The birth of the Austrian school, that's my topic. The founding of the Austrian school was one of the greatest intellectual achievements in human history. And it was all undertaken by one man, Carl Menger. Carl Menger is the founder of the Austrian School of Economics. In fact, at some point Ludwig von Mises said that until 1881, when Menger began to find some students, there was no Austrian school. There was only Carl Menger. So he was the one who founded it. It was something new under the sun, as we'll see. So let me start just by directing your attention to the Marginalist Revolution. Marginalist Revolution was also a very, very interesting development because it was sort of the founding or the invention or discovery, rather, of the law of Marginal utility. And it was done independently by three different economists who were working independently of one another and who lived in different areas. So we had Carl Menger from Austria, William Stanley Jevins, who was British, and Leon Valras, who was a Swiss French. And Menger and Jevins wrote their books in 1871, and Valras, who was at the time not familiar with their books, or so he said, published his book in 1874. Now, Valras and Jevins were mathematical economists. They conceptualized Marginal utility, and utility is simply another word for satisfaction. They conceptualized utility, and we'll talk more about this, as quantities of satisfaction that could be added up, that could be compared between individuals. That was not Menger's approach. Carl Menger saw utility as the outcome of a judgment by human beings about how concrete goods, the bottle of water that I'm about to be drinking, the laptop that you have, concrete units of goods were judged as more or less important by individual human beings. So utility was not a mathematical concept to Menger, and that's extremely important. There were different terms were used. Menger himself did not apply a term to the concept. His student, Wieser, came up with the word Marginal utility, or the term Marginal utility. The final utility was the term used by Jevins, and Rarite was the term used by Valras. However, the term Marginal utility did find its way into common use among economists, and is the term that we use today. That's William Stanley Jevins, kind of a wise guy when he was younger, and then sort of a grandfatherly type as he got older. There's Leon Valras, kind of dark and diabolical. But then again, he turns into a grandfather, too. There's Menger, distinguished when he was younger, distinguished when he was older. Oh, that's a modern economist. But you'd say the same thing about him as you did about Menger. I can't believe I wore goggles when I was that age, but that was his style. Trust me on that. Okay, so the great historians of thought have gushed about Menger's, and rightly so, about his achievement. Okay, so we had Joseph Schumpeter saying that Menger was no one's pupil and what he created stands. Menger's theory of value, price, and distribution is the best we have up to now, 1926. And just so you know, Schumpeter was, even though he was an Austrian, he was more a follower of Valras, but he still gave testimony to how great Menger was. Ludwig von Mises, who was two generations after Karl Menger in the Austrian school, wrote what is known as the Austrian School of Economics started in 1871, when Karl Menger published a slender volume, okay, and it was called Principles of Economics. Until the end of the 70s, as I said before, there was no Austrian school that was only Karl Menger. And finally, Mises's student, Hayek, wrote that the Austrian school's fundamental ideas belong fully and wholly to Karl Menger. Okay, so Menger was the founder. And what he created, and he did create, I mean, there's one thing that human beings can create in this world. Okay, as the economist, J.B. Say, pointed out in 1802, human beings cannot create goods. Okay, they can transform elements of their environment so that they better satisfy wants, but they can't create something from nothing. However, ideas are something that human beings can't create. They are something new under the sun. And that was the case with Karl Menger. Okay, so let's talk a little bit about what economics looked like when Karl Menger began to write, or what Karl Menger published in his book. He began to write it a little bit earlier than 1871. There were the classical economists. Now, Ludwig von Mises liked the classical economists. They did a lot of good things, but they did have their flaws. So David Hume, Adam Smith, David Ricardo, they were the main classical economists you might want to add in John Stuart Mill, who wrote later in the century, but he was a much weaker thinker than these three. Okay, and he turned towards socialism under the influence of his wife Harriet. Okay, let me just say a few things about the classical school. They faced a problem that they could not solve. What they did was they focused on goods, when they dealt with goods, as classes so that they talked about diamonds, water, coal, bread, in general. Not as they related to human beings at a given time in history with given wants and given resources at their disposal, which is what Menger did.  And that problem was the paradox of value. And they went wrong in trying to solve this paradox. Because they gave this paradox a wrong answer, their value theory was flawed. And this is what ultimately undermined the classical school. So they looked at diamonds and they said, hmm, there's a paradox there. Diamonds are very expensive. Okay, a carat of diamonds costs much more or had a much higher price than, let's say, a pound of bread. But on the other hand, bread was much more useful to human beings. Okay, without bread, and again, in classes if there's no bread in the world, whoever chooses between all the bread in the world. I mean, this is Menger's great insight, no one does. But without bread, human beings would not be able to subsist. Because that was a staple in England, bread. On the other hand, diamonds were simply a mere frippery. They were for ostentation, for conspicuous consumption. We could do without them and not be worse off as human beings. We could certainly go on living. So that was the paradox. Now how did they solve that paradox? What they did was to, and here's an example of the paradox. That diamond, which is a graph pink, was at the time in 2010 the most expensive diamond ever sold at auction. And you can begin to see the problem there, right? Because the classical school believed that the cost of production was what determined the price of a good. So this is how they tried to solve the paradox of value. They said, look, there's two kinds of values for goods. There's a subjective use value, the satisfaction that human beings get from consuming the good, and then there's an objective exchange value, which was the price of the good on the market. So what they said was, well, we don't really have much to say as economists about subjective use value. Yes, yes, there has to be subjective use value if something is to be a good, but that's all we're going to say about it. So they just forgot about it. And they focused on building a system of economic theory around the exchange value, trying to explain prices of goods and services. And their explanation was a cost of production explanation. So Adam Smith used money costs of production. David Ricardo used an even simpler theory which was picked up by Marx, and that is the number of labor hours. So if, for example, an HDTV had 20 times the number of labor hours as, let's say, a tablet computer, then the HDTV would be 20 times as expensive. But they confronted another problem. The problem was, things like HDTVs, articles of clothing, coal, and so on, those all can be reproduced. And in some sense, you can explain the prices by the costs. Though those costs were backward-looking. On the other hand, what about something like this diamond? We don't know when it was found. No one knows what the cost of this diamond was. Or what about things like the handwritten lyrics to I Am the Walrus by John Lennon which sold for over $100,000 at auction? How much did that cost John Lennon to write those lyrics? Or what about a painting by an old master who is now dead or any artist that has passed away? The price of those paintings typically had nothing to do with the cost of production. Classically, economists weren't dumb. They recognized this problem. They said, well, okay, there's two kinds of goods. So one kind of the reproducible goods, the clothing, the McDonald's, hamburgers, and so on, these things have their prices explained by cost of production. Prices depend on the cost of production. Other things like antiques, collectibles, handwritten lyrics, and so on, those things are scarcity goods. So that's explained simply by supply and demand. Now they did believe in supply and demand. This is one of the reasons why Menger liked them. In the short run, they did believe that the supply and demand for good determines its value. So therefore, for example, that if the demand for hybrid cars went up, goes up, then you have an increase in the price of those hybrid cars, and they went even further, they had a good theory of how prices regulate production. They did not think prices were arbitrary. So Menger also liked these two things about them, the fact that they did focus on supply and demand, at least in the short run, and at least for goods that could not be reproduced, and that in the long run, my other point, which is now slipping away, that prices did regulate production. For example, take the example of an increase in the price of oil in 2010, when price of oil shot up, the fracking technology became commercially viable. So in response to the increase in price, there was an increase in the supply or output of oil and gas, and resources then shifted into those areas. So they did believe that supply and demand controlled things in the short run. But in the long run, everything tended toward the cost of production. Since there were high prices, let's say in fracking technology, more people got into fracking technology. We had more oil, with the greater supply of oil, prices fell, and the price fell to near the average cost, which then wiped out profits. So this was the theory of the classical economists. So there were a number of problems with that theory. So this is what I just went over. There was certainly wrong about this. That was your explanation. This is what I just