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Addressing Policy/Institutional Issues in Natural Gas and Electricity

Hand Writing Regulation
Alberto Ramirez Orquin's picture
Professor of Electrical Engineering, University of Puerto Rico at Mayaguez and co-founder of Resilient Grids, LLC. University of Puerto Rico at Mayaguez & Resilient Grids, LLC.

Dr. Alberto Ramirez Orquin is an energy expert with industrial experience encompassing a vast international utility engineering practice, including extensively the US and Canada; he held the...

  • Member since 2003
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  • Apr 26, 2005
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The compounding energy crunch, with soaring prices, is calling for a systematic improvement of all the relevant components of the processes involved. This has become an imperative, minding the competitiveness of the manufacturing/service sectors, the consumer, and ultimately society’s welfare. One field where not enough research has taken place is the one pertaining to the entities, governmental or not, having different roles to play in the matter. It is realistic to assume that the efficiency of the total energy matrix would increase substantially with a higher institutional quality, conceivably more than from technological breakthroughs. The implications here strongly suggest looking at the mission, ways and means associated to the institutions responsible for such critical areas as policy, regulation, reliability, system operation, etc; a sort of total quality assessment. Given the magnitude of the subject this brief essay intends to be just a tantalizing glimpse or at least a discussion promoter.

A possible definition for Energy Policy (EP)

Energy Policy (EP) may be defined as a concerted strategy, based on a set of instruments, designed to seek an optimal/harmonic development, production, delivery and use of energy from a societal perspective. Some of these instruments are regulatory, economic, environmental, technological, legal, etc. But EP appears to be within the context of general policy, not any more a mere subset of economics or public works, etc; today it is clearly a national security/defense matter. There is also a jurisdictional consideration since it is not only a federal concern; for the states must deal with energy policy as well (the California Energy Commission is a good example of this). Emerging macro regions or common markets may set higher level guidelines. In the US as in many other countries the energy policy has been a discipline under different Secretaries within government. The Department of Energy (DOE)/FERC are the natural offices of the Executive dealing with this topic; furthermore the appointed Cabinet-based National Energy Policy Development Group produced in May of 2001 the last major policy report on record; basically a diagnostic on the state of affairs plus a wishful roadmap to a better future in energy. Nonetheless an update of that document is overdue because of the significant changes that have happened since its release. In any event a quest for progress in this endeavor seems timely; perhaps embodied in an energy equivalent to what Alan Greenspan and his team are for monetary policy; which would certainly provide an adequate framework for total institutional quality, continuity and consistency in the mid/long runs.

NG and Electricity

Natural gas has become one of the most essential commodities, steadily replacing other forms of fossil gasolines, oils and coal/derivatives. The advent of very successful integrated systems, in particular cogeneration and combined-cycle technologies, is one of the main reasons for such a replacing trend. This preponderance will be exacerbated when producing hydrogen from NG matures as a technology for electricity generating sources, both fixed and mobile. Consequently electric power and NG are two products which comprise a critical synergy requiring considerable policy and regulatory attention. Moreover the physics of the electricity and natural gas systems are extremely different, posing a distinct analytical challenge. There are still a number of other complexities when dealing with these factors. From classical microeconomics, electric power and NG can be considered as substitute goods; indeed they are alternative resources for a vast number of applications. But, as previously stated, they can also be deemed as complements. This prompts a dilemma when trying to assess the pertinent markets, a must in order to define the extent and composition of such industries. The concept of product substitution, with attendant cross-elasticity, is key to the very marketplace essence, bearing in mind structure/conduct/performance, mainly as it relates to entry and monopoly seeking behavior. Therefore it is clear that both fields must be dealt with very comprehensively from any policy, operational or oversight standpoints.

Looking at Texas

As stated, jurisdictional considerations are important; in this regard Texas, one of the four independent subsystems in North America, and the top energy state of the Country, represents a relevant study case. The region is well known for the autonomic idiosyncrasy of its electricity industry. For the rest of the Nation the states regulate their retail structures leaving to FERC the interstate commerce regulation, which includes the macro grids. But Texas keeps its electrical network synchronously isolated to avoid the aforementioned regulation; in principle the flow through controllable interties (DC or FACTS devices) does not cause per se the federal incumbency. Similar criteria may apply to the fossil fuel pipelines.

There are parallels with other areas as well as dissymmetries; one peculiarity can be found on ERCOT, the Reliability Council of application that yet carries out the operation and control of the electrical system, managing also the commercial bilateral trading in a sort of mixed functionality. The utility commission, PUCT, devotes primarily to watch the Choice Program and Telecommunications at the retail level; its oversight upon ERCOT is not clear or even technically feasible, while T&D planning tasks lay in between the two organizations. The council/independent operator is left somewhat as a self-regulated monopoly, subject to a minor accountability; this may be problematic given the amount of discretion involved in the application of the intricate procedures in place; this is not unusual for the typical ISO/RTO in the US. Such an intricacy is in itself a barrier to entry or hurdle to open access.

On the other hand the fossil fuels, including natural gas, their assets and intrastate pipelines receive the oversight from the historical Railroad Commission; this institution generates also policy guidelines; the Senate Energy Commission is eventually the specialized Body in charge of devising the relatable legislation.

A valid question, however, arises regarding the effectiveness of the supervising function to deal with business segments of great complexity, having besides powerful firms constantly seeking maximum profits (nothing intrinsically wrong with that notion). Nevertheless these sophisticated players do hold wide-scope positions; possibly in addition to enjoying territorial regulated monopolies, or at least an ostensible dominance in both natural gas and electricity. Conversely the respective commissions must deal with these portfolios separately; therefore they would tend to miss the more subtle interdependences, mutual effects and correlations, leading potentially to substantial arbitrage opportunities for the holding companies. This phenomenon is bound to be used to exert composite market power and intertemporal gaming. The strategy may lead for instance to monopoly rents causing both hefty summer (electric) and winter (NG) prices in detriment of the consumer welfare/surplus. This is a scenario where the agencies are rendered with the distinct weakness of having a lower perspective of the problem under scrutiny, in addition to less information and comprehensiveness to cope with the primary task ratepayers expect from them.

In summary, it appears obvious that independent research is needed in order to reformulate and amend some of these structural/functional shortcomings, improving thus the overall efficiency of the energy industrial organization on behalf of society.

Alberto Ramirez Orquin's picture
Thank Alberto Ramirez for the Post!
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