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Merchant Transmission Investment

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Author Info
Joskow, P.
Tirole, J.

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Abstract

We examine the performance attributes of a merchant transmission investment framework that relies on ‘market driven’ transmission investment to provide the infrastructure to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model appears to solve the natural monopoly problem and the associated need for regulating transmission companies traditionally associated with electric transmission networks. We expand the model to incorporate imperfection in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of the behaviour system operators and transmission owners on transmission capacity and reliability, co-ordination and bargaining considerations, forward contract, commitment and asset specificity issues. This significantly undermines the attractive properties of the merchant investment model. Relying primarily on a market driven investment framework to govern investment is likely to lead to inefficient investment decisions and undermine the performance of competitive markets.

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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0324.

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Date of creation: May 2003
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Handle: RePEc:cam:camdae:0324

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Holmstrom, Bengt & Tirole, Jean, 2000. "Liquidity and Risk Management," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 295-319, August.
  2. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  3. Green, Richard, 1999. "The Electricity Contract Market in England and Wales," Journal of Industrial Economics, Blackwell Publishing, vol. 47(1), pages 107-24, March. [Downloadable!] (restricted)
  4. Aghion, Philippe & Bolton, Patrick, 1987. "Contracts as a Barrier to Entry," American Economic Review, American Economic Association, vol. 77(3), pages 388-401, June.
  5. 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.
  6. Chao, Hung-Po & Peck, Stephen, 1996. "A Market Mechanism for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 10(1), pages 25-59, July.
  7. Green, Richard, 1997. "Transmission pricing in England and Wales," Utilities Policy, Elsevier, vol. 6(3), pages 185-193, September. [Downloadable!] (restricted)
  8. Bushnell, James B. & Stoft, Steven E., 1997. "Improving private incentives for electric grid investment," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 85-108, March. [Downloadable!] (restricted)
  9. Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July. [Downloadable!] (restricted)
  10. Roger E. Bohn & Michael C. Caramanis & Fred C. Schweppe, 1984. "Optimal Pricing in Electrical Networks over Space and Time," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 360-376, Autumn. [Downloadable!] (restricted)
  11. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn. [Downloadable!] (restricted)
  12. Wu, Felix, et al, 1996. "Folk Theorems on Transmission Access: Proofs and Counterexamples," Journal of Regulatory Economics, Springer, vol. 10(1), pages 5-23, July.
  13. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Paul L. Joskow, 2005. "Markets For Power In The United States - An Interim Assessment," Working Papers 0512, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
  2. Brunekreeft, G., 2004. "‘Regulatory Issues in Merchant Transmission Investment’," Cambridge Working Papers in Economics 0422, Faculty of Economics, University of Cambridge. [Downloadable!]
  3. Littlechild, S., 2004. "Regulated and merchant interconnectors in Australia: SNI and Murraylink revisited," Cambridge Working Papers in Economics 0410, Faculty of Economics, University of Cambridge. [Downloadable!]
  4. Littlechild, S.C. & Skerk, C.J., 2004. "Regulation of transmission expansion in Argentina Part II: Developments since the Fourth Line," Cambridge Working Papers in Economics 0465, Faculty of Economics, University of Cambridge. [Downloadable!]
  5. Isamu Matsukawa, 2005. "The Effects of Average Revenue Regulation on Electricity Transmission Investment and Pricing," Industrial Organization 0512009, EconWPA. [Downloadable!]
    Other versions:
  6. Ingo Vogelsang, 2005. "Electricity Transmission Pricing and Performance-Based Regulation," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  7. Joskow, P.L., 2003. "The Difficult Transition to Competitive Electricity Markets in the U.S," Cambridge Working Papers in Economics 0328, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  8. Littlechild, S.C. & Skerk, C.J., 2004. "Regulation of transmission expansion in Argentina Part I: State ownership, reform and the Fourth Line," Cambridge Working Papers in Economics 0464, Faculty of Economics, University of Cambridge. [Downloadable!]
  9. 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. [Downloadable!]
    Other versions:
  10. Ujjayant Chakravorty & Eithan Hochman & Chieko Umetsu & David Zilberman, 2004. "Privatizing Water Distribution," Emory Economics 0403, Department of Economics, Emory University (Atlanta). [Downloadable!]
  11. Brunekreeft, G., 2003. "Market-based Investment in Electricity Transmission Networks: Controllable Flow," Cambridge Working Papers in Economics 0340, Faculty of Economics, University of Cambridge. [Downloadable!]
  12. Paul L. Joskow, 2004. "Transmission Policy in the United States," Working Papers 0417, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research. [Downloadable!]
    Other versions:
  13. Fischbeck, Paul & Vajjhala, Shalini, 2006. "Quantifying Siting Difficulty: A Case Study of U.S. Transmission Line Siting," Discussion Papers dp-06-03, Resources For the Future. [Downloadable!]
    Other versions:
  14. Makoto TANAKA, 2005. "Optimal Transmission Capacity under Nodal Pricing and Incentive Regulation for Transco," Discussion papers 05021, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  15. Juan Pablo Montero & Salvador Valdés, 2003. "Notas para la Regulación Eficiente de la Transmisión Eléctrica," Documentos de Trabajo 242, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
    Other versions:
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