Introduction of independent players in a centrally planned market: decision support by long-term production costing

This paper presents long-term production costing as an important decision tool that can be used to assess entry of exogenous players within an otherwise centrally planned, natural monopolistic market. The ex-monopolist emerges as the dominant participant of the restructured market, and continues to play a decisive role in price determination. In doing so, it can apply long-term production costing methods to decide the extent to which entry of independent players should be permissible. On the other hand, the independent entrants can use production costing to weigh their gains in view of the price decided by the ex-monopolist or the policy maker. The specific case of an energy market is examined through a suitably formulated long-term production costing model. A case study shows that transfer of some of the generating units to independent power producers (IPPs) can lead to considerable reduction of production cost and fuel heat consumption associated with utility owned generation. Further, if the choice of generating units to be transferred to IPPs is made with suitable care, then the marginal cost of utility generation can be reduced significantly; thereby lowering the price of electricity.