chapter  3
23 Pages

A decentralized coordination framework for analyzing regulatory institutions

The technological and economic history discussed in Chapter 2 help us understand the origins and persistence of the vertically-integrated regulatory and business model, and the application of natural monopoly theory in designing regulatory institutions. That discussion also highlights the changes that have reduced the natural monopoly model’s relevance to the electric power industry. If this static model and its assumptions are inappropriate and a more dynamic regulatory model is required, what should that model look like? Following Beinhocker (2006), I categorize this model as one of “complexity economics.” Complexity economics frames economic questions explicitly in terms of the dynamics of human action and interaction, over space and time. It also relies on economic coordination and productive/dynamic efficiency as welfare criteria, not on allocative/static efficiency, as discussed in Chapter 2. The coordination framework used in this analysis has the following defining ideas:

1 Heterogeneous agents with diffuse private knowledge; 2 The benefits of decentralized coordination; 3 The possibility of emergent order, both economic and physical, in electric

power systems; 4 Technological change makes decentralized coordination and emergent order

possible; 5 Institutions play a crucial role in enabling heterogeneous agents with

diffuse, private knowledge to achieve decentralized coordination and emergent order; and

6 Institutions must have the capacity to adapt to unknown and changing conditions.