Playing with Fire - The 10 Tcf/year Supply Gap -- Part I

Posted on December 15, 2006
Posted By: Andrew Weissman
 
This is the first of a four part series of articles on the natural gas and electricity price and supply risks facing the U.S. economy. The first article provides an overview and summary. Subsequent articles will examine specific issues in more detail.

It’s been almost 5 years since I first began speaking out publicly on “The Emerging Natural Gas Crisis.” It may be an appropriate time, therefore, to step back and reassess the likely long-term prospects for price and supply in the U.S. market.

After 5 years of soaring prices, where do we stand? Are the most severe price shocks already behind us? Or a few years from now will the price increases of the past few years look tame – just as 3 years ago the notion that oil might soon reach $75 per barrel might have been considered absurd?

If the latter is true – if we’re still at a relatively early stage in the emerging crisis – what steps, if any, can be taken, to avoid the potential for serious further harm to the U.S. economy from rising energy costs?

And perhaps most critically, how can we instill the sense of urgency needed to put in place a comprehensive national energy strategy? Over the past 5 years, higher-than-expected natural gas and electricity costs have drained more than $ 400 billion dollars from the U.S. economy (roughly comparable to the cost of the Iraq war) and seriously impaired the ability of U.S. companies to compete in global markets. If largely avoidable costs of this magnitude haven’t been sufficient to stimulate a more effective response, what will?

Fully answering these questions would require a book length report. I won’t attempt, therefore, to provide definitive answers here. Instead, my goal is to stimulate further discussion and deeper inquiry into matters of urgent concern.

Fundamentally, however, four major conclusions stand out:

1. The severity of the crisis is much greater than I assumed might occur when I first began speaking out on the potential for sharply escalating natural gas prices almost five years ago. Even before Hurricane Katrina struck the Gulf of Mexico last year, natural gas prices had quadrupled in just 3 ½ years:

These price increases are likely to be just the “tip of the iceberg,” however, unless action is taken immediately to develop new sources of energy supply to meet the needs of the U.S. economy. As explained in detail in Parts II and III, during the next decade, an unprecedented gap is likely to develop between the amount of natural gas required to meet the needs of the U.S. economy and the supplies likely to be available to the U.S. market.

By the mid to later part of the next decade, this gap could reach 7.5 to 10.0 Tcf per year – an amount roughly equivalent, in BTU terms, to 1.5 X the amount of oil the U.S. currently imports from the Middle East.

Further, under very plausible scenarios, this gap could easily be twice as large (i.e., the equivalent of almost 3 X current U.S. oil imports from the Middle East) – especially if new environmental restrictions are enacted at either the federal or state level that have the effect of encouraging the increased use of natural gas (as appears increasingly likely to occur).

2. An energy supply gap of this magnitude could result in hundreds of billions of dollars per year in needless energy costs and seriously impede the growth of the U.S. economy. This massive shortfall in supplies will not necessarily result in physical curtailments of supply – although the possibility of periodic physical curtailments of supply cannot be ruled out, especially in the power sector.

Instead in a de-regulated market, price is the mechanism used to ration available supply. Given the magnitude of the potential natural gas supply gap, however, unprecedented price increases are likely to be required in order to reduce demand to the level of available supplies. This is especially true since, over the past 5 years: (i) due to tighter environmental restrictions, opportunities for fuel switching (which has acted as a safety valve to mitigate price increases in the past) have been greatly reduced; and (ii) repeated price spikes already have driven many of the most price sensitive natural gas users out of the U.S. market.

As a result, in the future, as the supply/demand balance continues to tighten, steep price increases may be required in order to drive even small amounts of additional demand from the market. To balance supply and demand by the end of the next decade, however, demand may have to be reduced by an amount that significantly exceeds total current U.S. industrial demand – a truly formidable task.

If we fail to begin implementing an alternative energy strategy soon, therefore, by 2020 the price increases required to reduce demand to the point that it matches available supply could prove to be brutal – slowing the growth of the U.S. economy, and potentially resulting in the permanent shutdown of a significant portion of the manufacturing sector in the U.S.

Further, there is a serious risk that in some regions of the country, the huge investments that have been made to maintain the reliability and cost-effectiveness of our electricity supply infrastructure will prove to have been for naught, since power companies may be unable to obtain the fuel required to operate all of the gas-fired generating units currently interconnected to the grid.

3. This impending crisis can be prevented by adopting a comprehensive national energy strategy to reduce U.S. dependence upon natural gas as a fuel to generate electricity. The crisis potentially created by this massive looming energy supply gap can be largely avoided – but only if we begin to recognize the magnitude of the energy supply shortfall we currently face and begin within the next 12 months to develop and implement a comprehensive program to bridge this gap.

There is no single, “silver bullet” solution to this problem. To bridge a gap of the magnitude that is likely to arise over the next decade, a multi-pronged strategy must be put in place. This strategy should include aggressive development of renewable energy (as already mandated by an increasing number of states), drilling for natural gas in areas that are currently restricted but can be developed in an environmentally responsible manner and a revival of nuclear power.

Realistically, however, to adequately address the massive energy supply gap that is likely to develop by the middle of the next decade (when we currently face a crisis of major proportions), during the next 5 to 10 years, most of the required solution must come from two areas:

i. Energy efficiency. We need to set far more aggressive goals than we have done in the past for improvements in energy efficiency and develop a realistic strategy for achieving these goals. Improved energy efficiency, particularly in the commercial sector, is the quickest and most cost effective way to begin closing the energy supply gap in a meaningful way in a short period of time.

ii. Accelerated deployment of coal gasification and coal-to-liquids projects on a major scale. Energy efficiency alone, however, is not enough. Given the magnitude of the supply deficit we face, it is also essential that we begin immediately to develop programs to more fully utilize our most abundant domestic energy resource: coal.

As a growing number of major environmental groups now recognize, substitution of the use of coal for natural gas and liquid fuels can be done in a way that is a way that is fully consistent with all major environmental goals, and can achieve hundreds of billions of dollars of savings for the U.S. economy during the next decade.

All that’s missing is the will to act.

4. Action must begin now. To avoid serious harm, however, action must begin immediately. The characteristic of energy infrastructure is that it takes a long lead time to modify. Further, while actions that begin soon could begin achieving significant results within 4 to 5 years (and even sooner in the case of energy efficiency), scale is also a major issue. Realistically, even with major improvements in energy efficiency, a decade or more will be required to close the energy supply gap described in these articles.

Quite literally, therefore, there is no time to delay in moving forward with these programs.

Warning Signs Clear

How could the U.S. be facing an energy crisis this severe without the potential risks being better understood?

In a sense, of course, the failure to anticipate the next phase of the natural gas crisis shouldn’t be surprising. Earlier in the decade, the U.S. Energy Information Administration (EIA) and most major private forecasting firms failed to anticipate the massive price dislocations of the past 5 years – one of the more stunning failures of market analysis in industry history. For the most part, however, these forecasters still are using the same basic price forecasting techniques, often with the same personnel. Over the past 3 to 4 years, the track record of many of these forecasters is only marginally better. It is not immediately apparent, therefore, why they should be expected to do a better job of anticipating major price dislocations in the future.

The warning signs, indicating the potential for major future price dislocations, couldn’t be clearer. Specifically:

1. Over the past several years, the E&P industry has experienced far more difficulty avoiding further declines in U.S. production than was expected just three years ago, at the time of the National Petroleum Council’s 2003 Study.

Over the past several years, in response to higher prices, the E&P industry in North America has “pulled out all of the stops” to increase production – ramping up development far more aggressively than most observers expected.

Expenditures on development have reached an all-time high. Further, drilling of new wells has increased at a ferocious rate. Since 2002, the number of natural gas wells drilled in the U.S. each year has nearly doubled, increasing by more than 15,000 wells per year to an estimated nearly 32,000 wells drilled in 2006 (an increase of 90% over 2002). The story is much the same in Canada, with the number of new wells increasing by more than 8,600 wells per year (95%) to any estimated 17,700 new wells in 2006.

This massive increase, however, hasn’t been nearly enough. Instead, as a result of the continued aging of most major fields, production per well has declined by 16.6% since 1996, with a particularly steep decline over the past 4 years:

In the U.S. and Canada combined, since January 1, 2000, a total of 247,000 new wells have been drilled. This approximately equals the number of new wells that had been drilled in the previous 17 years, and has significantly reduced the number of attractive new prospects that remain to be developed on both sides of the border.

Despite this massive increase in drilling, however, U.S. production, after peaking at 19.6 Tcf/year in 2001, has declined by 1.3 Tcf per year – a decline of 6.7%. Canadian production has largely drifted sideways for the past 7 years.

By now, of course, this decline is widely recognized within the industry. Even after expectations have been lowered, however, natural gas production has continued to disappoint.

In September of 2003, for example, after completing a major multi-year study, the National Petroleum Council (NPC) dramatically reduced estimates of future U.S. production – reducing expected U.S. production in 2010 by 6.0 Tcf/year (a reduction of > 23 % from its previous estimate, issued less than 4 years earlier). See National Petroleum Council, Meeting the Challenges of the Nation's Growing Natural Gas Demand (1999) and Balancing Natural Gas Policy – Fueling the Demands of a Growing Economy (2003)

In the 3 years since this revised estimate was issued, however, despite far higher prices and far higher drilling rates than the NPC assumed in its Study, production has continued to fall far short of expected levels:

This rapid fall-off in North American production since 2001 does not bode well for future U.S. supplies. Over the past 5 years, major new development efforts have been initiated in some regions – including the Barnett Shale region in Texas, southwest Louisiana and several areas in the Rockies.

It is possible that, for the next 2 to 3 years, continued expansion of these fields, coupled with a continued aggressive ramp-up in drilling (if drilling continues to be aggressively expanded), will be sufficient to hold U.S. production at constant levels or even expand production modestly.

Few in the industry, however, expect that these increases can be sustained for any extended period.

Record prices have given producers strong incentives to increase the intensity of drilling in existing fields and prompted developers to reach far down into their inventory of remaining prospects in these fields.

At least for now, this has been sufficient to avoid even steeper declines in U.S. production – keeping the price of natural gas in single digits in most months.

The intensity of In-field development can’t be increased indefinitely, however. Instead, some of the best and brightest developers in the industry believe that the effect of the intensive development of the past few years inevitably will be to hasten the day when production in many fields will begin to precipitously decline – as began to occur almost a decade ago in the Near Shelf Region in the Gulf.

Notably, since, 1997, production in the Near Shelf Region in the Gulf – until recently the most important producing Basin in the U.S. -- has declined by 5.25 Bcf/day (a decline of nearly 42 %):

If production in other major basins also begins to decline rapidly sometime soon (as some developers believe is likely), we could see a sudden further fall-off in total U.S. production and simultaneous rapid increase in prices.

2. At the same time, the amount of natural gas needed to meet the requirements of the U.S. economy has grown dramatically. This increase is due primarily to rapid growth in the amount of natural gas required to generate electricity -- which has increased by over 900 Bcf in the past 2 years alone, reaching an expected 6.22 Tcf this year (equivalent to > 428% of total U.S. demand). Increases have been particularly steep in the May through September period:

This growth in power sector demand closely tracks estimates we issued several years ago. It far exceeds, however, estimates developed by both EIA and the National Petroleum Council.

As recently as February of this year, for example, EIA estimated that, during the 5-year period between 2004 and 2009, power sector consumption of natural gas would increase by a total of only 40 Bcf, from 5.32 to 5.36 Tcf/year (an estimate that the Agency should have recognized was absurd):

The actual increase in consumption between 2004 and 2006 is more than 40 X as large – less than 1/3rd of which can reasonably be attributed to hotter-than-normal weather this past summer. EIA’s long-term forecast assumed that power sector consumption of natural gas would not reach this level until 2013 – i.e., for another 7 years.

Earlier this month, EIA revised its near-term forecast – acknowledging reality, at least to a limited degree. Remarkably, however, EIA continues to take the position that, between 2006 and 2011, power sector consumption of natural gas will increase by a total of only 290 Bcf (i.e., an average of 58 Bcf/year):

This is an absurdly low forecast of growth in power sector consumption in an industry in which 40 % of all generation is now gas-fired, as a result of $ 100-billion + in new gas-fired generation added over the past 6 years:

EIA’s assumption regarding growth in power sector consumption of natural gas, however, is the single most important assumption in its estimate of total U.S. demand – and therefore the cornerstone for its price forecast during this period.

The National Petroleum Council’s 2003 estimate of future power sector demand is slightly more accurate than EIA’s 2006 forecast – but not by much. By the end of this year, (i.e., 2006), total power sector consumption already will have matched the level that in 2003 the National Petroleum Council was projecting would occur sometime between 2010 and 2011 – in effect reaching in 36 months a level previously projected to take more than 7 years:

The inevitable result of this steep increase in power sector demand, at a time when total U.S. production of natural gas has been flat or declining, has been a rapid increase in the price of natural gas, in order to reduce demand to the point that it matched available supplies.

Not surprisingly, therefore over the past 5 years, industrial use of natural gas has declined by almost 1 Tcf/year – a decline of just under 16 %. Without this decline, over the past 5 years, it would not have been possible to satisfy burgeoning power sector demand for natural gas and still simultaneously serve space heating demand in winter months.

In future years, however, this squeeze between available supplies and the amount of gas needed to meet the requirements of the U.S. economy is likely to become even more severe.

During the next 10 years, the underlying rate of power sector use of natural gas to generate electricity is likely to continue to rapidly increase. The only question is by how much. Even if no new environmental restrictions are enacted at either the federal or state level that result in increased use of natural gas at any time in the next decade, for example, (a scenario that currently appears unlikely), we would expect power sector consumption of natural gas to increase by an average of 350 to 500 Bcf/year for much of the next decade, after adjusting for differences in weather.

Cumulatively, therefore, by the middle part of the decade, even in a “no change” scenario, power sector demand for natural gas would be likely to increase to at least 9.5 Tcf/year (vs. EIA’s AEO 2007 estimate of projected consumption of 7.11 Tcf/year in 2015 – reduced slightly from its AEO 2006 estimate, despite EIA’s huge underestimate of near-term consumption in AEO 2006).

A number of major States, however – including California – already have initiated major programs to reduce greenhouse gases, not reflected in any of the most frequently-referenced published forecasts of natural gas demand or likely future prices for natural gas. With control over the State legislatures in a number of key states recently have passed into Democratic hands, the pressure to adopt such measures is likely to increase significantly during the next two years.

It remains to be seen, of course, whether new programs will be enacted and, if they are, how they will be structured and how affected companies will choose to comply. Clearly, however, the time has passed when the potential for major new environmental restrictions that would affect natural gas use can be blithely ignored in predicting future demand for natural gas or likely future price levels.

Instead, depending upon whether such programs are enacted and specifically how they are tailored, major further increases in power sector demand for natural gas, not factored into any current forecast of future demand for natural gas or future prices are clearly possible, with the potential to increase power sector demand for natural gas by several Trillion Cubic Feet per year within the next 10 to 15 years.

Further, this isn’t the only omission in most estimates of future demand for natural gas. Instead, many estimates of long-term demand for natural gas:

  • Fail to adequately take into account the rapid increase in demand that is occurring for use of natural gas to expand production of ethanol and other bio-fuels (which typically is very natural gas intensive, both for fuels processing and for growing crops);

  • Fail to adequately evaluate the potential impact on demand for natural gas and likely price levels of natural gas of deviations from “normal” weather or lack of adequate storage capacity;

  • Fail to adequately evaluate the potential impact of lower-than-expected availability of other forms of generation (i.e., nuclear, hydro and coal) or retirement of a larger-than expected number of non-gas-fired plants;

  • Examine only a narrow range of scenarios regarding potential future oil prices; and

  • These are not minor omissions. Instead, the effect of these omissions in all likelihood is to understate the potential natural gas requirements of the U.S. economy by at least an additional 2 to 4 Tcf in some future years, on top of the errors in estimating power sector consumption of natural gas discussed previously.

    Most long-term estimates of future U.S. demand for natural gas, therefore, drastically understate the potential future needs of the U.S. economy. By 2020, for example, the gap between EIA’s most recent forecast of future U.S. demand and the amount of natural gas actually needed by the U.S. economy could easily be in the range of 3 to 4 Tcf per year (looking only at the demand ½ of the supply/demand equation):

    3. Our ability to meet future U.S energy needs is currently dependent upon highly speculative assumptions regarding potential future sources of supply. Finally, and in many respects of even greater concern, U.S. energy supply is becoming increasingly dependent upon highly speculative assumptions regarding future sources of supply. In EIA’s 2006 annual energy forecast, natural gas is expected to play a critical role in meeting the long-term energy needs of the U.S. economy, both as for direct use by major energy users and to meet incremental demand for electricity. In EIA’s forecast, however, more than 97 % of expected long-term growth in U.S. supply is expected to come from just two sources – the Alaskan natural gas pipeline and a massive increase in imports of LNG:

    The U.S. has an urgent need for additional natural gas from both of these sources. As a practical matter, however, there is virtually no chance that the U.S. can obtained the increased supplies of natural gas from Alaska or from LNG imports EIA assumes in its recent forecasts in the time frames and quantifies EIA assumes in its forecast. Instead, even in a “best case” scenario, completion of the Alaskan pipeline (assuming it goes forward) would be likely to slip by several years, compared to the unrealistic completion dates assumed in EIA’s recent forecasts, and LNG imports are likely to consistently fall well below EIA’s forecast levels (certainly at least for the next 10 to 12 years).

    On its face, therefore – the severe errors in EIA’s estimate of future demand aside – anyone who studies EIA’s recent forecasts carefully should quickly realize that they are patently unrealistic, and do not provide a defensible basis for estimating future natural gas prices in the U.S. market.

    EIA’s forecasts, for example, assumes that: (i) the Alaskan natural gas pipeline project will go forward in the near future; and (ii) the entire project – from early phase engineering, through permitting, through completion of construction and testing – can be completed in about the same time frame that is required to design, permit and construct a new coal-fired plant at a single site.

    The Alaskan pipeline, however, is one of the more ambitious construction projects ever proposed – intended to span a distance of 3,000 miles and expected to take 54 million man-hours to construct. Contrary to the assumption made at the time EIA release AEO 2006, the project has remained at an impasse over the past year, as a result of unresolved issues involving the State of Alaska. Further, even if these issues can be successfully resolved, there is a massive amount of engineering work must be completed, along with a series of lengthy and potentially complex permitting procedures, involving two different countries, with numerous potential opportunities for opponents of the project to assert objections and potentially attempt to block the project from moving forward.

    Almost any prudent planner, therefore, presumably would assume the potential for several years delay in completing a project of this magnitude and complexity (assuming it moves forward at all) – which thus far EIA has failed to do.

    If anything, however, EIA’s assumptions regarding potential future LNG imports into the U.S. are even more problematic. Notably, even before the final version of AEO 2006 was issued, in its Short-term Energy Outlooks, began cutting dramatically its estimates of expected LNG import levels in both 2006 and 2007 (the two years covered by both its short and long-term forecasts).

    EIA’s most recent short-term forecast predicts that 2006 LNG imports will fall 40 % below the level forecast in AEO 2006. The gap in 2007 is expected to remain at essentially the same level – viz., a shortfall of 41 %:

    This startling gap between actual and expected imports of LNG (i.e., for 2007, an expected gap of 1.6 Bcf/day, equal to 2.6 % of expected U.S. supplies for the year) provides a foretaste of what is likely to be a recurring pattern throughout the next decade, as major new LNG liquefaction projects frequently come on line well after their original target dates, and U.S. bidders frequently are outbid for the available supply by purchasers in other markets.

    These, too, are not minor flaws in EIA’s long-term forecasts of supply and demand in the U.S. market. Instead, EIA has massively underestimated the potential future needs of the U.S. economy and indulged in unrealistic, “best case” or “better-than-best-case” assumptions regarding future supplies.

    The end result is a long-term forecast that provides a grossly distorted picture of the likely future supply/demand balance and likely future price levels in the U.S. market – particularly in the mid to later part of the next decade, when the natural gas crisis is likely to become most acute.

    The adverse consequences from this distorted picture could be severe.

    Why There Isn’t a Greater Sense of Urgency

    If the potential stakes for the U.S. economy are so high, and the warning signs of a potential crisis are reasonably clear-cut, why isn’t there a greater sense of urgency, regarding the need to take action to meet our future energy needs?

    Many factors undoubtedly are at work. At least in my judgment, however, one of the most important, however, is that -- notwithstanding the serious harm that already has occurred to the U.S. economy due to higher-than-expected energy costs, the natural gas price forecasts routinely relied upon to formulate energy policy and used as the basis for major energy-related investment decisions (viz., directly or indirectly, the long-term forecasts issued by EIA) do not provide a reliable basis for decision-making.

    Given the events of the past 5 years (including the failure of most price forecasters to anticipate one of the most extreme sustained price dislocations that has occurred in the history of U.S. energy markets) it might be reasonable to expect that a vigorous effort would be made to “get it right now” – i.e., to prepare rigorous, well substantiated estimates of likely supply and demand and likely natural gas pricing under a range of different scenarios regarding weather conditions, oil prices, economic growth and other relevant parameters, and to update these forecasts at least annually.

    Instead, just the opposite is true. Most forecasts of U.S. natural gas prices (and therefore, indirectly, most forecasts of U.S. electricity prices) are based to a significant degree upon estimates of natural gas supply and demand and natural gas prices developed by the U.S. Energy Information Administration (EIA) – often with only minor adjustments by the entity issuing the forecast.

    EIA’s forecasts, however: (i) are based upon unreliable data regarding likely future supply and demand for natural gas; (ii) use poorly-tested assumptions, flawed modeling tools which the Agency itself recognizes are outdated and flawed methodologies; and typically understate severely the risk of higher prices. Yet, critical decisions relating to the U.S. energy supply infrastructure are made every year based upon these profoundly flawed forecasts. These same natural gas price forecasts also provide the starting point for most electricity price forecasts, undercutting the validity of these forecasts as well.

    EIA has very limited total funding and does not consider the preparation of its estimates of natural gas supply and demand to be part of its core mission –which it considers to be collecting and reporting historical data on energy use. As a result, only limited resources are allocated to its forecasting effort.

    Even though energy plays a pivotal role in our economy, and forecasting is hardly a simple task, in the end EIA’s long-term forecasts are prepared by a very small team (literally a handful of individuals) that lacks the funding necessary to develop reliable estimates and is forced to perform its work using outmoded tools.

    While this team does the best that it reasonably can with limited resources, it should not be surprising, given EIA’s budget limitations, that these forecasts often have been far off the mark – particularly in recent years, when the energy markets have been undergoing rapid and far-reaching change.

    Remarkably, however, even though EIA’s seriously flawed forecasts already have cost U.S. consumers hundreds of billions of dollars in needless energy costs, and seriously impaired the ability of U.S. companies to compete effectively in global markets, no major effort currently is being made to improve the quality of EIA’s forecasts or to put in place alternative mechanisms to more accurately assess the future natural gas supply and price risks facing the U.S. market.

    The inevitable result of continuing to rely on natural gas price and supply forecasts with a proven track record of being inaccurate is to fritter away tens of billion dollars each year on unwise investments, and ultimately saddle the U.S. economy with an energy infrastructure that is likely to fall far short of meeting future U.S. needs -- potentially locking the U.S. into higher energy costs for many years to come.

    The next two articles in this series, therefore, will review in detail some of the major flaws in EIA’s estimates of the future demand and future supply, and outline some of the steps required to develop a more accurate set of estimates. Part IV, the concluding article, will then discuss in greater detail the steps required to avoid potential serious damage to the U.S. economy from a shortage in energy supplies.

    In my judgment, there is no question that our energy needs can be met – in an environmentally responsible manner - and in ways that contribute significantly to economic growth. The question is only whether we arrive at an accurate understanding of the issues confronting us quickly enough, and have the will to act.

    The difference in potential outcomes, however, depending upon whether we take effective action that enables us to successfully overcome near-term challenges, or continue to sit paralyzed, are stark – and may affect the future of our country for generations to come.

 
 
Authored By:
For any questions, comments or reactions, please don’t hesitate to contact Andy Weissman directly at Andy.Weissman@EnergyBusinessWatch.com or 202-589-2391. Visit our new web site at www.energybusinesswatch.com
 

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Comments

December, 15 2006

Ferdinand E. Banks says

Brilliant contribution that deserves the widest possible circulation, expecially since Newsweek has just published a collection of articles on energy, at least a quarter of which are crank or misleading. The above article does raise a question however. Why can't we have more work like this instead of the low-powered offerings served up at the high-profile energy conferences?

December, 15 2006

Jose Antonio Vanderhorst-Silverio says

Mr. Weissman,

I read your first article on the emerging gas crisis with great interest. The approach and the information you have presented is very rich indeed.

My interest is compounded as I have been researching and writing for more than 10 years about a current crisis in electricity in the Dominican Republic. I claim to have developed a market architecture and design – electricity without price controls (EWPC) - that solves the electricity restructuring flaws worldwide. Both crisis need to be studied as systemic crisis.

As your “goal is to stimulate further discussion and deeper inquiry into matters of urgent concern,” in line with my suggested generative dialogue on EnergyPulse, I suggest that you have disclosed a case begging the use of Business Dynamics. Business Dynamics is an outgrowth of System Dynamics, which is a "social system design" profession that is about 50 years old, as you can see at the beginning of the System Dynamics NEWSLETTER, Volume 19 – Number 2, June 2006.

The father of system dynamics, and Founding President of the System Dynamic Society, in his plenary address to the International System Dynamics Conference, on July 2003, under the title "Economic Theory for the New Millennium," Jay W. Forrester explained clearly why forecasting is a losing game:

The attempt to forecast future economic behavior is often taken as the proper and maybe the only important test of an economic model. The ability of a model to forecast future conditions is sometimes described as the gold standard for model evaluation. But seldom in the economic literature is there any claim that a model forecast is better than a naïve forecast of simply extrapolating from the recent past. Actually, I believe that attempts to forecast future conditions is a losing game and has been a diversion that has carried economists away from far more productive work.
Among other key elements, Professor Forrester also spoke about how prices develop:

In the model, supply and demand are not balanced by prices alone, as is commonly done in economic models. Inventories, backlogs, and delivery delays are the primary short-term balancing forces. Prices then change as a result of over or under supply of product.
Paraphrasing Mr. Forrester (see Newsletter), we need to "see emerging a stream of powerful, insightful, provocative, and publicly influential books on dynamics of subjects like energy." It could be called "Energy Dynamics."

A sense or urgency to face the worldwide energy crisis and a sense of urgency to practice Energy Dynamics will reinforce each other, creating a virtuous circle. In line with Energy Dynamics, the generative dialogue welcomes your series of articles and especially your goal to help us avoid playing with fire in the future.

Regards,

José Antonio Vanderhorst-Silverio, PhD Interdependent (Systemic) Consultant on Electricity Proponent of Electricity Without Price Controls (EWPC)

December, 15 2006

Len Gould says

Another brilliant article, Andrew, entirely up to your usual high standard. Looking forward with anticipation to the next in the series.

Regarding the (lack of) quality of "official" entity forcasts, eg. your

"EIA estimated that, during the 5-year period between 2004 and 2009, power sector consumption of natural gas would increase by a total of only 40 Bcf, from 5.32 to 5.36 Tcf/year (an estimate that the Agency should have recognized was absurd):"

given that you and others had convinced many of us 3 or 4 years ago that N Gas was too valuable and volatile to use for pure electricity generation, esp. new build, why do you suppose the "official" bodies forcasts have been so unrealistic? Can inadvertent under-staffing by incompetent management explain it reasonably? Surely it takes no genius to estimate the capital cost, risk insurance etc. of building LNG trains in countries with near chaotic civil governments etc. How much longer would you guess that the informal agreement to keep the "lid on" whle certain players divest and diversify will last?

December, 16 2006

Ferdinand E. Banks says

'Dynamics"! Let's see what we've got here, Jose. In my servomechanisms class at UCLA, when I heard that word I brushed the cobwebs out of my eyes. When I hear it in an economics lecture I check my watch and start thinking about being somewhere else. I believe it was Nicholas Kaldor who said that economists use the word dynamics about their own work in order to imply that the statics approach of other ecoomists is yesterdays news. I also heard the word dynamics used a great deal a few years ago in discussions about the oil supply. Pardon my English, but the people using it usually didn't know what they were talking about.

About Professor Forrester. As far as I am concerned, he's both right and wrong in those pronouncements you cite. Any work by e.g. economists, and especially model building, automatically leads into forecasts at one level or another. For instance, I would like to take this opportunity to forecast that on the basis of mainstream economics models and literature, electricity deregulation not only is failing almost everywhere, but eventually might reach the 100% failure mark.

December, 16 2006

Jose Antonio Vanderhorst-Silverio says

Hi Andrew, Len, Ferdinand and readers,

Please note on the System Dynamics NEWSLETTER, Volume 19 – Number 4, October 2006 that “The creator of the discipline of System Dynamics, Prof. Jay Wright Forrester, has been made a member of the International Federation of Operational Research Societies' OR Hall of Fame.”

