my hotel, one block away was at that moment the victim of a rolling blackout. Utilities during those blackouts were receiving fallacious signals of course, due to shenanigans by Enron, but it could just as easily have been a REAL crisis, with equal results. After all, the store manager at the furniture store doesn't see the power bill, some other schmoe in the company does, like the janitor (er, maintenance engineer).

The bad thing about our energy industry is the fact that because of regulation, the utility has to look in their crystal ball and predict events far into the future, far enough to grind through the glacial pace of the UTC regulators. Having established those pricing mechanisms for those power quanta defined however they see fit, they then have to live with the results, regardless of what reality throws their way. As long as regulators are involved this will be the nature of the beast. Take regulators away and you're leaving the market susceptible to the kind of mischief that Enron engaged in (albeit, they were in a pseudo-regulated environment). Now we have Charybdis and Scylla, damned if you do, damned if you don't.

IMEUC works well either with "predicted demand" (eg. pre-purchased options to consume) or with realtime pricing. In both cases however it requires a complete paradigm shift regarding "demand". With 5 billion new population "demand"ing to join the lifestyle of the favoured billion, we may find earth imposing limits on us unles we do some ourselves. Earth is certain to be harsher.

A large part of society's problems can also be attributed to your attitude toward the "janitor (er, maintenance engineer)". With that sort of placement in your particular social pecking order, and the resulting pay scale difference between he and the salesman, did you expect to attract a highly educated engineer to the job?

I say pitch regulation of energy prices, that's an increasingly deadend game, eg. see recent oil. IMEUC and obviously, tough but fair competitiveness regulation, is the future.

I'm interested in your concept of demand, just too pragmatic to believe that consumers can be treated in that manner. As I've said before, individuals can be smart, but the masses are incredibly stupid. The only reason we don't see more blinking LCD clocks on VCR's is because we don't have VCR's anymore, not because the population suddenly got smart about programming a simple clock. I would personally LOVE to have a smarter society around me, I get disappointed every day by what I see out there, but wishing won't make it so. Utopian visions have a way of turning dystopian.

You've completely missed my point about the "janitor". I brought it up in another thread about power budgeting being the purview of the maintenance guy, and it isn't ME who treats him with disdain, but his BOSSES. A company I owned was the 3rd largest tenant in a 16 story building, and the maintenance engineer (janitor) was my best friend. In 35 years on the job, no tenant had EVER bought him a beer, which I did in the 1st month. Don't pretend I have some sort of disdain for the working class, the opposite is the truth. I have respect for anyone who knows their work and does their job well, period.

Remember, we've talked before about BUSINESSES being the majority consumers of power, not CONSUMERS. Businesses get the TOU meters first because they DESERVE them, and they can benefit from them. However, because some businesses don't operate efficiently, our intelligently, your issue stated above does indeed occur. That's when you have elegant control systems being overridden because the janitors don't like cleaning in dark buildings, so turn on ALL the lights, even on floors they aren't cleaning. So much for the vaunted power savings. Perhaps it would do both you and Fred good to take a walk at night and take a good look around at this world we share. Open your eyes a little.

And Fred if I'd have meant econometrics I'd have said it. I'm a huge fan of legitimate statistical analysis properly applied for predictive purposes. What that has to do with econometrics eludes me.

I think we would all agree that millions of consumers cannot ALL be expected to simultaneously turn things on or off on a whim or even a price spike if they are watching and paying real-time wholesale electricity prices. But a substantial portion would if they had the technology to automate demand response with real-time prices.

Just being AWARE of one's running utility bill everyday (with a real-time display) has been shown in study after study to promote conservation, with total energy consumption reductions of nearly 10% on average across a population in the hundreds of households. Obviously the more affluent consumers who don't care what they spend won't curtail their usage, but other frugal ones will by as much as 20%. Similar effects have been confirmed in US utility trials with residential real-time prices over the last few years.

What Len's IMEUC proposes is to extend the concept of real-time energy monitoring to automated demand response, and most importantly enable every customer to buy power from the generator of their choice if they wish to do so. Many consumers go out of their way to save pennies on their food and gasoline purchases, and would do so too with electricity if they had the technology in their hands to do it without having to watch their meter all day long.

Consider also if you believe plug-in electric cars are going to emerge on a wide scale over the next decade, SOMETHING must be done to manage the extra demand to avoid gigantic increases in peaks, like every afternoon when people get home from work and (want to) plug in to top up. And if these vehicles also have the capacity to use their batteries for temporary storage and later sell it back into the grid during peaks, as many have been discussing lately, then surely the grid will need the technology to identify huge numbers of micro generation sources, and pay them for their power with real-time prices. IMEUC is a roposal that would automatically take care of this.

Didn't see your response til after the forum's statue of limitation was exceeded. To me the model results seem to suggest that the model is not unique. Perhaps something that recognizes prices as a function of a number of variables including market power would be more convincing. A model that would allow market power to decrease or increase prices, that is, if we can get past the lawyer's and economist's definitions. Do applaud the late recognition that reserves are needed. Decreasing the slope of the supply curve has alot going for it. Earlier you alluded to the fact that numbers didn't bear this out. What do those numbers look like? Just to throw a little gasoline on the restructuring fire, today's "deregulation" byline bears a good read:

TEXAS ELECTRICITY RATES HAVE RISEN FASTER UNDER DEREGULATION THAT THOSE IN OTHER STATES, STUDY CONCLUDES

Texas residential electricity rates have risen faster under deregulation than rates in all other deregulated states that allow competition in the retail electricity market, according to a new study by a group of Texas municipalities. - (Knight-Ridder) --> http://www.energycentral.com/global/news_text.cfm?id=11473940

We succeeded in modeling very close approximations to subsequent prices, including two turns, up, then down. We did it by actually modeling how markets work. Very few in this industry understand how markets work so most modelers just missed the boat entirely. People who are still doing price forecasts with merchant generators as their clients claim our results were unique. There must be a couple of others who understand how to model a market and do not divulge that they did just as well because their capabilities are trade secrets.

The interesting thing is that a model based on an assumption of no significant exercise of market power was so accurate in forecasting prices right through a crisis. Keep in mind that high bids in a shortage is not by itself evidence of market power. A demonstration that they would not have been so high but for the exercise of market power is required. I do not believe that could be demonstrated for California in 2000 and 2001 as much as some would like to believe otherwise.

As for Texas, it depends on natural gas for much of its generation. Regardless of the regulatory paradigm its rates would rise more than average. In fact the pressures for deregulation have been proportional to the price levels. Jurisdictions that were so ‘backwards’ as to rely on coal and nuclear for the great majority of their generation have enjoyed low prices and little pressure to deregulate or make any substantial changes.