TRADING FORWARD IN AN IMPERFECT MARKET - THE CASE OF ELECTRICITY IN BRITAIN

This paper is concerned with the strategic behaviour of oligopolists when there is a contract market as well as a market for cash delivery. One form of contract market of particular interest is a futures market, where contracts are standardised and prices are transparent. Literature, concerning the role of futures contracting when the spot market is imperfect, has recently developed. This paper extends these ideas to the British electricity industry. The thrust of government policy in this sector has been to attempt to create a competitive commodity market, and a spot market - the pool - has been developed. This paper develops a model of contracting in the electricity industry. Section I of the paper considers the initial conditions of the industry, including analysis of the initial portfolio. Section II develops an analysis of recontracting. The paper is intended as one with a strong policy message, in particular concerning the form of the contract market. Section III presents the conclusions and policy implications. -from Author