In addition, one of the experts on “Energy Dynamics” is Professor Andy Ford, the author of "Modeling the Environment". He developed a system dynamics model for the Western wholesale market of the US. For example (see document):

As noted in a panel discussion on investor behavior at a workshop convened by the California Energy Commission on November 7, 2001, “Exploring Alternative Wholesale Energy Market Structures of California,” Professor Andy Ford remarked as follows:

…when the western market is simulated over a longer time interval, it becomes clear that the Power Authority commitments will eventually lead to a reduction in private sector investment. (“Simulation Scenarios for the Western Electricity Market,” prepared by Professor Andrew Ford, Washington State University, p. 24)…IEP agrees with Professor Ford that the intervention of the CPA, particularly in an owner/operator mode, will tend to drive away much needed private investment in California.

So the development of Energy Dynamics started already. As a further proof, on the same NEWSLETTER, one of Andy Ford student, Allyson Beall, gave “A first-timer’s view” at a “PhD Colloquium,” saying, among other things:

Having had little face to face experience with system dynamics modelers other than my chair Andy Ford, I came to the colloquium having no idea what to expect…Stefan Groesser, modeling innovations in the residential building market, is grappling with the goal of the Swiss government to dramatically reduce residential energy demand. The second session opened with a study by Mathias Bosshardt of technological change in the Swiss car fleet… Kaszem Yaghootkar described his project dealing with the management of the problem of uncertainties in overlapping phases of engineering projects.
In simple term, the world is undergoing a revolution - transition - from a stable state to hopefully another stable state. In the past stable state –until the oil crisis - forecasting gave us reasonable results. However, as uncertainty increases during a transition, forecasting just does not work anymore. The article gives very rich examples of uncertainty of both gas demand and gas supply.

Andrew’s article brings a very important system dynamics element in his first summary article: how to sell the sense for urgency. For example, he identifies important systemic delays that people with mechanistic mental models just don't take into account. Those delays can be dynamically simulated in a complex system model, based on interdependent – systemic – elements to support the sense for urgency. Also, for example, Yaghootkar project seems to be useful for modeling the Alaskan Natural Gas Project.

The interdependencies identified by Andrew are the reason we need to cut across topics on EnergyPulse. The last addition to the generative dialogue was placed under the article The Future Utility Customer Service Model to support the emergent EWPC solution paradigm to power sector flaws.

Regards,

José Antonio

December, 16 2006

Murray Duffin says

Hi Andy, Great article, as usual. Two observations: In the chart where you show potential for seeficiency savings you significantly understate the potential, at least by factor 2 in the short run. That's the good news. In the suoply part of the same chart you also understate dramatically the potential supply decline. See: http://europe.theoildrum.com/story/2006/11/27/61031/618 . That's the bad news. Murray

December, 16 2006

bill payne says

Dependance of oil refining and coal production on natural gas is scary.

http://www.prosefights.org/coal/northantelope/northantelope.htm

December, 16 2006

Jose Antonio Vanderhorst-Silverio says

Hi again,

There is more food for thought on the “sense of urgency” as a key issue. Please check on the Interview on Proposed Windfall Profits Tax >>, Report on Business Television on April 28, 2006 on ANDY WEISSMAN'S SPEECHES & WEBCASTS, to understand the “in the process will be a huge amount of damage,” that results from complex interdependencies not being acknowledge with the required sense of urgency. By the way, Andy is underlined in the interview as “In defense of big oil.”

Murray Duffin and Bill Paine info about uncertainty of data also helps the business case for Energy Dynamics development.

System dynamics is the tool to look at growth and collapse processes by understanding system dynamic structure. The emergent EWPC paradigm is oriented in “defense of the customer,” with special emphasis on the opportunities for the development of markets at the Bottom of the Pyramid. Energy Dynamics is the tools to study the flaws of deregulation, without real live costly experiments. I am wide open to test and optimize EWPC with emerging Energy Dynamics simulation experiments.

December, 16 2006

Jose Antonio Vanderhorst-Silverio says

Please take a look at Systems Thinking for Sustainability: A Decision-Support Approach for Electrical Utility Executives Addressing Climate Change (416KB pdf), by Andrew Jones (2005), to see an ongoing Energy Dynamics project. I am sure others such efforts are in the making.

December, 17 2006

Ferdinand E. Banks says

"Forecasting doesn't work any more", you say Jose. Kind of reminds me of what Kenneth Arrow's commanding officer told him during WW2 when Prof Arrow was doing weather forecasting for the US Air Force: 'We know that the forecasts are worthless, but what would be do without them.'

The correct interpretation here is that worthless means different things for different people. If forecasting makes any sense at all, which it does, then it was better that Captain Arrow did it instead of 'Yardbird' Bill.

December, 17 2006

Jose Antonio Vanderhorst-Silverio says

Ferdinand, please take the whole sentence and the context in consideration.

You seem to be right under a mechanistic thinking mental model that doesn’t consider the environment. However, under a systemic thinking mental model, the interdependencies are very important. These are the components playing in the environment: 1) In simple term; 2) the world is undergoing a revolution - transition - from a stable state to hopefully another stable state; 3) In the past stable state –until the oil crisis - forecasting gave us reasonable results; 4) as uncertainty increases during a transition; and 5) forecasting just does not work anymore.

As for the environment you have the paragraph: The attempt to forecast future economic behavior is often taken as the proper and maybe the only important test of an economic model. The ability of a model to forecast future conditions is sometimes described as the gold standard for model evaluation. But seldom in the economic literature is there any claim that a model forecast is better than a naïve forecast of simply extrapolating from the recent past. Actually, I believe that attempts to forecast future conditions is a losing game and has been a diversion that has carried economists away from far more productive work.

The correct interpretation is different and valuable using the correct mental model.

Under a generative dialogue you are different than your opinion. While understanding Imy opinion may be wrong, I think your opinion was wrong. You are, however, a very intelligent man and a valuable member of any generative dialogue. Please keep at it.

Best regards,

José Antonio

December, 18 2006

Jose Antonio Vanderhorst-Silverio says

Hi Andy,

Based on uncorrected material about the National Energy Modelling System, EIA is using the Short-Term Integrated Forecasting System (STIFS) since 1979 to do forecasting. "STIFS does not account for all feedbacks of energy prices or consumption on production... nor capital stock changes," which what you should expect at a time of high uncertainty. Instead, they have Fossil2 for long run studies which uses System Dynamics. Many questions, what, why, when, how..., could follow about Fossil2. Because of the uncorrected source one question should be posed first: Does Fossil2 exists in reality?

December, 18 2006

Jose Antonio Vanderhorst-Silverio says

More on Fossil2...The FOSSIL2 model itself, according to DOE, is not well understood in the department except by a few people in the Office of Policy, Planning and Analysis. And, the staff at EIA indicated that they too did not have in-depth knowledge of the characteristics and workings of the FOSSIL2 model...

December, 18 2006

Arvid Hallén says

Great article Mr. Weissman! I have for a long wanted to know more about the US gas situation, more than it was heading in the wrong direction that is.

But I'd like to be a little critical. You write:

"There is no single, “silver bullet” solution to this problem."

I mean that there is one, and it's called nuclear power.

"To bridge a gap of the magnitude that is likely to arise over the next decade, a multi-pronged strategy must be put in place"

As far as I am concerned, multi-pronged can mean multiple nuclear power plants.

"Realistically, however, to adequately address the massive energy supply gap that is likely to develop by the 2012 to 2015 time frame (when we currently face a crisis of major proportions), during the next 5 to 10 years, most of the required solution must come from two areas:"

None of these two being nuclear energy. Everyone would be much better of if we all asked ourselves: what would Valery Giscard D'Estaing do? He would do what he did in 1974, that is, swiftly ordering several dozen nuclear reactors while sweeping away cumbersome bureaucracy.

People always say nuclear power takes too long time. But this is because they haven't studied who fast everything happened in France 30 years ago. If the state wants nuclear power to happen fast, it will happen fast.

The natural gas crisis will become a big problem in 2012 to 2015, that is in 5-8 years. How much progress had the French nuclear crash program made in it's first 5-8 years?

After 5 years it had resulted in 3 completed reactors (and another 2 on which construction had begun before 1974). After 8 years the result was 20(+2) reactors!

As the US has 5 times the population of France, the above numbers should be multiplied by 5. That means 100 (!) (+10) new reactors in 2015 if we start today and sweep away the NRC bureacracy!

It is just a matter of political will.

Ps. A graph showing the break-neck expansion of French nuclear power can be found here: http://www.iea.org/textbase/stats/pdf_graphs/FRELEC.pdf

December, 19 2006

Jose Antonio Vanderhorst-Silverio says

Hi Arvid,

"It is Time To Innovate - Energy Utilities Face Unprecedented Challenge, Opportunity. A new paradigm of electric power is emerging which will replace vertical integration and under either ("Tough Times" or "Rising Expectations") very plausible “non-continuity” scenario, will allow a large market share of distributed resources, as explained under the article The Future Utility Customer Service Model.

Notice please that a third way was missed in the decade old debate, which I consider to be electricity without price controls (EWPC). Notice also that under systemic thinking we should be changing from debate to a generative dialogue to answer the question posed by Andy “And perhaps most critically, how can we instill the sense of urgency needed for a comprehensive energy strategy to be put in place?” A lot of uncertainty will not allow imposing a highly risky silver bullet anymore.

Given a “non-continuity” – systemic thinking - expansion scenario, to be simulated using Energy Dynamics against the nuclear silver bullet – mechanistic thinking - expansion “continuity” scenario, please describe the mental model behind the proposal explaining the following about EDF Finances (Source Wikipedia).

For a long time, EDF suffered from very low profits for a group benefiting from such monopoly, especially since in the weakness of its results on the domestic market, were added the poor performances of its foreign subsidiaries. Nevertheless, its balance sheet is very fragile, because of its international development, of its tariff policy in France and rapid deterioration of its profitability.

From 2001 till 2003, EDF was forced to reduce its equity capital due to untoward deviations of conversion in South America and write-down of its assets in Germany, Italy and in Brazil for a total of €6.4 billion total. However, according to the report of the Roulet Commission, international development, although costly, must be followed, because if EDF spent €15 billion euro on acquisitions, its rivals would spend €70 billion. The commission recommends a European strategy, an international presence, albeit focussed, and a larger drive to supply gas.

The most significant problem (in May, 2004) was the rocking of the balance sheet between equity capitals of €19 billion and a €24.5 billion debt (November, 2004), for which it is necessary to add:

--- about €30 billion to meet its commitments to retirement of its workers in the electrical and gas industries (retirement at 55 years, favourable pension rates, etc), which will be met over time by the new tax payable tariff by consumers.

--- €6.4 billion for financial commitments in Italy and in Germany, a sum which could come to more than €10 billion, from 2005.

--- and a huge sum to continue establishing reserves to finance the future dismantling of 58 nuclear power stations. A theoretical reserve currently valued at €28 billion was made, but it is far from being sufficient and it is used in fact to a greater extent for international development.

Thanks,

José Antonio (not just José)

December, 19 2006

Len Gould says

Jose Antonio: Such problems as needing to accumulate $28 billion from 58 reactors can only be wished for, compared to eg. a shortage of natural gas. 58 reactors producing 1 gw each would accumulate that amount in 6 years with a $0.01 per kwhr surcharge.

December, 19 2006

Paul Stevens says

AECL (Atomic Energy of Canada, Limited) has been building 600 Mw nuclear reactors on budget, and on time (in four years) for the last decade, one of the only companies constructing nuclear reactors during that time period. The critical li9miting factor in any ramp-up of nuclear power is likely to be staffing. Any jurisdiction serious about producing power at minimum cost would only have to expidite environmental assessments, and ensure spurious or nuisance legal maneuvering was eliminated or m inimized.

Team CANDU (industry group of private companies) has already said they would assume financial penalties for late, over budget turnkey projects.

http://www.canducanada.ca/eng/team.html

I don't work for any of these companies, but with a record of meeting committments that goes back over a decade, and financial guarantees I think that nuclear is an obvious possible solution to gas powered electrical generation, and a more desireable one at this point than coal gasification.

December, 19 2006

Jose Antonio Vanderhorst-Silverio says

Len and Paul: the supply oriented, vertical integration, central station, mechanistic thinking, continuity paradigm is just one scenario. The 28 billion euros "is far from being sufficient." The surcharge depends on what it costs consumers the electricity, no just what the electricity bill amounts to. The difference is customer's outage costs, which rise as end use devices become sophisticated.

Under mechanistic thinking Andy’s article infers the need of forecasting. Under systemic thinking Forrester’s explains why forecasting is a losing game. Instead of forecasting, the use of scenarios comes to the fore, together with what I suggest to call Energy Dynamics. Forrester wrote about Industrial Dynamics, and John D. Sterman wrote Business Dynamics.

Decision making under scenarios is centered on intelligent conversations and finding flaws on mental models to find decisions which are robust under every scenario. Those are the predetermined elements.

I strongly believe, Energy Efficiency (EE) and Demand Response (DR) are predetermined elements which give EWPC an edge. To develop the resources on the demand side in EWPC, the old mental model of cherry picking, as Andy suggests in “Improved energy efficiency, particularly in the commercial sector, is the quickest and most cost effective way to begin closing the energy supply gap in a meaningful way in a short period of time” should change. As I posted on April 12, 2006, under the article What a surprise: Prices move both ways this is what Electric Power Research Institute (EPRI) had said then:

--- Energy efficiency (EE) and demand response (DR) can be cost-effective alternatives to adding new capacity --- Programmatic approaches to EE and DR have been successful, but have only “scratched-the-surface” of what’s possible --- Huge opportunity to utilize technology, innovation, and markets to drive EE, DR, and overall electricity utilization
Such an approach, based on simulations with Energy Dynamics and scenario building, will allow the development of a trusted market design and architecture where long run and short run risk management is under control. EWPC is one healthy candidate for the approach.

In “Poised for change: hopeful signs for the power industry (see Time to Innovate…),” Charles W. Gellings, vice president of innovation at the EPRI, adds that:

Assumption: The end-use efficiency of energy utilization has stagnated.

Fact: The U.S. is improving its end-use energy efficiency at a rate of about 1 percent per year. However, there is a potential for reducing the consumption of electricity by between 24 and 44 percent — if all existing technologies and those under development were deployed.

Going for a nuclear silver bullet strategy, without considering the emerging market reform paradigm, is playing with fire.

December, 19 2006

Todd McKissick says

Paul has struck a chord with my concerns regarding over utilizing nuclear, although he stops short of my full curiosity. Can someone please offer some insight as to the total nuclear capacity required to shore up all the other fuels? Given that oil has value in many other chemical application as does natural gas and other resources, what extent would people 100 years from now want us to be saving for them? If we make up that capacity plus cover the developing countries' growth by building hundreds (or thousands???) of new reactors globally, what will it cost? How many highly skilled employees will it take? How many regulatory and security personnel? How much new transmission infrastructure and all the other external 'needs' will be needed in the US and globally?

Once someone can answer that, then the next question is how do we eliminate the monopolistic tendencies that will inevitably arise? Seems to me that that future industry would dwarf the current oil industry.

December, 19 2006

Len Gould says

My only point was that "At right now" France is far better off than the US re: power generation, especially if global warming is of any concern.

Jose Antonio: I am actually one of the strongest supporters of a pure market electricity strategy such as EWPC. See my own articles in EnergyPulse on the subject. However, I think you should re-name the strategy "Energy Without Price Controls" and extend it to natural gas other metered energy deliveries, eg. district heating and cooling. As soon as you have a sufficient meter communications and central market infrastructure to handle electricity, you could easily handle the others for very little added cost per customer.

December, 19 2006

Jose Antonio Vanderhorst-Silverio says

Hi to all of you, as the second phase of the generative dialogue is developing around nuclear energy and the emerging market design and architecture.

If I understand correctly, Len is suggesting extending EWPC to Utilities Without Price Controls (UWPC). Both water and gas end-user needs seem to be fine for such extension. That is a good suggestion for the generative dialogue. That is in synchronicity with Jamie Wimberly’s article The Future Utility Customer Service Model closure, in which he endorses systemic approach and the revolution away from the continuity scenario.

The water suggestion reminds me that central power stations extension development is a large user of water, leading to the important problem of the limits of water ecosystems services; namely cooling water requirements of power stations. According to the source Water requirements of nuclear power stations are 20 to 83 per cent more than for other power stations. Water ecosystem services are an issue that may impose a growth limit to power system development.

Keeping for the moment on EWPC market design and architecture, I like to add to Len’s impression that I am not sure what he means by “a pure market electricity strategy such as EWPC.” EWPC is a combination – the third way missing in the decade old debate - of a controlled market and a free market.”

Transmission tightly integrated with distribution and system planning, operation and control involve a controlled, monopoly, market which is different from open transmission access controlled by RTOs and “native” loads. Generation and retail marketing belong to a non-real time free market, so it is not straightforward market extension to other utilities. Generation monopolies are not advised and should compete with the demand side, where CANDU technology can compete freely with other technologies on the short and long run.

The interface between long run system adequacy and short run smooth real-time operation and control of a power system is based on demand side and supply side unit commitments from retailers and generators. That is needed to ensure that Fred Schweppe’s engineering criteria is met. Water and gas systems requirements will not interfere with power system operation and control, leading to the potential and sound design feasibility of Len’s suggestion on the economies of scope of UWPC, as the engineering criteria of gas and water systems don’t interfere either.

December, 19 2006

Jose Antonio Vanderhorst-Silverio says

Correction: a real-time free electricity market is not a straightforward extension to other utilities; a non-realtime certainly is.

December, 19 2006

Arvid Hallén says

José Antonio,

Much of what you write (systemic thinking, energy dynamics etc) goes a bit above my level. While you no doubt have spent time on these things and know them very well, I am just a humble student, who by the way is very grateful I can discuss all these things with all the very competent people of this board.

So I'll limit my comments to the things I understand, or believe I understand. You write:

"A lot of uncertainty will not allow imposing a highly risky silver bullet anymore."

I agree, but I don't agree on your conclusion. Embarking on a massive nuclear program to me seems to be a very low risk project as the technology is mature, the costs are rather well known and the fuel supply is not reliant on unstable nations.

And to quote Warren Buffet: "Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."

While you might think that is not a very fitting thing to quote for a humble student of economics and energy, my experience is that most people (not including this board) have absolutely no idea what energy issues are about, and this includes those who should know it (EIA, IEA etc).

Anyway, you also write: "For a long time, EDF suffered from very low profits for a group benefiting from such monopoly, especially since in the weakness of its results on the domestic market, were added the poor performances of its foreign subsidiaries."

EDF is not supposed to make profits. It's a state monopoly and should only deliver cheap power to consumers, with power prices based solely on generation costs. All the international adventures are silly, and so is the change in the French power pricing mechanism (deregulation...). Neoliberalism has been gaining hold even in France.

"However, according to the report of the Roulet Commission, international development, although costly, must be followed, because if EDF spent €15 billion euro on acquisitions, its rivals would spend €70 billion. The commission recommends a European strategy, an international presence, albeit focussed, and a larger drive to supply gas."

Absurd! Must I spend 20.000 euros on a new car because my neighbour spends 50.000? EDF should remain a national power monopoly. If the French state feels like meddling in foreign power markets with taxpayer money, they should not do it via EDF.

"about €30 billion to meet its commitments to retirement of its workers in the electrical and gas industries (retirement at 55 years, favourable pension rates, etc), which will be met over time by the new tax payable tariff by consumers."

I just can not believe a nuclear power corporation, where the cost mass is completely dominated by capital costs, has troubles with paying wages and pensions. Lower the pensions or increase the electricity rates.

"€6.4 billion for financial commitments in Italy and in Germany, a sum which could come to more than €10 billion, from 2005."

These things should never have been a part of the mission of EDF.

"and a huge sum to continue establishing reserves to finance the future dismantling of 58 nuclear power stations. A theoretical reserve currently valued at €28 billion was made, but it is far from being sufficient and it is used in fact to a greater extent for international development."

In Sweden that cost is covered by a fee on nuclear electricity, of about 0,1 eurocents per kWh. This fee is calculated with a very conservative 25 year reactor life and will cover ALL expenses. The money is put in the segregated Spent Nuclear Fuel Fund. The total cost will be about 7 billion euros. It's not a big financial commitment for the nuclear industry.

December, 19 2006

Arvid Hallén says

By the way, cooling water is in most cases not an issue limiting nuclear power. The Sea, or great lakes or rivers, are not often far away from power consumers.

Even if they are, that can be dealt with. We do have power lines, and other options too.

For example, the largest nuclear power plant in the US, Palo Verde, is located in the middle of a desert. It is cooled with the waste water of the city of Phoenix.

December, 19 2006

Arvid Hallén says

Pictures of Palo Verde.

In the desert: http://www.chemistryland.com/CHM107/Energy/PaloVerdeNuclear-w.jpg

By night, not looking like a desert: http://www.dem.state.az.us/preparedness/pvngs2004/night_pv.jpg

From above (warning, very big!): http://eyeball-series.org/npp/palo-verde2-npp.jpg

December, 19 2006

Jose Antonio Vanderhorst-Silverio says

Arvid, thanks for your humble response about the mental model related to the wikepedia quote about EDF Finances. It is clear from your response that it is a vertical integration controlled market mental model. As you can infer from my writing something else is emerging to solve the efficiency of electric power markets.

Uncertainty is a very complex issue. I accept that nuclear power could be part of any scenario, but it should compete with other technologies. Energy efficiency should be in all scenarios – as a predetermined element. Market rules should eliminate the barriers to the resources of the demand side to allow for the full competitive development of energy efficiency, demand response, energy storage, distributed generation, etc.

Electric power monopolies - vertical integration – have become increasingly inefficient since the 70s. Physical risk management on vertical integration was done with supply side - generation and transmission reserves for system coordination. The emerging market changes iron system coordination to bits system coordination, as information and control transaction costs that were prohibitive years ago are getting cheaper and cheaper as time goes on.

Deregulation was sold by people that apparently didn't know about electricity (maybe knew a lot) but knew a lot about making money. The “decade old debate” was about vertical integration versus a flawed reform paradigm that is more inefficient than vertical integration for the majority of the customers. Please read about electricity without price controls starting with The Future Utility Customer Service Model to understand the third way. Go as deep as possible into the links until you feel satified.

The European Union agreed to liberalize electricity and gas for all customers on July 1st, 2007. France, Germany, and Spain are being pressured to unbundled retail and other changes. However, the problem is that the market design and architecture is the flawed one. The third way was not considered at all. Unbundling and other changes, although required, are insufficient to develop a true competitive market.

Regards,

José Antonio

December, 20 2006

Ferdinand E. Banks says

I had intended to drop out of the deregulation discussion for a very good reason: I know too much about it, and where this subject is concerned my memory is very good.

I was at the NATO sponsored meeting in Portugal where a collection of cranks and fly-by-nights from both the US and Europe came to the conclusion that electric deregulation was the way to go, which was the main reason that they had been invited. The stars of that conference were Professor (of physics) Arthur Rosenfeld of the University of California (Berkeley), who got EVERYTHING wrong, and the late Fred Schweppe - a brilliant man who also got everything wrong. Why was this? In the case of Rosenfeld he thought - as I thought at the time - that any physicist probably knew more about electric deregulation than any economist, which may or may not be correct, but as I discovered a few years later when I climbed up on my anti-deregulation soapbox, is definitely not true where yours truly and a few others are concerned..

As for Dr Schweppe (from the electronics lab at MIT), he had made the mistake of reading the elementary economics books, and unfortunately concluded that the people who wrote them mostly knew what they were talking about, which they might or might not, but usually not in those few paragraphs where they discuss electric/gas deregulation - where the emphasis here should be on 'few'.

All of this took place about 20 years ago, and is no longer relevant, because now we see how the deregulation scam has turned out: it has failed, is failing or will fail just about everywhere. Sweden is one of the countries which the deregulation booster club designated a deregulation role model, and the last time I looked the consumer price of electricity had increased 70% since deregulation was initiated. The thing to remember here is that deregulation was sold to the voters in this country on the basis of efficiency (and not equity). The point was that the price to consumers was to fall, and even though there might be a few losers, most households would be winners. Instead the price has not only increased for households, but also for the energy intensive industries - which is very very bad news in a country where borders have unfortunately been opened to an absurd extent. I can also mention that in the case of France, deregulation would likely favor the good citizens of Paris while increasing the miseries of about half of the remaining country.

Unless I am mistaken, Jose is suggesting that there is something beautiful for deregulation scholars as well as the deregulation booster club in the published work of X, Y, Z...whoever. Assuming that I ever teach a course in economics again where deregulation is a main topic, any student who mentions even en-passant any of this literature during my lectures becomes a candidate for a failing grade. I don't have to mention I hope what happens to any scholar or pseudo-scholar appearing in a seminar room at this university with a deregulation song-and-dance. As I explained to Prof David Newbery of Cambridge University, he has received his warning that clown time is over, and from now on it's going to be real business.

December, 20 2006

Arvid Hallén says

José Antonio,

I will look into your articles about the, shall we call it, "third way"? ;)

And I note that we both agree that the old monopolies were better than the current system of deregulation. Concerning the EU pushed power and gas deregulation I have a rule; if they say something in Bruxelles, do the opposite.

( Spirits and liquor deregulation excluded ;) )

December, 20 2006

Arvid Hallén says

By the way, it's funny that no matter what the article we comment is about, we end up discussing power deregulation.

December, 20 2006

Jim Beyer says

Good article. Lots of useful information here.

If I am understanding things correctly, the market response most likely will be to shut down gas-fired power plants. That would address a good portion of the shortfall, wouldn't it? I think this occurred in the 70's. What may be different this time is that these shutdowns may cut into needed capacity, and the issue of CO2 emissions may make coal-fired plants less palatable.

I think it is really important for energy thinkers in California to read this article, especially the folks at CARB and EPRI. Much of their glowing praise for all-electric and pluggable hybrid electric vehicles (PHEVs) is based on a rosy future of NG-powered electric plants. I think PHEVs make a lot of sense, but no technology is well-served by scatterbrained assumptions.

December, 20 2006

Len Gould says

Professor Banks: I would like to submit that on de-regulation I believe you are wrong (and therefore naturally and to my regret, myself for a failing grade). For a long time, I argued on this forum exactly the position which you take, because I could see the obvious, that what has replaced the former closely regulated state or private monopoly system everywhere is a system of significantly less regulated private monololies. I naturally conclude that was the original intention, and still strongly oppose it for generation and marketing. However, I don't disagree with the proponents of change on the point that state and private monopolies are in many cases a sub-optimal model, IMHO an obvious conclusion. First the management becomes political, the technical teams cannot attract top talent, the regulators may become captives and the workers all unionize and become an isolated elite in their fields all commonly way overpaid by market standards. Second the political masters cannot resist using the pricing structure as a tool for wooing votes, often resulting in industries subsidizing households, and the tax payer subsidizing all.

Mind you the regulated monopoly system isn't that bad, and is certainly better than what has replaced it in Ontario, where the large nuclear baseload in OPG's hands has made it too risky for anyone else to build baseload, and the "market rules" bar OPG from building any more even though it is needed. Result is only the cheapest gas gen is getting built, and very little of that, while retail prices are still controlled somewhat.

The real solution is a system where electricity is bought and sold in a market comparable to gasoline, where I can switch suppliers every eg. 15 minute interval if I choose, and the supplier I choose for any interval depends on my requirement for reliability and perhaps environmental factors etc. The trick is to use a smart meter operating under my command to bid my purchase into a central market and then record my consumption credit the winning supplier for each 15 minute interval.

The grid management then is done either directly by; or by contract on competitive bids to; a regulated monopoly, as is the market database and metering and communication system. All generation of any size, from small home CHP generators to large central turbine units are then free to offer into any market which they can reach by transmission, which of course they pay tarrifs to according to congestion etc.

The point is,with current electronics, that meter can be constructed in volume with all the intelligence it requires for little more cost that a low-end cellphone ($100) plus a present std. mechanical meter (<$100). It can then easily host a std. secure website which the homeowner or their designated service provider interacts with to setup and occasionally change the purchasing rules it would use.

Why not?

December, 20 2006

Len Gould says

I forgot to include the main factor in favour of this system, that being that each user's meter is also capable of controlling, via a low-power powerline carrier signal, the user's non-critical loads (refrigerators, clothes dryers, water heaters, space heating etc) according to their pre-programmed tollerance for price vs. discomfort. The gets optimal demand control, plus potential for optimal efficiency with very well done programming.

December, 20 2006

Jim Beyer says

Len,

It sounds like you are advocating demand response or demand load averaging to our grid, rather than deregulation per se. I'm not in general a fan of regulation, but deregulation of electricity in California was a disaster. Power trading companies like Enron used stealthy backdoor techniques to achieve monopoly control under certain conditions. Remember the power plant Enron told to shut down so they could shoot up the price of electricity? What's worse, most of that stuff wasn't even illegal until the regulators found the loop hole and closed it. By then Enron was moving on to find new loopholes.

