Curzon Price, John Anthony; (2002) Modeling for market design: Methodology and case studies from energy markets. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

The aim of this thesis is to critically examine the economic modeling tools available to policy makers as they attempt to establish the rules and structures necessary for the success of market-based regulation of energy natural monopolies. Four case studies each consider a modeling style applied to a specific energy market design question. Economic theory has seen a burgeoning success in its analysis of mechanism design problems, in particular in uncovering the fundamental causes of regulatory performance as asymmetric information and imperfectly aligned agent interests. These advances should naturally illuminate the policy problems of regulating decentralised utilities. What are the modeling methods appropriate in making mechanism design relevant to everyday microeconomic policy decisions? Chapter 1 summarises the successes and failures of the models considered, and concludes with a statement of support for methodological diversity. Chapter 2 builds an Applied Theory model of an auction format proposed by the UK energy regulator with the aim of providing a promised level of revenue to the natural monopolist while instituting a market mechanism. The model employs Nash equilibrium reasoning to undermine confidence in the suitability of the proposed mechanism. Despite the very limited representational realism of the model, it provides a strong prima facie case against the mechanism. Chapter 3 examines the reasons for a particular exercise of market power common in the UK power market: electricity suppliers have offered power for sale at a cost lower than the spot price of their inputs would suggest is efficient. Two explanations, one drawn from a large-scale statistical analysis and another grounded in minute examination of institutional and empirical detail, are contrasted. While the empirical method successfully uncovers plausible explanations of behaviour, it remains relatively silent on forecasting behaviour under different policy environments. Chapter 4 uses experimental methods to examine the properties of uniform and discriminatory auctions in the context of the UK gas storage market. The experimental method generates useful conclusions for a policy makerincluding one which has the potential to diffuse regulatory conflict. However, direct empirical validation of the results, providing support for the belief that the laboratory setting is a good representation of the market, is not available. Moreover, the complexity of the mechanisms modeled is limited. Chapter 5 surveys the applied use of large-scale micro-economic simulation models in policy making. The structural-econometric approach is contrasted to an applied-theory approach. Both of these are contrasted to the use of agent-based simulations. While little success is found in the application of these to UK power policy, an application to UK medical intern markets suggests that these methods should live up to their promise in the context of energy natural monopoly regulation.

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