Alejandro Joffré (CMM, Santiago, CHili)

We consider a wholesale electricity market model with general networks, transmission losses and strategic producers. Previous work by Escobar and Jofre (2005) shows how regulation mechanisms such as the case when prices correspond to the Lagrange multipliers of a centralized cost minimization program allow the producers to charge significantly more than marginal price. In this paper we consider an incomplete information setting where the cost structure of a producer is unknown to both its competitor and the regulator. We derive an optimal regulation mechanism, which is compute numerically and compare its performance to the ”price equal to Lagrange multiplier” mechanism in an incomplete information setting.