I don't like the fact that electricity is regulated as it is. It is stodgy, immobile, and completely non-innovative. But unfortunately, when regulation is removed, the innovations employed are not often in the best interest of the customer. Perhaps there is a middle ground somewhere?

BTW, I really really like real-time metering to allow for demand response from customers. But I don't think that need have to do with regulation per se, and not at all with shortages of NG!

December, 20 2006

Len Gould says

Jim: If I'm not mistaken, the only reason Enron was able to achieve their nefarious ends was due to poor market design, eg. a set of poorly thought out controls. If the market is really fully uncontrolled, as I advocate, (eg. retail gasoline), the purchaser actually gets the best deal available over the long term.

December, 20 2006

Len Gould says

Also the system provides for the grid controller to broadcast requests for customers to reduce their load in peak periods, for which the user gets financial credit for the amount they bring their usage below their pre-contracted usage in the 15 minute interval to an amount equivalent to a large part of the value of generation at the time.

December, 20 2006

Ferdinand E. Banks says

Len

On this business of deregulation, at this stage of the game, you probably know much more than I do, but if you were in my place, and had seen and heard the things that I have seen and heard, it is very possible that you would believe exactly as I do. When they deregulated in many countries and states, it amounted to a licence for generators to game the system and to make fools of politicians and consumers - among others. This suggestion of yours about meters etc may well work, but what difference would it make in e.g. New Zealand? Bill Hogan pronounced deregulation in that country as a model for the rest of the world, by which he was evidently thinking in terms of the price of electricity; but that price was kept low because the price of natural gas was artificially kept low. Now the gas is running out. I dont think that the NZ deregulation paradise can be restored by a more clever use of meters, etc. And so on and so on and...

Besides, what deregulation has generally led to is a reduction in physical investment. I dont know what can be done to compensate for that sad state of affairs, nor have I heard anything innovative from anybody else, so maybe I should give myself a failing grade.

Fred

December, 20 2006

Jose Antonio Vanderhorst-Silverio says

Response to Prof. Banks:

Prof. Banks -12.20.06 - On this article: “I had intended to drop out of the deregulation discussion for a very good reason: I know too much about it, and where this subject is concerned my memory is very good.

Prof. Banks - 12.24.05 - On A Few More Unfriendly Comments on Electric Deregulation. “I'm afraid however, that I cannot tell Jose Antonio Vanderhorst-Silverio exactly what he wants to know, because everything considered, my knowledge of this subject is relatively limited. For instance, I don't know as much of the engineering as I should and could know. What I do know, however, is the academic economics, and more important I know when people who know the economics as well as I do, or better, have decided to depart from the truth because it pays them to do so. And when I say "pays" I'm talking about real money, and not cigar store coupons or feelings of relief.

Prof. Banks -12.20.06 - On this article: “… the late Fred Schweppe - a brilliant man who also got everything wrong… he had made the mistake of reading the elementary economics books, and unfortunately concluded that the people who wrote them mostly knew what they were talking about, which they might or might not, but usually not in those few paragraphs where they discuss electric/gas deregulation - where the emphasis here should be on 'few'.”

1988 - On the book Spot Pricing of Electricity: On page 111, introducing Chapter 5 “A Possible Future Deregulation,” it can be read that: “This chapter only presents a set of basic ideas; it does not analyze their impacts because such analyses have not yet been done. Since the advantages and disadvantages have not been quantified, we are not advocating deregulation (i.e. we do not know whether there is “a lady or a tiger” behind the door).” Fred Schweppe died before the book was published. If Prof. Banks opinion is correct, then Prof. Schweppe changed his opinion.

1988 - On the book Spot Pricing of Electricity: On page 126, under Historical Notes and References – Chapter 5, “The deregulation concept of this chapter is based on a supply and demand marketplace. Most of the other deregulation literature is oriented only to the supply side i.e., to deregulating generation without altering the way users buy electricity. We believe that deregulation which considerers only the supply side of the supply-demand equation is very dangerous and could have very negative results… A second major difference between this chapter and most of the rest of the deregulation literature lies in our concern that the economics and physical security of power systems not be destroyed or compromised.”

Prof. Banks - 12.20.06 - On this article: “Unless I am mistaken, Jose is suggesting that there is something beautiful for deregulation scholars…”

Vanderhorst-Silverio: Only one dead scholar; the late Fred C. Schweppe.

December, 20 2006

Jose Antonio Vanderhorst-Silverio says

Hi Arvid,

I suggest that you read the whole thing since it is a complex subject. That is why I said go as deep as possible. However, if you only want to look superficially, search for "Electricity WPC," "EWPC," and "electricity without price controls."

The third way is only in the article on the "future..." Above is another explanation on the historical notes. They use deregulation coming from "most of the other literature..." and the result was playing with fire...

Instead of playing with fire, it is better to develop simulation scenarios and to run system dynamics applied to water, gas and electricity – in a sense play with energy dynamics.

December, 21 2006

Ferdinand E. Banks says

"America's consumers have now suffered ten years of misguided experimentation with electric restructuring". This is the first line of a message that I just received about a conference called TAKE BACK THE POWER that will be held at the National Press Club in Washington (DC). The situation is different in Sweden, although the time frame (10 years) is the same. There was no experimentation in this country, nor was any necessary. The point was to scam the consumers, and this was duly and easily carried out.

What about the academic economists who supported restructuring. Do you remember the passage in the great song 'The man who got away' that began as follows: 'Fools will be fooled'. That pretty much tells the whole story, doesn't it?

At the conference in Portugal that I mentioned above, I not only listened to Fred Schweppe, but talked to him. He believed that the real world could take on the characteristics of the make-believe world depicted in the early chapters of your favorite elementary economics textbook, where it would be possible some day to buy and sell electricity the same way that you can buy and sell used clothes at some charity bazaar. The difference between Fred Schweppe and the big bosses at Enron is that he REALLY believed it. If he had added, as the Enron people did, that consumers would experience a 40 percent decrease in their electric bills, then I would have climbed up on my anti-deregulation soapbox right then and there.

Once again: NO TINKERING ON THE DEMAND SIDE CAN OFFSET THE GAMING AND LACK OF INVESTMENT ON THE SUPPLY SIDE! Nobody should be forced to sit through a boring and illogical lecture by some hypocritical member of the deregulation booster-club in order to understand that.

December, 21 2006

Jose Antonio Vanderhorst-Silverio says

Prof. Banks,

Part 1 of 2.

Everybody needs to agree with that you know what happen in Sweden: it is a scam in which the government makes the most. You are a brilliant man with fixed opinion that got everything right, except some humble engineering things (about physical electric power risk management for example) as you mentioned last year – “I don't know as much of the engineering as I should and could know…” (see my post of yesterday).

Prof. Banks - 10.4.05 – on Electric and Gas Deregulation: Not-So-Cold Cases:

… in my journeys I never miss a chance to emphasize that deregulation increases uncertainty, and according to mainstream economic theory, uncertainty leads to a decline in physical investment.

In addition, where Europe is concerned, I happen to know that with both electricity and gas, the decision makers of the EU once entertained the thought that they could make deregulation work by strong-arm methods, by which I mean constructing additional pipelines (and power lines) for billions of dollars, and thereby obtaining what DeVany and Wall called “connected networks”. Personally, I prefer seeing this money going into high-quality health care and personal security, because as far as I can tell almost everyone who wants to buy gas and electricity has access to it, even though they may have to buy it from regulated monopolists.

The fact that the theory supporting natural gas and electricity deregulation is internally inconsistent, blatantly unrelated to reality, grossly incomplete, and to a certain extent amateurish, is not likely to keep this particular wolf away from the door.

Prof. Banks – 6.28.05 – On Econimic Theory and Some Disobliging Aspects of the Swedish Deregulation Experience:

The problem is not the theory, but the people using it.

The most valuable risk management tools in the electric market are still long term contracts in a regulated or deregulated environment.

Vanderhorst-Silverio – 11.3.05 - On An Alternative Business Case for Demand Response:

The business case of Demand Response (DR) is enhanced under free markets, innovation, and probabilistic (risk) mindsets. DR is poised to be the demand side risk management tool to complement the traditional "LOLP" supply side risk management tool. There are two sides on the DR coin. On one side, system crashes are mitigated by a least cost mix of supply and demand risk management tools that may be applied in time and space. On the other, DR is the key to the segmentation of customers supply security (a kind of insurance). Because of its fine grain nature, DR can help mitigate delays (intended or not) of lumpy investments in generation, transmission, and distribution.

See second post next…

December, 21 2006

Jose Antonio Vanderhorst-Silverio says

Part 2 of 2.

Vanderhorst-Silverio: As can be seen, with the development of the resources on the demand side there is no need to develop “connected networks.” The decline of physical investments, the increase in uncertainty, etc. are certainly about the people using it, but also to a large extend a problem with the theory. The old vertical integrated utility does its risk management physically by investing in reserves. Schweppe disclosed how the new vertical integrated utility could develop a market with demand response to decrease uncertainty. Vanderhorst-Silverio envisions the development of the resources of the demand side by way of a suggesting a third way that promises lower costs and/or enabling higher value from electricity to the customers, instead of lower prices, but open to change his opinion to make electricity without price controls an emergent reality in a public generative dialogue.

There was one way for one person to know too much and get stuck in debates: learning from the past. There is another way to learn: several people learning from the emergent future in a generative dialogue. The electric power industry is being exposed to new realities that were thought out by late Prof. Fred Charles Schweppe in the decade 1978-1988. That research he led is only recently being flesh out in what is a creative destruction – not tinkering. Jamie Wimberly DEFG CEO, in synchronicity with my comments in support to the emerging power sector reform paradigm revolution, said the following in a sharp closure of his article The Future Utility Customer Service Model:

Thank you to Dr. Vanderhorst-Silverio for his interesting comments and citations. We also agree that a systemic approach is required to envisioning the future. In fact, many utilities also are moving in that direction and attempting to more tightly integrate their systems, platforms and practices. Technology such as AMI is allowing for this progress in a way that simply did not exist five years ago.

At my firm, the Distributed Energy Financial Group LLC, we believe the changing utility customer service model is simply one manifestation of a technological revolution akin to the industrial revolution that promises much more value creation over time. Building off of the advances in information technology and network management begun decades ago, those advances are now being incorporated into complex systems and the management of assets that form the bedrock of any economy, namely, energy, transportation, water, telecommunications, etc. Greater levels of efficiency and productivity are leading to new product and service generation.

And what do customers want? Most customers are not buying “alternative” or “green,” but are more interested in cheap, reliable energy sources. In fact, I would argue that they are not even buying energy per se, but rather comfort, convenience, light, entertainment, mobility, etc. Greater levels of efficiency allowing for greater levels of consumption of what people desire have the virtuous impact of being “cleaner and greener.” One must be careful to not confuse cause and effect.

Jamie

Jamie Wimberly DEFG CEO

December, 21 2006

Len Gould says

Jamie Wimberly's comment, quoted by Jose Antonio

"In fact, many utilities also are moving in that direction and attempting to more tightly integrate their systems, platforms and practices. Technology such as AMI is allowing for this progress in a way that simply did not exist five years ago"

simply indicates how poorly Mr Wimberly understands the concept I, and to a lesser extend Jose Antonio, advocate. Anyone with my experience in IT hardware and software would know that the ideal deregulated system which I advocate has been easily achievable and economical for at least the past 20 years, if fact ever since the development of the economical embedded digital computer. (How old is the digital wristwatch, the industrial barcode printer, portable barcode scanner, etc.? All these systems use esentially the same technology with similar economics. We were buying smart communications-capable thermal barcode printers and installing them in washdown industrial environments in the mid 1980's). We and many others were also connecting multiple very large databases all across Canada since 1990.

There is currently simply no technological or economic barrier to implermenting the smart metering infrastructure I advocate.

And Fred. I agree with you that the system cannot be fully implemented safely as long as many areas are served by only a few monopolistic generation entities. But I ask you, regarding your hate for "deregulation" and "energy free markets", how much of that is the result only of the experience of Sweden, where local prices were held artificially low because the generating companies were arbitrarily barred by law from seeking markets in other countries where electricity was more valuable? I grant that you may have a case, but I think it may not be an example which applies broadly to economics of electricity marketing outside of Sweden. I am convinced that the marketing model I advocate could safely be applied to most distribution regions in North America with only minor re-structuring of generation, esp. where the ISO - RTO model for transmission and market operation has been adopted, a significant proportion.

And given that the meters I advocate would inherintly include a connection for the customer's local CHP generation to tie in, and a communication pathway for the ISO to broadcast requests for their startup in urget peak situation (simply by offering a high enough price), I think it shouldn't take too long for a significant proportion of total generation to be provided by eg. small CHP generating units "topping the energy quality" of most natural gas now burned for heating fuel, which would then be able to keep the large generators honest.

December, 21 2006

Jose Antonio Vanderhorst-Silverio says

Len,

My opinion about having a middleman - the retailers under competition - between the generators and the customers to replace two middlemen - the regulator and the distributor under monopoly - is related to long run risk management for the development of the resources of the demand side. I just don't see yet the institutional arrangement to avoid the middleman. Rate of return regulation or performance based rates are avoided for the commercial competitive activities. Instead, retailers operate under prudential regulation / similar to the financial industry - to protect the public. Retailers also perform physical risk management on the demand side.

December, 21 2006

Jose Antonio Vanderhorst-Silverio says

Historical news on deregulation scams: "Court Says U.S. Oversight of Power Industry Was Lax," by DAVID CAY JOHNSTON, The New York Times, December 20, 2006.

"A federal appeals court yesterday called into question the government’s efforts to change the power industry into a more competitive business, ruling that national energy officials abdicated their responsibility to ensure fair electricity markets."

December, 21 2006

Ferdinand E. Banks says

Guilty as charged, Len. The 70% average increase in electricity prices since deregulation came into effect in Sweden stoked my fury. But I think that I've got something to be annoyed about. The curse of open borders and globalism might eventually deindustrial this country, and that process can only be speeded up by escalating electricity prices. I've tried to explain all this to the industrial uppe- crust, but apparently I've got some serious personality problems: instead of thanking me for my words of wisdom, several of them have accused me of being a nasty person with a hatred for 'free' markets. Now they are complaining about high electric prices.

I don't like to blow my own horn, but I've never been wrong about this subject, and 'I ain't gonna start now'. I was in Hong Kong when the California meltdown arrived. I had predicted it months before, but apparently not in the dulcet tones that are so highly valued in that part of the world. Anyway, let me finish with the following suggestion: propose any kind of adjustments that you want on the demand side of the California electric market when it ran into trouble, and then ask yourself what playing games with meters and metering and IT would have to offer against the gaming of the system that took place in and around that great state - the kind of gaming that led the governor at that time to use the expression "out of state criminals".

Fred

December, 21 2006

Len Gould says

Fred: I do agree that implementing intelligent meter based markets alone are not a sufficient condition for eliminating or seriously regulation, just one of the absolutely necessary pre-conditions. I consider it apparent that after implementing the smart meters, THEN a long period of eliminating excess market power and monopoly situation must ensue, prior to "deregulation". The main reason I propose it is because a) I think it is increasingly important to our future energy security to implement effectively CHP (fossil and bio-fueled) and Solar-Thermal generation at every point of energy use. and b) the only incentive for existing regulated vertically integrated monopolies is to block that process, as they effectively do with present rules on interconnection, costs for studies and any other means they have.

Also primarily, I don't want to hear ANY further talk of "market-based" or "de-regulated" electricity until a system is in place which allows me to continually choose among a reasonably broad group of actively competitive suppliers at every point that I wish.

And Jose Antonio, allowing me to choose to sign a multi-year contract with one of two or three "retailers" who are questionably competitive and only control 10% of the value chain anyway isn't exactly what I have in mind, nor even close. I should be able to switch suppliers three time during any single day's peak period, thank you. Anything less will need constant supervision from regulators, so why bother?

December, 21 2006

Jose Antonio Vanderhorst-Silverio says

Len I think that monopoly power is already way over extended. The Federal Appeals Court decisions might open a different avenue to ensure fair electricity markets. I give you the benefit of the doubt on your market design and architecture, which I would like to understand. Maybe we could have two competing markets approaches for the generative dialogue. I invite readers to continue participation in the dialogue. It could be that EWPC is an intermediate stage to your ideal market.

December, 21 2006

Jose Antonio Vanderhorst-Silverio says

As Len points out, the technology to design and develop demand response has been available for more than 10 years ago. By 2000, if the utilities had accepted Fred Schweppe theory and practice of Spot Pricing of Electricity for the vertical integrated utilities – as an intermediate stage - to develop first (before generation deregulation) the retail market, history would have been different. Today is advisable to jump the vertical integration stage. On April 20, 2006 I posted a comment under the article Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices that reads as follows:

The debate in California has changed remarkably over the past year or two. Discussion now focuses not on whether retail competition or direct access is possible, but on how to make it happen. The three California investor-owned utilities affected by the commission's decision convened an industry working group, called the Western Power Exchange (Wepex) to address the issues related to implementing the new competitive retail market. Its responsibility has included making three filings to FERC by the end of April 1996, seeking:

• Approval to create a new institution - the ISO - that will provide comparable open access for wholesale and retail use of the transmission system, plus approval to transfer the control operation and control over a large share of utility transmission facilities to the ISO.

• Approval to create the PX to run a California spot market for power, plus approval for the utilities to sell into the PX at market based prices.

• A determination of the dividing line between transmission, over which the FERC has jurisdiction, and distribution, whose regulation is expected to be left to the states [1]."

The first and second bullets were opposed by Bill Hogan, as the following quote says: "For a different perspective on whether the system operator and the power exchange need to be separated, see "Avoiding the Separation Fallacy," by William Hogan, Electricity Journal, December 1995, pp. 26/37 [2]"

The last bullet is common to Enron's and Hogan's mental models. The origin can be traced to Bill Hogan, as can be seen from my post "Retail Access is Easy" above. As can be seen, Bill Hogan is the most influential person of deregulation.

© José Antonio Vanderhorst-Silverio, PhD. 2006.

Interdependent Consultant on Electricity

Dominican Republic

[1] Barbara R. Barkovich & Dianne V. Hawk, "Charting a new course in California," IEEE Spectrum, July 1996, pp. 28-29.

[2] Ibid, pp 31.

I agree that even following Schweppe’s advice there was not any guarantee of avoiding agreements of the weird sort. The problem is with the theory and the people using it. Fair electricity markets that offer workable competition are not easy to develop.

December, 21 2006

Jose Antonio Vanderhorst-Silverio says

Len,

As you suggested, the interface technology (including metering) could have economies of scope. As such, the business case for retailers is not limited to 10 per cent.

December, 22 2006

Ferdinand E. Banks says

Len

Let me reaffirm where we disagree. According to the economics books that I have read, and think that I understand perfectly, regardless of the sophistication and perfection of the metering, etc, electric deregulation would not work. Of course I am willing to admit that while for Sweden the best thing would be to return to the arrangement that we had before deregulation, and try to forget this screwy deregulation experiment, this might not be true for the US. I think that it would be true, but I'm not absolutely sure.

About this business of switching suppliers that you mention. Fred Schweppe included that in his agenda, though in a 'sexist' sort of way: the madame of the house would take charge of this in the course of her household chores.

Something that hasn't been discussed is the presence of an auction exchange for selling various quantities of electricity, which ostensibly is the best indicator of supply and demand. An example is the Nordic Electric Exchange (NORDPOOL) in Oslo, and regardless of what it is or isn't THIS IS THE BIGGEST MISTAKE OF ALL IN THE DEREGULATION CIRCUS, at least where individual countries are concerned, but I see no reason to go into that in detail here.

December, 22 2006

Jose Antonio Vanderhorst-Silverio says

In addition to the comments under this article, please find further comments on a generative dialogue about Independent Market for Every Utility Customer (IMEUC) and Electricity Without Price Controls (EWPC).

Part 1 of 2.

Jose Antonio – 11.21.06 – on AMI Services Solutions for Alberta's Deregulated Market:

Deregulation on a piecemeal basis leads to the outcome you are pointing out. Transmission and distribution is fractured; the customer interface is fractured; the value chain is fractured. I suggest that ADOE (and other energy departments) retain a consultant for advice on electricity without price control (EWPC).

The result should be a robust market, where retailers business design innovation (with AMI) should develop the resources on the demand side (with water and gas as well). Reintegration of T&D should assure short run (price elasticity demand response) and long run (boom-bust mitigation) risk managements, with a different standard market structure and design. In simple terms, the result should be the End-State of the Electricity Industry.

The benefits of AMI in the new integral-reform-paradigm will be larger than in the fractured-high/volatility-paradigm, as growth and development towards the new economy will result from real creative destruction.

Energy departments worldwide should look closely to the article issues in the making. As electricity deregulation is a very complex subject matter, debate will prove insufficient. There is a need for a generative dialogue that will help see the presence of the emergent solution. I strongly believe EWPC is the way out of those issues.

Len – 11.22.06 – on AMI Services Solutions for Alberta's Deregulated Market:

Agree with Jose generally, though I think your recommendations don't quite go far enough. Given the meter communications infrastructure you propose, your final "Benefits" graph misses entirely the largest potential benefit by far, that of providing genuine real-time pricing and intelligent interaction with the markets from every customer's meter. It would provide a large block of added benefits at only a very low incremental cost.
Len - 1.12.06 – On Independent Market for Every Utility Customer Part 2 - Market Operation

The most basic operation of the market is to:

· Resell to customers the electricity or natural gas produced by large baseload suppliers under very long-term fixed price contracts negotiated by the Market Manager entity based on their projections of future demand.

· Provide means for merchant generators of all sizes to contract with customer load in excess of this baseload to provide additional power in excess of the baseload.

Continued on next post…

December, 22 2006

Jose Antonio Vanderhorst-Silverio says

Part 2 of 2.

Len - 1.12.06 – On Independent Market for Every Utility Customer Part 2 - Market Operation

The Market Manager uses a public tender process to add to this baseload contract supply as load increases within their market territory. Ideally they never get themselves into a position of having to pay for more production than customers purchase, but in the event that happens they are still responsible for paying the contract, so must try to re-sell the excess into other neighboring markets. Failing that, the Market Manager must add a levy onto all market transactions to collect the amount necessary to cover the shortfall amount owed the provider above the amount collected by sales…
Vanderhorst-Silverio: After reading the article suggested and its follow up, I find that after looking closely IMEUC does not corresponds to the new integral reform paradigm. IMEUC is based on mechanistic thinking about fundamental electricity economics, as can be found under the heading “Metrics” a statement that says: “[E]very consumer of utilities will benefit from a system such as this in three ways: first…every entity at every stage in the supply chain will be constrained to making their own good investment and operating decisions or be out-competed by a more efficient operator.”

As the result of efficiency on every stage of the supply chain, any competent electric power system planner would see a repetition of the fault found in the deregulation experiments of the last decade: the system is also fractured. Hence IMEUC does not lead to the maximum value expected by society as is EWPC where the system architecture is modularized at the proper interfaces on the value chain. For example, retail marketing is an essential service for the development of the resources of the demand side that is disintegrated in the IMEUC. A fault on market architecture is evident on IMEUC that becomes a barrier to emerging retail marketing business model innovations under competition.

It was to the innovation concept that Mr. Wimberly responded to my conclusion that “instead of Utilities Enterprise Solutions, a Retailers Enterprise Solutions arrives, which will make much more business for IT suppliers than expected under the Continuity Scenario. The main reason is that current business models are at the end of there useful life, while new technology is available to be transformed into competing innovative business models, leading to true deregulation of electric markets.”

While under EWPC obsolescence risk of customer interfaces are taken by retail marketers, under IMEUC monopoly regime the bets of the Market Manager on the customer interface (including metering) are transferred to the rate payers. As customers needs evolve, retail competition should be centered on business model innovations for the different market segments. One size fit all system is also big bet.

In addition, under IMEUC the Market Manager remains as an intermediary for base load generation based on very risky forecasting. Forecasting great weaknesses that leads to playing with fire have already been delved at length earlier on under this article. The resulting market design is no robust enough, leading to either excessive costs of over-capacity or under-capacity by missing proper whole system long run risk management. A market design error has been made, as an improper market signal may lead to large levies imposed on customers when there is a large forecasting error.

December, 22 2006

Darel Preble says

Current news on rapidly expanding nuclear - Nuclear Power Revival Could Encounter Hurdles - paint a dark picture regarding the nuclear fuel situation. It is simply inadequate for the MASSIVE energy shortfall and increasing pendency on imported fuel from unstable regions which we now face on the near horizon. A much more reliable energy source and far cleaner is sunshine at GeoSynchronous Orbit, beamed gently to rectennas hooked to earth's current utiltities. Simple. The Space Solar Power Workshop has shown how to built space solar power satellites - just as communications satellites were built, with the same public / private charter used for Comsat. That chapter is here

December, 22 2006

James Hopf says

Darel,

Surely you jest.

The technical problems of simply building some nuclear power plants are greater than getting the same amount of power from solar satellites??!! We've been doing the nuclear thing for 40 years now, and deliver ~20% of our power that way. Very reliable (90% capacity factor) and very clean (no measurable public health impact, ever). How many SPSs' are there right now? Suffice it to say that the reliability of a space-based power plant has not yet been demonstrated.

The problem discussed in the article you link is merely a short term problem that will be solved by simply bringing a few new uranium mines and enrichment plants on line. Hardly a technical challenge, all though it does require some time, which may result in a short term price spike. Given that ore only contributes a few percent of the final power cost, any potential spike will not significantly effect nuclear's price, or our ability to bring new plants on line. By the time new plants come on line in the US (2015 or later) this problem will already have been solved.

Finally, nobody need worry about the long term uranium supply situation, or how long the fuel supply will last under any strong nuclear growth scenario:

http://www.americanenergyindependence.com/uranium.html

http://216.94.150.122/investor_relations/speeches/speech_text.php?spid=49

December, 23 2006

Ferdinand E. Banks says

Tam Hunt keeps insisting that the price of uranium is on its way into the clouds, and so I guess that it aint so.

As for space, when John ('A Beautiful Mind') Nash was in Stockholm to pick up his Nobel (for generalizing a result obtained by Cournot more than a hundred years ago, and which probably took Nash all of 20 minutes), he suggested that nuclear garbage could be fired into space. Lots of beautiful things going to happen up there some day.

December, 23 2006

Arvid Hallén says

If Mr Nash thought nuclear waste should be sent into space, it is rather strange that he was considered brilliant enough to recieve a Nobel prize, or maybe the Royal Academy of Sciences as a rule give that prize to people with such stunningly stupid ideas.

By the way, there is a certain rumour about Fred, uh... vigourously critizising certain Nobel laureates of economics at their traditional Nobel lecture here in Uppsala. Maybe he would like to enlighten us on the veracity of said rumour, and if he use to spread his criticism to laureates of other subjects? ;)

December, 23 2006

Len Gould says

It is a strange (and failing) world where honest and accurate criticism can freely be ignored simply because of the tone or venue in which it may be delivered. Anything possible over substance, I suppose.

December, 23 2006

Len Gould says

Jose Antonio: I'm not entirely certain of my reasoning, but it seems to me irrational to assume that energy customers would prefer to deal with middlemen if they have the opportunity and means to easily deal with the source supplier at no additional difficulty. What value could retailler entities add to the chain to justify their overhead cost? Those "essential services" you propose, eg. demand management assistance, in IMEUC are simply value-added programming products sold to customers for installation onto their meters. It's Lotus Notes vs. Outlook for your business computers email management, and has practically nothing to do with the design of the hardware or communications infrastructure on which they run. I'm discussing the hardware and communications infrastructure, it's standard and minimal performance requirements. What applications (retailer x's product vs. retailer y's or the default program provided) is a side issue.

And I can't think of a single energy retailer specialist I know of which has the financial depth to guarantee survival in a volatile market which is sure to become more volatile as energy shortages start hitting, much less raise the financing for eg. a nuclear power station. My proposal to have the publicly owned and financed entity commit to long-term contracts for guaranteed baseload requirements is designed to A) enable prime rate financing of capital-intensive installations such as nuclear and low-emissions coal, and B) avoid customer exploitation by owners of eg. long-paid-off nuclear station owners who could (and presently are set to) sell electricity which may cost them 2.5 cents / kwhr to generate into a market where the "price to pay" is more and more often set by increasingly scarce and expensive natural gas. How does EWPC deal with those issues?

December, 24 2006

Jose Antonio Vanderhorst-Silverio says

While debating, people operate downloading and reloading rehearsed messages. They know what is true and they don’t need to “listen” to what the other writes. Some as Prof. Banks have the courage to write that “I know too much about it, and where this subject is concerned my memory is very good.”

Under a generative dialogue, the aim is different as “listening” is very important. The object is to tackle complex problems to learn from an emergent future. It is not possible to come up yet with a right solution.

