Market simulation models cannot be used for structural remedies

Summary form only given. The exercise of market power in restructured electricity systems currently draws considerable attention from economists on both sides of the Atlantic. The typical argument is that an incumbent company that has a dominant position in its historical market either uses it or will eventually use it. This entails considerable damage for the consumers and justifies ex ante measures to mitigate this potential exercise of market power. Market shares and indices such as the Hirschman Herfindal index (HHI), which are traditionally used to assess dominant positions in concentrated markets, do not apply well to restructured electricity markets. A still relatively recent but growing trend is to use market simulation models, whether based on activity analysis or on econometric representation of the generation system. Recent developments propose to eliminate the mathematical difficulties of the two stage models. We indicate that this is only achieved at the price of reinforcing the introduction of arbitrary economic assumptions with the result that the model reflects the impact of assumptions made by the modeller more than hypothesis calibrated on the basis of a solid theory or market observations. The conclusion is that our state of knowledge is not sufficient to draw practical recommendations on structural remedies like the extent of divestiture that would make an electricity market competitive.