Transmission Rights and Market Power on Electric Power Networks I: Financial Rights
AbstractWe examine whether and how the allocation of financial transmission rights affects the behavior of electricity generators and electricity consumers with market power in the electricity market. The analysis recognizes that the ultimate allocation of rights is endogenous, depending both on whether transmission rights can enhance market power and the microstructure of the rights market. Three alternative rights market microstructures are examined. The analysis initially focuses on a two-node network where there are cheap supplies available in an exporting region, expensive supplies in an importing region, and a congested transmission link between the two regions. Several other market power configurations are examined in less detail. We find that the allocation of financial rights can enhance the market power of generators at the expensive node and of electricity buyers at the cheap node. Financial rights can also mitigate market power of buyers at the expensive node and of sellers at the cheap node. However, when there is a monopoly at the expensive node, allocating financial rights to it need not affect its behavior since it may extract all of the congestion rents without possessing financial rights. Whether and how many rights will be allocated through the rights market to agents that can use them to enhance market power turns on the microstructure of the rights market and, in particular, on the extent of free riding on the potential monopoly rents accruing to rights holders. Extending the analysis to a three-node network to allow for loop flows does not change the basic results. Alternative regulatory rules that would restrict who can acquire rights are examined. A companion paper extends this analysis to the situation where physical rather than financial rights are utilized and compares the welfare properties of financial and physical rights from a market power enhancement perspective.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2093.
Date of creation: Mar 1999
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Find related papers by JEL classification:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
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.:
- Severin Borenstein & James. Bushnell & Steven Stoft, 2000.
"The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry,"
RAND Journal of Economics,
The RAND Corporation, vol. 31(2), pages 294-325, Summer.
- Severin Borenstein & James Bushnell & Steven Stoft, 1997. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," NBER Working Papers 6293, National Bureau of Economic Research, Inc.
- Berenstein, Severin & Bushnell, James & Stoft, Steven, 2000. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," Staff General Research Papers 13145, Iowa State University, Department of Economics.
- Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 172-204, February.
- Bengt Holmstrom & Jean Tirole, 1996.
"Private and Public Supply of Liquidity,"
NBER Working Papers
5817, National Bureau of Economic Research, Inc.
- A. Admati & P. Pßeiderer & J. Zechner, 2005.
"Large shareholder activism, risk sharing, and financial market equilibrium,"
- Admati, Anat R & Pfleiderer, Paul & Zechner, Josef, 1994. "Large Shareholder Activism, Risk Sharing, and Financial Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1097-1130, December.
- Green, Richard & Newbery, David M G, 1991.
"Competition in the British Electricity Spot Market,"
CEPR Discussion Papers
557, C.E.P.R. Discussion Papers.
- Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
- Steven Stoft, 1999. "Financial Transmission Rights Meet Cournot: How TCCs Curb Market Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-23.
- Harvey, Scott M. & Hogan, William W. & Pope, Susan L., 1996. "Transmission capacity reservations implemented through a spot market with transmission congestion contracts," The Electricity Journal, Elsevier, vol. 9(9), pages 42-55, November.
- Bushnell, James, 1999. "Transmission Rights and Market Power," The Electricity Journal, Elsevier, vol. 12(8), pages 77-85, October.
- Joskow, Paul L & Tirole, Jean, 1999. "Transmission Rights and Market Power on Electric Power Networks. II: Physical Rights," CEPR Discussion Papers 2087, C.E.P.R. Discussion Papers.
- Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
- Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
- 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.
- Shmuel S. Oren, 1997. "Economic Inefficiency of Passive Transmission Rights in Congested Electricity Systems with Competitive Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 63-83.
- Oren, Shmuel S. & Spiller, Pablo T. & Varaiya, Pravin & Wu, Felix, 1995. "Nodal prices and transmission rights: A critical appraisal," The Electricity Journal, Elsevier, vol. 8(3), pages 24-35, April.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.