On 5.12.06 – under Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices we had this interchange of opinions:

Len: I'm still waiting for anyone to acknowledge Independent Market for Every Utility Customer - Preliminary Business Case or Independent Market for Every Utility Customer Part 2 - Market Operation

José Antonio: “In other comments I have expressed that retailers’ business model innovations should be centered on AMI, CIS and demand response integration. That leads to the market winning approach, which is the first phase of competition: market vs. market, where collaboration is the critical strategy according to Geoffrey Moore in the book “Living on the fault line” … Len articles are part of the second phase of competition: company vs. company. That is a zero sum game, and so competition is the core strategy. That is why I don’t want to take sides yet. Sorry Len, I think your approach is one of several available to retailers. Good luck!”

See Avoiding the Boom and Bust Cycle in Electricity Trading and Let's Get Out of Back Rooms to a Generative Dialogue for an explanation of how under EWPC the mitigation of fuel price avoids unacceptable price spikes.

Jose Antonio today: the complex situation is similar to the one facing the gas industry that Andy has brilliantly explained. This explains why "recommendations don't quite go far enough." The complexity has three dimensions according to Adam Kahane (taken from Senge and other):

High dynamic complexity: forecasting tools should be replaced by system dynamics and scenario tools deployed by competent professionals. Fuel prices should be mitigated to produce electricity prices.

High generative complexity: an emergent market design and architecture model – a third way – is available and was not included in the decade long debate. Schweppes’s theory and practice was unable to emerge. EWPC is one candidate market design and architecture open to many competing solutions that extend Schweppes’s concepts.

High social complexity: there is a need for a customer orientation to be able to develop the resources of the demand side by market segments. As customers needs evolve, such development will empower customers only by interacting with them. Retailers’ accounts are assets that prudential regulation supervises and that customers and generators will trust if the system is designed properly.

Jose Antonio Vanderhorst-Silverio, PhD is an Interdependent [Systemic] Consultant on Electricity, whose “[R]esearch and practice areas, and interests include: [electricity without price controls], systems architecture, systems thinking, electricity retail marketing under a customer orientation, electric market rules, information systems requirements and design, contract assistance.”

December, 24 2006

James Carson says

Banks << NO TINKERING ON THE DEMAND SIDE CAN OFFSET THE GAMING AND LACK OF INVESTMENT ON THE SUPPLY SIDE! >>

The American power markets are wallowing in OVERcapacity due to excessive invesment from 1999 through 2004. As for gaming... If power marketers were any good at it, why aren't they making money? Why did virtually every merchant power company either go bankrupt, or flirt with it? As for his wailing about the 70% increase in electricity rates in Sweden.... Did he consider that the rest of the energy complex, fuels included, have risen MUCH more than that over the same period? Does he really believe that electricity rates would not have gone up anyway?

How can he expect anyone to take him seriously?

As for my 8-9 years experience analyzing electricity markets in the US, I have found that deregulation has forced utilities to examine every aspect of their operations to improve efficiency, leading to dramatic improvements. They have been forced to closely examine how they deploy their fleets of generation assets, and forced to closely examine the true cost of service to various classes of load.

Yes, market discipline has been painful. The benefits are hard to see because we do not know what would have happened otherwise. However, his sweeping claims of failure accompanied by his derisive catcalls are beyond the pale.

December, 25 2006

Ferdinand E. Banks says

I'm glad to see Mr Carson that you, like me, prefer to celebrate Christmas on 25 December instead of 24 December, as they do here in Sweden, and as a result I want to thank you for your Christmas gift.

WHERE SWEDEN IS CONCERNED, EVERYTHING YOU SAID - AND PROBABLY EVERYTHING YOU THINK - IS WRONG! The increase in electric prices in this country began almost immediately after the market was deregulated. Something else that began was a decrease in reliability. The tragic thing here is that journalists and independent analysts knew that this would happen, but not dumb academic economists. At the present time, the wholesale power sellers - the generators - are rolling in cash. The largest power company, Vattenfall, is probably making the largest profits of any enterprise in the country, and the energy intensive Swedish manufacturers have greatly decreased their investing in this country and are systematically moving their operations abroad because of the high domestic electric prices. Incidentally, the generators did not protest the closing of the Swedish nuclear plants because they - unlike you - read the first few chapters in their microeconomics textbooks: supply down means that price increases.

What surprises me though is how wrong you are about the US. Just as deregulation has failed almost everywhere in the world, it has failed in almost every state in the US where it has been tried. That is what the 'Take Back the Power Conference' that will be held in Washington (DC) on 26 February is all about. Now, if you were there, and I were there, and we shared the same platform, you would get a chance to find out what your 8-9 years of experience analyzing electric markets in the US was worth. Believe me mister, it wouldn't be worth much. And by the way, generating companies in and around California made billions as a result of the deregulation fiasco in that state. Gaming accounted for a large part of that bonanza.

You say that market discipline is painful. Tell that to the chumps who believed Enron when they said that deregulation would lead to a 40% decrease in the price of electricity in California. In case you forgot, the legislator who led the deregulation charge soon saw the light and joined the anti-deregulator booster club. Somebody else who saw the light was Senator Hollings, who initially was a big deregulation suppprter. As for the overcapacity that you talk about, just how much overcapacity is there in the transmission system? Unless I'm mistake those staunch anti-market people US Energy Secretary Bodman and Vice President Cheney have said that more transmission capacity is necessary (before the beauties of deregulation can be appreciated).

A suggestion: Check out EnergyBiz - and especially letters from readers - for the last year to get an insight into what many/most US analysts think about electric deregulation. And I repeat, for your benefit and theirs: NO TINKERING ON THE DEMAND SIDE CAN OFFSET THE GAMING AND LACK OF INVESTMENT ON THE SUPPLY SIDE!

Before I forget, a merry Christmas and happy New Year, and do yourself a favor: stay away from the screwy electric deregulation literature passed out by deregulation hustlers and phonies in your local faculty of economics.

December, 25 2006

Ferdinand E. Banks says

Arvid, I'm going to take your question as a question and not a challenge, because just about every economics teacher in the Kingdom of Sweden knows that it's a bad mistake to challenge me, and they are right to know that. I take no prisoners in this country.

The Nash Equilibrium is a generalization of the Cournot equilibrium, discovered about 100+ years ago by M. Cournot. For a man as brilliant as John Nash is/was, it couldn't have taken more than 20 minutes to formulate, if that. It did NOT happen the way that was shown in the travesty that was sold to the film-making public under the title 'A Beautiful Mind', which is a marvelous book by Sylvia Nasar. Incidentally, the most important scene in that book was the one in which the Russel Crowe 'OSTENSIBLY' threw the math book into the waste paper basket. Although not mentioned by the ignorant directors/writers of that film, the book was 'Complex Theory' by the Finnish-Swede Professor Ahlfors - the first winner of the Fields Medal. Check GOOGLE for what the Fields Medal is all about, and if you know math, look at the so-called equation that Russel Crowe wrote on the blackboard for his students to examine at their leisure. Crowe was beautiful in that scene, but fortunately they didn't use it or the rest of that trashy film to push the lie that Nash was at any time a serious candidate for the Fields Medal.

About the so-called Nobel Prize in economics. All that anyone needs to know about that was summed up by the performance of the two prize winners Finn Kydland and Edward Prescott several years ago on the program 'Genius Speculates' (Snillen Speculerar). This was a good reason why one of the two most brilliant US physicists of the 20th century, Murray Gell-Mann, once said that the economics winners should not be allowed to sit next to the real scientists, because to his way of thinking economics is not a science. The best description of the performance of those two 'gentlemen' was IGNORANCE IN ACTION. In fact, they shouldn't have been allowed to sit next to the dance floor in the Cafe Boulevard in Stockholm when it was .... Anyway, for your information, the Nobel Prize in economics is decided by know-nothings who try to choose people whom they believe will supply them with plane tickets to romantic places. So you see, it's not really strange after all that strange people are given that prize. I can add here that when Gunnar Myrdal received the prize, he immediately announced that there shouldn't be an economics prize, and nearly created a scene at the Nobel banquet by questioning at the top of his voice the bonafides of the other winner.

Finally, I have no objection to the Nobel Prize, except possibly the one in literature - which is a scandal. The peace price also causes a little concern, while the economics prize is... I've also seen this accusation - probably by your good self - that when Nobel Prize winners give their talk in Uppsala, I show up to challenge them or make a spectacle or something. This is very wrong, young man, because I happen to know that that occasion is the wrong place to give anybody a lesson if they deserve one, and if I happen to have what it takes at the time to give one.

December, 25 2006

Jose Antonio Vanderhorst-Silverio says

Mr. Carson initiated what seems to be a heated debate with Prof. Banks. In my most recent comment you may see that a debate centers on the typical downloading and reloading. However, if they decide to learn from the emerging future, by following my suggestion to Let's Get Out of Back Rooms to a Generative Dialogue all of us might be served better.

In that respect, I also suggest to change the debate based on the past

NO TINKERING ON THE DEMAND SIDE CAN OFFSET THE GAMING AND LACK OF INVESTMENT ON THE SUPPLY SIDE!
to an emergent generative dialogue on

IRRESPECTIVE OF LOCATION, THE BEST INVESTMENT STRATEGY FOR AN ELECTRIC POWER SYSTEM WITH THE APPROPIATE MARKET ARCHITECTURE AND DESIGN IS A MIX OF INVESTMENTS ON THE DEVELOPMENT OF THE RESOURCES OF THE DEMAND SIDE AND INVESTMENTS ON THE DEVELOPMENT OF THE RESOURCES OF THE SUPPLY SIDE THAT REDUCES SHORT RUN AND LONG RUN SYSTEMIC RISK WHILE SOCIETY RECEIVES THE MAXIMUM VALUE FROM ELECTRICITY.
The suggested forward looking statement itself is open to be clarified and refined.

December, 25 2006

Len Gould says

Merry Christmas all:

Were it not the season to be jolly, I might add that it seems that the greatest benefit of "generative dialogue" is that it means one doesn't need to respond to questions. Sorry Jose Antonio, just couldn't resist.

a) What value could retailler entities add to the chain to justify their overhead cost?

b) How does EWPC deal with those issues?

December, 25 2006

Jose Antonio Vanderhorst-Silverio says

Merry Christmas to everyone!

Thanks Len for considering the generative dialogue. In a generative dialogue what is important is "listening" in sychronicity with other interest parties to the larger whole that is emerging. For example, a common understanding of what EWPC means as a third way not considered in the decade old debate.

I presume that large customers could be allowed to go directly to generators for their deals in the wholesale market. Then, what you are suggesting is a monopoly retailer innovation under a Market Manager. I suggest to have retail competition, so that other potential innovations are also allowed to emerge. Go to any marketing book and you will find why intermediaries are needed.

What you are proposing is to impose on everyone the Swithboard Profit Model “innovation,” which Adrian Slywosky describes on page 59 of his book “The Profit Zone.”

Some markets are characterized by multiple sellers communicating with multiple buyers, with high costs incurred by both. In many case, there is an opportunity to create a high-value intermediary that concentrates these multiple communicating pathways through one point, one channel, by creating a switchboard. The switchboard reduces the cost to both buyers and sellers. A powerful component of the switchboard model is that it builds on itself; the more buyers and sellers that join, the more valuable it becomes.
Such middleman model is perfectly allowed under the EWPC market architecture and design. That is why I said earlier "good luck!" Please say so if there are other things that still bother you.

December, 25 2006

Len Gould says

Agreed Jose Antonio on Switchboard model. The point is, once the transaction costs are zeroed with full automation, the large generating entities have no reason to object to selling directly to the smallest customers as well as "large customers". And the market manager is not monopolizing retail, simply the means of recording transactions. IFany would-be retailer can come up with a model which can attract customers away from the generating entities, then they are entirely free to enter the market with offers right alongside the originating generating entites.

December, 25 2006

Len Gould says

Further, am I correct is assuming that in EWPC it would have to be what you describe as retailers who would contract with large generating entities for construction of large capital-intensive generating plants, eg. nuclear and IGCC coal? Given the large increments in which that must be added, and the necessity of adding it in advance of the need for it, how could any retailer ever finance it at anything close to the prime rate, as required?

December, 26 2006

Len Gould says

A further benefit of the "IMEUC" strategy is it enables rational application of PHEV personal transport vehicles as both off-peak load levelers AND as on-peak generation-from-storage. With eg. 25% of the 2 million vehicles in the Los Angeles area having each a 50 kw (fuel-cell or standard engine) electric power plant and eg. 50 kwh rechargable battery system onboard, that represents a potential 2,000,000 x 1/4 x 0.05 = 25,000 MW of emergency peaking power, or eg. 12,500 MW if only half of them are parked and plugged in at daytime peak, my guestimate reasonable expectation. Assuming each of them is plugged into a meter as I describe in my articles, eg at the parking lot at work and in the home at night, and the auto is capable of registering ownership in the meter and reading the market through the meter, then the vehicle owner simply needs to tell the auto what market price they will be willing to generate power back to the grid at, and what price they are willing to pay for re-charges. Naturally these prices would vary under owner's control depending on levels of alternate fuel in the vehicle, battery charge levels, planned long trips after work etc.

It could a) solve the energy storage problem for a large block of wind generation. b) make a tidy profit for the vehicle owner if well programmed. eg. suppose the owner picks up an extra 25 kwh each night in excess of their commute requirements at 5 cents, and re-sells it at peak into the grid at 25 cents, for 250 days per year they gain 25 x 0.20 x 250 = $1250 per year (less a deduction for battery/charger efficiency of course), for doing nothing but driving the most fuel-efficient vehicle available. And being PHEV, they're also getting the other eg. 17 kwh (eg 50 miles at 3 mi/kwh) of driving fuel per day for 200 days at eg. $0.05/kwhr at eg 90% charger effic ($187) vs. gasoline at eg. $3.00/gal and 22 mpg ($1,363), a further saving of $1,176

http://avt.inel.gov/pdf/fsev/costs.pdf

For one example EV on which this is based, see Toyota's 1998 example at link below, and note the quote "Toyota's Armstock made an interesting comment near the end of our test drive. When asked when we can expect to see the RAV4-EV go on sale to consumers, he remarked that the technology is advancing so rapidly that he expects the current model to be as obsolete in thee years as a pesonal computer with an Intel 286 micro-processor is today. That's an exciting prospect, considering how well integrated the RAV4-EV is even now."

http://www.evworld.com/archives/testdrives/rav4ev.html

December, 26 2006

Jose Antonio Vanderhorst-Silverio says

Generative dialogue synthesis:

Competition is divided in two phases: One) market vs market and Two) company vs company.

In Phase One all interested parties cooperate in the generative dialogue to select the emergent winning market. Phase Two is not part of the generative dialogue.

EWPC – an integral reform paradigm - is an open and robust emergent market architecture and design that divides the vertically integrated utility at modular interfaces. 1) Long run and short run system planning, operation and control natural monopoly functions are also kept integrated. 2) The T&D wires natural transport monopoly is kept integrated. 3) Supply - generation - natural competitive functions compete with each other 4) Demand - retail - natural competitive functions compete with each other. 5) Supply and demand – Megawatt/vars vs Negawatt/vars - compete with each other in time and space. Module 1 commitments on planning, operation and control are to be executed by the other modules.

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

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

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

Module 1 is to take decisions for the health of the whole system as they unfold. The forward looking statement suggested to Prof. Banks and Mr. Carson on the generative dialogue goes in that direction. The Market Manager does not have such integral perspective.

I want to keep my opinions on Phase One. I am open to review the general open market design and architecture, if there are unfair elements associated with it. I have “listen” carefully to Len’s opinions and perceive that his interests, by going farther than necessary, go well beyond Phase One. Other parties representative of the larger whole – high social complexity - with different interests – regulators, generation of differing kinds, wholesale, retail, transmission, distribution, fuel supply, manufacturers of systems and equipments, etc. - are invited to participate in the generative dialogue.

© 2006. José Antonio Vanderhorst-Silverio, PhD.

December, 26 2006

James Carson says

As to Dr. Vanderhorst-Silverio claiming that I initiated a heated debate with Professor Banks, perhaps he should read the professor's other comments. I have merely responded in kind.

Banks << WHERE SWEDEN IS CONCERNED, EVERYTHING YOU SAID - AND PROBABLY EVERYTHING YOU THINK - IS WRONG! >>

Why should I care about what happened in Sweden? Given the long history of planned economies there, I have no doubt that market discipline highlighted many deficiencies and irrational legacies.

<< What surprises me though is how wrong you are about the US. Just as deregulation has failed almost everywhere in the world, it has failed in almost every state in the US where it has been tried. >>

I disagree completely. I pointed out where the many benefits came from; you utterly neglected to address them. Moreover, they are even trying again in California. Why is that? Could it be that they see benefits from de-regulation despite their earlier failures? The success of wholesale deregulation over the past decade in PJM ISO is impressive. Nearly so in New York and New England. Midwest ISO implemented a similar market model about eighteen months ago. So far so good there. ERCOT and SPP are moving forward with variations on the successes in the Northeast and Midwest. Retail power has been growing, more slowly than one would like, perhaps, but growing nevertheless.

<< That is what the 'Take Back the Power Conference' that will be held in Washington (DC) on 26 February is all about. >>

Your 'Conference' is so important that it doesn't even show up in a Google. Perhaps you would be so kind as to provide a link so that your point will make sense. I probably won't show up, but you never know.

<< And by the way, generating companies in and around California made billions as a result of the deregulation fiasco in that state. Gaming accounted for a large part of that bonanza. >>

LOL. I have already have made the point that they can't be very good at it. Again, if they made all this money, where is it? Why did they all flirt with bankruptcy shortly thereafter?

<< Tell that to the chumps who believed Enron when they said that deregulation would lead to a 40% decrease in the price of electricity in California. >>

I do not recall anyone anywhere making such a claim. Nevertheless, such a claim would be absurd on its face. Anyone that believed that hokum was an idiot.

<< ... just how much overcapacity is there in the transmission system? >>

None. Apparently, you are unaware that the market model as implemented in the US did not de-regulate transmission; it unbundled generation, transmission and load. Transmission is still completely regulated, perhaps even more than before.

Even so, the model as prescribed by FERC includes a feature called Financial Transmission Rights (FTRs) that help to establish a cost of congestion that can be used, in turn, to establish a value for added transmission. It doesn't work very well, but they are trying.

<< Unless I'm mistake those staunch anti-market people US Energy Secretary Bodman and Vice President Cheney have said that more transmission capacity is necessary (before the beauties of deregulation can be appreciated). >>

I was unaware that either Secretary Bodman or Vice President Cheney ever spent any time in the power sector. Fyi, de-regulation policy in the US is not made in the Energy Department, nor by anyone who answers to the Administration, it is made at FERC, which is an independent federal agency. What Bodman and Cheney have to say is irrelevant.

<< do yourself a favor: stay away from the screwy electric deregulation literature passed out by deregulation hustlers and phonies in your local faculty of economics. >>

... and listen only to the anti-de-regulation cranks like Professor Banks? **snicker**

<< just about every economics teacher in the Kingdom of Sweden knows that it's a bad mistake to challenge me, and they are right to know that. I take no prisoners in this country. >>

Your earlier comments tagged you as an intellectual bully, now confirmed.

December, 26 2006

James Carson says

Gould << What value could retailler entities add to the chain to justify their overhead cost? >>

Retail power has proven to be disappointing in the US. There are several independent providers, and quite a few utility affiliated providers. Your question drives to the heart of that disappointment. In fact, retail entities add little value to the chain. They may supplant some ancillary utility functions like billing. Even there, they add virtually nothing.

By way of comparison, how much value is added by having multiple large discount retailers like Target, Walmart and KMart? What about multiple long distance carriers? What about groceries? Same products, different stores. Again, very little value is added. Consequently, retail profit margins as a percentage of retail price are extremely thin.

The value added is competition. If not for competition for the retail dollar (or Euro or Krona), we would still be paying exorbitant prices in little shops, with far less consumer choice. Efficiencies of scale and broad distribution would never have emerged. In a never ending cycle of innovation and creative destruction, the retail sector rolls along, giving us a little more for our buck each day.

For retail power to succeed, they must start adding consumer value. They must innovate in pricing or product. I am encouraged by the emergence of 'green' energy offerings. Guaranteed pricing is drawing some consumer attention, especially in the commercial and industrial sectors. Still... they have a long way to go.

James Carson Risquant Energy JBCarson@RisQuant.com

December, 26 2006

Len Gould says

Jose Antonio: Your cogent discussion raises some issues with IMEUC which I hope to clarify in a third article in the series here on EnergyPulse in perhaps a couple of weeks, provided I can submit it up to the high standards of the editorial staff. Thank you.

December, 26 2006

Len Gould says

James: The obvious value added by Walmart and Home Depot etc. is conglomeration of thousands of manufacturer's products into a single pleasant space. No manufacturer of machine screws or sewing thread could ever afford to offer their product themselves in 10 or more convenient locations in every city, so they happily allow the retailer to do so and the customers willingly pay the retailers significant markups for the convenience. In 2000, many hoped that online shopping might change all that, but it turns out thers's still those issues of delivery cost and convenience.

I don't see how the same applies to a single relatively undifferented product like energized electrons or methane molecules.

December, 26 2006

Ferdinand E. Banks says

Better leave dreamland, Mr Carson. You have a way of getting things wrong that will reveal the state of your knowledge to the people in this forum.

Sweden and Norway probably still have the lowest cost electricity in the world. Sweden doesn't have a planned economy. They have a mixed economy, which is not at all the same thing. I'm not going to debate the failures of deregulation in the US with you, because there is nothing to debate. It's failed just about everywhere, and everybody knows it. Tune in to EnergyBiz or even EnergyCentral Daily. I think that even you should understand what their contributors are saying, altough if you can't understand you can consult Senators Hollings and Dorgan. I know that your attention is fixed on the US, but electric deregulation has also failed in Sweden and Norway, Ontario and Alberta in Canada, South Australia, Brazil, and now its failing in one of Bill Hogan's role models, New Zealand, etc.

'Take back the power' is not MY conference. It's being held at the National Press Club in Washington DC, and they have a web site. If you cant find it it's because you don't want to find it, but I can tell you one thing. If you attend and try to exploit the nonsense in your posts you will go home a very disappointed and frustrated man.

About generating countries flirting with bankrupcy. Poor dumb me. I thought that it was the distributors/retailers and consumers who got the worst of that deal, while the generators cleaned up. The reason I thought it was because that was the way it was. Similarly with Enron's words of wisdom to Governor Pete whatever-his-name-was. I'm sure that some concerned California resident will straighten you out on this point.

I dont know where Messrs Bodman and Chaney spend their time, but in the Newsweek special issue called 'Breaking Out' Mr Bodman shared his thoughts on the transmission situation in the US with the faithful. Of course it wouldn't have made the slightest bit of difference to me whether he did or not in that issue or anywhere else, because after the California meltdown most of the power structure in Washington were singing the blues about transmission.

I'm not an anti-deregulation crank, Mr Carson. I'm an anti deregulation FANATIC! And I can afford to be that, because I know just as most of the people who read this know that deregulation in the US has failed. Let's face it: truth will out. And by the way, please continue with your comments. I've really got some nice papers on deregulation that I could write if I wasnt busy straightening out this oil thing.

December, 26 2006

Len Gould says

And James, I might also point out that deregulation or whatever it's called in the airline industry is definitely a questionable benefit for myself now sqished starving into a tiny uncushioned seat on an aircraft run by a company which I know is bankrupt and where the line employees are overworked, underpaid and angry at their employer. It was little else than union-busting.

I also hear that the telephone carriers are all re-conglomerating again, and now with no oversight. Hang onto your long distance bill.....

December, 26 2006

Jose Antonio Vanderhorst-Silverio says

You are welcome Len. I will wait to see your opinions on the third article. Thanks also for your contributions to the generative dialogue.

Best regards,

José Antonio

December, 26 2006

James Carson says

Gould << The obvious value added by Walmart and Home Depot etc. is conglomeration of thousands of manufacturer's products into a single pleasant space. >>

Consider that Walmart supplanted Sears and Home Depot supplanted several hardware store chains like Warners and Coast to Coast. I further disagree that 'energized electrons or methane molecules' cannot be differentiated for marketing purposes. As I mentioned, guaranteed pricing and green power are two differentiations out there right now. Others will emerge over time. Could anyone have foreseen the dramatic price drop and explosion in innovation in telecommunications?

My point was that, on the margin, retailers add little value. How much difference is there between Walmart and Target? So, why do we have both? Over a long period of time, the constant competitive pressures drive innovation in the never-ending search for an edge.

Gould << And James, I might also point out that deregulation or whatever it's called in the airline industry is definitely a questionable benefit for myself.... >>

Even if you upgrade to first class, you would still be paying far less than you were paying before deregulation.

Gould << It was little else than union-busting. >>

Your point is what? That this was bad?

Gould << I also hear that the telephone carriers are all re-conglomerating again, and now with no oversight. Hang onto your long distance bill..... >>

Dont be absurd. I am sure they have heard about Vonage.

December, 26 2006

James Carson says

Banks << Sweden and Norway probably still have the lowest cost electricity in the world. >>

I was already aware of that, which begs the question, what are you complaining about? Btw, it is only slightly better than in the US.

Banks << Sweden doesn't have a planned economy. They have a mixed economy, which is not at all the same thing. >>

A mixed economy is not planned? If you say so, perfesser.... LOL. http://en.wikipedia.org/wiki/Mixed_economy

Banks << It's failed just about everywhere, and everybody knows it. >>

Everybody but FERC. And PJM ISO. And Midwest ISO. And ISO New England. And NYSO. And CAISO. And SPP. And ERCOT. I don't know about elsewhere, since I have my hands full here in the US. However, I suspect that you know just as little about those other areas of the world. I am not so sure you know anything about power de-regulation in Sweden and Norway.

Banks << 'Take back the power' is not MY conference. It's being held at the National Press Club in Washington DC, and they have a web site. If you cant find it it's because you don't want to find it >>

Show me. http://www.google.com/search?hl=en&q=Take+back+the+power&btnG=Google+Search http://www.google.com/search?hl=en&lr=&safe=off&q=Take+back+the+power+National+press+club&btnG=Search

<< ... but I can tell you one thing. If you attend and try to exploit the nonsense in your posts you will go home a very disappointed and frustrated man. >>

I suspect you are right. I am always frustrated and disappointed with stupidity.

<< About generating countries flirting with bankrupcy. Poor dumb me. I thought that it was the distributors/retailers and consumers who got the worst of that deal, while the generators cleaned up. The reason I thought it was because that was the way it was. >>

So.... You have no answer for where the money went? Why the gencos all flirted with bankruptcy? I suspected as much.

<< Similarly with Enron's words of wisdom to Governor Pete whatever-his-name-was. I'm sure that some concerned California resident will straighten you out on this point. >>

Perhaps they will. If they actually bought that nonsense, they deserved that lesson.

<< I'm not an anti-deregulation crank, Mr Carson. I'm an anti deregulation FANATIC! >>

What more can I say? You said it yourself.

<< I know just as most of the people who read this know that deregulation in the US has failed. >>

I suspect that 'most of the people who read this' know no such thing, but are not interested in provoking your tirades.

<< I've really got some nice papers on deregulation that I could write if I wasnt busy straightening out this oil thing. >>

I can't wait to read about your solution....

JBCarson@RisQuant.com

December, 26 2006

Len Gould says

"Your point is what? That this was bad?"

Nuff said.

December, 27 2006

James Carson says

Overall, I find Andrew's analysis cogent, and the prognosis chilling. While a power market analyst, not a natgas analyst, I find myself largely in agreement after testing several of the assertions. I am looking forward to the remaining installments. There are a few points that I would like to respond to.

<< Over the past 5 years, higher-than-expected natural gas and electricity costs have drained more than $ 400 billion dollars from the U.S. economy ... and seriously impaired the ability of U.S. companies to compete in global markets. >>

I take issue with both points made here. First, I would characterize 'drained' as 'redirect'. We neglected energy policy for two decades while we wallowed in oversupply. We are paying for that negligence, and now find that we must redirect resources to the energy sector. Second, I do not agree that US companies ability to compete has necessarily been impaired. Other nations have faced the same set of developments. To be sure, some industrial production (e.g. chemicals) has moved overseas closer to sources of cheap gas, but such movement is logical given relative advantage. The resilient performance of the US economy in recent years demonstrates that we have not suffered competitively.

<< Earlier in the decade, the U.S. Energy Information Administration (EIA) and most major private forecasting firms failed entirely to anticipate the massive price dislocations of the past 5 years, one of the more stunning failures of market analysis in industry history. >>

Agreed. At best, EIA forecasts serve as a starting point for real analysis.

<< The actual increase in consumption between 2004 and 2006 is more than 40 X as large, less than 1/3rd of which can reasonably be attributed to hotter-than-normal weather this past summer. >>

While I am not necessarily in disagreement, I would like to see the basis for the 1/3 assertion. It seems pretty flimsy to me. Virtually ALL of the additional cooling load was served by natgas burners. Oil burners were used very sparingly due to the extremely high cost, and coal burners were slated to run 24x7x100% anyway. Even assignment of coal assets to spinning reserve duty was minimized. Fyi, the cost per MWH of natgas generation was half that of fuel oil last summer.

