Distinguishing design flaws from misconduct: a new approach to electricity market analysis

The power industry is perhaps the only industry where industry-wide economy heavily depends on engineering operation. Economic inefficiency can be a consequence of either Market Participants' Misconducts (MPM) or engineering operation difficulties associated with Market Design Flaws (MDF). Based on the characteristic of engineering operation and economic studies of strategic behavior, we suggest that the independence of errors in engineering control can be used as a measure of market functioning. It is also possible to distinguish the market problems of MPM and MDF by studying a matrix of correlations of engineering variables and economic indices. This paper proposes a method of empirical analysis by analyzing the significance of dependence of engineering control variables. An application to the ERCOT real-time market is also presented to illustrate the method.