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Electricity Transmission Pricing and Performance-Based Regulation

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  • Ingo Vogelsang

Abstract

Performance-based regulation (PBR) is influenced by the Bayesian and non-Bayesian incentive mechanisms. While Bayesian incentives are impractical, the insights from their properties can be combined with practical non-Bayesian mechanisms for application to transmission pricing. This combination suggests an approach based on the distinction between ultra-short, short and long periods. Ultra-short periods are marked by real-time pricing of point-to-point transmission services. Pricing in short periods involves fixed fees and adjustments via price-cap formulas or profit sharing. Productivity-enhancing incentives have to be tempered by long-term commitment considerations, so that profit sharing may dominate pure price caps. Investment incentives require long-term adjustments based on rate-of-return regulation with a “used and useful” criterion.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1474.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1474

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