<< EIA continues to take the position that, between 2006 and 2011, power sector consumption of natural gas will increase by a total of 290 Bcf (i.e., an average of 58 Bcf/year): >>

What is your basis for disagreeing with this? What rate of growth do you expect in power consumption, and what proportion of that do you expect to be served by natgas generation?

<< During the next 10 years, the underlying rate of power sector use of natural gas to generate electricity is likely to continue to rapidly increase. The only question is by how much. >>

Not so fast.... This would happen with a combination of increasing loads, retirement of lower cost coal units, or without the installation of new lower cost coal units. The EIA expects loads to increase at about 1.5% per year. While a moderation of growth rates, it is not unrealistic. Except in regions with huge over capacity, very few coal units are expected to be retired, and new ones are being planned.

of interest: http://www.eia.doe.gov/oiaf/aeo/figure_5.html

Finally, it seems to me that Andrew has overlooked a seasonal factor that takes some of the sting out of the problem. Some, NOT all. On the margin, natgas generation primarily serves summer cooling loads, a time period when natgas supplies are more than ample. Unless that generation somehow interferes with storage injections, summertime consumption does not create short term reasons for concern. That much was demonstrated in 2006. The winter power peak (while space heating needs dominate) is not that important and spot shortages can be managed by fuel switching and transmission. Of course, improved transmission and additional natgas storage facilities would help.

Again, an excellent article.

December, 27 2006

Ferdinand E. Banks says

James, you won't have to go to that conference to confront stupidity. By the time I'm finished with you all that you'll have to do is to listen to yourself.

First of all, I'm glad to hear you say that Sweden and Norway have the lowest cost electricity in the world. I'm going to pass that on to some of the local ignoramuses as a contribution from one of their own, because they believe that everything that can be wrong with a country is wrong with this one.

Planned economy versus mixed economy. Sweden has no planned economy! If you believe that then neither you nor your sources know what a planned economy is. Nor do the people or the governments here want a planned economy. What most of them want is a higher degree of welfare than they have in e.g. the US, which seems logical to me, although I can understand that this is a matter of taste.

You claim that you can't give us the details of deregulation failure in Guadacanal or on the rim of the Kalihari because you have your hands full sorting out the deregulation-regulation mess in the US. Your hands may be full but your brain is empty is you believe that a very large number of power consumers in the US haven't learned the hard way about the curse of deregulation. And you say that various organizations haven't found out. I know they haven't and I also know the reason they haven't, and so does everybody else, except possibly you: it has to do with money and careers. Truth doesn't enter into it.

About being a FANATIC. I could be wrong, but I've come to believe that the easiest way to be a winner in this old world of ours is, statistically speaking, being one or both of two things - being born a genius, or being or becoming a fanatic. Note the expression 'statistically speaking'. Sure, you can be a winner without those advantages, but that turns it into a gamble, doesn't it, and some of us don't like gambles? I've also found out that plenty of geniuses and fanatics arn't winners, which makes me as sad as all get-out, because these are the persons we need to explain to gentlemen like your good self that electric deregulation has failed, is failing, or will fail just about everywhere.

And you cant wait to read some of my papers, you say. Well, best of luck to you, because I don't write them for you, my children or grandchildren, my colleagues or students, savants at Harvard or Cambridge, or for that matter the people who were in my platoon. I write them for myself. Remember, I'm the man who was booted out of engineering school for failing math and physics - not once but twice - and who was expelled from infantry leadership school (although he finished first in the class) and was put to work on the garbage detail. I wonder what happened to that guy.

Incidentally, the correct spelling is not perfesser but prefesser!

December, 27 2006

James Carson says

<< because they believe that everything that can be wrong with a country is wrong with this one (Sweden). >>

It may surprize you to learn that I have spent some time in Norway and Sweden, having relatives there, though less time in recent years. I understand why the suicide rate is so high there.

<< Planned economy versus mixed economy. Sweden has no planned economy! If you believe that then neither you nor your sources know what a planned economy is. >>

A mixed economy has some degree of planning. That is what differentiates it from 'mixed'. Swedish planning doesn't go so deep as the Soviet Union, Cuba, or North Korea, but there is a very high degree of planning by the Swedish government and most of the rest of Europe compared with the US or most Asian economies. Imo, it explains the meager performance of the European economy.

<< Your hands may be full but your brain is empty is you believe that a very large number of power consumers in the US haven't learned the hard way about the curse of deregulation. >>

Power consumers here understand very well that there has been turmoil in the entire energy sector for some time. That turmoil has nothing whatsoever to do with electricity deregulation. As I pointed out earlier, de-regulation has lead to an intense examination of utility operations. That, in turn, has lead to a tremendous increase in productivity.

Even the California debacle cannot be attributed to de-regulation, imo. There would have been a debacle anyway. Why is that? Three factors converged to create extraordinarily adverse conditions. (1) A light snowpack hampered hydro generation. (2) Three successive years of mild summers and winters lulled system operators and regulators into complancy. They were waylaid by a hot summer followed by a cold winter. (3) An untimely failure of a major natgas line led to a downrating. The state compounded the problem by threatening criminal prosecution if generators exceeded their NOX and SOX limits on oil fired units. To be sure, 'gaming' compounded matters, and the crisis might have manifested itself differently without de-regulation, but the underlying conditions had nothing to do with de-regulation.

<< And you say that various organizations haven't found out. I know they haven't and I also know the reason they haven't, and so does everybody else, except possibly you: it has to do with money and careers. Truth doesn't enter into it. >>

FERC commissioners would jeopardize their positions by reversing course? I know it's hard, but try not to be such an ignoramus.

Nevertheless.... I recall in very early 2000 receiving an engagement to examine the feasibility of retail power operations in a market known as SP-15 (southern CA) by a large merchant power company. The engagement was due March 1st with operations to commence April 1st. I would then assist with sourcing on an open ended basis. By the end of January, I submitted a two page memo recommending to kill the beast in its cradle, which they did. Why did I do that? The market rules forbade hedging. No client of mine would ever enter a power market without a comprehensive hedging strategy.

I find your presumption that money and career protection trump integrity to be repugnant. I think that they just disagree with you, and you are clueless to explain why without resorting to character assassination.

<< I could be wrong, but I've come to believe that the easiest way to be a winner in this old world of ours is, statistically speaking, being one or both of two things - being born a genius, or being or becoming a fanatic. Note the expression 'statistically speaking'. >>

I did note your use of the expression, and concluded that you don't know much about statistics. I also noted your textbooks tout the fact that they require nothing more than secondary school algebra to understand. Mind you, I don't think that that is bad. Authors of financial texts resort far too often to cryptic notation to make a point when common English would make it better. Nevertheless, I think a wee bit of calculus is necessary to understand derivatives.

JBCarson@RisQuant.com

December, 27 2006

James Carson says

<< I've also found out that plenty of geniuses and fanatics arn't winners, which makes me as sad as all get-out, because these are the persons we need to explain to gentlemen like your good self that electric deregulation has failed, is failing, or will fail just about everywhere. >>

I can't help myself.... look up LTCM....

<< I'm the man who was booted out of engineering school for failing math and physics - not once but twice >>

Your point, not mine....

December, 27 2006

Jack Ellis says

Gould: "And James, I might also point out that deregulation or whatever it's called in the airline industry is definitely a questionable benefit for myself now sqished starving into a tiny uncushioned seat on an aircraft run by a company which I know is bankrupt and where the line employees are overworked, underpaid and angry at their employer. It was little else than union-busting."

A bit of thread creep perhaps but I have to disagree with Mr. Gould here. First, the airlines are giving consumers exactly what they want, which is rock-bottom fares. Much as I hate being crammed in a sardine can, I'm as price-sensitive as the next traveler and I suspect most readers of this publication are as well. Under those conditions, it's small wonder service has suffered as airlines have struggled to fix their businesses and their business models. Second, there's a bit less leg room but the width of airline seats has not changed since the dawn of the jet age. Where airlines can fit in 9 seats instead of 8 or 10 seats instead of 9 they will, but most narrow-bodied jets have been built with the same 120 inch cross-section for over 40 years. Finally, I distinctly remember paying $360 to fly round-trip from Atlanta to Los Angeles, and $390 to fly round-trip between Atlanta and San Francisco. These were fares in the late 1970s. Today most leisure travelers pay about the same in nominal dollars, which means in inflation-adjusted terms, they've got a pretty good deal.

I'm not pining away for the good old days of airline travel because they were good only if you had plenty of money to spend.

December, 27 2006

Tom Matthews says

I enjoyed reading your article. I'm curious as to why 2011 Nymex natural gas futures (simple 12 month average) are trading almost par with 2007 and at a discount to the 2008 through 2010 simple averages. The market seems to have a different opinion about near term consumption and production. Or is this backwardatiuon in the out-years caused by regulated limits on utility hedging (limited to 12 months in many states) as compared to non-regulated production hedges on the sell-side. I would appreciate your thoughts or those of any other poster. Thanks

December, 27 2006

Ferdinand E. Banks says

So you read my international finance book Mr Carson. Well thank you, and so I'll keep this short. ABSOLUTELY NO CALCULUS IS NECESSARY TO UNDERSTAND DERIVATIVES (i.e. futures, options and swaps)! I've never had any personal contact with the people in New York or London, but I occasionally rubbed elbows with 'quants' in Australia and Singapore: they could add and subtract, and that's about it. Here I can suggest that you read Liars Poker (by Michael Lewis), and better 'Trading Up' (by Nancy Goldstone). You can also read Nick Leeson's book: I doubt whether that gentleman could handle the first few entries on a grade school multiplication table, because if he could he wouldn't have spent those years in what - in the army during my time - was called the 'slams'. Anybody with half a brain should have been able to handle the mistake that, 'he says', launched him on the road to Changi Prison. At the same time, however, I'm sure that he was a great trader.

LTCM - that's Long Term Capital Management isn't it. Among their partners was the most brilliant financial mathematician in the world, Robert Merton, but they still had to go to Alan Greenspan with their hats in their hand.

I tell you what, I'll sum up my reaction to your last posts as follows: With the exception of most of the paragraph beginning with "I did note..." I disagree with EVERYTHING you said. And if you are in Stockholm in February, drop into the Royal Institute of Technology and watch me filling one of those groovy blackboards with equations. But listen: puh-leeze don't tell me that I've made any mistakes. I heard enough of that from Professor DeCicco at Illinois Tech a couple of hundred years ago.

December, 27 2006

Jose Antonio Vanderhorst-Silverio says

To all readers that want to learn about the third way of deregulation

Part 1 of 2.

I am against debates on deregulation, because there is nothing we can do about the decade old debate. That is why I proposed instead to work on a generative dialogue, because we can learn about the emerging future, by considering, for example, EWPC as a candidate for such third way. Deregulation is a very complex and tough problem situation.

Adam Kahane says on page 68 of his book “solving tough problems,” that “[M]ost conventional approaches to solving problems emphasize talking, especially the authoritarian, boss or expert, way of talking: telling…” just like James Carson and Prof. Banks.

Kahane continuous saying: “In a debate, each party prepares their position and speech in advance and then delivers it to a panel, which chooses the most convincing speech. The same process is used in courtrooms and boardrooms and in parliament (except the legislators have usually made up their minds before they hear the speeches).” Fred and James seem to be excellent legislators.

Kahane concludes that “This approach works for deciding between already created alternatives, but it doesn’t create anything new… The additional element that is required to create something new, and that is ignored in most conventional approaches, is listening… [on page 70] the next step, listening openly, is even harder.”

Given that in this medium it is not possible to impose a solution by force, debates can only get stuck. With very high probability, that will be the result of Carson vs. Banks.

We need at least two people to start a debate, specially a heated debate. According to the Webster’s American Dictionary, debate means “discussion, especially of a public question in an assembly, involving opposing viewpoints.” Before Mr. Carson’s first comment, I believe that I was conducting a generative dialogue with Len (but not with Prof. Banks), since on 12.25.06 Len said “…I might add that it seems that the greatest benefit of "generative dialogue"…”

So, I will try to summarize some of the signals that have resulted so far from the electricity industry generative dialogue.

I recall that 12.19.06 was a very important synchronicity day for the generative dialogue on deregulation. While I was recalling that “it is time innovate…,” Len said he was “actually one of the strongest supporters of a pure market electricity strategy such as EWPC.” As I explained that EWPC is not a pure market electricity strategy, I found an important and strong signal: “Jamie Wimberly’s article The Future Utility Customer Service Model closure, in which he endorses systemic approach and the revolution away from the continuity scenario.” That is the key issue here!

December, 27 2006

Jose Antonio Vanderhorst-Silverio says

Part 2 of 2.

On 12.20.06, Fred wanted to restart the debate, but was unsuccessful. Len suddenly decided to take command and defend his baby project IMEUC as an emerging deregulation project, saying to Fred “I would like to submit that on de-regulation I believe you are wrong (and therefore naturally and to my regret, myself for a failing grade).”

On 12.21.06 I defused Prof. Banks argument about “NO TINKERING ON THE DEMAND SIDE CAN OFFSET THE GAMING AND LACK OF INVESTMENT ON THE SUPPLY SIDE!” He said nothing, which to the untrained eye means he accepted the arguments. However, being a great downloader he repeated it later on in response to James.

On 12.24.06 Mr. Carson came to respond Banks on the “NO TINKERING…” argument that he didn’t defend.

Trying to reframe the debate, on 12.25.06, I rephrased Fred’s “NO TINKERING…”argument in a generative dialogue sense. But, on 12.26.06, Mr. Carson’s did not “listen” as his aim was to keep debating.

Before completing my 12.26.06 response to Len, which starts with “Generative dialogue synthesis,” I said “I have ‘listened’ carefully to Len’s opinions and perceive that his interests, by going farther than necessary, go well beyond Phase One. Other parties representative of the larger whole – high social complexity - with different interests – regulators, generation of differing kinds, wholesale, retail, transmission, distribution, fuel supply, manufacturers of systems and equipments, etc. - are invited to participate in the generative dialogue.”

On 12.26.06 Len asked for a time out of “perhaps a couple of weeks…”

I hope to have taken away some of the interference that seems to exist on the generative dialogue.

Regards,

José Antonio Vanderhorst-Silverio, PhD

December, 27 2006

James Carson says

Banks << So you read my international finance book Mr Carson. >>

LOL. No, I read the Amazon synopsis.

Banks << Well thank you, and so I'll keep this short. ABSOLUTELY NO CALCULUS IS NECESSARY TO UNDERSTAND DERIVATIVES (i.e. futures, options and swaps)! >>

LOLOLOL. If you say so, perfesser. I don't spose you consider those funny looking letters to be significant. You know, delta, gamma, theta....

Banks << Anybody with half a brain should have been able to handle the mistake that, 'he says', launched him on the road to Changi Prison. At the same time, however, I'm sure that he was a great trader. >>

I don't know about 'handle', but I agree that it didn't require calculus to avoid Leeson's mistake. As to whether he was a great trader, what are you smoking?

Banks << LTCM - that's Long Term Capital Management isn't it. Among their partners was the most brilliant financial mathematician in the world, Robert Merton, but they still had to go to Alan Greenspan with their hats in their hand. >>

Exactly. Which shows you what kind of trouble brilliant people can get themselves into. To quote you, "I've also found out that plenty of geniuses and fanatics arn't winners, which makes me as sad as all get-out..."

Banks << I'll sum up my reaction to your last posts as follows: With the exception of most of the paragraph beginning with "I did note..." I disagree with EVERYTHING you said. >>

I do wish you would put up some kind of argument. You know, reasoning... evidence....

Matthews << I'm curious as to why 2011 Nymex natural gas futures (simple 12 month average) are trading almost par with 2007 and at a discount to the 2008 through 2010 simple averages. >>

Over a long period of time, and in general in energy, nearby contracts trade at premiums to deferred. The reason cited is "convenience yield", which in my view is synonymous with "We don't have a clue, but have to call it something." You can look it up if you have a few minutes to waste.

Mattews << The market seems to have a different opinion about near term consumption and production. Or is this backwardatiuon in the out-years caused by regulated limits on utility hedging (limited to 12 months in many states) as compared to non-regulated production hedges on the sell-side. >>

I would not put a whole lot of reliance on the deferred months of the forward curve. The volume and open interest suggest that the value of the opinions expressed by market participants is of little value.

I will engage Dr. Vanderhorst-Silverio later.

December, 27 2006

James Carson says

Vanderhorst-Silverio << I am against debates on deregulation, because there is nothing we can do about the decade old debate. >>

A clear and honest historical record must be established to give guidance to future policy changes. I contend that Professor Banks mis-states when he asserts that de-regulation has failed. Moreover, he advocates re-regulation, a future directed goal with which I vehemently disagree. Contrary to your premise, the debate is NOT over.

Vanderhorst-Silverio << Given that in this medium it is not possible to impose a solution by force, debates can only get stuck. With very high probability, that will be the result of Carson vs. Banks. >>

My intention is not to convince Professor Banks. My intention is to challenge his assertions with which I disagree. Thousands of people read these forums, and I think it is a bad idea for them to get the impression that Professor Banks reflects the prevailing consensus. Frankly, I expected a more spirited clash. He merely makes pronouncements with little support and fails to respond to my rejoinders.

Vanderhorst-Silverio << Trying to reframe the debate, on 12.25.06, I rephrased Fred’s NO TINKERING argument in a generative dialogue sense. But, on 12.26.06, Mr. Carson’s did not listen as his aim was to keep debating. >>

Well.... to be perfectly frank about it, I haven't a clue what you were getting at, which explains why I did not respond. Even if I disagree with him, I understand Professor Banks. I have read your reframing several times and still don't understand it. Here it is again:

Vanderhorst-Silverio <>

From my perspective, your reframing is content-free. Who makes what decisions? Using what criteria? What do you mean by systemic risk and maximum value? What elements of society? How can a non-monopolistic electric power system have any investment strategy never mind a 'best' strategy? Why is it up to the supply side to reduce systemic risk? I could go on and on....

You see, my world is the bone and gristle world of decisions. I care about LMPs, FTRs, weather forecasts, fuel prices, NYMEX vs ICE, spark spreads and so on, so as to develop an informed opinion on various power markets while making reasonable value at risk estimations for clients. What hedging strategy should we implement to reduce risks while maintaining value? What possible future scenarios can cause unacceptable consequences? Should we build that plant or not? What price should we quote on this retail deal? Is that a good price for this forward contract? How do these decisions affect expected earnings? Risk exposure?

That is why I found Andrew's analysis useful. He is telling me that natgas over the next few years will be scarce and prices high. I care about that. A LOT. His insight may influence the advice I give to clients. For example, if natgas really does reach and stay at $12, windmills could be a good investment. Below $8? No.

Okay.... I agree to engage in such a dialogue. Be forewarned, I am a demanding and knowledgeable student of power de-regulation, and will not let you get away with wafflespeak and obfuscation.

You refer to Electricity Without Price Controls (EWPC) as if it were some sort of alternative market model. I am the late comer to this discussion. What is it? I have yet to see an answer I understand. Let's start with this: What is EWPC?

December, 27 2006

James Carson says

For some reason, the quote didnt make it. Here it is again.

<< IRRESPECTIVE OF LOCATION, THE BEST INVESTMENT STRATEGY FOR AN ELECTRIC POWER SYSTEM WITH THE APPROPIATE MARKET ARCHITECTURE AND DESIGN IS A MIX OF INVESTMENTS ON THE DEVELOPMENT OF THE RESOURCES OF THE DEMAND SIDE AND INVESTMENTS ON THE DEVELOPMENT OF THE RESOURCES OF THE SUPPLY SIDE THAT REDUCES SHORT RUN AND LONG RUN SYSTEMIC RISK WHILE SOCIETY RECEIVES THE MAXIMUM VALUE FROM ELECTRICITY. >>

December, 28 2006

Ferdinand E. Banks says

Mr Carson, you really do have a sweet way of getting EVERYTHING wrong. My books are filled with mathematics, which is why I felt that I had the right to say that you don't need math to understand derivatives. I also think that I understand - which you obviously do not - the meaning of 'convenience yield'. In saying that convenience yield is nonsense you are not just saying that the contributors to this forum don't know what they are talking about, but also that the elite of finance economists and perhaps also finance professionals don't come up to your exaulted standards.

Aside from that, when you blatantly assert that you are not going to let the rest of us get away with wafflespeak and obfuscation I got a really good laugh. I just wish that I had you in one of my seminar rooms for a couple of hours. I'd see to it that you were repaid in full for your generosity.

December, 28 2006

Ferdinand E. Banks says

The self-appointed deregulation vigilante and propagandist James Carson claims that I misrepresent the failure of deregulation. What we have here on his part is another of those departures made famous by the late Josef Goebbels: The bigger the lie, the more anxious people will be to believe it. From exactly where did a purveyor of high-flown bunkum get the incentive to formulate the paragraph beginning with the sentence "You see, my world is the bone and gristle world of decisions", followed by a list of his curiosities which includes "ICE vs NYMEX", which he employs to make "value at risk estimations for clients". Shouldn't someone tell him that this is gobbledygook?

Go to the conference 'Take Back the Power' and set those non-believers straight, Mr Carson. And when they tell you that deregulation has failed, is failing or will fail everywhere, tell them about delta, gamma and theta.

December, 28 2006

James Carson says

<< My books are filled with mathematics >>

Perhaps you should clarify the Amazon descriptions then.

<< I also think that I understand - which you obviously do not - the meaning of 'convenience yield'. In saying that convenience yield is nonsense you are not just saying that the contributors to this forum don't know what they are talking about, but also that the elite of finance economists and perhaps also finance professionals don't come up to your exaulted standards. >>

Yeah.... Pretty much. I expect conventional wisdom to prove itself from time to time. I also note that you fail to actually defend the use of the 'convenience yield'. No, I don't really want you to do so.

<< when you blatantly assert that you are not going to let the rest of us get away with wafflespeak and obfuscation I got a really good laugh. I just wish that I had you in one of my seminar rooms for a couple of hours. I'd see to it that you were repaid in full for your generosity. >>

**chuckle** When I was in graduate school a (very, very) long time ago, I sent a professor to the hospital with a hypertension attack. He tried your intimidation tactics and I turned the tables on him with facts. I am intimidated by the likes of you neither on this forum nor in a seminar room.

<< The self-appointed deregulation vigilante and propagandist James Carson claims that I misrepresent the failure of deregulation. >>

More to the point, you haven't even made a prima facie case that de-regulation has failed. You pointed to California and I pointed out why the debacle would have occurred anyway. You failed to respond. You pointed to several other regional failures, to which I responded that I was not familiar with their experiences, but you failed to respond with any specficity whatsoever as to what occurred. I pointed out several benefits to de-regulation here in the US, especially wrt improved productivity. You failed to respond. I pointed out that the US was moving forward with de-regulation in a number of regions, you responded by impugning the character of the decision makers. Once again, why don't you try some REASONING? Present some EVIDENCE? Am I really the first person who has called you out like this?

<< "You see, my world is the bone and gristle world of decisions", followed by a list of his curiosities which includes "ICE vs NYMEX", which he employs to make "value at risk estimations for clients". Shouldn't someone tell him that this is gobbledygook? >>

'ICE vs NYMEX' refers to the decision by a company to use the Intercontinental Exchange or the New York Mercantile Exchange for executing hedging transactions in power and natgas in the US. It isn't a particularly momentus decision, but it seems to concern many executives.

'Value at risk estimations for clients' refers to the expected dimunition of the value of an asset or portfolio over a specified period of time at a specified probability of adversity. 'for clients' means that I perform this task as a contractor, not as an employee. In power, most clients want to know how much value can we lose over the next thirty days given 5% probability adversity. Bankers typically want to know about 1% probability adversity over one day.

For my part, I prefer to report value at risk as the probability of an unacceptable adverse outcome. Such as: What is the probability that we will lose money this year? What is the probability that we will bankrupt over the next three years? What is the probability that our cash flow will be negative over the next thirty days? Those questions and their answers have more intuitive value.

No doubt, these terms seem to be gobbledygook to you because you are unfamiliar with the bone and gristle world of real decision making. I assure you that the utility executives reading this forum did not need my explanations.

<< Go to the conference 'Take Back the Power' and set those non-believers straight, Mr Carson. And when they tell you that deregulation has failed, is failing or will fail everywhere, tell them about delta, gamma and theta. >>

I still can't find any reference to such a conference, despite posting two google searches earlier. Frankly, I have better things to do with my time and conference budget than to engage in such a debate.

When your quiver of diatribes and insults is empty, you will either ignore me, or you will engage in a REAL debate over de-regulation. For my part, I expect the former because I do not believe you are capable of the latter.

December, 28 2006

Ferdinand E. Banks says

I have no problem at all clarifying the Amazon description: I WROTE IT! And I repeat: my books are filled with mathematics. Here's another piece of information for you to mull over: I worked for a consulting company in Chicago as a systems analyst and statistician, and I've taught mathematical economics in 5 universities.

Convenience yield! This is the wrong forum for you to confess your ignorance on on that subject. Almost all finance books contain information on convenience yield, but if you cant read those books, that's your problem. I tell you what, if you cant read those books, then you have my permission call them worthless.

I dont know what store-front university would hire a teacher that somebody like you could hassle, but you'd better make sure that you never find yourself in a seminar room with me.

No Mr Carson. You arn't the first person to call me out on this deregulation thing. The first person was in Hong Kong, and I told him like I told you that a melt down was on its way in California. About the other states in the US: you dont know about them because you dont want to know about them. About other countries: you dont know about them because you couldn't find them on a map as large as a bill board. I think that for the time being I'm going to leave it to the other contributors to this forum to tell you about what happened inside and outside the US. Namely, that deregulation has failed, is failing and will fail just about everywhere. But if they don't tell you, then eventually you'll get the entire story from my good self.

ICE vs NYMEX. What are you talking about sir? Don't you know that NYMEX delisted some of its natural gas contracts because of liquidity problems. Hedging power on NYMEX! I wonder if you would be so kind as to clarify that for the people in the cheap seats, but look James, dont make any mistakes in your explanation, because I happen to know a looootl about hedging, and I can explain it without reference to delta, gamma, and theta, and of course sigma - sigma because I remember writing it on the blackboard at IIT shortly before the dean of 'something' told me to leave his institution and never come back.

'5% probability adversity and 1% probability adversity.' Hey look, this is Fred. You're talking to Fred now and not one of those marks you call your clients.

I'm not sure, but I wouldn't be suprised if they are waiting for you at the 'Take Back the Power' conference. If so, I'll ask them to check out your posts on this site. They probably need some light entertainment - with the emphasis on 'light'.

Probabilities! So you want to calculate probabilities, do you. Well calculate this one: the probability that amateur night is over, and you're in with the first team now.

Have a good year, James, and thanks for the opportunity to.....

December, 28 2006

Jose Antonio Vanderhorst-Silverio says

Thanks James for accepting the challenge of the generative dialogue. My world is that of an interdependent (systemic) consultant on electricity centered now on market design and architecture. I have “listen” closely to what you wrote and will also "listen" to any new perspective you may bring.

Part 1 of 3.

As I suggested under the article The Power Will Be There But Will It Get to Market?, please accept that the word debate has the meaning found in the suggested reading: generative dialogue paper by Adam Kahane, entitled "Changing the World by Changing How We Talk and Listen." Diagram "Four Ways of Talking and Listening," presented by Kahane in a 2003 conference.

I hope you understand now that under the generative dialogue debates based on the deregulation performance so far are completely misleading. A large part of the overcapacity is due to lack of knowledge of the utility industry by vested interests. In my opinion, debates on the decade old deregulation are over. Let’s do a generative dialogue on deregulation to create a new market architecture and design for the electricity system, without selfish components that destroy the system as W. Edward Deming would have said.

Under the article Condemned to the Fourth Quartile?, I wrote the following:

I found in the website an interesting paragraph in the introduction of the report "Viewpoint on Energy: shortages, surplus, and the search for value” of PA Consulting,” prepared by Todd Filsinger, Member del PA Management Group, to the article prepared by Edward Kee (also a member) entitled “Reaping the benefits of electricity industry reform: defining and limiting the use of price controls,” that says:

Deregulated wholesale electricity markets have come under attack for their perceived deficiencies. Edward argues that the competitive benefits of wholesale competition have never been realized because of the deleterious impact of retail market regulation and political interventions, which decouple the ultimate consumer from real-time market pricing, thwarting economically rational decisions on power consumption. He concludes that only when the retail customer is allowed to decide when and how much to consume based on the actual cost of providing that service, will the many promised benefits of competitive energy markets be realized.

I believe that the paragraph can be taken as a useful contribution to the generative dialogue I proposed earlier in the post Let's Get Out of Back Rooms to a Generative Dialogue. A generative dialogue cannot be done by looking the issues in isolation topic by topic, but as a system, cutting across topics. Please follow the links on the post.

I work under the Koestenbaum strategy that says “reality means having no illusions.” I have “convinced” Fred many times. So, only once I see results, I will change my opinion when I see the consensus. In general, to fill in the content you will need to read a lot of my comments dispersed on EnergyPulse to make sense of EWPC and the rephrased argument. I know that I should start to write my book to make it easy for readers to make sense to EWPC.