mentioned about how prices regulate production, and these will be up, and you can go through them. But any increase in demand for anything raises the price in the short run above the average cost. That brings about a profit, and that raises the profit above normal, brings new people in, draws new entrepreneurs in, and that pushes prices down. So when the Apple iPad was introduced, there was introduced a high price, high profits, and soon the tablet computer market exploded. So all of this stuff was good, at least from Enger's point of view. But the paradox of value was the real problem. Now, before I get to Enger's purpose, it's important to point out that the classical economists believe that value was inherent in a good. So that when you had a price of a good and its cost, that that cost was determined by the production process, by what happened before the good reached the market, not by the consumers, not by the judgments of the consumers, but by the laborers in some sense sweating into the good, how much sweat was put into the good. That's the cost of the good. But as I pointed out before, certainly we don't know, or certainly from the point of view of an individual, if a diamond is picked up on a beach, or a diamond takes a lot of effort to find and to mine, those two diamonds, if in the eyes of the consumer, in quality, well, then those two diamonds are equal in value. So Enger's point was that value was forward-looking. Once the good came onto the market, you had individuals assessing those goods and how important they were for their own ends. So value was not inherent in a good. Value was imputed to a good by human beings who were deciding on how useful those goods were in achieving their own welfare. Okay, so in the preface of his book, Menger wrote the following. He said, I have devoted special attention to the investigation, and note the words that I have in red here. Causal connections between economic phenomena involving products and the corresponding agents of production. Not only for the purpose of establishing a price theory based on reality and placing all price phenomena together under one unified point of view, but also because of the important insights we thereby gained into many other economic processes, which were, before then, completely misunderstood. So he wanted to explain the value of all goods, not just consumer goods, but also labor, land, capital goods. He wanted to all explain it by one principle. So that was his intent. And you can see that what he did was to start a tradition, and we call it the causal realist tradition. He wanted to explain the cause of prices in the real world. So his price theory, Austrian price theory, is causal realist price theory. It's the investigation of the causes of real prices and wages that are actually paid on the market. We want to know what explains the prices that are right now being paid, for example, at Walmart. Why are those prices being paid? This is what Menger aimed at explaining and all of his followers have kept to this tradition. It's very important. Now, in writing some notes to himself before he wrote his book, he came up with this idea that human beings were at the center of all economic activity. He was a journalist. He was a financial journalist. So he saw that prices were changing on financial markets, not only from day to day, but sometimes from minute to minute. And that certainly wasn't something that the classical economists could explain with their course of production theory. So he began to make notes to himself. And one was man himself is the beginning and the end of every economy. So the economy begins with people's wants and ends with people satisfying those wants through their economic activities. And I'll give you a little diagram of how that occurs. He also wrote, our science is the theory of human beings' ability to deal with their wants. So now what he's doing, he's putting consumers at the center of economic activity. The classical school, because they had sort of pushed the side subjective use value, put the business decision maker, the businessman, at the center of economic activity. Okay, so what the classical school focused on was buying your factors of production, your resources cheap, and producing a good that you could sell at a higher price. So they focused on the decision making of the businessman. Now that's important, but that doesn't tell the complete story. Because why is the thing that the businessman has transformed his resources into? Why is that electric car or hybrid car? Why does that have a high price? A price that's higher than its costs? You have to go to the consumer to be able to explain that phenomenon. So here is the diagram. And Menger wrote out these three trinities of causation. So if you'll know, we start with ends, human ends, human ends inspire people, induce people to look around for means to satisfy those ends. So someone is cold and wants shelter from the elements. So let's say Robinson Crusoe, he's going to look around this island and see what is useful or what can be used to build some sort of a shelter. So human ends then bring about the notion of means. How can I satisfy these ends? Once the means have been arranged and transformed into something that can directly satisfy those ends, the ends are realized. So the means cause the realization of the ends. And so you see that arrow goes back. So causation goes two ways. All activity is caused by the ends, but then when you achieve those ends, that satisfies your wants. The second one you begin with, these again are Manger's words, you begin with man in a generic sense. That brings about an investigation of the external world for things that can satisfy the man's wants, that can keep the man alive. So then the subsistence is what causes the man to be able to live and satisfy his wants. So man causes the creation of subsistence, but the subsistence then causes the life in this case to go on. And finally, wants, goods, and satisfaction, that's the same sort of trinity. Wants cause the search for goods, the production of goods, and once you have the goods, the goods themselves cause the satisfaction of the wants. And this is interesting, because it's taken from... Manger was a bibliophile, had one of the biggest economics libraries in all of Europe, and he certainly read the French liberal economists, he referred to them in his writings. And one of the chapters in Frederick Bastiat, the great laissez-faire economist from the mid-19th century, reads wants, efforts, and satisfaction, which is exactly the trinity of causality that Manger put in his notes. Wants bring about human efforts to satisfy those wants. Once you have the goods available then, you can directly satisfy those wants. And that was Bastiat's point. Now, Manger looked very carefully at goods.  You could dig a ditch and fill it in, or you could build a huge structure that was ugly and no one liked and no firm wanted to rent space in. So no matter how much time, effort, and resources it cost to build this huge skyscraper that no one wanted to rent in, that would not be a good. So Manger said there has to be a human need. And he used the word need synonymously with the word want. He didn't mean necessarily biological need. He said the thing is capable of being brought into causal connection with the satisfaction of the need. So you have to have the need. So let's say your need is that for food. You're hungry. What thing might be brought into causal connection with satisfying that need? Well, let's say a meal at Chipotle. So you have the means. You can control those means. If you have the money available you can purchase a meal at Chipotle. Human knowledge of the causal connection you have to know that a meal at Chipotle will satisfy your hunger. That there's a causal connection between that meal and your hunger. And finally you have to have command of the thing sufficient to direct it to the satisfaction of the need. So in this case if you have the money available then you can have command of the thing. Now there's a mistake there that Manger made and it was later on until the 1930s corrected by Ludwig von Mises. Mises, and this was in Manger but Manger wasn't aware of it as much as Mises was. Mises understood that in the real world there's imperfect knowledge and uncertainty. We don't always know what things will satisfy our needs. So Mises combined two and three or actually crossed them out and replaced them with another proposition. He said really it's the belief that a thing has the capacity to cause the satisfaction of a human need. And Mises of course is right if you look at things like a psychic if someone has a need to get in touch with a dead relative they go to a psychic. They don't have knowledge that this is actually will satisfy that need, right? They have a belief that it will. They may very well be wrong about all of this. Someone wants knowledge and knowledgeable commentary about the real world about what's going on in the world. So they buy the New York Times. Again, certainly the human knowledge of the causal connection is not there. There's a belief that it will do that. Now Manger actually recognized this and he said well there are these goods because he saw that psychics for example did get paid or people who sold quack medicines did sell the medicine at a price but he called them imaginary goods. So Manger actually recognized that but he put them into another class. So for Manger then if you start with wants then that means that you have dissatisfaction, right? That you're not satisfied. That the things around you aren't immediately fulfilling your wants. So Manger pointed out that there's scarcity and as a result of scarcity there has to be choice, okay? You have to rank some things higher than other things. You have to decide how to use the scarce things that are around you. And then in order to do that you have to rank your wants according to which one is more important which is less important. And that brings us to the concept of economizing. So in classical economics you had what was called the economic man. The person who operated on markets as a businessman who bought in markets where things were cheap and then sold the markets where things were more expensive to earn a profit. Manger broadened that to human beings faced with scarcity who then ranked their wants and economized those things. That is when you say you economize what we mean is that you use things or resources or goods for