A model for electricity markets: The impact of regulation on value

In this paper it is proposed a simple, although useful model, intended for electricity markets, which enlightens the analysis of regulatory procedures and their consequences over value creation. Today it is widely recognized that, in regard to public services, the aim of regulation should be to maximize the social wealth added (EWA). This wealth includes consumers surplus (ECA), tributes paid to government (EGA) and investor value added (EVA). Thus, regulation implies both efficiency, regarding the location of resources, and fair price levels. The task is seriously impaired by informational asymmetries, and a second-best optimum is only attained with incentive-compatible contracts. Those problems, among many others, can be treated with the proposed model. In order to clarify some of the issues, an example is developed showing the social wealth added under several instances of market operation: regulates vs. unregulated firm, level of taxation, and optimized vs. non-optimized investment and resources.