December, 28 2006

Jose Antonio Vanderhorst-Silverio says

Part 2 of 3.

On systemic risk see my answer to Fred about his expertise on risk management and his lack of knowledge hidden under engineering knowledge. I think that what I have done so far is: “cracking through the egg shell (title of a chapter of solving tough problems)” of the power industry. That is the missing side of your “world … the bone and gristle world of decisions.”

Andy started his article with the following sentence: “This is the first of a four part series of articles on the natural gas and electricity price and supply risks facing the U.S. economy. The first article provides an overview and summary.” If we apply the expected long run natural gas price and supply risks to the electricity industry, there is a big difference between the decade old debate and a generative dialogue to “reassess the likely long-term prospects for price and supply in the U.S. market,” as Andy puts it.

At the center of the decade old deregulation debate, the research and practice suggested by Fred C. Schweppe and his colleagues in the 1988 book Spot Pricing of Electricity was in general bypassed. That is exactly what PA Consulting Viepoint on Energy is saying now.

My article An Alternative Business Case for Demand Response, a rebuttal to The Business Case for Demand Response, by Thomas Brunetto, Managing Director and Jamie Wimberly, CEO, both of Distributed Energy Financial Group, was the first stake on the “ground” that led to the emerging EWPC model. As you can see from what I said to be the “Key issue” in my post you refer to, it is Mr. Wimberly who acknowledges an emergent revolution away from the continuity scenario, which the Deloitte Research Energy Study identified in the 2005-2010.

Schweppe’s insights were to be applied first to a transformation of the vertically integrated utility by developing a spot price energy marketplace. As can be seen from my comments of 12.27.05 to Mr. Martin-Giraldo under A Few More Unfriendly Comments on Electric Deregulation, written by Fred, all deregulation experiments were based on jumping to the wrong conclusions. This is part of what I posted at that time:

I believe there has been a big misunderstanding of Fred C. Schweppe proposal. Trying to clarify his proposal, lets consider four general structures for the electric business: A) a traditional vertical integrated utility; B) a faulty deregulation or re-regulation that keeps a largely irresponsive and obsolete utility business model; C) Fred C. Schweppe “Regulated Spot Price Based Energy Marketplace” with homeostatic utility controls, where the utility is the only middleman; and D) a true deregulated electricity market, with retailers innovative business models, without price controls, a new value chain (generator, retailer & customer), while re-regulating the wires monopoly.

Quote completed on next paragraph…

December, 28 2006

Jose Antonio Vanderhorst-Silverio says

Part 3 of 3.

As you will see, moving from the regulated Space A to the regulated Space C involves a very large undertaking, while moving from Space C to Space to D no such a large one. The regulated (Space C: see page 11 of Spot Pricing of Electricity) “energy marketplace involves the utility and its customers operating as partners… Utility implementation concerns include real-time calculation/prediction of hourly spot prices, metering-communication-billing, and system control center operation using the new control signal called price… customers who choose to exploit the energy marketplace potentials must implement the appropriate response systems (today demand response), which could range from simple manual response to sophisticated digital controls.”
Among the thing that I have done is recognize that Space C is no longer advisable and that all of the retail activities, including CIS, AMI, etc. should belong to a competitive entity. This is what I said then:
My hypothesis is that time and reality are given us the opportunity to bypass Space C and go directly to Space D. It does not make any sense today to develop a Regulated Spot Price Based Energy Marketplace. It does not make any sense either to stay at Space A. Maybe my contribution, if there is one, is recognizing that a very simple restructuring, which keeps the wires utility out of the competitive business, creates an opportunity for retail marketers to develop the Deregulated Spot Price Based Energy Marketplace. That I suggest is the required change in firm organization that goes satisfies the control scheme, on the need to develop the corresponding innovative business models.
By the way, on 1.7.06, Fred said: “Sorry José, but you'll have to take this discussion up with somebody else.” I am glad that you would like to take it from the faulty end of the deregulation spectrum.

What should have emerged in the 90s is still waiting to emerge, except that now the 2005 Energy Bill favors Demand Response. Most of the damage done seems that it cannot be undone. Experts, like Jack Casazza, claim that the agreements of the “weird sort” (Fred’s term) are like scramble eggs, which can be unscrambled. However, new developments as those reported by David Cay Johnston that says “A federal appeals court yesterday called into question the government’s efforts to change the power industry into a more competitive business, ruling that national energy officials abdicated their responsibility to ensure fair electricity markets,” may help unscrambled them.

You are really a late comer. In the past year I have written comments at length in support of EWPC in EnergyPulse. I suggest that you take your time and read as much as you can to get up to speed.

Don’t forget the most important rule of the generative dialogue: you are not your opinion. This of course applies to me and everybody else too.

Regards,

José Antonio

© 2006. José Antonio Vanderhorst-Silverio, PhD

December, 28 2006

James Carson says

Banks << Convenience yield! This is the wrong forum for you to confess your ignorance on on that subject. Almost all finance books contain information on convenience yield, but if you cant read those books, that's your problem. I tell you what, if you cant read those books, then you have my permission call them worthless. >>

I've read them, I just don't believe them.

Banks << I dont know what store-front university would hire a teacher that somebody like you could hassle, but you'd better make sure that you never find yourself in a seminar room with me. >>

University of Minnesota, as a matter of fact.

Banks << About the other states in the US: you dont know about them because you dont want to know about them. >>

As a matter of fact, I know a great deal about de-regulation in the US.

Banks << About other countries: you dont know about them because you couldn't find them on a map as large as a bill board. >>

I am well travelled. I have even spent a day or two in Uppsala. I think.

Banks << I think that for the time being I'm going to leave it to the other contributors to this forum to tell you about what happened inside and outside the US. Namely, that deregulation has failed, is failing and will fail just about everywhere. But if they don't tell you, then eventually you'll get the entire story from my good self. >>

Yawn.... More bluster, no content.

Banks << ICE vs NYMEX. What are you talking about sir? Don't you know that NYMEX delisted some of its natural gas contracts because of liquidity problems. >>

They certainly haven't delisted their HH futures contract. In fact, they have expanded that one to online trading to compete with ICE. They did de-list some of the more esoteric products and kept many of them.

Banks << Hedging power on NYMEX! I wonder if you would be so kind as to clarify that for the people in the cheap seats, but look James, dont make any mistakes in your explanation.... >>

Yes, hedging power on NYMEX. They offer several power contracts, along with options. I am mostly familiar with the PJM Western Hub product and have executed many futures and options trades on that product. I prefer ICE, but they don't offer power options yet.

They also currently list with current settlements: Cinergy Hub, Michigan Hub, NYISO A, NYISO G, NYISO J, ISO New England, Illinois Hub (MISO), Northern Illinois Hub (PJM), AEP Dayton Hub, and ERCOT Sellers Choice. Oh, also Mid-Columbia, Palo Verde, NP15 and SP15 in the western US that settle on the Dow Jones Indices. Liquidity is problemmatic for all of them, least for CinHub or PJM Western Hub. I also have problems with their daily settlement procedure, and taking their contracts through delivery is an accounting nightmare. I will do an ICE/NYMEX swap before going through that pain again.

Unless this has changed recently, you cannot execute a NYMEX power deal online or through a regular broker, you have to use one of the specialized brokers like ICAP or Amerex. They execute the trade ex-pit, and submit the trade to the NYMEX Clearport system. They can also do ICE deals, ICE/NYMEX deals, and even spark spread deals for both ICE and NYMEX.

Banks << '5% probability adversity and 1% probability adversity.' Hey look, this is Fred. You're talking to Fred now and not one of those marks you call your clients. >>

Apparently, you are not acquainted with 'value at risk', what it means and how it is used in risk management. I would think that you might have stumbled across that concept a time or two, but.... I suggest you pick up a tome by Wilmott. He's pretty readable.

Banks << Probabilities! So you want to calculate probabilities, do you. Well calculate this one: the probability that amateur night is over, and you're in with the first team now. >>

LOL. You haven't even made the third line Junior Varsity.

JBCarson@RisQuant.com

December, 28 2006

James Carson says

<< Thanks James for accepting the challenge of the generative dialogue. My world is that of an interdependent (systemic) consultant on electricity centered now on market design and architecture. I have 'listen' closely to what you wrote and will also "listen" to any new perspective you may bring. >>

Fair enough. Is your universe centered someplace specific geographically, the Dominican Republic?

<< In my opinion, debates on the decade old deregulation are over. >>

I wish that were so. Cranks like Banks prove otherwise.

<< Let’s do a generative dialogue on deregulation to create a new market architecture and design for the electricity system, without selfish components that destroy the system >>

I see the flaws, and the benefits, of the current architecture in the US more clearly than just about anyone. However, your phrase 'without selfish components' makes me squirm.

<< Edward argues that the competitive benefits of wholesale competition have never been realized because of the deleterious impact of retail market regulation and political interventions, which decouple the ultimate consumer from real-time market pricing, thwarting economically rational decisions on power consumption. He concludes that only when the retail customer is allowed to decide when and how much to consume based on the actual cost of providing that service, will the many promised benefits of competitive energy markets be realized. >>

I find myself in a quandary. I agree: to receive the FULL benefits of de-regulation that the consumer must make the consumption decision on the margin. However, I disagree with the implication that we have received no benefits from partial de-regulation. On the contrary, many benefits have already been realized.

<< At the center of the decade old deregulation debate, the research and practice suggested by Fred C. Schweppe and his colleagues in the 1988 book Spot Pricing of Electricity was in general bypassed. >>

Beyond historical or academic interest, why should anyone care what Schweppe said? That was nearly two decades ago. After examining your summary in your article, I must conclude that Professor Schweppe didn't know much about power systems. Perhaps there is some element of his analysis that I missed.

As I read Brunetto's arguments, it looks to me like he advocates for increasing consumer sensitivity to prices by encouraging them to time shift their load. I agree with that, but disagree that he goes far enough. In my view, each consumer should be given a live LMP (Locational Marginal Price). Then, that household could respond to that price signal. Responses could easily be automated. For example, some systems could be turned down or off based on signals.

Here is an example of how Brunnetto's approach has already been implemented in my household. Xcel Energy has a radio controller here that has two functions. It reads my meter and it can turn off (and back on) my air conditioner. My contract with them says that they can turn off the air for no more than fifteen minutes every hour. I get a lower rate for the year by yielding them that optionality. Btw, they are getting a damned good deal, but, I am not complaining.

I advocate that the technology be used to offer me the LMP so that I can make the decision minute to minute as to how to respond. If prices get too high, set the thermostat higher. I think you get the idea.

Your approach, otoh, which I summarize as DR along with Schweppe's "customer-based electrical generation and storage" seems to be more of a distributed generation concept. While that may be advantageous in the Dominican Republic, I have my doubts about it here. Why? We have very cheap electricity because most of our megawatts come from very low cost coal and nuclear power plants. I can't run a coal plant in my backyard, never mind a nuke.

<< I believe that the End-State of the power industry needs to keep the wires monopolies completely separate from the competitive generation and retail businesses. >>

That has been accomplished already in the US. The wires monopolies are regionally managed by several ISOs that are operationally independent of the generators. The buy side operates independently of the sell side too. Retail power is still heavily regulated by the individual states in a crazy quilt patchwork.

Part One.

JBCarson@RisQuant.com

December, 28 2006

James Carson says

<< It does not make any sense today to develop a Regulated Spot Price Based Energy Marketplace. >>

I am not sure whether we are in agreement or not. First, it is politically impossible to implement a market structure without maximum prices. The experience in California in 2000 and 2001 and the US midwest in the summers of 1998 and 1999 preclude that.

Second, it depends on what you mean by 'regulated'. If by that you mean that all transactions become bilateral, forget it. Been there, done that, NO WAY. If by 'unregulated' you allow for a centralized clearing mechanism where all physical power flows through an ISO structure using some variation of realtime continuous dutch auction (realtime LMPs), then fine, we are in agreement. Fyi, in the US, while there has been some re-organization, the wires monopoly was never de-regulated.

The first hard won lesson of the US experience is that bulk transmission must be controlled centrally and independently. The second hard won lesson is that ALL physical power MUST trade realtime, and that ALL forward trades MUST be financial and settled on the realtime.

Regarding de-regulation of the retail marketplace, I agree that that is a worthy goal. However, imo, the retail marketplace must be locked with the structured wholesale marketplace described above. Furthermore, the entire transmission network must be a monopoly straight thru to the meter. That limits retail competition to CIS and pricing. That is pretty meager.

The real benefits of de-regulation will arrive when the creative energies of the marketplace find and exploit new opportunities to generate power, store power, control its consumption, and so on. The metaphor I prefer is telecommunications.

<< In the past year I have written comments at length in support of EWPC in EnergyPulse. I suggest that you take your time and read as much as you can to get up to speed. >>

I have sampled some of them already, and I still don't get what you mean by EWPC. As presented, the concept is too abstract for me to understand how it would be implemented in reality.After all, I am a practical analyst.

JBCarson@RisQuant.com

December, 29 2006

Ferdinand E. Banks says

You evidently have a lot of steam to blow off, Mr Practical Analyst, and so I think that I'm going to let you do it without my help, but I do resent one thing. You can call me a crank, but please don't claim that I couldn't make the third team. I did in fact make the third team - Army versus Air Force - in a New Year's day 'classic' in Nagoya Japan. But when it comes to retailing bunkum and untruths, you definitely belong on the first team.

December, 29 2006

Ferdinand E. Banks says

Sorry, but one last attempt to set the accounts straight. Go to GOOGLE, RisQuant Energy, and then check out a certain conference held at the University of Minnesota in 2004, where a certain practical analyst gave a demonstration of high level analysis that began with the following: "Monte Carlo simulation has become the principal means by which power assets may be valued since there exist few analytic methods". Following this we hear about how simulated weather conditions are brought into the picture.

And yet I'm widely referred to as a "crank" because I flunked college algebra and only made the third team in the Army-Airforce Bowl game..

Why don't you explain the above brilliant piece of work for cranks like myself, or better, offer to present it at the 'Take Back the Power' gig.

December, 29 2006

Len Gould says

Even though both persons may share the same definition of success and failure in an enterprise, one persons evaluation of a particular step along the path (ie the step from fully regulated to current) may legitimately be "failed, it didn't achieve the stable end state" while the other's may legitimately be "succeeded, it made significant progress toward" and both could be correct.

I think partly we may be snarled in semantics here, and should heed some of Jose Antonio's advice re: "I am not my opinion", eg. realize that conceding that another's position on one particular point may be better formed than ours doesn't in any way diminish ourselves.

JBCarson: ========/Snip

<< Edward argues that the competitive benefits of wholesale competition have never been realized because of the deleterious impact of retail market regulation and political interventions, which decouple the ultimate consumer from real-time market pricing, thwarting economically rational decisions on power consumption. He concludes that only when the retail customer is allowed to decide when and how much to consume based on the actual cost of providing that service, will the many promised benefits of competitive energy markets be realized. >>

I find myself in a quandary. I agree: to receive the FULL benefits of de-regulation that the consumer must make the consumption decision on the margin. However, I disagree with the implication that we have received no benefits from partial de-regulation. On the contrary, many benefits have already been realized.

/End Snip ================

I doubt that many would disagree that an electrical market where every customer is charged actual cost-based prices from competing suppliers at very short intervals using a system which costs very little to install and operate; would be nearly ideal. James indicates that to be his logical choice, and I agree totally. James, perhaps you might read my article here Independent Market for Every Utility Customer to critique as a proposed path to the endstate of electricity markets.

December, 29 2006

Jose Antonio Vanderhorst-Silverio says

Thanks James for your comments.

Go back to part 2 of my comments. Spaces A, C and D are stable architecture. Space B is unstable: as price increase, system reliability decrease. That is a counterintuitive systemic behavior. Trying to make stable there is a movement from Space B to Space C, which is at the core of the afterthought in the 2005 Energy Bill, which resulted in Bruneto & Wimberly’s article.

Bruneto & Wimberly explain that to get to Space C, the process of evaluating and implementing DR is less complex, than the “current” - Space B - architecture in the US. However, under the EWPC environment, the process of evaluating and implementing DR is not only less complex than in Space C, but also more efficient in the long run as we get to the End-State - Space D - of the electricity industry. The benefits are shared among two major stakeholders, the consumer and the competitive retailer under EWPC, instead of three major stakeholders – customer, monopoly distributor, and regulator, under a fully regulated environment.

LMP theory and practice comes from Fred C. Schweppe as the leader of the spot pricing of electricity research at MIT. LMP without DR leads to an incomplete – Space B - market. When you say “[T]hen, the household could respond to that price signal,” you are, like it or not, using Fred Schweppe’s – Space C - theory. As you can see a practical analyst has mental models - theories in use – to suggest decisions. Some of those theories - beliefs -are flawed when policies interact with each other in dynamic systemic ways on complex systems, as the counterintuitive behavior of Space B referred above.

I agree that under the flawed “current” market design and architecture it is politically impossible to implement a market structure without maximum prices. That happened because Schweppe insights were not taken into consideration. Space C was “bypassed” (Schweppe recommended A to C to D) and innovation was foreclosed, as the three California utilities preserve their “native” loads and delay innovation one decade, keeping alive a totally unnecessary debate.

Search for Hogan in the following articles, read the complete comments (not only samples), and their links, and get back to me with your conclusions.

What a surprise: Prices move both ways

The Gap Between Demand Response Potential and Demand Response Reality

Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices

Regards,

José Antonio

December, 29 2006

Ferdinand E. Banks says

Have I come to the right place? Am I in the right forum? Hasn't anybody read my last post about the contribution of a distinguished practical analyst to a certain conference? I'll put it in capitals:

"MONTE CARLO SIMULATION HAS BECOME THE PRINCIPAL MEANS BY WHICH POWER ASSETS MAY BE VALUED SINCE THERE EXIST FEW ANALYTIC METHODS."

I failed college algebra twice. I didn't fail operations analysis - in fact I was one of the best students in the class, and so I dont feel any compulsion to toady to bunkum. And what I've written above is just the beginning, because simulated weather conditions come into the capital evaluation picture in what might be described as a very non-meaningful way. If you don't believe it give GOOGLE a chance to work its magic. I think that we'll get most of the answers that we need there.

I tell you what, James. I offer 'remi'. You stop spreading the word about my being relegated to the third team, and I'll return to being a gentleman.

December, 29 2006

Jose Antonio Vanderhorst-Silverio says

Jim, Len, and other readers,

A few more lines added for Jim after lunch. I will wait on Len promised article.

There is a difference between "selfish components" and "selfish components that destroy the system." Another name for demand response is price demand elasticity. California deregulation was an incomplete market without enough demand elasticity that had a "native" selfish component that destroyed the system. Your example of Enron is perfect, but the insight seems to be that of a contradictory scenario.

Acording to Eamon Kelly in his book “Powerful Times: Rising to the Challenge of our Uncertain World,” page 35, Winston Churchill said: “A lie gets halfway around the world before the truth has a chance to get its coat on.” On page 36, Kelly says that “Conspiracy theories can, ironically, provide an ordered framework with which to understand chaotic events.” I will make an exception to my opinion that “debates are over.” So, under the principle that I am not my opinion, let’s try to find an alternative explanation scenario.

Picture yourself in the year 2000, and as a practical analyst that knew about the protection inherent in utility regulation and also knew what had happen in the US midwest in the summers of 1998 and 1999. You also knew what I said above on 12.21.06 that starts as “The debate in California has changed remarkably over the past year or two. Discussion now focuses not on whether retail competition or direct access is possible, but on how to make it happen. The three California investor-owned utilities affected by the commission's decision convened an industry working group, called the Western Power Exchange (Wepex) to address the issues related to implementing the new competitive retail market.” Please answer, to the best of your knowledge, if there might be some ground for a complot theory on which Enron was a just a casualty.

I agree that under Space B there are winners and losers. Read Donella Meadows article to see that big industry is supposed to receive the benefit of Space B. Systems like PJM, the role model of SMD, is stable by having excessive reserves. My son tells me that his residential rates in Pittsburgh were very high. Coal stations have low variable costs, but people health costs in their neighborhoods are much higher than without. No to mention, Andy's expected carbon tax that Congress seems to be working on.

Retail competition under Space B is pretty meager. Not so in Space D, where business design innovations, on the development of the resources of the demand side, will result in creative destruction of the power industry.

That’s it for now.

Happy New Year,

José Antonio

December, 29 2006

James Carson says

<< But when it comes to retailing bunkum and untruths, you definitely belong on the first team. >>

... not that you have even started to make that case.

<< one last attempt to set the accounts straight. Go to GOOGLE, RisQuant Energy, and then check out a certain conference held at the University of Minnesota in 2004, where a certain practical analyst gave a demonstration of high level analysis that began with the following: "Monte Carlo simulation has become the principal means by which power assets may be valued since there exist few analytic methods". Following this we hear about how simulated weather conditions are brought into the picture.... Why don't you explain the above brilliant piece of work for cranks like myself, or better, offer to present it at the 'Take Back the Power' gig. >>

That work is mine. The presentation stands on its own without further elucidation by me. If you differ, please, by ALL means, make your case.

December, 29 2006

James Carson says

Gould << James, perhaps you might read my article here Independent Market for Every Utility Customer to critique as a proposed path to the endstate of electricity markets. >>

Here are a few comments.

1. We are closer than you may believe to a technical solution to your metering proposal. All that would be required in my own home would be to add some controller logic.

2. I am not ready to sign onto the multivendor approach just yet. I need to ruminate on that one for a while. My initial reaction is to oppose that and compel the consumer to respond to the LMP price signal.

I think you need to examine further how the wholesale markets would interact with this new retail paradigm. In the US, I suggest you examine the PJM market. It is the most highly developed, most successful, and the lessons learned there are driving the rest of the country.

3. I agree that the metering function must be centralized.

4. I vehemently disagree that transmission and physical distribution can be de-regulated. That is the one element of the power system that is, by necessity, a monopoly. Some parts, like billing, can be broken out.

5. I disagree that the 'market manager', as you term it, should have any role whatsoever in negotiating deals. Their role should be limited to clearing only.

6. The market manager would, by necessity, have a substantial role in adapting the transmission system to new sources and sinks.

7. I do not think there is any necessity for the blizzard of rules and structures you lay out in part two. For example, why should the mm be responsible for submitting a weather forecast?

8. My contribution to your market model would be to charge the consumer a default plan that reflects the realtime LMP plus distribution costs plus ancillary and capacity charges plus whatever. Then, companies could offer OTHER plans that are financially settled on the LMP depending on the consumer's risk appetite and load profile.

Here are some examples. Those who want certainty in their billing without the hassle of trying to manage their consumption would pay top dollar for a fixed price contract. The task of managing the risk would fall to the provider. Those willing to work with a provider to manage costs, such as putting a governor on their air conditioner, would benefit. Those who are willing to install pervasive energy management systems could do so and take their chances with the realtime LMP, and benefit most of the time.

December, 29 2006

James Carson says

Different parts of the US are in very different phases of de-regulation, and in different 'spaces'. Secondly, I believe that stability is largely achieved in PJM, and moving in that direction in California, the Midwest, Texas, and Northeast. Not so in the Southeast, Florida, and most of the West. There is more work to do, of course, but I believe that the situation is proceeding well.

Why do I believe that? One of the overlooked lessons of the August 2003 blackout event was the success by PJM in halting the propogation. Internal documents show that PJM had expressed concerns all day about anomolies in the MISO region. Fyi, MISO had not yet made the transition to full operating status as an ISO. Thus, PJM was prepared when the blackout tripped. Only Erie PA and northern New Jersey were hit. Otherwise, it was stopped cold. Had they not stopped it, the blackout could easily have propogated through the entire eastern Interconnect from Louisiana to the Arctic to Florida, by far the largest in the world. My conclusion is that the ISO model works to guarantee reliability.

<< The benefits are shared among two major stakeholders, the consumer and the competitive retailer under EWPC, instead of three major stakeholders, customer, monopoly distributor, and regulator, under a fully regulated environment. >>

If you say so....

<< LMP theory and practice comes from Fred C. Schweppe as the leader of the spot pricing of electricity research at MIT. LMP without DR leads to an incomplete – Space B - market. >>

I disagree, then, that space B is either unstable or problemmatic. To be sure, demand response would definately add value, but I disagree that it is essential. My sense is that, in the US, stakeholders would prefer to consolidate, let the wholesale side mature, and tackle demand response on a limited and/or experimental basis. Being as large and diverse as we are, we have the luxury of allowing pockets to experiment. Such experimentation is definately occurring.

Question: Was it Schweppe, then, who first proposed the continuous dutch auction for determining realtime prices? How far did he take the concept?

<< I agree that under the flawed current market design and architecture it is politically impossible to implement a market structure without maximum prices. That happened because Schweppe insights were not taken into consideration. >>

Well... partly. Had demand response been incorporated into the system, then the disasters would have been mitigated. However, that takes a lot of time. Moreover, most of the problems had a non-market genesis. I have already discussed California. There was also the problem of undercapacity in the mid to late 1990s that greatly exacerbated matters. We continue to have problems with transmission undercapacity.

<< innovation was foreclosed, as the three California utilities preserve their native loads and delay innovation one decade, keeping alive a totally unnecessary debate. >>

California is but one part of the US, and, frankly, largely irrelevant.

December, 29 2006

Ferdinand E. Banks says

Oh no, James. You made no presentation at that conference. You were in the POSTER session. Intelligent people arn't going to let you ruin their conference by trying to convince other intelligent people that MONTE CARLO SIMULATION HAS BECOME THE PRINCIPAL MEANS BY WHICH POWER ASSETS ARE VALUED SINCE THERE EXIST FEW ANALYTIC METHODS.

Would somebody please tell Mr Carson just how that sounds. And I renew my offer.

December, 29 2006

James Carson says

<< I failed college algebra twice. >>

No doubt.

<< ... simulated weather conditions come into the capital evaluation picture in what might be described as a very non-meaningful way. >>

DUH. Unless you happen to be in the energy business. Hell, American retailers are moaning about the warm winter (so far) suppressing sales of winter outerwear.

Weather is the KEY driver of load and spark spreads. Spark spread is the key driver of expected cash flows for EVERY generator, nukes and coal burners included. Cash flow is THE key variable of every capital decision. Are you really this ignorant, or are you putting us on???? NORDPOOL must be different, because nobody familiar with the North American power markets would make such an asinine comment.

In a world where weather (temperature) drives load and everything else down the line, I have found it useful to have a simulation tool that mimics the weather. That way, I can make an estimation as to how alternative weather scenarios can influence a generator's cash flow, or cost to serve load. The distribution of weather will drive the distribution of outcomes so that I can make a risk assessment.

<< I tell you what, James. I offer 'remi'. You stop spreading the word about my being relegated to the third team, and I'll return to being a gentleman. >>

First, you have never been a gentleman. Second, that was third LINE, which is a hockey metaphor, and I am not sure you even know that you need pads to play.

December, 29 2006

James Carson says

<< There is a difference between "selfish components" and "selfish components that destroy the system." >>

Please elucidate.

<< Another name for demand response is price demand elasticity. >>

That would be a micro-economic framework. At the present time, there is virtually no elasticity of demand with respect to price. Even given huge price increases, demand does not appear to respond.

In fact, an interesting feature of the power markets is that the demand curve appears to have a positive slope. That is, high prices are associated with high quantities and low prices are associated with low quantity. In most markets, we expect higher prices to lessen demand. Even with a full demand response regime in place, this feature will remain. Why is that? In power, it is not price that drives quantity demanded, it is the demand that drives price. Especially in a summer peaking world, higher temperatures drive demand (load) upward hugely, and thus drive prices upward. Mild weather drives prices AND quantities downward.

<< California deregulation was an incomplete market without enough demand elasticity that had a "native" selfish component that destroyed the system. >>

This requires more development. I still don't see what this means.

<< Picture yourself in the year 2000, and as a practical analyst that knew about the protection inherent in utility regulation and also knew what had happen in the US midwest in the summers of 1998 and 1999. >>

Was there, did that.

<< You also knew what I said above on 12.21.06 that starts as The debate in California has changed remarkably over the past year or two. Discussion now focuses not on whether retail competition or direct access is possible, but on how to make it happen. >>

Yes, and I played a role in that debate that I mentioned earlier. I prevented a large genco from entering the retail market in southern CA in early 2000. Very timely advice.

<< The three California investor-owned utilities affected by the commission's decision convened an industry working group, called the Western Power Exchange (Wepex) to address the issues related to implementing the new competitive retail market. Please answer, to the best of your knowledge, if there might be some ground for a complot theory on which Enron was a just a casualty. >>

Considering that this cabal was devastated by the debacle, of course not.

There is a misconception that Enron played much of a role in the CA debacle. Yes, they were gaming. However, Enron was a second tier player mostly trading through their Portland subsidiary. There were other players who were much more important in gaming the system. I am not going to mention names.

<< Systems like PJM, the role model of SMD, is stable by having excessive reserves. >>

Their reserves are not that excessive. Fifteen percent is the standard, and PJM capacity margins are at twenty. Most of that excess capacity margin is concentrated in the western (newer) part of the ISO. Most of the excess capacity in the US is to the south and west of PJM.