only those wants that are most important to you. So Manger had a concept of economic goods so if I can go back on this which I may be able to Manger pointed out that some of the things that fulfill a human need things like the sun, a sunny day or the air in this room those things are not scarce. Goods, Manger said, they're free goods but they're not scarce. All of the conditions have to be present for something to be a scarce good. Once you admit into your system that most goods are scarce that's when you have economics. That's when you have the need to economize. So instead of being an economic man someone who's controlled by economic motives someone who's controlled by the need to earn a profit you have someone who is acting the economizing man. So economizing is a verb. Economizing is something that someone does in reaction to the all pervasive state of scarcity that we as human beings find ourselves in. What's interesting here you might note that let's say you want to go to a baseball game and to go to a baseball game you need a sunny day. Well certainly the sun fulfills the human need there is a belief that there is a causal relation between the sun and a pleasant experience at the baseball game but the sun isn't a good. Why isn't the sun a good? The sun isn't a good because you can't command it. We don't have the technology yet available to produce a sunny day to get rid of the clouds. So even though the sun is extremely useful to human beings we're going to come back to this point it's not a good. And air is not a good even though it fulfills some of these because as we'll see in a few minutes it's not scarce, air is not scarce in a normal situation. So for menger the value of a good is determined by its marginal utility and that has a very specific meaning. Remember utility means nothing more than satisfaction. So it's the satisfaction from the least important or lowest ranked and served by the available supply of the good. So I'm going to give you the abstract definition which you might not catch on to right away. Then I'll go through an example. And the law of marginal utility is the next proposition that's listed there. As the supply of a good possessed by an individual increases its marginal utility and therefore its value decreases. Right now, how did menger arrive at those propositions? Menger asked some very probing questions. He was very good at solving economic problems by first posing a question. So he came up with this example and then asked the question. In this example you have a fictional Robinson Crusoe who is stranded on an island without any resources at his disposal but what exists on the island itself. So he has no capital goods. He just has his human energy and natural resources. And he has a lot of wants. Well, let's say that this island is arable. He can grow wheat on this island and there are the means there that will permit him to grow the wheat but he can only grow so much wheat. Wheat is scarce. It's scarce good. It doesn't grow wild. It doesn't grow in overabundance. So let's say that menger ranks his wants. Because he can grow let's say five sacks of wheat each harvest. And so the most important to him is the first end which is to sustain his life. The second is to have a second sack of wheat that's enough to give him vitality to allow him to be more active and satisfy other wants. Then the third sack he would devote to using it as seed for the next year's harvest so that he can live another year. The fourth he might use to vary his diet. Let's say there's wild goats on the island. He can domesticate them, feed them and get butter, milk, cheese and goat meat and so on. And finally well, he used whiskey. He also wants a beverage. I like vodka so I put vodka in there. So menger then asks a question. What is the value of a sack of wheat? Because remember, Austrians don't focus on classes of goods. We don't focus on all the wheat. We focus on units of goods that we have to choose between. So he asks the question, what is the value of wheat? Is the value of wheat the satisfaction that you get from sustaining your life? Is it from some average of all five ends you sort of try to add them up which obviously you can't do. You can't add the utility from these five ends. You can only rank them. So notice it's first, second, third, fourth, fifth. I did not put cardinal numbers there. I didn't say that the bread to sustain life would give you 100 eutles and bread to sustain health would give you 50 eutles. Eutles is sometimes if you had economics used as the unit to measure utility.  And there is no definition of a eutle. It's not extensive time and space. It's an intensive internal magnitude or even just a quality. So here's the question Mengar asked to solve that problem of what is the value of one sack of wheat. He said to himself or he said to his readers, what would happen if let's say some vermin break into the shelter where we had the wheat stored and let's say it consumed the bag or the sack that was earmarked for the second highest ranked end. That is bread to sustain his health. What would Mengar as an economizing man do? Well you can see the answer right away. Would he go without the bread to sustain his health? Of course not. He would rearrange his resources so that he was economizing them so that he was achieving only the highest ranked ends that he could with that supply of the good. So he would give up making vodka. It would be a terrible thing, but he'd give it up. And that's true of no matter which sack he lost. So the marginal utility is the relevant. When you see marginal it's the relevant. It's the unit that you're considering. So the relevant utility in utilities in other words for satisfaction. The relevant satisfaction of a sack of wheat is simply the satisfaction from consuming the vodka. That is what he values the sack of wheat at. No matter which one it is that's the value. Now what would happen to the value if he lost that first sack? Okay, now he only has four sacks left. Well that's the law of modern utility. As you increase the supply of a good that an individual possesses the margin utility of the good falls and so does its value. And of course that holds in reverse. As you decrease the supply of a good that an individual possesses the margin utility rises. That is the least satisfaction that you can achieve with that supply increases and so does the value. So wheat is now more valuable to Robinson Crusoe. On the other hand if he found that he could with fertilizer get a sixth sack of wheat then he would feed a parent which has a lower value than consuming the vodka and therefore the value and the margin utility of the good would fall. Or rather the margin utility which controls the value would fall. Let me give you a quiz. Let's say there's a farmer who has different goods that satisfy different ends are not interchangeable like we're assuming the wheat was all interchangeable. There were identical sacks and this is how he ranks the uses that he can put these two animals to. So the horse can be used. Most important then is to use the horse for plowing wheat. Second most important is to add the second horse to the team and make him more productive in producing wheat. The third end is to have milk. So one cow can give him milk and then the fourth is to have beef. So a second cow would be used for beef and he has a supply of two cows and then the third horse would be used for recreational riding. So we can ask Manger's question what if the barn is burning and you can save four of the five animals. What's a lower valued animal? So the horse is going to be a lower valued animal. You don't look at the higher end of the value scale. What you do look at is the relevant satisfaction. It must be given up. So looking at that value scale as it is, we call it a value scale, a ranking of values, we would say with those animals that the cow has a higher value than the horse. Right now the cow has a higher value than the horse. Once the horse is lost in that fire what happens? Now the margin utility of beef is lower than the margin utility of the second horse that increases productivity. So now the horse becomes the higher valued animal. But Manger went beyond that. He came up with another notion that helps us explain pricing in the whole economy. By the way of course. So then how did Manger solve the paradox of value? Manger solved the paradox of value very simply by pointing out that we value diamonds in units just as we do any other good. We value bread in units. Let's say it's the water it was called the water diamond paradox, but let's use bread, the bread diamond paradox. In a normal situation there's much more many more pounds of bread in the world than there are carrots of diamonds. So diamonds may be ranked very may have a much higher price than bread. But ask yourself if you're in the desert and you've been there for three days and you're on the point of dying of thirst and you had that pink diamond, that $46 million pink diamond in your pocket and someone came up to you with a gallon of water which would need to stay alive would you trade the pink diamond for the gallon of water? Yes, of course you would. The reason being that the relevant unit of water since you have none, it's extremely scarce the relevant unit of water is higher in value than the relevant diamond. You're going to choose the water over the diamond. So in that situation the water has a higher value. In a normal situation the water is much more abundant than diamonds so even though water might be very, very high on your value scale, on almost everyone's value scale water has a much lower value than diamonds because it serves much lower ranked ends and that's why, as I mentioned before, air has no value to us in a normal situation. So because if we lost one cubic foot of air from this room no one would notice it. It wouldn't on anyone's satisfaction. However, if someone's going to the moon or if someone is a deep sea diver or someone has emphysema and it's a day where like a normal day in Los Angeles with a lot of smog then you would pay to purchase a supply of air. So it all depends on the situation of the individual, his values, his means and so on. So the concrete situation. Menger always used the word concrete to refer to real situations. So let's go on to the orders of goods I have a few more minutes here Menger said that there are steps in producing consumer goods. We have to progressively transform certain elements beginning with