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Toward a combined merchant-regulatory mechanism for electricity transmission expansion

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Author Info

  • William Hogan

    ()

  • Juan Rosellón

    ()

  • Ingo Vogelsang

    ()

Abstract

Electricity transmission pricing and transmission grid expansion have received increasing regulatory and analytical attention in recent years. Since electricity transmission is a very special service with unusual characteristics, such as loop flows, the approaches have been largely tailor-made and not simply taken from the general economic literature or from the more specific but still general incentive regulation literature. An exception has been Vogelsang (2001), who postulated transmission cost and demand functions with fairly general properties and then adapted known regulatory adjustment processes to the electricity transmission problem. A concern with this approach has been that the properties of transmission cost and demand functions are little known but are suspected to differ from conventional functional forms. The assumed cost and demand properties in Vogelsang (2001) may actually not hold for transmission companies (Transcos). Loop-flows imply that certain investments in transmission upgrades cause negative network effects on other transmission links, so that capacity is multidimensional. Total network capacity might even decrease due to the addition of new capacity in certain transmission links. The transmission capacity cost function can be discontinuous. There are two disparate approaches to transmission investment: one employs the theory based on long-run financial rights (LTFTR) to transmission (merchant approach), while the other is based on the incentive-regulation hypothesis (regulatory approach). An independent system operator (ISO) could handle the actual dispatch and operational pricing. The transmission firm is regulated through benchmark or price regulation to provide long-term investment incentives while avoiding congestion. In this paper we consider the elements that could combine the merchant and regulatory approaches in a setting with price-taking electricity generators and loads.

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

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File URL: http://hdl.handle.net/10.1007/s11149-010-9123-2
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Bibliographic Info

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

Volume (Year): 38 (2010)
Issue (Month): 2 (October)
Pages: 113-143

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Handle: RePEc:kap:regeco:v:38:y:2010:i:2:p:113-143

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

Related research

Keywords: Electricity transmission; Financial transmission rights; Incentive regulation; Loop-flow problem; D24; L51; L94;

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References

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  1. Ingo Vogelsang, 2005. "Electricity Transmission Pricing and Performance-Based Regulation," CESifo Working Paper Series 1474, CESifo Group Munich.
  2. 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.
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  6. Paul L. Joskow, 2004. "Transmission Policy in the United States," Working Papers 0417, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
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  8. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
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  12. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September.
  13. Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, vol. 29(2), pages 167-193, 03.
  14. Martzoukos, Spiros H. & Teplitz-Sembitzky, Witold, 1992. "Optimal timing of transmission line investments in the face of uncertain demand : An option valuation approach," Energy Economics, Elsevier, vol. 14(1), pages 3-9, January.
  15. Vajjhala, Shalini P. & Fischbeck, Paul S., 2007. "Quantifying siting difficulty: A case study of US transmission line siting," Energy Policy, Elsevier, vol. 35(1), pages 650-671, January.
  16. Ordover, Janusz A & Panzar, John C, 1982. "On the Nonlinear Pricing of Inputs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 659-75, October.
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  18. Thomas-Olivier Leautier, 2000. "Regulation of an Electric Power Transmission Company," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 61-92.
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Citations

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Cited by:
  1. Pringles, Rolando & Olsina, Fernando & Garcés, Francisco, 2014. "Designing regulatory frameworks for merchant transmission investments by real options analysis," Energy Policy, Elsevier, vol. 67(C), pages 272-280.
  2. Dagobert L. Brito & Juan Rosellón, 2010. "Lumpy Investment in Regulated Natural Gas Pipelines: An Application of the Theory of the Second Best," Discussion Papers of DIW Berlin 1024, DIW Berlin, German Institute for Economic Research.
  3. Stephen Littlechild, 2012. "Merchant and regulated transmission: theory, evidence and policy," Journal of Regulatory Economics, Springer, vol. 42(3), pages 308-335, December.
  4. Juan Rosellón & Erix Ruiz, 2011. "Transmission Investment in the Peruvian Electricity Market: Theory and Applications," Working papers DTE 522, CIDE, División de Economía.
  5. Anne Neumann & Juan Rosellón & Hannes Weigt, 2011. "Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market: A Proposed Merchant-Regulatory Mechanism," Discussion Papers of DIW Berlin 1145, DIW Berlin, German Institute for Economic Research.
  6. Clastres, Cédric, 2011. "Smart grids: Another step towards competition, energy security and climate change objectives," Energy Policy, Elsevier, vol. 39(9), pages 5399-5408, September.
  7. Cave, Martin, 2013. "Extending competition in network industries: Can input markets circumvent the need for an administered access regime?," Utilities Policy, Elsevier, vol. 27(C), pages 82-92.

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