<< My son tells me that his residential rates in Pittsburgh were very high. >>

Compared with what? According to the 2004 Statistical Abstract of the United States, PA residential pays 9.58 cents per kwh. That is a tad high for the United States, but rock bottom by world standards.

<< Coal stations have low variable costs, but people health costs in their neighborhoods are much higher than without. >>

I am very dubious of the research methodology on that topic. Nevertheless, coal stations are all making efforts to clean up the technology. Mercury, particulates, SOX and NOX are largely solved. And, I disagree that CO2 is a pollutant.

<< No to mention, Andy's expected carbon tax that Congress seems to be working on. >>

I have my doubts as to whether that will get very far. Call it a Pollyannish belief in the underlying wisdom of our political leadership.

<< business design innovations, on the development of the resources of the demand side, will result in creative destruction of the power industry. >>

First, I agree that retail de-regulation will have such an effect. However, I think we will have a great deal of creative destruction even without it. There is enough 'space' right now to make sound business decisions wrt a large number of innovations. I have worked on a few, in fact.

December, 29 2006

James Carson says

<< Oh no, James. You made no presentation at that conference. You were in the POSTER session. >>

I never claimed otherwise. By 'presentation', I meant the set of pdf slides that anyone can download and examine.

<< Intelligent people arn't going to let you ruin their conference by trying to convince other intelligent people that MONTE CARLO SIMULATION HAS BECOME THE PRINCIPAL MEANS BY WHICH POWER ASSETS ARE VALUED SINCE THERE EXIST FEW ANALYTIC METHODS. >>

If you know of any direct analytic means to value power assets, by all means, share them with us. Btw, I will not let you get away with any cost driven basis. The cost to develop an asset is largely irrelevant wrt its value once it is built. It's value is derived from its CASH FLOW. Perhaps you believe otherwise.

<< Would somebody please tell Mr Carson just how that sounds. And I renew my offer. >>

Nobody is taking you up on that. Why is that, I wonder?

December, 29 2006

Jose Antonio Vanderhorst-Silverio says

Jim,

I perceive that you don’t really want, or are not prepared, or your terms of reference bind you somehow, to engage in a generative dialogue. I sense you want to debate. If that is the case, we will get into a stalemate very fast. I don’t have the time that Fred has to debate. While you are a practical analyst and I just try to be without illusions. That is why I am saving my posts as:

A Generative Dialogue Without Illusions Part 5

A Generative Dialogue Without Illusions Part 4

A Generative Dialogue Without Illusions Part 3

A Generative Dialogue Without Illusions Part 2

A Generative Dialogue Without Illusions Part 1

Given the above, I won’t engage to your complete response. So, I will write just a few paragraphs.

You said earlier “I see the flaws, and the benefits, of the current architecture in the US more clearly than just about anyone. However, your phrase 'without selfish components' makes me squirm.” I know that there is no such thing as the current architecture, but for simplicity I called it Space B. Space B is centered on open transmission access architecture. Essentially the whole point is that to make it stable you need to have more supply side reserves as in Space A o move to Space C by investing in demand response. In both cases you are investing in physical risk management.

On 12.17.06 above, I said the following: “Ferdinand, please take the whole sentence and the context in consideration… You seem to be right under a mechanistic thinking mental model that doesn’t consider the environment. However, under a systemic thinking mental model, the interdependencies are very important…” Your opinions are very similar to that of Fred. They are great tools for debates that get stuck.

If you read the whole comments, and not part by part as independent elements you will see the answers to your questions, if you are on the positive generative dialogue. If you have done that, even with my difficulties with the language, you will know that there was no a need to elucidate, as the idea of “system destruction” is developed in that paragraph of “selfish components” and reinforced in the next 2 paragraphs.

Please advise if you “want to learn about the third way of deregulation,” as I suggested on 12.27.06. If so, please read about what I believe was Bill Hogan’s great mistake, that changed the industry and led to the decade old debate.

With a lot of respect,

José Antonio

December, 29 2006

James Carson says

<< I perceive that you don’t really want, or are not prepared, or your terms of reference bind you somehow, to engage in a generative dialogue. I sense you want to debate. If that is the case, we will get into a stalemate very fast. >>

I think I have engaged in such a dialogue, so far.

<< Essentially the whole point is that to make it [Space B] stable you need to have more supply side reserves as in Space A o move to Space C by investing in demand response. In both cases you are investing in physical risk management. >>

So far, the consensus is that fewer reserves are required. For example, spinning reserve requirements have been reduced as the ISO has taken over the reliability role from the individual utilities. That has been one of the principal benefits, in fact. Another of the benefits has been to assign spinning reserve duties to CT units and assign coal units to full power generation.

<< Please advise if you “want to learn about the third way of deregulation >>

I think we have come to an impasse over that. You seem to require demand response to declare success, I disagree that that is required, although I strongly agree that it would be valuable. I also believe that the markets in the US need some time to mature and experiment before we can progress to that level.

<< With a lot of respect >>

Same here. I wish you luck in developing your 'third way'. Even so, I will continue to respond to your posts.

To Fred: A clarification is in order wrt my definition of the term 'asset'. I mean that term to include any contractual obligations, in addition to physical generation assets.

December, 30 2006

Ferdinand E. Banks says

Jose, I'm not debating with the good Carson person, just stating what I think are some facts. Google mentions three conferences which were graced by his presence. He was in a poster session in one and a member of the audience in the other two. My conclusion is that THE KIND OF OPINIONS THAT HE HAS BEEN GIVEN THE RIGHT TO PRESENT ON THIS FORUM WERE CONSIDERED WORTHLESS BY THE ARRANGERS OF THOSE CONFERENCES. At the same time let me make it clear that it wouldn't have made any difference to me if he had been declared the guest of honor or the collector of used cigarette butts at those gigs, because as far as I am concerned he doesn't have anything to offer any scientific meeting, anywhere, at any time - although that could change if he decides to leave dreamsville.

A director of the industrial association in Sweden has said that electric deregulation threatens 100,000 jobs in this country. He could be wrong: it might be a 1000 and it might be 150,000. But regardless of what it is, think about the disruption in the families of the people who will lose their employment because of the acceptance of what amounts to a socially destructive fad, BY WHICH I MEAN ELECTRIC DEREGULATION. Now listen to this:

"MONTE CARLO METHODS HAVE BECOME THE PRINCIPLE METHOD BY WHICH POWER ASSETS ARE VALUED SINCE THERE EXISTS FEW ANALYTIC METHODS."

Yes, I seem to remember failing college algebra twice, was bounced out of infantry leadership school and assigned to a garbage truck, could only make the third team in the Army-Air Force bowl game in Nagoya Japan, was threatened with a courts martial by my superiors at Hardt Kaserne in Germany, was once informed by the gorgeous Professor H. of Gothenburg University that my work was completely and totally hopeless, etc, etc, but even so I cant get it out of my head that no definition or redefinition of the term "asset" will make sense of the statement above or the abstract in which it appeared.

I really and truly know about these things James, because there have been a few nutty things in my books and lectures, and there will be some in the future, but not as many as .... .

Thanks for the exposure, and my offer is still on the table. But if you don't accept, then I'll just have to...surrender.

December, 30 2006

James Carson says

<< Google mentions three conferences which were graced by his presence. He was in a poster session in one and a member of the audience in the other two. >>

There were a total of six conferences and workshops at the IMA that I attended over that year. The IMA is one of the seven NSF advanced mathematics institutes, and their theme for that year was of great interest to me. As the IMA has as the central element of its charter the Application of mathematics, they invite industry participation. The conferences and workshops are quite small, ranging in size from thirty to one hundred people from all over the world.

<< My conclusion is that THE KIND OF OPINIONS THAT HE HAS BEEN GIVEN THE RIGHT TO PRESENT ON THIS FORUM WERE CONSIDERED WORTHLESS BY THE ARRANGERS OF THOSE CONFERENCES. >>

I considered myself very fortunate indeed to even be allowed to attend!! I approached the director about presenting a piece of my findings in a poster session, and he agreed. Frankly, it was well received.

<< A director of the industrial association in Sweden has said that electric deregulation threatens 100,000 jobs in this country. >>

Deregulation has 'destroyed' many more than 100,000 jobs in the US. They are now busy with productive careers.

<< think about the disruption in the families of the people who will lose their employment because of the acceptance of what amounts to a socially destructive fad, BY WHICH I MEAN ELECTRIC DEREGULATION. >>

Think about the disruption of society when ineffiecient industries are protected! You may find the Swedish unemployment rate of 5.6% to be acceptable, even robust, but where I come from that would be an issue of great concern! Your attitude about protecting inefficiency likely explains why Sweden would be one of the worst performing US states.

You should look into the concept of 'creative destruction'. That theme has been a subtext of the exchange I have had with Jose Antonio.

<< no definition or redefinition of the term "asset" will make sense of the statement above >>

The term was not 'redefined'. I BROADENED the definition to include contracts and other obligations. It seemed to me you were fixing on asset meaning 'fixed asset' or 'generation asset'. It doesn't matter, imo, you can't value a generation asset without taking weather into account. I would happily defend that proposition. Hell, I already HAVE.

<< I really and truly know about these things James >>

You haven't shown me anything. Nothing. You have made pronouncements about the failure of de-regulation, then failed to back them up with facts when challenged. You attacked my presentation (pdfs) at the IMA, but failed to explain why you think it is worthless. You challenged my point about trading power on the NYMEX, to which I responded in detail. I noticed that you failed to acknowledge that even YOU learned something there. That is merely a representative sampling of the tenor of our exchange.

<< I'll just have to...surrender. >>

Suit yourself. Lightweight....

December, 30 2006

Jose Antonio Vanderhorst-Silverio says

Thanks Fred for the information.

Happy New Year,

José Antonio

December, 30 2006

Jose Antonio Vanderhorst-Silverio says

To all readers that want to learn about the third way of deregulation

Jack Casazza, Frank Delea and George Loehr, of “Power Engineers Supporting Truth (PEST),” have written the article “Electrons Versus People: Which group is smarter?”, for the January-February 2007 issue, of the IEEE Power & Energy Magazine, “In my View” column.

While I strongly recommend reading and “listening openly” to what the authors say, I only quote incompletely the beginning and last paragraphs. The authors start by saying that: “Deregulation and the concomitant restructuring of the electric power industry in the United States have resulted in a decline in the reliability of North American bulk power systems and constitute the ultimate root cause of the California meltdown, Enron's depredations, and the 14 August 2003 blackout.”

As part of the decade old debate, done with faulty deregulation and restructuring, the authors conclude that “An independent investigation is needed of all the issues raised by the blackout and other reliability problems to ascertain that all necessary remedial actions have been taken.”

As can be seen in the book “Powerful Times: Rising to the Challenge of our Uncertain World,” written by Eamonn Kelly, CEO of Global Business Network, a renown futures network and scenario strategy consultant, there is a need to consider an emergent paradigm and creative destruction of the power industry.

The independent investigation should consider fully both the institutional memory and the sound research done by Fred C. Schweppe and colleagues, from 1978-1988, not in a debate, but in a generative dialogue, to resolve most of the flaws identified by Casazza, Delea and Loehr, and also to break the barriers to the emergent innovations flowing into the industry.

In one promising third way of deregulation mixed market architecture and design, centered on Electricity Without Price Controls (EWPC), NERC reliability activities are merged into the system engineer institution, which is in charge of managing short run and long run systemic risk, with both supply side and demand side resources. That center stage controlled market institution assures that electrons and people have the same purpose. Transportation (T&D) of electricity is an integrated monopoly responding to the system engineer institution and under a traditional regulator.

The free market, non real-time activities, restricted to the supply side resources (central watts and vars generation and storage, FACTS, etc.) and demand side resources (AMI, CIS, energy efficiency, demand response, distributed watts and vars generation and storage, etc.), also respond to the system engineer institution on matters of control, operations and planning, and to a prudential regulator on conduct of business, such as competition, market power, consumer protection, asset quality, etc.

As the readers of the comments under this article may recall, at the center of the suggested generative dialogue we have pending the following statement:

IRRESPECTIVE OF LOCATION, THE BEST INVESTMENT STRATEGY FOR AN ELECTRIC POWER SYSTEM WITH THE APPROPIATE MARKET ARCHITECTURE AND DESIGN IS A MIX OF INVESTMENTS ON THE DEVELOPMENT OF THE RESOURCES OF THE DEMAND SIDE AND INVESTMENTS ON THE DEVELOPMENT OF THE RESOURCES OF THE SUPPLY SIDE THAT REDUCES SHORT RUN AND LONG RUN SYSTEMIC RISK WHILE SOCIETY RECEIVES THE MAXIMUM VALUE FROM ELECTRICITY.

© 2006. José Antonio Vanderhorst-Silverio, PhD.

December, 30 2006

Len Gould says

James:

<<5. I disagree that the 'market manager', as you term it, should have any role whatsoever in negotiating deals. Their role should be limited to clearing only. >>

In your scenario then, who would be able to assemble the capital investment to construct new nuclear or IGCC coal plants in a timely manner at eg. prime interest rate? Wouldn't new generation installs become over-skewed to the cheapest capital cost units, regardless of efficiency (as eg. past 10 - 15 yrs in US, where obviously building nuclear would have made far more sense than all the gas-fired CCGT, but was[is] impossible to finance...) A market mgr with taxpayer backing singing 20 or 30 yr take-or-pay contracts with private generating companies would resolve all that, at the minor additional risk to taxpayers of a possible new technology making nuclear energy obsolete, or etc. Even if they eg. choose coal rather than nuclear and then get caught by surprise with a large pollution penalty, they couldn't do worse than if they weren't there, I think)

<<6. The market manager would, by necessity, have a substantial role in adapting the transmission system to new sources and sinks. >>

I haven't worked out the transaction details quite yet, but rather than a "regulator" establishing fixed prices for T&D across a large piece of geography, why not have the market calculate the path of each transaction on 15 minute intervals and charge each customer individually a T rate and a D rate based on circuit path from their selected supplier to their service entrance? I'll grant it's a lot of calculation but we have huge computer capacity available to us these days.

<<7. I do not think there is any necessity for the blizzard of rules and structures you lay out in part two. For example, why should the mm be responsible for submitting a weather forecast? >>

Simply a convenience. eg weather forcasts. Why should 2 million meters need to go collect third party weather predicitions individually when a single set at their home database would serve. If eg. 1% of them then want to alter those based on their own prediction strategy, fine, they're free to, but otherwise the weather services could be swamped.

Other rules are there to ensure all participants see their "incentive vectors" pointed in a direction which benefits the overall system and society in general under all conditions. Consumer is rewarded for accurately predicting their consumption first, and then minimizing consumption. Distribution and transmission for maximizing load factors on a stable grid. Generation for producing both delivered energy and grid stability requirements at lowest cost.

<<8. My contribution to your market model would be to charge the consumer a default plan that reflects the realtime LMP plus distribution costs plus ancillary and capacity charges plus whatever. Then, companies could offer OTHER plans that are financially settled on the LMP depending on the consumer's risk appetite and load profile.

Here are some examples. Those who want certainty in their billing without the hassle of trying to manage their consumption would pay top dollar for a fixed price contract.>>

"charge the consumer a default plan" may work today with todays simple centralized generation model, but fails eg. to reward a consumer who installs a distributed CHP unit to serve a heating load and sells their excess electricity to their nextdoor neighbor, making no demands on substations or transmission etc. With proper rules, eg. an "unused substation and feeder capacity charge" paid by all connected customers proportional to their service size, the CHP installer will need to evaluate as part of their business case whether they are in a load-growth region or not, eg. will the "USFC Charge" disappear soon or remain in future? (btw not discussed in article, only 3000 words avail). And the USFC Charge would make only a poor return on capital for the T&D entities relative to the "Required SFC Charge" which would make a good return on capital.

December, 30 2006

James Carson says

José Antonio Vanderhorst-Silverio << The authors start by saying that: 'Deregulation and the concomitant restructuring of the electric power industry in the United States have resulted in a decline in the reliability of North American bulk power systems and constitute the ultimate root cause of the California meltdown, Enron's depredations, and the 14 August 2003 blackout.' >>

The CA meltdown was 'caused' the unfortunate confluence of three factors, none of which is either directly or indirectly associated with de-regulation. 1) three years of mild weather leading to complacency, then a hot summer followed by a cold winter stressed the system. 2) Low snowpack from the previous winter lead to a deficiency of hydro resources. 3) The downrating of a major natgas line lead to widespread fuel shortages. This was exacerbated by CA threats of criminal prosecution of those who would exceed their NOX and SOX allotments.

Enron's depredations were directly caused by de-regulation, as were the depredations of other market participants. However, those depredations only exacerbated the problem, they did not cause it.

The August 2003 blackout is more complicated. To the extent that MISO was in a (perpetual) state of transition in 2003 from the old paradigm to the new, yes, de-regulation caused the blackout in part. The blackout started with First Energy. They had a major event followed twenty minutes later by a second. Even during pre-de-regulation days, the system was configured to be only n-1 robust. If an event occurred that put the control area out of compliance, they had thirty minutes to come back into compliance. Neither of the events in question can be attributed to de-regulation.

There already has been several working groups that have examined the situation ad nauseum. The first group produced the US-Canada Interim Report. They determined that the primary cause was inadequate vegetation control. This happened due to community opposition to aggressive management. This physical cause was compounded by inadequate situational awareness by First Energy. Amazingly, they were not aware of the first event until the second occurred. FE had not invested in upgraded equipment and software because that function was 'soon' to be passed to the Midwest ISO. They missed the alarm. Just as amazing, Midwest ISO missed the first alarm too. Since the second failing led to the blackout, they didn't miss that one. The first clue that First Energy management had that there was a problem was when their OWN lights flickered as their building switched to backup power.

http://www.ima.umn.edu/talks/workshops/3-8-13.2004/overbye/overbye.pdf Look to page four of this pdf. The rest is interesting too.

The superior performance of the PJM ISO during that episode stopped the propagation of the blackout cold. Moreover, tapping resources throughout the ISO to assiste NYISO and NEISO in their restart were invaluable in minimizing the length of the blackout. I know from personal experience that they called on generation resources as far away as the southern Delmarva peninsula to bring NY back up. My conclusion is that it was the immature and transitional status in MISO that caused the problem, not de-regulation itself.

I read the IEEE article, and it looks to me like a bunch of engineers pining for the 'good ole days'. Some of the points like, 'Industry expenditures for new facilities and manpower have been reduced.' are not only demonstrably false, they are downright silly. I cannot take anything they say seriously.

December, 30 2006

James Carson says

<< In your scenario then, who would be able to assemble the capital investment to construct new nuclear or IGCC coal plants in a timely manner at eg. prime interest rate? >>

I disagree with the notion that a contractual obligation is required to obtain such financing at very competitive rates. We see huge scale investments in a variety of capital intensive projects move forward without such guarantees. Enough market history has transpired to make pretty fair estimations of cash flows for such investments. I could readily estimate a present value of future cash flows for a coal burner anywhere in PJM or MISO AND quantify the risks.

Also, it would be very simple to enlist large institutions to participate. A large university, or a large corporation, or a consumer cooperative, or even a syndicate could buy into such a deal. Again, such deals would be FINANCIAL, not physical. I suspect that investment banks could even be persuaded to participate just like they do for stock offerings. A lot of banks already have extensive experience trading power.

<< A market mgr with taxpayer backing singing 20 or 30 yr take-or-pay contracts with private generating companies would resolve all that, at the minor additional risk to taxpayers of a possible new technology making nuclear energy obsolete, or etc. >>

Oh, really.... Try telling that to the taxpayers, and the politicians.

<< Wouldn't new generation installs become over-skewed to the cheapest capital cost units, regardless of efficiency (as eg. past 10 - 15 yrs in US, where obviously building nuclear would have made far more sense than all the gas-fired CCGT, but was[is] impossible to finance...) >>

No, after the experience of the recent CC building boom, that isn't going to happen again.

Your understanding of the US situation is faulty in two respects. First, there had been intense pressure to build natgas fired CC units throughout the 1990s for environmental reasons. Second, from the utility perspective, those units made perfect sense since they can be economically shut down during low load periods. Since 1980, peak loads have been rising relative to average loads due to the increased proliferation of air conditioning and other devices. (This is to say that load factors, average load divided by peak load, have been falling.) Utilities needed resources that had greater flexibility than coal or nuclear. Of course, we did not really need the orgy of CC building that occurred from 1999 to 2004.

Even now, nuclear is problemmatic for this reason: It is difficult to vary the output to conform to load. I understand that some of the newer nuclear technologies (PBR) don't have this problem. Frankly, I think the answer would be to allow for nukes to bleed off the energy for hydrogen production. Then, during periods of low load, they have something useful to do.

part one of two

JBCarson@RisQuant.com

December, 30 2006

James Carson says

continued....

<< why not have the market calculate the path of each transaction on 15 minute intervals and charge each customer individually a T rate and a D rate based on circuit path from their selected supplier to their service entrance? >>

Why should a customer pay for TnD that is not actually used? There is no way to control where the specific electrons go. I prefer the way that this issue is handled within an LMP market.

<< ... otherwise the weather services could be swamped. >>

I see an opportunity for some future entrepreneur....

<< Other rules are there to ensure all participants see their "incentive vectors" pointed in a direction which benefits the overall system and society in general under all conditions. Consumer is rewarded for accurately predicting their consumption first, and then minimizing consumption. Distribution and transmission for maximizing load factors on a stable grid. Generation for producing both delivered energy and grid stability requirements at lowest cost. >>

This doesn't require rules, for the most part. I think we should refrain from manipulating 'incentive vectors' overmuch.

<< "charge the consumer a default plan" may work today with todays simple centralized generation model, but fails eg. to reward a consumer who installs a distributed CHP unit to serve a heating load and sells their excess electricity to their nextdoor neighbor, making no demands on substations or transmission etc. >>

Such a situation could be accomodated within my proposed structure in either of two ways. First, you could conceivably physically move the energy behind the meters. I am uncertain of the technical issues. Second, the source could send the power back into the grid physically on a 'net metering' basis as is ALREADY allowed. The sink would consume as usual, but there would ALSO be a financial transaction cleared through the ISO. The second way would not avoid TnD costs, but I disagree that they should if they are going to use the transmission commons.

Please note that the current default plan is fixed price, my default plan would be LMP. If you want fixed price, you will have to find someone to sell it to you.

JBCarson@RisQuant.com

December, 31 2006

Len Gould says

<>

Everthing done manipulates incentive vectors. It could actually be argued that deciding to not make maximum use of available digital technology is implementing a "rule" (decision) which manipulates incentive vectors.

<>

Not in very many jurisdictions I am aware of. eg. in Ontario, net metering is only allowed if the generation uses a renewable fuel, a silly rule but better than mnost US locations where it is simply not allowed period. And I fail to see how "Net Metering" can be done with anything more than the very simplest of TOU metering. eg. customer A is rewarded for consuming a large amount during mid-day peak but then spinning his meter backward throughout the night? It doesn't work.

December, 31 2006

Len Gould says

(I had the < < Everthing done manipulates incentive vectors. It could actually be argued that deciding to not make maximum use of available digital technology is implementing a "rule" (decision) which manipulates incentive vectors.

< Not in very many jurisdictions I am aware of. eg. in Ontario, net metering is only allowed if the generation uses a renewable fuel, a silly rule but better than mnost US locations where it is simply not allowed period. And I fail to see how "Net Metering" can be done with anything more than the very simplest of TOU metering. eg. customer A is rewarded for consuming a large amount during mid-day peak but then spinning his meter backward throughout the night? It doesn't work.

December, 31 2006

James Carson says

<< Everthing done manipulates incentive vectors.

Fair enough.

<< It could actually be argued that deciding to not make maximum use of available digital technology is implementing a "rule" (decision) which manipulates incentive vectors. >>

It could be argued, but I would not agree. My position is that people should be allowed to make whatever decision they desire, and pay the consequences. If a household doesn't want to participate in managing their energy consumption, then we have to presume that they have a rational reason for making that choice, and respect that, but charge them for the convenience. In the current regime, households do not have the choice to be rational.

<< Not in very many jurisdictions I am aware of (is net metering allowed). >>

Quite a few in the US. 35-40 states depending on exactly what you mean. One of the problems, however, is that the rules are a hodge-podge of state mandates and regulations.

Here is a table of rules by state for net metering:

http://www.irecusa.org/connect/net_metering.pdf?PHPSESSID=f50aad8224850731682635304dc309fa

Here is a map:

http://www.dsireusa.org/documents/SummaryMaps/NetMetering_Map.ppt

<< And I fail to see how "Net Metering" can be done with anything more than the very simplest of TOU metering. eg. customer A is rewarded for consuming a large amount during mid-day peak but then spinning his meter backward throughout the night? It doesn't work. >>

It could be easily done with hourly readings, which would be essential anyway for my view to be implemented. .

December, 31 2006

Jose Antonio Vanderhorst-Silverio says

To all readers that want to learn about the third way of deregulation

Eberhart Rechtin and Mark Maier, in their book “The Art of System Architecting,” explain that “social system quality… is less a foundation than a case-by-case trade-off; that is, the quality desired depends on the system to be provided. In nuclear power generation, modern manufacturing, and manned space flight, ultraquality is an imperative. But in public health, pollution control, and safety, the level of acceptable quality is only one of many economic, social, political, and technical factors to be accommodated.” [I published this insight on march this year at the Academy of Science of the Dominican Republic.]

In the first case, the experts are the engineers. For the center stage, controlled market, system engineer institution to assures that electrons and people have the same purpose, as I mentioned on 12.30.06, ultraquality is an imperative to manage short run and long run systemic risk, with both supply side and demand side resources.

In the second case, according to Rechtin and Maier, the accommodation is done by the architect with “a professional response to the public needs and perceptions.” It is such unjustified perceptions that fueled the decade long debate. Bill Hogan mistake was that he didn’t understand what Fred Schweppe meant by the fourth criterion: “consider the engineering requirements for controlling, operating and planning an electric power system,” which can only be met by ultraquality. As time has advanced and new digital technology market share becomes larger, electricity demand for quality is only increasing. A professional response is needed, however, for the remaining, non real-time, free market activities of retail and generation. EWPC for the customers is such a response.

PEST engineers are correct when they say that “'Deregulation and the concomitant restructuring of the electric power industry in the United States have resulted in a decline in the reliability of North American bulk power systems and constitute the ultimate root cause of the California meltdown, Enron's depredations, and the 14 August 2003 blackout.”

In al three cases mentioned by PEST, the root cause is the lack of ultraquality. First the lack of ultraquality “stressed the system.” Had the past decade been used to developed elasticity in the resources of the demand side true, none of the three cases had resulted. The decline in reliability when the system is stressed led to price spikes. Instead of changing from stage 1, to stage 2, to stage 3, California just needed to rotate blackouts and compensate the customers’ interruptions.

While PEST can be tagged as pinning for the good old days, by no means are they silly. Engineering manpower and institutional memory has suffered a lot in the power industry worldwide under deregulation. There is a need to allow for the emergence of the good new days, and EWPC is a strong candidate to increase the revised criteria: 1) Freedom of choice; 2) Economic efficiency; 3) Equity; and 4) Ultraquality. Only through new knowledge and innovations will societies satisfy emergent needs.

© 2006. José Antonio Vanderhorst-Silverio, PhD.

December, 31 2006

James Carson says

<< In al three cases mentioned by PEST, the root cause is the lack of ultraquality. >>

Fair enough. However, the lack of 'ultraquality' is not necessarily the fault of de-regulation.

<< First the lack of ultraquality 'stressed the system'. >>

To reiterate: The CA debacle was caused by the unfortunate confluence of the three factors, NONE of which were caused by de-regulation. The August 2003 blackout was caused by timid vegetation management, which was not caused by de-regulation. This was, however, exacerbated by First Energy's failure to invest in system control software, and that was caused by de-regulation.

<< Had the past decade been used to developed elasticity in the resources of the demand side true, none of the three cases had resulted. >>

Then, would you conclude that they would have occurred anyway? (Enron debacle excepted.) I agree, but there would undoubtedly have been different manifestations.

<< While PEST can be tagged as pinning for the good old days, by no means are they silly. Engineering manpower and institutional memory has suffered a lot in the power industry worldwide under deregulation. >>

They are silly when they assert that expenditures for new facilities have been reduced. Moreover, they are silly wth their gratuitous insult: "almost fundamentalist reliance on markets"

As for the decline in 'institutional memory', it was that 'memory' that has delayed de-regulation. It was that DELAY in developing the capabilities of the Midwest ISO that exacerbated the August 2003 blackout. It was the successful maturation of the SMD market model that halted the propogation by PJM.

December, 31 2006

Len Gould says

James: <>

Then we have no difference at all really. Make that interval 15 min instead of an hour, and I'll fully support your plan as at least a step into AMR which is not wasted. As I've said in the article I posted, market design is not really something I'm terribly interested in and I think if the infrastructure exists, then the best market should soon evolve, provided regulation authorities can be kept as much out of it as is safely possible. I'm primarily at this point concerned that distribution entities not be allowed to waste the AMR budget on systems which are obviously incapable of ever satisfying the eventual goal, whatever market design that may turn out to be.

