MODELING LATENT MARKET POWER ACROSS GAS AND ELECTRICITY MARKETS

The restructuring of energy utilities into new competitive markets is a worldwide fashion of the 1990s. As a consequence, managers must lear n to operate in competitive systems for which they have no experience and government agencies must begin to regulate markets where economic analogies may have Limited relevance. For markets in transition, where strategic imbalances exist, system dynamics has a useful role to play in developing a better understanding of processes which might shape t heir evolution. In this paper we develop some insight into the market power which a dominant electricity generator might achieve from its si ze and ability to trade in both the electricity and gas spot markets. By selectively choosing to sell some gas, rather than generate electri city, a large diversified power company can increase the price of elec tricity obtained with the rest of its plant, earn returns on the gas s old and also increase the volatility in the spot markets, which should subsequently increase the returns on hedging contracts. The applicati on is to the British case, but the implications are much wider. (C) 19 97 John Wiley & Sons, Ltd.