land and labor into what we later call capital goods and then finally transform them into the good that we consume. So he called the higher order goods those goods that were further away from the consumers, those that were less ready for consumption and would take more time such as iron ore mining, steel production all those higher order goods and the lower order goods were those goods that were closer to consumers. The final order good was of course the consumer good to deal at the dealer. And what's important about this is that Menger realized and was able to show just why the cost of production theory of the classical economist was wrong. And what he pointed out is that value was imputed backwards. People don't value the automobile because it costs a lot to dig iron out of the ground in the sometime in the past no one cares about that. You go into an automobile, you don't think about wow, the guy who was working on that steel it was a hard job and there was a lot of resources involved. No one thinks about that. What they think about is how does this car improve my welfare compared to other things I could purchase with this sum of money. That's what you think about. Your always value is a forward looking phenomenon not a backward looking phenomenon. And here's a little diagram of that. Notice that production goes in one direction. It goes from the higher order goods to the lower order goods from the farm tools to the wheat to the flour which is the wheat's ground into flour and flour is then baked in the bread and bread is then transported to the supermarket and then you purchase it. But notice value goes the other way. So consumers don't value the bread because it costs some money to produce the bread. In fact the consumers don't value the loaf of bread at all. What consumers actually value and this wasn't Manger who saw this but his student Bombaverk pointed out that what we value are the services from the bread. We value what we expect our satisfaction to be when we actually eat the bread in the form of a sandwich let's say. So with a one time good like bread that you consume right away that might be a little difficult to understand. But you value the car that's sitting in your driveway not because you like the car itself not because you attach a value to the car directly but because you attach a value to the transportation services or the showing off services if it's a really cool car that you get from owning that car and then you impute that back to the car itself. So all that stream of satisfaction into the future is the basis of the value of the automobile itself. And then all the way up things go back the only reason why the steel and the electricity and the factory space are valuable is because the car that they produce is valuable. So Manger used a very good example he said what if people stop smoking cigarettes they suddenly believe that they're bad for your health and they stop smoking cigarettes all together. What would happen to the value of the cigarettes? Well, they would fall to zero but not only the value of cigarettes the value of cigarette rolling machines would fall to zero the value of the premises if it couldn't be used for anything else on which the cigarettes were produced would fall to zero and most importantly the value of land would fall let's say the land could only produce tobacco leaves that would fall to zero. The classical school could never explain why land had a price. So they said well land's a monopoly there's not enough land in the world everybody can't have it so the people that have it are monopolists and they charge a monopoly price. Manger showed no no it's the consumers that determine the value of land. Let me just tell you one more story before I end. So a few nights ago I saw the movie Witness again I like that movie quite a bit it's about the Pennsylvania Dutch Harrison Ford stars in it it's kind of a police thriller takes place in southeast in Pennsylvania where there are Amish and there's a scene in the movie where he's in hiding Harrison Ford from people that want to kill him and he's living among the Amish and he can't find the buttons on his shirt and she says well we're plain people we don't wear any sort of adornments and in fact we just have eyes and hooks just little loops and a little metal piece that we put in we don't even want buttons so if everyone had adopted the values let's say of the Amish let's say everybody in the United States did what would happen to the value of diamonds not only do they not have buttons obviously they don't have any jewelry value of diamonds is 4 to 0 despite how much it cost to mine diamonds what would happen to the value of or the wages or salaries of the very specialized gem appraisers well suddenly no one would pay anything for a gem appraiser and of course what would happen to the value of diamond mines 4 to 0 so what Menger has done to sum up is to explain how prices are determined throughout the economy in all orders of goods starting with human beings at the center okay and through the notion of causation that the wants cause all of this phenomenon everything you see around us if you go to New York City and see the skyline all of those things were built were constructed because of human wants okay and they in turn then satisfy the human wants so that was Menger's vision and I'll stop there thank you


It's my pleasure to introduce Dr. Fergal McNamara. Fergal is currently the coordinator for electricity distribution system operators at Eurelectric. It's around about 2,500 DSOs. He's seeking to represent their views in public affairs matters in the European Union before that many of us would have known Fergal as senior energy advisor at the Department of Communications Energy and Natural Resources. But he's been, I think, in all about a quarter of a century in the area of, yes, it is a quarter of a century. The design and regulation of electric power markets. It's a nice sort of body of experience there. I'm the head of capacity market design at the British Department of Energy and Climate Change, group regulation manager at the ESB, the first secretary general of the Electricity Association of Ireland. So as his title indicates, he's going to give us a perspective from the electricity industry on last November's clean energy for all Europeans, the package of legislative instruments and regulations and so on, which amount he tells me because he sleeps with them under his pillow. 4,000 pages. Thank you very much, Owen. Thank you for that very kind introduction. It's great to be here at the Institute. I've been coming here for many years, in fact from when I was first founded in 1994. I've been a regular here for a very long time and it's always great to be back here and see many former colleagues and old friends. So thank you all for coming to hear me this afternoon. And I'll tell you what I'm going to cover. I'm going to outline the commission's proposals of last November, the clean energy package for all Europeans. I'm going to speak a little bit about where it is, the process, the co-decision process and how it's getting on and what are the prospects like, what are the timetables. And then I'm going to try to give you the views of the electricity industry on some parts of it. Clearly it's a huge package and the industry is very broad. And I'm going to whiz around the various instruments and regulations and give you as best a summary as I can of what's in it and what we think of it. And I'm especially going to do that on behalf of the distribution system operators of Europe. And the distribution, I'll say DSO from now on, the DSOs are the smaller last mile electricity distribution wires companies. That's who they are. So first of all, who is your electric? Who is it here this afternoon speaking to you? Well, your electric is the trade association for the electricity industry in Europe. It's been around for more than 20 years and before that it had another name. So it's a really long standing organization. It's got about 3,500 of the electricity former utilities, if you like, from all the member states, including OECD Europe. Of those 3,500, about two and a half thousands are the DSOs, my constituency basically. You'll see that we have about, collectively, the industry has about 200 million customers, or half a trillion of turnover and some of the production stats, you can see them there, 1,100 gigawatts of power production with 3,500 terawatt hours produced annually. So that is your electric. That is who we are. What do we do? We have sort of three priorities. The one that we're really proud of is the declaration made by all the chief executive officers of the utilities to work towards an industry that's carbon free by 2050. We had a declaration on that in 2009, which seems like quite a long time ago, but it was a really courageous and interesting declaration and you'll remember that COP was in Copenhagen that year and it was around about that time that the CEOs made that declaration. Other things we're working on is ensuring that there's a cost efficient energy market or in the eternal energy market for electricity across Europe and developing an efficient approach to electrification of the demand side, what would a view, of course, to mitigating the climate change? They're the things we stand for. At the moment, we're working towards these six presidential priorities and I won't read them all off for you. The one that I did want to highlight for you is the DSOs, my constituency again, and I'll be speaking a little bit about this as we go on, but the DSOs have been now catapulted to the center of the energy transition and one of the priorities that we have in our work is to ensure that their role is recognized and indeed to help them in whatever policy and legislative matters they need at European level so that their role can be recognized and they can step up to it. So I suppose I'm here in the institute and the transition that's going on to the low carbon society is well known to all of you and I just wanted to pick out a few little bits of it to set the scene for the role of the DSO here and the first one I wanted to mention really was the decoupling of economic growth and electricity consumption. So that's the first chart I'm showing you there. The energy intensity is clearly falling right across the EU. So you can continue to use more electricity and not have to pay a price in economic growth terms and I think better than that, I'm showing you the growth