Smart Grids: How Smart?

By Mark Sardella, PE, Writer, Local Energy News, April, 13, 2009 - President Obama's stimulus package, the American Recovery and Reinvestment Act, appropriates nearly $24 billion to modernize our country's electric power grid, including an $11 billion outlay to make it "smart". Those appropriations are stirring the hopes of renewable energy advocates, who foresee expanded opportunities for solar and wind technologies as well as a big, new role for plug-in electric and hybrid-electric vehicles. more...
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Energy Policies are Complex Energy Solutions Are Even More So -- The Pickens Plan --

By Andrew C. Givens, President, Cardinal Energy Service, Inc., March, 27, 2009 -

The energy market is extremely complex and crosses international boundaries. On the supply side there are many participants including sovereign nations that own and develop reserves; multinational integrated producers; regional and local fossil fuel developers, drillers, miners and producers; refiners and processors; transporters; local dealers and utilities. With regard to nuclear fuels there are issues about politics, the environment, and security as much as there is about fuel supply. Politics, weather, and public perceptions all impact the energy supply and price from each of these components. more...
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Even More Than Paris

By Roger Feldman, Counsel, Andrews Kurth LLP, October, 07, 2008 - With the Olympics over and the World Series just out of sight, it seems that the only circus for the American people to focus on--to keep their minds off the price of bread and oil--is the Presidential Campaign. Inevitably, pundits have begun to ululate about something called “energy,” and the “policy makers” have been pressed into the service of the image makers. Paris Hilton, who thinks both candidates’ energy policies together are what America needs, may this year have emerged as some sort of savant. Sober columnists have come to effectively agree with her, viz. the solemn pronouncement from Newsweek: “Judged by their rhetoric, you might think McCain and Obama differ dramatically. But their agendas overlap substantially.” Could be, in a nation where Boone Pickens is the Ralph Nader of the year, and where windmills have become both candidates’ symbol du jour. more...
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Competition vs. Regulation: Have We Achieved Conversational Clarity?

By Scott Hempling, Director, National Regulatory Research Institute, May, 14, 2008 - The "central, continuing responsibility of legislatures and regulatory commissions [is] finding the best possible mix of inevitably imperfect regulation and inevitably imperfect competition."

A. Kahn, The Economics of Regulation: Principles and Institutions, Vol. I, Introduction at xxxvii; Volume II at 114 (1970; 1988 edition).

This quote says it all. Resist either/or, expect imperfection, show curiosity continuously. Facts, intellect, integrity and humility, not ideology. These are the paths toward "the best possible mix."

To what end? Missing from Dr. Kahn's quote (but omnipresent in his ensuing 600 pages) is this answer: Competition and regulation share a common purpose—to align private behavior with the public interest. Effective competition induces competitors toward efficiency, customer service, and reliability. Effective regulation does the same. Together, they induce accountability—to the consumers, investors, and the public.

Do our market structure debates serve this purpose? Do we emulate Kahn's insistence on facts, intellect, integrity, humility, and the absence of ideology? This essay focuses on conversational clarity: How well do our words assist our aims?

Semantic Suboptimality: Three Examples

Ever get asked at a dinner party "What do you do?" (My mother still doesn't know.) Our answers often use words that confuse. That confusion affects our policymaking. Consider three examples.

"Deregulation": This term, to the experienced practitioner, means “competition is authorized.” But the term is hopelessly ambiguous because (a) "authorized" competition is not "effective" competition; (b) authorized competition, after a century of monopoly, still requires “regulation” for licensing, fraud prevention, access to bottleneck facilities, prevention of affiliate abuse, and assurance of last resort service; (c) the term literally could mean either "elimination" of regulation or "reduction" of regulation (e.g., the term "decelerate" means reduce speed, not eliminate all motion); and (d) if effected incorrectly, the result of “deregulation” is still "regulation," except that it is regulation of the market by the incumbent to protect its position, rather than regulation of the incumbent by the commission to protect consumers.

Proponents of "deregulation" intend the prefix "de " to replace a negative (regulation) with a positive (elimination of regulation). But the phrase cannily avoids accountability; for if they labeled their goal "effective competition" rather than "deregulation" they'd have to show evidence in place of rhetoric. The converse applies as well: critics of "deregulation" imply that "regulation" creates benefits, but they do not always identify (and guarantee) those benefits. In short, the bipolarity of the term "deregulation" makes discussions more stick figured than sophisticated.

"Competition works": I once shared a panel with someone who said, platitudinously, "competition works." How much ambiguity can two words hold? "Competition" in which geographic markets? Which product markets? For which consumer segments? During which time periods? "Works" when? Overnight? After years of investment by newcomers, during which time period incumbents enjoy "first mover advantage" without facing competitive pressure? "Works" how well? For whom? For the incumbent? For the newcomer? For some customers? For all customers? How does someone say "Competition works," without being "hooked" off the stage, Vaudeville style? Why does our community tolerate such mental muddiness?

"Market share": We often say "generation is competitive.” Competitiveness refers to a market. A market has a geographic component and a product component. "Generation" is not a market. "Generating capacity serving Maryland’s Eastern Shore on an August afternoon” is a market. A company can own generating units constituting 1 percent of the generating capacity in the PJM region (Ohio to Virginia), suggesting, to a layperson, no market power. But due to locational luck, those same generating units could constitute 90 percent of the capacity available to a transmission-constrained subregion on a hot afternoon. "Generation" is not a market.