December, 31 2006

Len Gould says

James: You should grant however that a serious contributor to the 2003 blackout was the "new mode" competitive secrecy now imposed on network engineers who used to continually share as much information as possible prior to deregulation. Not only were the Ohio operators discouraged from communicating with their Michigan counterparts and vice vera, they are barred from doing so by corporate policy, because the Michigan group is now their market competitor. (This from several US T&D engineers posting to eng-tips.com forum which analysed the blackout in detail.)

January, 01 2007

Jose Antonio Vanderhorst-Silverio says

To all readers that want to learn about the third way of deregulation

To complement the posts EWPC: People Coordinating and Cooperating with Electrons and EWPC: People Coordinating and Cooperating with Electrons Part 2, in chapter one of their book, Rechtin and Maeir define ultraquality “as a level of quality so demanding that it is impractical to measure defects, much less certify a system prior to use.” On a note to the definition they say ultraquality “was discussed extensively by Juran…”

They add that “Demonstrating this limit state in high quality is not a simple extension of existing quality measures… because system complexity has outpaced instrument accuracy.”

Systemic thinking, scenarios, system dynamics, mental models are tools to help us approach system complexity. An explanation based on simple cause and effect, mechanistic thinking, is generally insufficient to explain system complexity. Those tools should be used fully, since “[a]n independent investigation is needed of all the issues raised by the blackout and other reliability problems to ascertain that all necessary remedial actions have been taken, as PEST suggest and the GMH extends.”

January, 01 2007

James Carson says

<< Make that interval 15 min instead of an hour, and I'll fully support your plan as at least a step into AMR which is not wasted. >>

Fifteen minutes is already the interval in ERCOT (Texas). For my part, I prefer fifteen minutes myself. The shorter interval makes managing CT units easier.

<< market design is not really something I'm terribly interested in and I think if the infrastructure exists, then the best market should soon evolve, provided regulation authorities can be kept as much out of it as is safely possible. >>

Imo, the SMD fills your requirement, at least as implemented in PJM. Keep in mind that the ISOs are not exactly regulators, they are transmission operating companies. "Regulation", that is setting and enforcing standards has fallen to re-organized NERC regional councils. FERC, of course, remains involved on a policy level.

<< You should grant however that a serious contributor to the 2003 blackout was the "new mode" competitive secrecy now imposed on network engineers who used to continually share as much information as possible prior to deregulation. Not only were the Ohio operators discouraged from communicating with their Michigan counterparts and vice vera, they are barred from doing so by corporate policy, because the Michigan group is now their market competitor. (This from several US T&D engineers posting to eng-tips.com forum which analysed the blackout in detail.) >>

1> In the new MISO organization, not only would Michigan be 'informed' about events in Ohio, they would be in the same control area, perhaps in the same room. Transmission operators are now in constant communication and have comprehensive access to information throughout the ISO. They don't care about 'competitive' information.

2> Considerable information sharing was ongoing. PJM had made several inquiries throughout the day to MISO and First Energy regarding anomolies it was seeing at flowgates in western MISO. (Iowa, I think). They also asked about loads and stresses in the Cleveland area because they were seeing anomolies on their own border. In the old system, did one utility actually monitor flowgates in another control area? I don't think so....

Please keep in mind that PJM had a reputation for being ninnies. They frequently made inquiries with other control areas. PJM and NYISO had often been in conflict over this. PJM also often buy spin in excess of the minimum requirements. On the day in question, I believe that they had considerable excess spin on hand. Events proved their cautious approach and culture wrt reliability is warranted. I believe that that culture is setting the standard throughout the Eastern Interconnect. Well, maybe not in SERC and FRCC....

3> There was no information to share! The first indication of trouble at First Energy was that their own lights flickered as the blackout struck their facility and their emergency generators switched on. I doubt that the engineers at First Energy would be willing to admit that.

4> On the day in question, MISO technical personnel were actually inside the First Energy control facility. They and FE were working on issues pertaining to Indiana. MISO and FE personnel believed that the anomolies that PJM was inquiring about pertained to issues they were already dealing with, and they were probably right.

January, 01 2007

James Carson says

<< “[a]n independent investigation is needed of all the issues raised by the blackout and other reliability problems to ascertain that all necessary remedial actions have been taken, as PEST suggest and the GMH extends.” >>

We do NOT need yet ANOTHER investigation. The blackout has been investigated ad nauseum. We already know what happened.

January, 02 2007

Jose Antonio Vanderhorst-Silverio says

The IEEE Spectrum Online, Tech Talk, a weekly Blog, discussing topics chosen by Susan Hassler, IEEE Spectrum's Editor-in-Chief, issued on October 13th the post FINAL REPORT: BLACKOUT ACTION NEEDED, where I added the only three comments posted so far. I suggest reading those comments too, if you are interested in the generative dialogue.

Jim Carson seems to enter into a very radical opinion when he says that “We do NOT need yet ANOTHER investigation. The blackout has been investigated ad nauseum. We already know what happened.”

As can be seen in the Final Report, however, a totally different story exists: “… the ultimate impact of the source failure was compounded by "long-standing institutional failures and weaknesses that need to be understood and corrected in order to maintain reliability.”

Secretary Bodman is more conservative than Jim when he says “I appreciate the hard work and diligence that went into this important report. It demonstrates that while improvements are being made to enhance grid reliability, we still have a very complex system that is subject to possible mechanical and human failures. We must remain vigilant." Phrases like “need to be understood,” “very complex system,” “must remain vigilant,” denote that they still don’t know what happened.

In addition, admission that there are "long-standing institutional failures and weaknesses that need to be understood and corrected in order to maintain reliability,” can be the ground for an independent investigation, or better yet a generative dialogue by itself, which I repeat “… should consider fully both the institutional memory and the sound research done by Fred C. Schweppe and colleagues, from 1978-1988, not in a debate, but in a generative dialogue, to resolve most of the flaws identified by Casazza, Delea and Loehr, and also to break the barriers to the emergent innovations flowing into the industry.”

Since the Final Report stresses that “… we have a very complex system…,” I also reiterate that “[S]ystemic thinking, scenarios, system dynamics, mental models are tools to help us approach system complexity. An explanation based on simple cause and effect, mechanistic thinking, is generally insufficient to explain system complexity…”

I am willing to change my opinion to change the need for an independent investigation to that of generative dialogue, and the remaining sentence would read “[T]hose tools should be used fully, since “[a generative dialogue] is needed of all the issues raised by the blackout and other reliability problems to ascertain that all necessary remedial actions have been taken, as PEST suggest and the GMH extends.”

© 2007. José Antonio Vanderhorst Silverio, Ph.D.

January, 02 2007

James Carson says

<< As can be seen in the Final Report, however, a totally different story exists: “… the ultimate impact of the source failure was compounded by "long-standing institutional failures and weaknesses that need to be understood and corrected in order to maintain reliability.” >>

Those 'long standing institutional failures and weaknesses' have long been corrected. First Energy no longer has ANY control over transmission. Midwest ISO now has taken over that role, just like PJM has taken over that role next door.

<< Phrases like “need to be understood,” “very complex system,” “must remain vigilant,” denote that they still don’t know what happened. >>

You are taking a politician at his word? LOL.

Keep beating this dead horse if you like, I do not care to.

January, 02 2007

Jose Antonio Vanderhorst-Silverio says

James said, "My intention is not to convince Professor Banks… is to challenge his assertions with which I disagree. Thousands of people read these forums, and I think it is a bad idea for them to get the impression that… Banks reflects the prevailing consensus. Frankly, I expected a more spirited clash. He merely makes pronouncements with little support and fails to respond to my rejoinders." As I will show, readers can reverse Banks and Carson’s names without any loss of generality. That shows that Jim opinion does not reflect the prevailing consensus either.” Bad ideas “must be killed, the sooner the better.” After working for 30 years at FPC and at FERC, Jack Duckworth – a professional engineer, not a politician - predicted the 14th August Blackout in the very illuminating article The Fatal Flaw in Electric Power Deregulation. Mr. Duckworth said that “[D]eregulation can work, but it will not work unless those overseeing the deregulation initiative recognize the inherent flaw and install a mechanism that will fill the gap by guaranteeing the availability of electric power without guaranteeing the price.” As a mechanism, he said: “When I saw in 2001 that the market was failing to ensure adequate generating reserve margins, I proposed in my book, Power to the People, that the government put national rules in place that would require any power generating company to maintain a set reserve generating capacity margin as a condition of doing business. Such a mandatory reserve margin would ensure that there could never be a disastrous shortage of supply that could blackout an entire electric power supply region. It would also ensure a level field for all competing generating companies.” This is what Jim, the practical analyst, advised to all readers of EnergyPulse on Feb 18, 2003:

Sorry, I did not find this article at all illuminating. The principal objection appears to be that reliability is not considered in the market price of power, and cannot be. This is true, as far as it goes. However, there are several market mechanisms that have been developed that specifically address this.

First, capacity. It is not perfect, but it does work after a fashion. More work must be done to improve this mechanism. Seond, spinning reserve markets are already functioning in PJM and, I believe, ERCOT. So far, so good on these efforts. The notion that electricity is somehow 'different' from other commodities must be killed, the sooner the better. One could make the similar points about wheat and natural gas. Indeed, the histories of both of those commodities are replete with similar concerns.

Power as a commodity is distinguished by two 'interesting' features, both of which contribute to its incredible volatility. First, with a few exceptions, power cannot be stored. However, now that we have functioning markets, we can measure the value of storage. I have already worked on one project that required an estimate of the value of storage. Second, the elasticity of the demand curve at any particular moment for power is essentially zero. That is, a marginal change in price produces no change whatsoever in demand. Even a large change in price produces no change in demand. That is why the marketplace is working so hard on 'demand side' management programs. Again, the market is responding, albeit slowly. James Carson JBCarson@RisQuant.com

January, 02 2007

Jose Antonio Vanderhorst-Silverio says

James said, "My intention is not to convince Professor Banks… is to challenge his assertions with which I disagree. Thousands of people read these forums, and I think it is a bad idea for them to get the impression that… Banks reflects the prevailing consensus. Frankly, I expected a more spirited clash. He merely makes pronouncements with little support and fails to respond to my rejoinders."

As I will show, readers can reverse Banks and Carson’s names without any loss of generality. That shows that Jim opinion does not reflect the prevailing consensus either.” Bad ideas “must be killed, the sooner the better.”

After working for 30 years at FPC and at FERC, Jack Duckworth – a professional engineer, not a politician - predicted the 14th August Blackout in the very illuminating article The Fatal Flaw in Electric Power Deregulation. Mr. Duckworth said that “[D]eregulation can work, but it will not work unless those overseeing the deregulation initiative recognize the inherent flaw and install a mechanism that will fill the gap by guaranteeing the availability of electric power without guaranteeing the price.”

As a mechanism, he said: “When I saw in 2001 that the market was failing to ensure adequate generating reserve margins, I proposed in my book, Power to the People, that the government put national rules in place that would require any power generating company to maintain a set reserve generating capacity margin as a condition of doing business. Such a mandatory reserve margin would ensure that there could never be a disastrous shortage of supply that could blackout an entire electric power supply region. It would also ensure a level field for all competing generating companies.”

This is what Jim, the practical analyst, advised to all readers of EnergyPulse on Feb 18, 2003:

Sorry, I did not find this article at all illuminating.

The principal objection appears to be that reliability is not considered in the market price of power, and cannot be. This is true, as far as it goes. However, there are several market mechanisms that have been developed that specifically address this.

First, capacity. It is not perfect, but it does work after a fashion. More work must be done to improve this mechanism.

Seond, spinning reserve markets are already functioning in PJM and, I believe, ERCOT. So far, so good on these efforts. The notion that electricity is somehow 'different' from other commodities must be killed, the sooner the better. One could make the similar points about wheat and natural gas. Indeed, the histories of both of those commodities are replete with similar concerns.

Power as a commodity is distinguished by two 'interesting' features, both of which contribute to its incredible volatility. First, with a few exceptions, power cannot be stored. However, now that we have functioning markets, we can measure the value of storage. I have already worked on one project that required an estimate of the value of storage.

Second, the elasticity of the demand curve at any particular moment for power is essentially zero. That is, a marginal change in price produces no change whatsoever in demand. Even a large change in price produces no change in demand. That is why the marketplace is working so hard on 'demand side' management programs. Again, the market is responding, albeit slowly.

James Carson JBCarson@RisQuant.com

January, 02 2007

James Carson says

<< readers can reverse Banks and Carson’s names without any loss of generality. That shows that Jim opinion does not reflect the prevailing consensus either. >>

First, I never claimed to reflect the prevailing consensus. Second, I have been more than forthcoming wrt supporting my views with evidence. Professor Banks, otoh, has been forthcoming with nothing more than bombast and hypocrisy.

<< Mr. Duckworth said that << [D]eregulation can work, but it will not work unless those overseeing the deregulation initiative recognize the inherent flaw and install a mechanism that will fill the gap by guaranteeing the availability of electric power without guaranteeing the price. >>

Mr. Duckworth was correct. That is why we have ISOs. That is why NERC has re-organized. Duh.

<< This is what Jim, the practical analyst, advised to all readers of EnergyPulse on Feb 18, 2003: >>

....

I stand by my prior posting completely. Please state in detail where you disagree with my posting in 2003. From what I can see, I did not even disagree with Duckworth. I merely stated that I believed the issue of reliability had already been addressed through the provision of capacity and spinning reserve markets. I believe that I was right.

Nobody in their right mind would assert that the August 2003 blackout had anything to do with lack of capacity. Capacity margins in MISO are huge, were huge in 2003, and much greater than any reasonable standard would mandate. As far as spinning reserve margins are concerned, the old pre-de-regulation rules were in still place in August 2003.

I have stated several times, and backed that up with documentation, why the August 2003 blackout occurred, and why de-regulation had a limited role. Again, the success of PJM in arresting the propagation of the blackout demonstrates that the SMD is more than robust. Again, the launch of the Midwest ISO has remedied First Energy's deficiencies.

January, 02 2007

James Carson says

Duckworth << “When I saw in 2001 that the market was failing to ensure adequate generating reserve margins,... >>

I don't know where HE was, but by 2001, the overbuilding was already becoming apparent to me. We were already two years into the buiding spree. The NERC report linked below was published in October 2002, four months before Duckworth's EnergyPulse article, shows very clearly that there was no such failure "to ensure adequate generating reserve margins". On the contrary.

Duckworth << ... I proposed in my book, Power to the People, that the government put national rules in place that would require any power generating company to maintain a set reserve generating capacity margin as a condition of doing business. Such a mandatory reserve margin would ensure that there could never be a disastrous shortage of supply that could blackout an entire electric power supply region >>

The LAST thing anyone can blame the August 2003 blackout on was a lack of capacity reserve margins. As of Summer 2002, ECAR, the predescessor NERC region that included Ohio and Michigan, had reserve margins as a percentage of net internal demand of 27.7% Those reserve margins were expected to balloon by another 20 points by 2006. Link below. Their reserve margins were nearly double the 15% standard. Ohio was positively drenched in excess capacity as of the time of the blackout.

ftp://www.nerc.com/pub/sys/all_updl/docs/pubs/2002ras.pdf See page 17 of the pdf.

Perhaps, Dr. Vanderhorst-Silverio, you should check out the FACTS before you post nonsense.

January, 03 2007

Jose Antonio Vanderhorst-Silverio says

To complete the response to James, please read the following post: EWPC: People Coordinating and Cooperating with Electrons Part 6.

Having reserves available is insufficient. Active and reactive reserves need to be dispatched and deployed in the correct places to keep the system synchronized. Lack of enough reactive reserves leads to voltage collapse, which fuels the dominoe effect.

Because the US grid was not designed for Model 2, a comprehensive design based on ultraquality is a must. Investments required under Model 3 are much smaller than with Model 2, as "connected networks" are very expensive.

A flawed market design and architecture that increases boom-bust behavior is probably the culprit on excess capacity in some regions of the USA.

Please take any follow up discussions to Part II.

January, 03 2007

James Carson says

<< please read the following post >>

No. It is quite evident that you are not reading my posts, you certainly have ignored the points that I have been making in them. I refuse to allow you to patronize me anymore.

<< Active and reactive reserves need to be dispatched and deployed in the correct places to keep the system synchronized. Lack of enough reactive reserves leads to voltage collapse, which fuels the dominoe effect. >>

PJM already manages that quite well. So will the other ISOs as they mature.

<< A flawed market design and architecture that increases boom-bust behavior is probably the culprit on excess capacity in some regions of the USA. >>

Perhaps, but I want to see some real evidence before I come to that concusion.

<< Please take any follow up discussions to Part II. >>

No. I disagree that your discussion of power market design is pertinent to the natgas discussion.

January, 03 2007

Jose Antonio Vanderhorst-Silverio says

I change my opinion on the first 3 items.

1) You patronized me first. Go back, read my posts without ignoring items - taking only samples - and respond them. Once you do that and will do the same.

2) PJM was involved in a large blackout, I believe in 1967. That explains why they played it safe and kept their vertical integration institutional memory quite well. FERC tried to used them as an institutional memory bridge with SMD, but was unsuccesful. In the meantime a lot of value destruction has resulted for not listening to the engineers that had the institutional memory elsewhere.

3) I am happy with perhaps. One 300 MW CC purchased in those day came to my country because of the excessive orders placed in the US. I suggest you do the research.

4) Taken where it belongs: Part 2, because EnergyPulse Topic is just a mechanical device. The author said what his topic scope was.

January, 03 2007

James Carson says

<< You patronized me first. Go back, read my posts without ignoring items - taking only samples - and respond them. Once you do that and will do the same. >>

I put the samplings in to facilitate reading and focus my response. I have ignored little of what you posted. What I have ignored, I simply choose not to comment on. If you want me to respond to a specific point, please challenge me to do so. Your postings are very long and repetitive, and often do not come to a point. I have neither the time nor the patience to respond in detail to each of them.

<< PJM was involved in a large blackout, I believe in 1967. That explains why they played it safe and kept their vertical integration institutional memory quite well. >>

Since New York has had more problems with blackouts than PJM, why did their institutional memory fail? Also, PJM was not a unified control area in 1967. It would not become that for thirty years. PJM as an organization had no such institutional memory.

<< FERC tried to used them as an institutional memory bridge with SMD, but was unsuccesful. >>

And your basis for making this claim is WHAT? Why was it only PJM that retained that memory? New York, New England and Canada have never experienced blackouts? Why is PJM different?

<< In the meantime a lot of value destruction has resulted for not listening to the engineers that had the institutional memory elsewhere. >>

In the meantime, these stalwart engineers delayed the rollout of the Midwest ISO so long that First Energy failed to make necessary investments in monitoring software. THAT contributed directly to the blackout.

<< The author said what his topic scope was. >>

Right, he did. Natural gas supplies is his topic. I refuse to add anything there not directly pertinent since that was requested. I do not see why de-regulation wrangling is pertinent to that discussion.

January, 04 2007

Ferdinand E. Banks says

"Bombast and hypocrisy", Mr Carson says about my good self. Reminds me of a couple of students I taught some years ago, who not only used that expression, but also claimed that I couldn't speak and write English properly. Of course, given the opportunity I like to claim that I am the best economics and international finance teacher in the world, so maybe I should tone that down. I tell you what: I'll settle for second best.

January, 04 2007

Jose Antonio Vanderhorst-Silverio says

Hi James,

On your first and last answers, the fourth I understand is just one of many opinions, I still think debates will not get us where we want to be, which is acting on the emergent worldwide (not just the US) gas crisis pinpointed by Andy, which requires very efficient use of natgas. But since you insist to find out why “… de-regulation wrangling is pertinent to…” the “Playing with Fire” discussion, I will tell you about one very big – key - issue that I posted and that you simply ignored. So I challenge you again without any discourtesy:

Search for Hogan in the following articles, read the complete comments (not only samples), and their links, and get back to me with your conclusions.

What a surprise: Prices move both ways

The Gap Between Demand Response Potential and Demand Response Reality

Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices

This time, however, I will post samples of what you will find. As Jack Casazza wrote to me on 12.29.05, under Professor Banks’ article A Few More Unfriendly Comments on Electric Deregulation, “The restructuring and deregulation of the electric power industry was a serious mistake in the USA and in many countries, harming the general public.” The mistake’s origin can be assigned to the most influential person of deregulation and restructuring, Bill Hogan, whose opinions were instrumental in changing the history of electricity. I know he is a very intelligent man, which I have not met. I know that the powerful lobbies were the true means behind the effort to extend the useful life of the investments of the IOUs.

This is part of what I wrote on 4.2.06, under What a surprise: Prices move both ways: ”If there is someone to be questioned (among many others which were part of "the system" of course), it has to be the JFK School of Government economist W.W. Hogan,… see complete post below to find out how the development of price elasticity of demand - demand response – by a market architecture and design flaw of 1992.

In addition, on Please Blame The Deregulation and Regulation Fiascos Parte 2, Hogan claimed on 11.15.96 – see details below - that retail access is easy, while creating the foundation of the protection of “native loads,” keeping a barrier to innovations on the demand side.

The demand response movement got force only after the 14th August 2003 blackout was begun to be understood. However, the 2005 Energy Bill still includes the “native” load possibility for vested interests, which should be repealed, like you would say “the sooner, the better.”

Responding you second and third items, the PJM Timeline shows the long institutional history of PJM, which begin in 1927 with PA and NJ, and became PJM Interconnection in 1956. The NYISO is an outgrowth of the New York Power Pool, formed by New York’s eight largest utilities following the Northeast Blackout of 1965. The Power Pool combined the power generation and technical resources of its members to create an organization committed to the reliable, safe and efficient operation of the electric system.

Thanks for getting back to the generative dialogue.

© 2007. José Antonio Vanderhorst-Silverio, Ph.D.

January, 04 2007

Jose Antonio Vanderhorst-Silverio says

Fundamentals of Deregulation [posted on 4.21.06 under Post hoc ergo propter hoc: The fallacy of blaming deregulation for rising electricity prices].

Slide #1 of 72

Retail Access is Easy, It’s Getting Wholesale Access that is Hard

William W. Hogan, Harvard University

Virginia Electricity Forum

Virginia State Corporation Commission

Charlottesville, Virginia

November 15, 1996

Slide #2 of 72

ELECTRICITY MARKET --------- Structures

Two elements stand at the core of a new market structure that can be fashioned consistent with this set of objectives.

• Pool-Based Market: Operation of the short-term market through a closely coordinated or pool-based dispatch. System security and network congestion problems handled as part of the dispatch. Transmission capacity rights allocated along with grid costs but implemented through short-term pool pricing and rental payments for use of allocated capacity. Long-run investment and contracts for energy handled in bilateral markets.

• Customer Choice: Under Efficient Direct Access customers remain with the local utility which buys from the wholesale market and resells at a time-of-use rate based on the spot price. There are no necessary changes in cost-of-service principles. All customers remain under the utility tariff but have effective access to the market. Decisions on cost recovery can proceed as before. Whatever can be done under traditional cost-of-service regulation can be continued. Universal service support, investments in energy efficiency, and subsidies for renewable and other environmentally preferred alternatives could be made when justified, and included in the cost of service applied to all customers separate from the time-of-use energy charges.

The pool-based, short-term electricity market addresses the few necessary constraints and technical issues by coordinating system operations and power plant dispatch. Customers, brokers and aggregators enjoy free choice to make long-term arrangements with any supplier or rely solely on access to the short-term market.

No need to read any further...

January, 04 2007

Jose Antonio Vanderhorst-Silverio says

Gentlemen, [posted on 4.2.06 under What a surprise: Prices move both ways]

With all my respect for Prof. Banks, I will kindly respond to his comments:

As it might be inferred from my comments, late Prof. Fred Charles Schweppe did not need to take “the early chapters of his favorite economics book literally.” Prof. Schweppe “was regarded as an individualist, almost a renegade, with new and highly creative ideas, someone who was determined to bring these ideas to fruition.” He understood very clearly the feedback requirements of a power system and new that the customer was key to his market proposal. However, as far as I know, his suggestions have not been implemented anywhere.

If there is someone to be questioned (among many others which were part of "the system" of course), it has to be the JFK School of Goverment economist W.W. Hogan, which according to Fernando Alvarado, "in 1992 (Fred was dead) introduced the concept of contract networks as a practical extension to these early notions (of using prices to control the system) because it permitted the establishment of property rights within networks and allowed (approximately) efficient prices to be determined from a dispatch that was influenced by the judment of human operators [1]."

In Fred Schweppe proposal, the end customer was an integral and active part of the market which were supposed to respond to prices. If I understand it correctly, it is Prof. Hogan who did not understand very well how important the end customer was as an active “empowered customer” as EPRI is suggesting. Professor Hogan did not find mistakes in "Schweppe et al., when he said that they "argue for the robustness of spot pricing even when the perfect optimal solution is not available:”

Hogan quotes them saying "The fact that the true (prices) may not be calculated does not destroys the value of implementing a spot price based energy marketplace. The actual value calculated will be much closer to the true values than the present-day flat or time-of-use tares, etc. The goal of implementing the spot price based energy marketplace is to improve the coupling between the utility and its customers, no to achieve theoretical optimality [2]."

By looking at Hogan’s paper, I understand that the big mistake was replacing the price responsive end customer with the non-responsive transmission customer. " As I explained in my comments to Prof. Banks article, where I said: “Recently, I have sent an email to Mr. Casazza, and have gone to Jesus M. Martin-Giraldo, Power Encounters blog, where I posted comments in Spanish about a misunderstanding of Fred C Schweppe's Homeostatic Utility Control in the literature review he posted…”

It turns out, that Schweppe’s said: "conventional metering is replaced by a Marketing Interface to Customer (MIC) which, in addition to measuring power usage, multiplies the usage by posted price and records the total cost [3]," which means that Homeostatic Utility Control was what we are now calling demand response.

The regulated “energy marketplace involves the utility and its customers operating as partners… Utility implementation concerns include real-time calculation/prediction of hourly spot prices, metering-communication-billing, and system control center operation using the new control signal called price… customers who choose to exploit the energy marketplace potentials must implement the appropriate response systems (today demand response), which could range from simple manual response to sophisticated digital controls [4].”

Ádditionally, when I talk about risk management of system failure, please be advised that I am talking about physical risk management of reserves in the power system, by system elements, mostly generators, and costumer responsiveness.

Best regards,

José Antonio Vanderhorst-Silverio, PhD

Interdependent Consultant on Electricity

[1] Fernando Alvarado, "Is Systems Control Entirely by Price Feasible?" Proceedings of the 36th Hawaii International Conference on Power Siences - 2003,

[2] F. C. Schweppe et al, Spot Pricing of Electricity, Kluwer Academic Press Publishers, 1998, p. 97.

[3] Homeostatic Utility Control Vol. IEEE PAS-99, No.3 May/Jun 1980, page 1151.

[4] F. C. Schweppe et al, Spot Pricing of Electricity, ... p. 11.

January, 04 2007

Len Gould says

Jose Antonio: “energy marketplace involves the utility and its customers operating as partners… Utility implementation concerns include real-time calculation/prediction of hourly spot prices, metering-communication-billing, and system control center operation using the new control signal called price… customers who choose to exploit the energy marketplace potentials must implement the appropriate response systems (today demand response), which could range from simple manual response to sophisticated digital controls [4].”

Ok you've convinced me that F. C. Schweppe had it fairly right (for his time, and if he drops that hourly spot pricing to 15 min). And I'll agree that many types of market design could operate well on the required physical infrastructure, and allowing different regions to implement many variations of markets will soon sort out those which operate best.

So, how do we get the physical system installed?

January, 04 2007

Jose Antonio Vanderhorst-Silverio says

Hi Len,

Fred C. Schweppe was suggesting a regulated marketplace in his days as an intermediate step to deregulation. EWPC avoids the costs and risks of the intermediate step, which includes obsolescence of an immature customer interface. Under EWPC a plurality of retailer business models will compete with each other to develop the resources of the demand side.

Competition is divided in two stages: 1) market vs. market; 2) company vs. company.

The generative dialogue is about cooperation in the first stage to select and develop the wining market. Once a general market is selected, a system architect will coordinate the detailed market design and architecture in close cooperation with the system engineer institution and the integrated T&D transport company. Fred Schweppe imposed no restriction on time intervals; he used one hour, but was open to other intervals; they should be the result of standardization.

“So, how do we get the physical system installed?” In the second stage retailers develop their business models to compete with other retailers to serve the customers.

January, 05 2007

Jose Antonio Vanderhorst-Silverio says

Comments are invited under the generative dialogue about Demand Response Under EWPC , where I said, among other things, that "... the parallel discussion with Fred Banks, Len Gould, Arvid Hallén, and James Carson, seems to have ended in favor of my suggestion of the emergent conceptual architecture and design of Market 3, electricity without price controls for the customers (EWPC) approach."

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