terms also. So energy intensity is going down and economic growth is going up. So they've got that scissors effect and that's a virtuous one. The other one below it is just a stats on the decline of the CO2 emissions from the energy sector and you'll see that since 1990 it's already collapsed by about 35%. And I'm told the equivalent figures for Ireland are a collapse from 900 to 400 which is about 50% over the same time period. So Ireland's a little bit faster than Europe as a whole on that. And quite interestingly if you look at where we are today the embedded cost, the embedded quantity of CO2 in the electricity production system is less than half now. So we're already 56% decarbonized on average across Europe which is an amazing story really. And to adapt electric vehicles is a very useful proposition and to decarbonize the transportation sector by including more electrification of transport is a virtuous thing to do. And you'll see some of the numbers there. One kilometer is costing 50 grammes of CO2 which is at least half, at least half of what the modern internal combustion engine can do. On the next one I just wanted to point out was a little bit of an adverse story here is the increase in prices that people are seeing. And I'm showing you price trends from 2008 average basis to households. And one piece is holding steady which is the energy costs. The energy costs are by and large not changing. The network costs are increasing. My constituency are increasing. A lot of that is due to the fact that they're having to interconnect a lot of distributed energy resources and more wires are needed to do that and the costs are clearly rising. That's part of the cost of the transition. It's offset of course by the benefits of the transition. But the one that I'm pointing out here to you is the increase in the taxes and levies which have gone up from 2008 to 2015 on an overall base of about 70%. It's still a small proportion of the overall bill in bill share terms is about 30%. But it is a story that's troublesome and is causing a lot of difficulty for a lot of customers. And customers are voters and in the names of the customer the energy transition has been affected so their support is clearly needed here. And if these charges are rising and rising and rising and they have no in public perception mitigating circumstances then we may give ourselves some trouble. So what we're really saying here is electricity should be one of the chosen zero emissions carriers for energy in the future. We think that the electricity sector at the moment is the last charts I'm showing you. Electricity sector in Europe is accounting for about 20, 25% of the primary energy requirement. The figures I'm showing you here are the global figures by the way. And electrifying heat and transport, heat is about 50% of the requirement. So electricity can play a huge role in electrifying heat and district heat pumps and other devices that will allow electricity to heat water and the space is great, half of the energy is coming from heat and about a quarter of the emissions. On the transport side the domestic transport accounts for about 10 to 15%. So there's a great story here about sector coupling about electricity entering into these areas. So that's really the energy transition and I was just going to play a very short little video that says all of that as well. Have you ever wondered what life would be like without electricity? Electricity does more than you think.  As the world transitions to cleaner forms of energy, the European power sector is making good progress to meet commitments to deliver carbon-neutral electricity by 2050. There are an increasing number of opportunities to reduce greenhouse gas emissions in key sectors of the economy. Electricity is set to become the key energy carrier for a decarbonised Europe. Replacing your car with an electric car eliminates tailpipe emissions and reduces air and noise pollution, giving us clean cities we all want to live in. To accelerate investment in electromobility, we need better charging infrastructure and stricter emission standards for conventional cars. Electricity provides great potential in buildings too. Choosing electricity-based heating and cooling systems over traditional fossil fuel-based technologies leads to greater efficiency, lower running costs and reduced greenhouse gas emissions. We can break out of the carbon-intensive cycle if the right incentives are in place. Electricity provides solution for a decarbonised European economy. More electricity is a winning strategy for Europe. More electricity means support for ambitious EU decarbonisation objectives and added value for Europe's most vital asset, its citizens. We believe Europe has a bright future, an electric future. So what I want to now talk about is the clean energy package and moving on to how that fits into this transition and how the role of the DSOs is emerging through that package. The first thing to mention, I suppose, is the package is part of the Energy Union, which is one of the key initiatives that was launched by the Yonker Commission in 2014. It's very evocative of the earlier part of the European Union, which was the European coal and steel community, and it sits side-by-side with other initiatives such as the Capital Markets Union and the Digital Single Market and other big flagship proposals. It's a fairly serious attempt by the Commission, in fact, to ensure that what were formerly silos and particularly people used to talk about silos between climate change and energy, that those silos were brought together and the things were considered in a holistic way. And we'll give the Clean Energy Package a scorecard in a few minutes about that. I don't propose to speak very much more about it. I know you had Tygo Bryan here speak about this, and I know you had Ms. Vorsteffer from the Commission here speaking about the Energy Union already. The only thing that I wanted to point out is the Clean Energy Package fits within this, and the Clean Energy Package is the Commission's proposal to deal with the targets that were set by the European Council back in October 2014, which is 40% reduction in greenhouse gas emissions from the 1990 level, minimum of 27% renewable energy resources across the Union, 27% of energy efficiency savings, and some other targets which are important to me for this context is the interconnection target, which is a minimum of 15% between member states and the requirement to roll out smart meters to 80% of European customers by 2020. So I suppose the stated aim of the Clean Energy Package is to bring about the reforms in policy and legislation that are needed in order to fulfill those targets and all of that, if you'll recall, was made ahead of the Paris Agreement on climate change. So October 2014 was about a year before the Paris Agreement came into place. And so what is the package? So the package is a 4,000 page compendium of regulations, directives and various studies. It's quite a pack, I took this photograph and that's what it looks like. Where is it at the moment? It has been managed by a joint declaration of the presidents, which means that it's one of the priority packages for legislation, legislative airtime basically in 2017. It's estimated to be worth $250 billion to European citizens. So that's what the parliament, the price tag the parliament has on it. And I just looked at the parliament's website and that's second only to work they're doing on the single market. So it's a fairly serious piece of value for European consumers. It's a proposal by the commission clearly and it's a proposal that's made for co-decision making. So it's made to the council and it's made to the parliament. Where is it on both of those? The package landed in the parliament around November, at the end of November, and it was heard at a plenary session in December and parliament sent the package to the ITRI committee. And the ITRI committee have been very busy on it and they've opened all the files and they've appointed rapid tours and shadow rapid tours for every one of these files. They've even reported out, which they had for some while by the way, but they reported out this week the energy performance of buildings directive. They reported that out already. But the rest of them are on timelines to be reported, which is basically the rapid tour prepared to report and he presents it to the committee and the committee adopt the report to take it back to the parliament. And the timeline for all the others is by October, by the end of summer, they will have all of these at a first reading at the ITRI committee and then it will take it up for a plenary in the parliament itself and that will establish the parliament's position. The council meanwhile have had two considerations of this. They've had a consideration of it at the December meeting and at the February meeting. And all I can tell you about that is what I've read in the public minutes, but the council are saying, giving a lot of political support to this and also to the timeline of getting this adopted in order to be able to get going on realising the benefits of this but honouring the pledges under the Paris Agreement. I would characterise the discussions in the council Morris exploratory at this point. They're talking, changing views. They're not page turning on the documents just yet. And I suppose in that sense, the parliament are a little bit ahead of them. I can't do justice to all of the instruments that are presently undergoing, which are sisters to this clean energy package, which affects the industry. But I do want to mention two that are really, really important when we're looking at the power market. The first is the reform of the emissions trading system. That has been going on for many years now and it looks like it's coming to an end. And the net effect of that is that it's going to put the emissions trading scheme on a solid footing to tighten up the excess supply and make the price more meaningful. And it's really important to mention that but it's outside of all of this and the eco design directive is very important to my members because it affects equipment standards and energy efficiency and equipment standards. So I just want to mention those two. I don't really want to try to give them justice or all the other associated regulations and directives that are out there about land, juice and effort sharing and so on. I'm going to focus entirely on the clean energy