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Financial Transmission Rights Meet Cournot: How TCCs Curb Market Power

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Author Info
Steven Stoft
Abstract

This paper reconsiders the problem of market power when generators face a demand curve limited by a transmission constraint. After demonstrating that the problem's importance originates in an inherent ambiguity in Cournot-Nash theory, I review Oren's (1997a) argument that generators in this situation capture all congestion rents. In the one-line case, this argument depends on an untested hypothesis while in the three-line case, the Nash equilibrium was misidentified. Finally, the argument that financial transmission rights (and TCCs in particular) will have zero market value is refuted by modeling the possibility of their purchase by generators. This allows transmission owners, who initially own the TCCs, to capture some of the congestion rent. In fact when total capacity exceeds line capacity by more than the capacity of the largest generator, TCCs should attain their perfectly competitive value, thereby curbing the market power of generators.

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Publisher Info
Article provided by International Association for Energy Economics in its journal The Energy Journal.

Volume (Year): 20 (1999)
Issue (Month): 1 ()
Pages: 1-24
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Handle: RePEc:aen:journl:1999v20-01-a01

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F0 - International Economics - - General

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  1. Joskow, Paul & Tirole, Jean, 2004. "Merchant Transmission Investment," IDEI Working Papers 263, Institut d'Économie Industrielle (IDEI), Toulouse.
    Other versions:
  2. Joskow, Paul L & Tirole, Jean, 1999. "Transmission Rights and Market Power on Electric Power Networks I: Financial Rights," CEPR Discussion Papers 2093, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. DAXHELET, Olivier & SMEERS, Yves, 1999. "Variational inequality models of restructured electricity systems," CORE Discussion Papers 1999066, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  4. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 358-387, November. [Downloadable!] (restricted)
  5. Richard Gilbert & Karsten Neuhoff & David Newbery, 2002. "Mediating Market Power in Electricity Networks," Department of Economics, Working Paper Series 1047, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
    Other versions:
  6. Hu, X. & Ralph, D. & Ralph, E.K. & Bardsley, P. & Ferris, M.C., 2004. "Electricity Generation with Looped Transmission Networks: Bidding to an ISO," Cambridge Working Papers in Economics 0470, Faculty of Economics, University of Cambridge. [Downloadable!]
  7. Rajnish Kamat & Shmuel Oren, 2004. "Two-settlement Systems for Electricity Markets under Network Uncertainty and Market Power," Journal of Regulatory Economics, Springer, vol. 25(1), pages 5-37, January. [Downloadable!] (restricted)
  8. Sun, Junjie, 2005. "U.S. Financial Transmission Rights: Theory and Practice," Staff General Research Papers 12266, Iowa State University, Department of Economics. [Downloadable!]
  9. Hu, X. & Ralph, R., 2006. "Using EPECs to model bilevel games in restructured electricity markets with locational prices," Cambridge Working Papers in Economics 0619, Faculty of Economics, University of Cambridge. [Downloadable!]
  10. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 261-290, November. [Downloadable!] (restricted)
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