The Electric Apple Market

Goal: This is a simulation of deregulation in the
electricity industry.

Apples

The apple pie market has historically been a highly regulated
industry, but it’s undergoing deregulation rather rapidly.

Until recently, pie apples all came from the Appleseed Farm
Elite corporation (ticker: APFEL). The Pie Apple Regulatory
Commission (PARC) has full authority to set rates for apples and to
structure the market.

Under deregulation, an upstart has entered the market: Apples 2
Extremes (ticker: AXX) hopes to make a killing through its agile
approach. It has encouraged the belief that competition will soon
lower the price of pies, and consumers everywhere love that
idea.

Pie Production

Trees: Trees are expensive but have a long lifetime.
(They are typically bought through bonds or stock sales; in effect
a farm pays a monthly “mortgage” per tree.) To get apples, a
farmer buys and applies a quantity of water, and gets a
proportional number of apples the next day. An unwatered tree
“hibernates”; the tree still must be paid for, but no water
need be bought (and of course you get no apples from it).

Pie apples: Pie apples are more sensitive than
traditional apples. The big problem is that they can’t be stored:
they have to be used the day they’re produced, or they’re too mealy
for use. Pie makers won’t accept day-old apples.

Farmers: Apple farmers are in it for the money. Different
farms may balance current expenses and future income differently.
They don’t like to cause shortages, but they can’t afford to ensure
that shortages could never happen. Farmers may not legally
collude.

Pie Makers: The consumers of pie apples are not pie
eaters directly, but rather the pie makers. This industry demands a
certain number of apples each day. The number is based on things
such as the price of apples, the pie business cycle, and random
factors. Pie makers value reliability and price. Reliability is
that they have as many apples as they need each day. (They don’t
care if some are wasted, as long as there are no shortages.)
Shortages take two forms: brownouts, when pies get less than the
optimal amount of apples, and blackouts, when pies burn because of
major shortages.

PARC: The Pie Apple Regulatory Commission has a tough
job. They try to fairly balance the needs of consumers and
producers. The PARC can set prices for apples; they define rules
about which apples get sold and how income is distributed among
producers. The commission wants to keep both farmers and pie makers
happy.

Game Structure

Mapping

Apples <=> Electricity

APFEL <=> Regulated utility. Typically has a longer-term
view but wants more certainty.

AXX <=> Historically
“unregulated” utility (typically new in the business). Short-term
view, accepts uncertainty.

PARC <=> Regulators

Pie Maker <=> Consumer (or e.g., distribution or
transmission)

Each Turn

Buy new trees if desired. (PARC-defined rules may restrict
purchases.)
Farmer decides how many trees to water, and pays for it.

Cost: tree cost for each tree owned + watering cost for each
tree watered

Each farm produces apples proportional to trees watered
Calculate the demand. Detect shortages.
Distribute apples to pie makers. (PARC-defined rules for which
apples get sold.)
Pie makers pay for apples. (PARC-defined rules for who gets how
much.)
PARC may issue a rules change
Cycle repeats

Groups can petition PARC at any time, but it can change rules
only at the end of each cycle.

Default Rules

PARC has historically used these rules:

Trees: Trees cost $10K. Water for one tree: $100/day.
Production: 100 apples/tree/day. A tree must be watered for a week
before it will start producing. Typically, only one new tree a week
is permitted. APFEL starts with 35 trees, AXX with 5.

Demand: There is a daily demand curve for power (in 100s
of apples). (Pie makers are civilized, and don’t work on
weekends.)

M: 5, T: 30, W: 20, H: 35, F: 10

Add 2d6 to this to get actual demand.

The facilitator can adjust the demand curve. PARC actions may
change it too. (For example, lowering the price will increase
demand; differential pricing might smooth it out.)

Apple distribution (pipeline): APFEL is guaranteed able
to sell up to 2500 apples/day. AXX is guaranteed the next 1000
apples/day (if needed). They split equally any sales above
3500.

Apple cost: Apples cost $1 each.

Income distribution: Proportional to apples sold. So if
demand is 4000, APFEL produces 3000 and AXX produces 2000, then
APFEL gets $2500+250=$2750, and AXX gets $1000+250=$1250.

Shortages:

(Note that PARC can’t change the rule about what happens to
them, but they can change how they “pass along the pain.”)

Brownout – Production is lower than demand. PARC gets a brown
card. PARC’s rule is that any producer who was below capacity that
day gets a brown card and a $1000 fine.
Blackout – Production is lower than demand by 15% or more. PARC
gets a black card. Every producer gets a $1000 fine, and any
producer who was below capacity gets a black card and an extra
$1000 fine.

Pie makers are willing to accept one brownout every couple
weeks. If it gets worse than this, they’re more vocal. They can
even go so far as to try to get the PARC fired.

Rule Changes

The PARC group can decide what rules they want. (They aren’t
restricted to these ideas.)

Inputs and outputs: They can change the cost of trees,
water, or apples.

Pipeline access: They can change how apple distribution
is handled.

Sell apples in proportion to farm’s production.
Sell apples in proportion to farm’s share of yesterday’s
consumption.
Create an auction and sell shares to the highest bidder.
Sell apples in proportion to farm’s fixed costs.
Historically regulated farms could be guaranteed priority.

Income distribution:

Income proportional to production
Income proportional to trees (whether watered or not)
Income guaranteed to (some?) producers

Mixins

Multiple Power Types: Model with different types of
trees. For example, you could have a “super-tree” that costs much
more but doesn’t have to be watered, in analogy to a nuclear power
plant.

Environmentalists: They value safe farming. Model this by
having two classes of trees. Normal trees have a lower price but a
higher chance of being stymied by environmentalists. Green trees
have a higher price and less chance of being blocked. (Let it take
several turns to buy a tree, and roll dice to decide if they’re
blocked.)

End Consumers: Model by having people who purchase and
eat pies. You can build up the whole chain: Farm => Pie Maker
=> Store => Purchaser => Eater. (This is analogous to the
chain of suppliers, distribution, and consumption in the power
industry.)

Commodity Brokers: You can introduce a spot market or
commodity market. Brokers value margin and volatility.

Future Market: You can introduce a futures market, e.g.,
for selling pipeline slots. (A grid of cells can represent slots
for each day in the week.)

Status: This game has not been played or tuned yet.

Source:
(William C. Wake.)