package. And what I'm going to try to do now is to run around the map a little bit and explain what's in these and to try to give you a snapshot of the industry's position on them. And I suppose I'll start with the first one on the top left, the risk preparedness directive. And this is a repeal of the security of supply, electricity security of supply directive. And it's creating very good structures for cross-border management of preparedness, prevention and management of crisis in the electricity grids. And it's a good thing and it creates a role for the TSOs in terms of working closer together to be able to prevent blackouts and so on and how to manage them when they come about. Our only comment on that is they sort of forgot about the generation sector and that needs to be included in there and I think that's a very sensible comment and that will be taken on board. A little later when I talked to you about the TSOs I'm going to talk about cybersecurity which is really, really interesting and appears in the risk preparedness directive. So that's that one. The energy performance of buildings directive, I don't want to speak too much about this because I know also you had Mary Donnelly here a few weeks ago and she spoke to that at length. I just wanted to say that there's a couple of really interesting things that we see in that is the smartness indicators. We see processes for energy performance certification which is really useful and requirements for electromobility in buildings, parking spots that have to be wired for electric cars and pre-cabling requirements and we think all that is very, very useful. On the Acer regulation, Acer is the association for cooperation of energy regulators. This was established in 2009 directives. There's a repeal of this and an upgrade of the role of Acer. More role in cross-border activities, more role in monitoring power markets, different roles in terms of elaborating what's called network goals which are legislation for technical rules for cross-border trading and roles to supervise the new proposed regional operation centers and the national electricity market operators. All very sensible. Some controversies in there about the changing of the voting rights of the regulators, but from our perspective, anything that's more regional or more European-wide which is in keeping with the market footprint is welcome. On the raise directive, we see the European target of 27% replacing all national targets for renewable energy. We see that as very positive. We see sustainability criteria for biomass. Also, it's very positive and we see the statements that are in there about support schemes if necessary. And I got to stress that support schemes if necessary would be granted on a more market-orientated approach. And together with the regulation and directive integrates all their renewable energy resources into the market in the mainstream way. We think that that's very positive. Little worried about the requirements for high efficiency combined heat and power if one is burning biomass and there are stipulations in there which may be closing too many doors too quickly about counting biomass burn against national targets and for subsidies. But by and large, I think the raise directive is very positive. One final thing in the raise directive is a requirement for one-stop shop permitting which is really, really useful, permitting for facilities. On the governance, we see that the governance is looking at preparing an integrated energy and climate plan which each member state will have to deliver to set out how it will honour the obligations in the Paris Agreement and the rise in this clean energy package. Streams lines, a lot of reporting requirements that's already there. And we think that's really positive. We're a little worried there's a command and control philosophy in this rather than a market philosophy so we've got to keep the market alive while member states are planning, so to speak. And that may overstate it a little bit but I think you will get my point. There's also some questions about how targets would be fulfilled in the event that a member state is falling short and any member states that are in the room where we have our sympathy of the workload that's coming towards you in the next period. On the energy efficiency directive, again, much of it is very positive from our perspective. We're looking at the changes in the primary energy factor. This is very, very important, counting the renewable energy content in electricity. We think it could go a bit further but we've received that very positively. A little worried about the increase in the target, it's increased from 27 to 30 and that seems to have hit a tipping point in the supply curve on the carbon markets and it has quite an effect by the commission's own impact assessment on the price of carbon in 2030 which will drop from 42 to 27 euro per allowance and that's a little troubling if the carbon market is to be the main driver of investments in the future. I saw, Chairman, I wanted to focus on the two that's really important is the regulation and directive and taking the two as a whole. We see many very positive things in this, much of the market orientation in it that supply and demand should be the only factors which determine prices, that price caps should be removed, that everybody has a balancing responsibility in the market and so on and we think that what they've put in there which is reflecting many of the things that happened in the network codes over the years puts everything on a very solid legal basis for the market. There are no new exemptions contemplated and then there's no undoing of previous exemptions which is good for investor certainty and we support that. There's a requirement in there on emissions performance standards in the capacity markets that's a little troublesome and just last month all the members got together and they issued a press release that they will not have any intention of building coal plants beyond 2020. So the emissions performance standard is a little bit moot from our perspective but from a principal perspective in policy design you clearly have an overlapping instrument here with the capacity markets which will undermine the efficacy of those capacity markets and we would be worried about that. There's a proposal in there to get the TSOs to work together in new regional operation centers. We're not sure regional operation centers are the right configuration for the TSOs to cooperate but nonetheless regional cooperation between TSOs is an important thing and if the markets are gonna be regional then regional transmission operations are very important. On the consumer questions we're very pleased to see things like price comparison tools which are certified and which allow customers to make genuine comparisons between officers offers given by competing suppliers. We're also very glad to see energy poverty left as a national member state competence. It's hard to see how energy poverty matters could be harmonized across Europe and I think that was very wise of the commission. There's some concern about some of the requirements in the package about over-regulation of bills. Consumer bills get lots and lots of paper which is not very useful to them but on the other hand can confuse them and overall the price charts I showed you earlier there isn't a recognition that something has to be done with prices. So I suppose Chairman that's, I suppose the Hitchhiker's Guide to the 4,000 pages of the package before I go to my own subject which is how it affects the TSOs. So who are the TSOs first of all? The TSOs are key facilitators of this energy transition. 90% of the renewable generation is local and being connected at the local distribution level and the TSOs are finding themselves by virtue of citizen action being catapulted into the center of this transition and they are really important being able and enabled to step up to this challenge and meet it because without them the system will not get decarbonized. And the first thing I just want to just tell you who they are, there are somewhere in the region of 2,500 of them, they're all over Europe. They're serving the customers 260 million customers and they have over 10 million kilometers of lines installed but the real one I wanted to talk about was the investment and I've been looking at a lot of the impact assessments and publications and our analysis and my best to take on the investment requirement over the next years, up to 2030 is somewhere in the region of 100 to 150 billion per year in this sector alone. So now we have our members trying to make business cases around 150 billion per year and they need this policy certainty and they need the clear line of sight so they can make those business cases. On the sector that I represent, the DSOs, that's somewhere in the region of 40 to 60 billion per year so my members have got to put business cases up and get those approved and get the data and equity that can match that and that's no easy task and particularly in light of the permitting conversations we had a little bit earlier. So the policy framework has to be investable basically and that's a big chunk of money that needs to be attracted by these companies. And so what I want to talk about now was the transition that they're going through themselves and I suppose the first observation here is the world is getting flatter. We have all the information is ubiquitous and this sector is no different. What was once a linear supply chain and is being increasingly decentralized. I don't know where the limit of decentralization is. There is an open question as to whether the grid can be crowdsourced. Could the grid be operated by individuals? I think not. I think there's always going to be a controlling entity and that controlling entity is the DSOs. There's two changes going on here. There's a technological change. There's a digitization questions right in the middle of the fourth industrial revolution and the data is transforming everything that people do but also the internet of things and the connected devices are all being connected to the DSOs and the DSOs are dealing with this vast amount of data and they get all the questions that arise with data but they all get all the possibilities that data analytics bring to them and they're trying to deal with all of that. Some of them are pioneering really interesting things in cognitive computing and quantum computing and things called augmented reality to operate the grids and one or two of them are pioneering things called software-defined grids so the grids are not just the hardware anymore they're all this data and the information that can be got from this data. All of this means that the DSOs from being a passive last mile business are becoming an active manager of the grid. Connect and forget they used to say about it. They used to go up and connect the house, forget. 