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POWER ENGINEERS SUPPORTING TRUTH
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How to Have a Good National Energy Policy By Jack Casazza Presented in El Salvador October 5, 2004
The Problems of the Electric Power Industry In the last 15 years, the electric power industry has been restructured world wide. Problems have occurred world wide. A summary of these problems provides background for my suggestions: Ø Costs to consumers became higher o Failure to produce promised savings Ø Reliability worse o More major, longer lasting, blackouts Ø An increase in control by economists, lawyers, bankers and politicians Ø Ordinary economic principles do not work with electricity Ø Introduction of market mechanisms that did not minimize costs Ø Major conflicts between profits and reliability Ø Actions by one competitor in synchronous net work affected the operation of all others in the network Types of Restructuring Three types of restructuring have occurred world wide: Ø Privatization o The selling of the existing power systems by the government to investors, often from foreign countries. These investors generally required a much higher rate of return on their investment than with previous government ownership. Sales of facilities were intended to provide funds to meet other government needs and to attract outside investment. o In a few cases cooperatives were formed in which the owners of the system were consumers supplied by the system. These were financed by low interest. Ø New Competitive Mechanisms o These involved separating the various system functional elements, e.g., generation, transmission, and distribution, and establishing competition between the various power suppliers. Ø New Regulatory Mechanisms o A small organization to monitor the functionary of the new competitive market was foreseen, with a significant reduction in past regulatory requirements. Not all types of restructuring have occurred in all countries. In making comparisons between countries of electricity costs one must be careful to analyze what types of restructuring was involved and what the basic costs are, particularly taxes, government subsidies and price controls. Principals for a Restructured Electric Power Industry The goal of electric power policy should be the overall welfare of the nation. The national economy is dependent on its electric power supply. When the nation benefits all consumers large and small benefit. Unfortunately the objective of restructuring for many involved has become the development of large profits for their companies. I am not opposed to making money, but we all need to recognize that what harms the nation will, in the long run, harm all. Because of its concern, the IEEE-USA has recently adopted a set of principles to guide future government and business decisions. While not all of these may be directly applicable in El Salvador and Central America, they may provide a basis for the future policies: IEEE-USA believes policymakers considering decisions on electric industry restructuring must consider certain fundamental principles to protect the public interest, and to maximize societal benefit. These principles should apply regardless of the regulatory regime that is ultimately adopted. IEEE-USA offers the following principles as guidance for policymakers:
The Effects of RestructuringAs a result of restructuring the driving force behind management decisions became the company’s profits, not system optimization. Prior to restructuring, the objective of the managers was the coordinated development of the system and the provision of reliable service at minimum cost within existing financial capability. With restructuring the objective became maximization of immediate profits, since ownership changes could occur.This resulted in decreased coordination in development and operation of the generation transmission and distribution systems as required by Principle No. 3 above. Each supplier was concerned about his own profits and not the effects of his decisions on the total system. Electricity pricing became very volatile at times of power shortages, rising to levels as much as 50 times prior levels for bulk power supplies. In the USA, and some other countries, procedures became common for artificially causing shortages of generation and transmission capability. In some cases, records were falsified by company executives to increase their annual bonuses. Payments to all bidders to supply electricity in the hourly competitive markets were based, not on the bid that they had made, but on the highest bid that was accepted for each hour. This resulted in significant cost increases since in many cases a supplier was paid considerably more than this bid. It also led to strong incentives to decrease the available power supply since this would increase the price of the highest accepted bid. This was done by declaring units not able to run when this was not the case or falsely creating transmission constraints limiting the ability of competitors to deliver power to an area. Individuals, in many cases engineers, were aware of these developments and the potential for harm to the general public. They were in a difficult position, facing a conflict between their obligations to their employer and their professional obligation to the public. Some who tried to object were demoted or had their salary reduced. Others who cooperated in the bid rigging, or did not disclose it, received large salaries and promotions. Some government studies claim large savings from restructuring. Many other studies in many countries have shown that large cost increases have resulted. The typical reason for the differences is that the studies claiming savings do