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The potential impact of cross-ownership in transmission: An application to the Belgian electricity market

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Author Info
Guido Pepermans () (K.U.Leuven-Center for Economic Studies)
Bert Willems () (K.U.Leuven-Center for Economic Studies)

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Abstract

This paper looks at the potential effect of partial ownership on the generation and the transmission sector of electricity markets. Ideally, in liberalized electricity markets, transmission is separated form generation. The transmission sector is a natural monopoly operated by a regulated transmission firm, while the generation sector is open for competition. This paper assumes that the transmission firm is not very well regulated and behaves strategically, that there is oligoplistic competition in generation, and that one of the generators, the incumbent, owns part of the transmission firm. We then study the effect of this partial ownership in a numerical model which is calibrated on the Belgian market. The model captures two kinds of partial ownership interactions: passive ownership, where the generation firm simply cashes its share of the transmission firm’s profit without having a direct impact on its decision process, and active ownership, where the generator has a direct influence on the transmission firm’s decision process. It is shown that ownership of the network operator by the incumbent generator reduces double marginalization (= welfare improving) but also reduces entry in the generation market (= welfare decreasing).

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Publisher Info
Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment in its series Energy, Transport and Environment Working Papers Series with number ete0501.

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Length: 34 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:ete:etewps:ete0501

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Web page: http://www.econ.kuleuven.be/ew/academic/energmil
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Related research
Keywords: vertical integration; unbundling; cross-ownership; electricity;

Other versions of this item:

Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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  1. 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. 18(1), pages 63-84.
  2. Bert Willems, 2002. "Modeling Cournot Competition in an Electricity Market with Transmission Constraints," The Energy Journal, International Association for Energy Economics, vol. 23(3), pages 95-126.
  3. Aleksandr Rudkevich & Max Duckworth & Richard Rosen, 1998. "Modeling Electricity Pricing in a Deregulated Generation Industry: The Potential for Oligopoly Pricing in a Poolco," The Energy Journal, International Association for Energy Economics, vol. 19(3), pages 19-48.
  4. William W. Hogan, 1997. "A Market Power Model with Strategic Interaction in Electricity Networks," The Energy Journal, International Association for Energy Economics, vol. 18(4), pages 107-142.
  5. Frank A. Wolak & Robert H. Patrick, 2001. "The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market," NBER Working Papers 8248, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March. [Downloadable!] (restricted)
  7. von der Fehr, Nils-Henrik Morch & Harbord, David, 1993. "Spot Market Competition in the UK Electricity Industry," Economic Journal, Royal Economic Society, vol. 103(418), pages 531-46, May. [Downloadable!] (restricted)
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  8. Guido Pepermans & Bert Willems, 2004. "Ramsey Pricing in a Congested Network with Market Power in Generation: A Numerical Illustration for Belgium," Energy, Transport and Environment Working Papers Series ete0408, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment. [Downloadable!]
  9. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-77, November. [Downloadable!] (restricted)
  10. Bert Willems, 2000. "Cournot competition in the electricity market with transmission constraints," Energy, Transport and Environment Working Papers Series ete0004, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment. [Downloadable!]
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  11. Bolle, Friedel, 1992. "Supply function equilibria and the danger of tacit collusion : The case of spot markets for electricity," Energy Economics, Elsevier, vol. 14(2), pages 94-102, April. [Downloadable!] (restricted)
  12. Severin Borenstein & James Bushnell & Christopher R. Knittel, 1999. "Market Power in Electricity Markets: Beyond Concentration Measures," The Energy Journal, International Association for Energy Economics, vol. 20(4), pages 65-88.
  13. Bresnahan, Timothy F. & Salop, Steven C., 1986. "Quantifying the competitive effects of production joint ventures," International Journal of Industrial Organization, Elsevier, vol. 4(2), pages 155-175, June. [Downloadable!] (restricted)
  14. 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. [Downloadable!] (restricted)
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