40 years later disconnected and put everything in the recycling but now it's connect and manage and this is a very active thing for them to do and it's a whole cultural change and it involves questions about operational and planning. I suppose the other thing to say is all of this is in a virtuous cycle so the digitization question we just spoke about the decentralization question and the electrification question the adoption rates of all of these things are in a virtuous cycle and I've seen some of my members who have given me these famous S curves and the only difference between this S curve and the ones that have been in the past is the speed of adoption. This is happening at such a startling rate and it's at a point now where it either takes off and realizes the benefits or indeed could end up with some stranded costs. So that's I suppose the transition flattening it out, decentralizing it and empowering customers. The lines of roles are changing and we see all sorts of new applications by customers. We see prosumers, these are people who install batteries or windmills on their house and they want to export to the grid and we're seeing local energy communities or renewable energy communities and closed distribution systems and so for all of this I've worked with my members and we've produced a new vision statement for the DSOs and this is the first time I'm going public on this new vision statement and I should say at the very start that one of the, I got a great idea for this vision statement from Audrey Zimmerman who was in this very room talking about the New York reforming energy vision in New York and one of the notions that came out with all of this was the DSOs had previously been pipes, they had been last mile wires and now they're becoming more like platforms where customers connect and they do commerce with another customer and all of it is much more like a platform enabling business and so that's what we're saying here, we're saying from DSOs are changing their whole business model from linear pipes to platforms where people can connect and do business and that's what we're trying to get into the culture of the companies and this involves transformation of the business models so this is questions about tariffing, this is questions about services, their rendering is the fee for services, for connecting people, it's the fee for using the systems and it's operating in a more flexible way. We're talking about working more in partnership with the regulators, regulatory models promoted low risk business operations in the past but here we have this major transformation and technology and we have to sort of pioneer things a little bit and work in partnership with the regulators, not in an adverse way as we have done in the past but now to transform this to a whole new level. We have to adopt a new planning techniques and upgrade the systems in order to be able to deal with all of the new applications that are out there which is to do with planning and operations and then finally to take on all these new roles and to make sure that we're continuing to be the neutral market facilitators because after all it is the common carriage public service business. So that is who the DSOs are, that's their new vision, I hope you like it and with that vision and with the clean energy package and now ready to talk about how the policy how the policy framework fits with what's required and I suppose there's two ways, there's two of those instruments that really affect the DSOs, the regulation and the directive and I won't go through all of these points but there's a few that are really interesting. The first one is about tariffs. Tariffs is really important, it's the way that DSOs get their money but it's also the vehicle by which the network sends signals out to the outside world and in the proposal, the commission have talked about harmonizing these tariffs between transmission and distribution and across distribution and we think that's too much of an ask, tariffs suit local circumstances better and the tariffs that would apply in the circumstances of the Greek islands would be totally different that might apply in the northern parts of Europe. So tariff harmonization per se is in our view not wise but we do think that tariffs have to conform to some harmonized principles if you like and we have proposed to the commission principles that all tariffs over time will conform to. The other one I wanted to mention was innovation which is the second one here. Innovation I've spoken to a little bit before, ways by which DSOs who have previously been culturally low risk businesses will start to innovate and start to do things in a whole new way and they will only do that if the regulatory model changes. I did a survey of the members and I got an answer from them that nine of the regulatory models across Europe have specific innovation components in them and that needs to go from nine to 28. On the other side here, I would like to just mention a few. Storage, storage is really interesting. Lots of customers are putting up new storage devices. Lots of customers are adopting electric cars. Customers want to trade out of the storage. The DSOs want to use the storage to operate their system more flexibly and the proposal at the moment says that DSOs can't own the storage. It has to be a market deployment and we welcome the market deployments but there are occasions when the DSO needs to deploy the storage devices itself and to satisfy the needs in the local needs in the network. So sometimes market forces in other words are not operating at the local level and the proposals in the package are too prescriptive in that regard. On local energy communities, we're delighted to see the commission endorsing all the new roles for customers and the way that they can engage with the transition, the way they can engage with the market. We just have to be careful that that's all done on a level playing field and I know there's a lot of questions that arise about the various adoption rates that some customers are adopting things and others aren't and then there are costs in the network that need to be borne by everybody. On data management is a really interesting area. Data is the new oil. Everybody wants to control the data and control the customer's data. There are clearly data privacy issues, cybersecurity issues and the DSO is in at the moment the custodian of these data and to provide these data to any market participant in a way that facilitates the operation of the market and to do that in a neutral way. The commission have proposed a common data format across Europe again. It's not going to be possible to do that because there are far too many different circumstances that obtain in each of the member states and changing IT systems to make a common format is a big problem. On cybersecurity it's an interesting area. The grids are becoming more vulnerable to cyber attack. The DSOs keep their operation system separate from the market systems and the cyber attacks that way is the first line of defense is the air gap between the two of those. One of our members in Ukraine in fact was attacked and the grid was sat down for a number of days. So this is an area that's very, very important and the commission have made some proposals in this and we're working with them to make sure that the DSOs are able to adopt the highest standards of cybersecurity. I should mention as an aside, I work with NATO on what they call the baseline requirements for resilience of cyber in warfare terms. In fact, they see the cyber systems as a key attack vector and they're doing everything with NATO and the EU to make sure that the systems are secure and stable. The last thing I want to talk about is flexibility. It's a really interesting area for the DSOs there. One time they always build wires when they had problems to build more wires and when they had problems to build even more wires. And nowadays customers are able to offer the same kinds of services to the DSOs as if wires were in place. That's an interesting challenge in itself because will the customer always be there to provide the service when the DSO needs it? It's the first question and the second question is how does the DSO's business model accommodate the new contracting processes that are there? And we're working with other DSO associations in preparing the way that DSOs can contract for that in a flexible way and a uniform way across Europe. And indeed we're working with the CE or on that a consultation is live closing I think next week. Thank you. So that's the views. I want to finish up on one more thing that's in the clean energy package which is really important and is changing the institutional framework. That's why I'm going to deal with it slightly separately. I don't ask you to read all of this but the existing institutional framework that governs the internal energy market comprises of the commission themselves. NSOE which is the institution that fosters cooperation amongst the 42 DSOs. So they're shown there on the bottom left and the Acer which is the institution fosters the cooperation with regulators. And where the DSOs are not in the picture yet. And the proposal is that there will be a DSO entity established that would promote institutional cooperation between the DSOs. So right now they cooperate on an industry basis but this is an official vehicle for them to cooperate. And they will cooperate on being a friend of the commission in terms of offering technical advice, producing harmonized rules and network codes and so forth on some of the topics we've just talked about and playing a role in interacting with all of the other institutions here. So this is a classic question of institutional design. I'm showing the green box going in with the others. Of course there's no space for them at the moment. They have to get in there. They have to be established and they have to become functional with all these different interfaces. So that's a really important question. The DSO companies are