Further, "market share" does not translate readily into "market influence.” The reason lies in the distinction between "market share" and "pivotality." Both are necessary to measure competitiveness. A company can have a small market share (say, 1 percent), yet in certain time periods be "pivotal." A pivotal supplier is an indispensable supplier—her supply is necessary to fill the demand at the time. If the total capacity in a market is 100 MW, and demand is 95 MW, then any supplier with more than 5 MW of capacity (a mere 5 percent of the total) is indispensable, because if she withdraws her supply then demand is not served. At the other end of the market share spectrum, a company can have a high market share (say, 75 percent), but if there are potential entrants poised at the perimeter, their entry threat can discipline even a monopolist. Facts matter.

The Stakes

At stake in our competition conversations are billions of investor and consumer dollars, as well as the reliability of our physical infrastructure. In the electric industry, the FERC and states struggle to determine the mix, in wholesale and retail markets. Their efforts intertwine. Wholesale markets need wholesale buyers; but there will not be wholesale buyers if states, distrusting wholesale markets, tell their utilities to build rather than buy. Effective wholesale competition requires efficient retail demand signals, but those signals remain blurred when retail prices reflect embedded cost rather than current production cost. Effective retail competition requires multiple, viable entrants with economic access to bottleneck facilities; active shoppers; and the absence of unearned incumbent advantages. But the politics of retail competition often demand deviations from these principles.

In the telecommunications industry, laden with a century of societal expectations, we struggle with this question: In the many markets for telecommunications services, when are competitive forces sufficiently vigorous and customer-responsive such that traditional policy purposes like "carrier of last resort," “universal service,” and intercarrier cooperation no longer require regulatory mandates?

A Sequence of Questions

In the three examples listed above, efforts at semantic simplicity yield words with multiple meanings. Confusion replaces comprehension. Finding the "best possible mix" is complicated. Our language should expose that complexity. Dinner guests will wish they'd never asked (happens to me all the time), but at least they'll understand why. Instead of opining on "competition vs. regulation," consider framing a sequence of questions:

1. Which geographic and product markets do we wish to discuss?

2. Is competition economically desirable, i.e., are economies of scale and scope sufficiently low that competition will not damage "static efficiency"? (See the work of Dr. John Kwoka of Northeastern University.) And if there is potential loss of "static efficiency," will this loss be offset by gains in "dynamic efficiency," as the rivals pressure each other? (Thanks to Dr. Kenneth Rose for his explanation of the difference between "static" and "dynamic" efficiency.)

3. Is competition technically feasible? Can the physical and communications networks accommodate the new traffic stimulated by competition?

Are consumers ready and willing to shop? Theories must confront practice. If consumers are too busy going to work, attending soccer games, and cooking meals to compare prices and offerings, competition will not work. more...
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Finding Middle Ground in our Energy Future

By Ben Cipiti, Researcher, Sandia National Laboratories, April, 18, 2008 - In the battle between climate change, energy policy, and capitalism the weakest voice at the table is that of the average person. While industrial lobbies have tremendous power in the government and while environmental organizations increasingly have more influence, somehow the voice of the average American has been missing from the discussion. But what does the majority of the population really want? Sure, we want to move toward clean energy, but we do not want to have to pay a tremendous amount for it? more...
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Lilliput Now

By Roger Feldman, Counsel, Andrews Kurth LLP, March, 31, 2008 - Gulliver got tied down because he was out of scale with the circumstances of Lilliput. More and more frequently we see headlines like “Thrust of Power Shortages Generating New Urgency” in several regions of the nation. Being tied down like Gulliver, as our power regulators are, seems like the inevitable consequence of being in a democracy with competing economic interest vying for favor. Is this inevitable, or is there a way to think ourselves out of this problem? more...
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Casablanca

By Roger Feldman, Counsel, Andrews Kurth LLP, March, 03, 2008 - Casablanca is really the ultimate movie about energy. Rick plays “As Time Goes By”; the markets, for good or ill, lurch along. So, too, do climate change regulation proposals. It is easy to believe, especially at this time of year when energy legislation shimmers like the Northern Lights, “Louis, I think this is the beginning of a beautiful friendship.” more...
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What does $100 per barrel oil mean for us?

By Tam Hunt, Director of Energy Programs, Community Environmental Council, February, 11, 2008 - On the first trading day of 2008, oil prices reached exactly $100 a barrel. Even adjusted for inflation, this is far higher than the highest prices reached in the 70s and early 80s. more...
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Congress Conjures Up an Energy Deficit

By Alan Caruba, CEO, The Caruba Organization, January, 28, 2008 - Let's understand a simple fact. You cannot squeeze any more energy out of a gallon of gasoline than already exists. If you mix it with an additive which itself provides less energy, what you get is less energy. more...
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A New Lecture on Electric Deregulation Failure

By Ferdinand E. Banks, Professor, , October, 24, 2007 - “At the mercy of forces that show no mercy”
-Former governor Gray Davis of California (about deregulation) more...
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