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Should merchant transmission investment be subject to a must-offer provision?

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  • Gert Brunekreeft

    ()

  • David Newbery

    ()

Abstract

Merchant electricity transmission investment is a practically relevant example of an unregulated investment with monopoly properties. However, while leaving the investment decision to the market, the regulator may decide to prohibit capacity withholding with a must-offer provision. This paper examines the welfare effects of a must-offer provision prior to the capacity choice, given three reasons for capacity withholding: uncertainty, demand growth and pre-emptive investment. A must-offer provision will decrease welfare in the first two cases, and can enhance welfare only in the last case. In the presence of importer market power, a regulatory test might be needed.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s11149-006-9002-z
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Bibliographic Info

Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 30 (2006)
Issue (Month): 3 (November)
Pages: 233-260

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Handle: RePEc:kap:regeco:v:30:y:2006:i:3:p:233-260

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Web page: http://www.springerlink.com/link.asp?id=100298

Related research

Keywords: Investment; Must-offer; Capacity withholding; Regulation; Electricity; L51; L94; L4;

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References

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  1. Gilbert, Richard J., 1989. "Mobility barriers and the value of incumbency," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 8, pages 475-535 Elsevier.
  2. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  3. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  4. Brunekreeft, Gert, 2005. "Regulatory issues in merchant transmission investment," Utilities Policy, Elsevier, vol. 13(2), pages 175-186, June.
  5. Paul Joskow & Jean Tirole, 2003. "Merchant Transmission Investment," NBER Working Papers 9534, National Bureau of Economic Research, Inc.
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  8. Rosellón Juan, 2003. "Different Approaches Towards Electricity Transmission Expansion," Review of Network Economics, De Gruyter, vol. 2(3), pages 1-32, September.
  9. Katz, Michael L & Shapiro, Carl, 1987. "R&D Rivalry with Licensing or Imitation," American Economic Review, American Economic Association, vol. 77(3), pages 402-20, June.
  10. Gert Brunekreeft, 2002. "Regulation and Third-Party Discrimination in the German Electricity Supply Industry," European Journal of Law and Economics, Springer, vol. 13(3), pages 203-220, May.
  11. Hogan, William W., 2003. "Transmission Market Design," Working Paper Series rwp03-040, Harvard University, John F. Kennedy School of Government.
  12. Bushnell, James B & Stoft, Steven E, 1996. "Electric Grid Investment under a Contract Network Regime," Journal of Regulatory Economics, Springer, vol. 10(1), pages 61-79, July.
  13. Brunekreeft, G. & Newbery, D., 2005. "Should Merchant Transmission Investment be Subject to a Must-offer Provision?," Cambridge Working Papers in Economics 0534, Faculty of Economics, University of Cambridge.
  14. Tanga McDaniel & Neuhoff, K., 2002. "Auctions to gas transmission access: The British experience," Cambridge Working Papers in Economics 0234, Faculty of Economics, University of Cambridge.
  15. 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.
  16. B. Curtis Eaton & Roger Ware, 1987. "A Theory of Market Structure with Sequential Entry," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 1-16, Spring.
  17. Brunekreeft, Gert, 2004. "Market-based investment in electricity transmission networks: controllable flow," Utilities Policy, Elsevier, vol. 12(4), pages 269-281, December.
  18. Richard Gilbert & Neuhoff, K. & Newbery, D., 2002. "Allocating Transmission to Mitigate Market Power in Electricity Networks," Cambridge Working Papers in Economics 0225, Faculty of Economics, University of Cambridge.
  19. Newbery, D. & Tanga McDaniel, 2002. "Auctions and trading in energy markets -- an economic analysis," Cambridge Working Papers in Economics 0233, Faculty of Economics, University of Cambridge.
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Citations

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Cited by:
  1. Ojeda, Osvaldo A. & Olsina, Fernando & Garcés, Francisco, 2009. "Simulation of the long-term dynamic of a market-based transmission interconnection," Energy Policy, Elsevier, vol. 37(8), pages 2889-2899, August.
  2. Adrien De Hauteclocque & Vincent Rious, 2008. "Regulatory Uncertainty and Inefficiency for the Development of Merchant Lines in Europe," Post-Print hal-00338296, HAL.
  3. Brunekreeft, G., 2004. "‘Regulatory Issues in Merchant Transmission Investment’," Cambridge Working Papers in Economics 0422, Faculty of Economics, University of Cambridge.
  4. Rabindra Nepal & John Foster, 2013. "Testing for Market Integration in the Australian National Electricity Market," Energy Economics and Management Group Working Papers 11-2013, School of Economics, University of Queensland, Australia.
  5. Brunekreeft, G. & Neuhoff, K. & Newbery, D., 2004. "Electricity transmission: an overview of the current debate," Cambridge Working Papers in Economics 0463, Faculty of Economics, University of Cambridge.
  6. Gert Brunekreeft & David Newbery, 2006. "Should merchant transmission investment be subject to a must-offer provision?," Journal of Regulatory Economics, Springer, vol. 30(3), pages 233-260, November.
  7. Nepal, R. & Jamasb, T., 2011. "Market Integration, Efficiency, and Interconnectors: The Irish Single Electricity Market," Cambridge Working Papers in Economics 1144, Faculty of Economics, University of Cambridge.
  8. de Hauteclocque, Adrien & Rious, Vincent, 2011. "Reconsidering the European regulation of merchant transmission investment in light of the third energy package: The role of dominant generators," Energy Policy, Elsevier, vol. 39(11), pages 7068-7077.
  9. Adrien de Hauteclocque & Vincent Rious, 2009. "Reconsidering the Regulation of Merchant Transmission Investment in the Light of the Third Energy Package: The Role of Dominant Generators," RSCAS Working Papers 2009/59, European University Institute.

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