really pleased with this proposal. It recognizes their new role. They have now this institutional official cooperation vehicle in the EU. And the question is always what is the scope of that organization? What would it do? And who is eligible to participate in it? On the scope questions, the worry is that your institution may end up lobbying or being a lobby rather than a cooperative, rather than a cooperative technical forum. It can't be a symposium on mathematics. It's got to include some practical application of DSO problems and bring them together with all the DSOs. So that's the first thing. The second thing is the eligibility requirements. The commission have outlined their proposals on eligibility which in effect mean that only 10% of the DSOs by number can participate, and we think that's far too few. So 10 out of the 2,500 will be eligible to participate. And it is our hope that we can persuade the commission to widen the eligibility criteria so more DSOs can participate and they have a contribution to make in that. So here we have, I suppose, the completion of the institutional framework that would underline the internal energy market. And one of the things, and this is the last thing I said, Chairman, one of the things that's coming out really strongly in all of this is the need for DSOs and DSOs to cooperate. There are sisters who are operating the same networks. Different voltage levels, different territories, but they're operating together in the interest of the customers and together operating in a way that affects the transition. And institutional cooperation between the two of them, which is currently on a voluntary basis, is paramount. And it's our hope to take a proactive role in establishing this entity so that it can be in place in good time for the coming into effect of this legislation. And we're already doing many of the things with the commission, with the NSOE, that put us in the position of leading the establishment of this organization. And that's what we hope to do. And our members support it wholeheartedly. So look, I hope I haven't confused it too much by covering the whole package. And thank you very much for your attention and coming out this afternoon. And thank you very much, Chairman.


I want to show you the terrestrial scanner VC600i. I think that's good to have both presentations, one behind the other. Kinematic scanning and I want to show you the static scanning. The... Sorry, do we have some... Then I talk to the video. So you take a tripod, take the scanner, six kilogram, and two batteries, one FC card. So there is a one terabyte hard drive inside. The data will be all the time synchronized with a CF express card. And the specialty, the real scanning time is 30 seconds. So we can scan one scan position per minute. That means 60 per hour. One scan position has 30 million points, 6 millimeter resolution in 10 meter distance. So that's a really high speed scanner. And the photographs are included. So you can change... For example, here are the RTK, GNSS receiver, here are the different photo cameras options. Specialty of the scanner, all the scans are registered inside on board on the scanner. So on the 100 scan position, 99 scan positions are registered inside. You take the CF express card. Unfortunately, we have no sound. That means our technical director is explaining you can... Since today, this video is on YouTube. You can listen to our technical director what happens in the automatic registration. There are three steps. First step is either IMU or GNSS. Second step is we convert to Voxel and make some Fourier transformation. Third step is a kind of ICP point cloud to point cloud registration. So that's a really registration process inside of the scanner. It's the same like in the computer. And the next are some examples. This is the one-touch processing wizard. So we can deliver the point cloud within 24 hours. That software RISCAM Pro comes with the instrument. We have an automatic elimination of moving targets. The point cloud is reflectance. That's autogonal view in the X-ray view. And some example, one is a square in Italy with a lot of scan positions. That's in UK, in York. That's an example on the railway with hundreds of scan positions. That's the metro in Paris. This is a construction site in Hungary. So the main points are there is an onboard registration. So you come back to the office. Everything is registered. If you have experience, it's a lot to do. But that's not a pre-registration. That's a real registration. We have one scan position per minute. And now it's quite lightweight. You see the 60 seconds. You see all the scan positions are almost all are below 60 seconds. And we have the one-touch processing wizard. The whole workflow is, of course, very high productivity. Everyone will tell you that. So I want to show you some examples. In Germany, seven and a half hours scanning time, 380 scan positions. The IP class of the scanner is IP64. On that day, it was raining. So for the police car crash scene scanning or for the railway, they cannot say, no, I don't want to scan today. They have to. Two and a half kilometers of railway sometimes twice scanned specialty is that on the mast bolt, you get some reflectors. They are fine scanned with this time of flight scanner. That means we have a special fine scan of these reflectors. And at the end, you can select the right coordinate system with the right EPSG code. And at the end, you get the standard deviation between the total station and the laser scanner. If you have the point cloud with all the moving targets, some people were walking around. In our software, Ricecam Pro, you can eliminate these targets completely automatically. So if these points are in only one scan position, we can eliminate them. That's the metro tunnel in Paris. And that's about 300 meters, one hour scanning, 42 scan positions. And you can see the quality of the point cloud. That's for a construction company in France. And you see 3.6 to 5 millimeter standard deviation again between total station and the laser scanner. In this case, 13 scan positions. That's a small project in UK to scan a city center. You see almost 150 scan positions in a little bit more than two hours. So you'll see the range of the scanner is up to 200 meters in the high-speed mode. If you really need more, you can slow down the scanner and you can measure up to one kilometer. But the standard scan is the 6 millimeter resolution in 10 meter distance, 30 million points. The pictures are included, the photographs. And also the IMU, GNSS, and so on. So you see the quality of the colored point cloud and also the same point cloud without the true color information. It's gray-coded with the so-called reflectance, which is range-independent. So the standard deviation in respect of a plane is about one and a half millimeter. If you want to be better, then we have a high-precision mode. Then one scan takes two and a half minutes and we are below one millimeter standard deviation. That's an example in Italy. Oops, sorry. In May, six and a half hours, 375 scan positions. Yeah, so this scanner is prepared for a big project with high accuracy scans. You see a lot of scan positions are fitting together completely automatically. Here we have one example. It's the cathedral in Regensburg in Germany. So there was a two-day scanning on the first day from 11 to 5 p.m. and in total 500 scan positions. So at the beginning, it's not a must to have a mobile device with you, but you can transfer the registration information on the mobile so you can see all the scan positions and also the data. At the beginning, in the project map, you see some scan positions and then at the end of the day, inside of the laser scanner, you can create this top view. But more important is, at the end of the first day, you start the one-touch processing visit and there are several tasks. You filter the data. You modify the multi-calibration of the camera. If it's not registered, you can register the scans. We have also a so-called multistation adjustment, which is a block adjustment of all the scan positions. We can use the control points for this block adjustment and we can also mark the single source points, remove all the moving objects and then we create an octree-based point cloud at the end, for example, with 5mm resolution. In the morning of the second day, we have the point cloud, so we can deliver within 24 hours such a point cloud of hundreds of scan positions and even the scanner does not scan upwards. The point cloud is complete because there are so many scan positions. That's again in reflectance. At that time, we used the on-top Sony Alpha 7.4 camera to take the pictures. Usually, we take the pictures at the same time we're scanning. In this case, first was the scanning and then we took the pictures. You see the instrument in the scene. The GPS, usually, we have an internal GNSS L1 receiver, but we have also the opportunity to have this antenna on top. Of course, that's indoor but outdoor. If you have a hotspot with your mobile phone, you bring the scanner into the internet, you get the correction signal, so you have the RTK GNSS solution with 1-2 cm accuracy per scan position. The whole scan from the top in the X-ray view and on the left side, you see the 200 meters maximum range from the point cloud. I think this application we see here can be a good feature of that kind of scanner. The scanners are so fast that you can use it for the construction. That means that it's a really big construction site with 600 meters long, 300 meters wide, more than 450 pillars, 14 meters between them, and everything was scanned in one single day, in eight hours. You see 379 scan positions. Again, approximately one minute per scan position and on the right side, in the project map, you can see how you can orientate yourself. This scanner is now in use every single day, every single week on that construction site, and they transfer data from Hungary to Austria to the headquarter of this construction company. If you scan the whole area, then you walk for six kilometers. 379 scan positions, 6,000 meters, and all the scans are registered completely automatically. Of course, there are a lot of control points, but they are using them all the time. So in the software scene 2, I think it's in the same hole now, you can see the point cloud. You can see the BIM model, and you can see also the difference between the BIM model, the IFC data, and the point cloud.