not recognize prior savings that were being made by coordination between systems and coordination between generation, transmission, and distribution system development and operation. Why Did Bad Things Happen? Users of electricity have little understanding of complex electric power systems and the electric power business. They pay attention only to the bill they pay each month and how often the power is interrupted. The first obvious question is did government policy help cause these bad results? In my view, the answer for the USA is yes, for the following reasons: Ø Decline in role of engineering profession Ø Lack of technical expertise in the government and company board of directors o Boards don’t know questions to ask o Lawyers, economists, setting technical policy Ø Failure to transfer technical knowledge from past to present Ø Dominance of “profits now” approach o Severe reductions in personnel, training and maintenance Ø Anything done anywhere in synchronous grid affects all else in the grid Ø Electricity flows in system based on laws of physics, not contracts or regulations Blackouts Because it resulted in huge economic damage in the northeastern part of the United States in excess of $5 billion, some discussion of the August 14, 2003 blackout, and the many blackouts in other countries, is relevant. Some key questions are:
One recommendation in the official USA/Canada government report suggests the investigation of question 2, but it has not received any attention as of yet. Questions 1 and 3 have been ignored. In my opinion the USA government policy established the basic conditions that made the blackout inevitable. The stage was set by changing the industry emphasis from reliability to the maximization of profits. Over the last 40 years there also has been an increasing emphasis on public involvement in policy decisions in many areas, particularly those involving the environment, energy, and health. This has often been through participation in public hearings, formation of new organizations, political activities. All of these procedures involve the collection, review and analyses of information. While review of past data is essential, the ability to project future developments and consequences of alternative policies is the main objective. The results of this projection process have important commercial effects, altering the future profits of various companies, important political effects, frequently being important in determining future elections, and important effects on our society. This leads to the various commercial and political organizations developing and implementing campaigns to convince the public that their position is the best for society. In this process, public relations experts and lobbyists have become the medium through which various positions are argued. Unfortunately, those presenting the various arguments are essentially “hired guns” paid to achieve a result. Large funds are needed to support their activities that are provided by those with monetary resources. Almost every organization involved in technical activities from regulation to research establishes committee or board of a “stakeholders.” Stakeholders have financial, political, or personal power concerns. The assumption is that this procedure will lead to the consensus needed to develop good policies. This would be true if the stakeholders had the required technical and economic background and experience, and only if they provide a fair representation of the population their decisions affect. To date the stakeholder approach has failed to achieve the desired result: good policy for all those affected by it, whether consumers, stakeholders, employees, or the general public. Some Steps to Reduce Electricity Prices With an unbundled electric power industry having many different companies, each concerned about their own profits, techniques are evolving for achieving some of the economic benefits formerly achieved under a single vertically integrated management. One is the negotiation of “coordination contracts” under which one organization take actions that will increase its costs in order to achieve a greater cost reduction in another organization. In such cases the system increasing its costs is fully compensated for its increase plus receives a share of the overall net savings. An example would be the scheduling of over-time work to return a transmission line to service sooner benefiting a power producer. Another area worthy of attention is the reduction of system losses. Reduction in technical losses, i.e., IzR losses, through improved voltage conditions can achieve significant savings. So can reductions in “commercial losses”, i.e., energy used without payment. Experience has shown that “commercial losses” are significantly reduced with the cooperative form of ownership since consumers become concerned with the theft of energy since it affects the company they own and their cost.
Recommendations1. Develop a basic set of principles for a restructured electric power industry for government and business management. 2. Make thorough cost and benefit studies of proposed new policies and plans to insure the overall welfare of the nation. 3. Consider as a part of the privatization process alternate forms of ownership, including the formation of consumer owned cooperatives. 4. Lastly, and most importantly, engineers must play a larger role in setting government and company policies and in managing the various organizations. Remember: o Economists are concerned with prices; o Bankers are concerned with financial returns; o Lawyers are concerned with contracts, laws, regulations; and o Engineers are concerned with costs and reliability.
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