Imperfect Markets and Imperfect Regulation: An Introduction to the Microeconomics and Political Economy of Power Markets.

AuthorKiesling, Lynne
PositionBook review

Imperfect Markets and Imperfect Regulation: An Introduction to the Microeconomics and Political Economy of Power Markets, by Thomas-Olivier Leautier (MIT Press 2019) 416 pages, ISBN 978-02620-3928-4 (hardcover and kindle edition)

In this challenging and dynamic time in the electricity industry, new digital and distributed energy resource (DER) technologies are transforming both actual and possible economic costs and benefits. They also stress existing regulatory and utility models, and strain market designs tailored to a more homogeneous and unidirectional transmission and distribution grid with passive demand. For the past 130 years, the vertically-integrated electricity industry has built and operated transmission and distribution grids designed for the one-way delivery of electricity to customers who were end users, and since the 1910s they have done so in the United States mostly as state-regulated investor-owned utilities with monopoly service territories. Now the powerful decentralizing forces of digitization and DER innovation, combined with an impetus for decarbonization, are changing the technological, economic, and policy landscape. A sound understanding of the economics of electricity markets is required for both academic and policy analyses of these challenges.

With Imperfect Markets and Imperfect Regulation: An Introduction to the Microeconomics and Political Economy of Power Markets, Thomas-Olivier Leautier offers such a foundation. This book serves multiple audiences--academics, researchers, and analysts wanting a thorough technical treatment of electricity economics, policymakers seeking familiarity with the issues and the implications of policy choices, and industry participants looking for an understanding of the economic implications of different policies and market designs. The complicated history of the industry's organization and regulation as vertically-integrated monopolies makes this understanding difficult. Leautier's analysis cuts through some of these institutional complications and focuses on underlying economic principles in ways that will be useful to these audiences. His focus is on the economic theory of electricity markets, and he does not cover related topics of natural monopoly or regulatory theory. He does not open the "black box of price formation" (p. 12), nor does he open the black box of regulators, their incentives, and the incentives of the industry participants they regulate.

Leautier organized...

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