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Optimal Transmission Capacity under Nodal Pricing and Incentive Regulation for Transco

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  • Makoto TANAKA

Abstract

This paper examines regulatory incentive mechanisms for efficient investment in the transmission network, taking into account both technological externalities among transmission lines and information asymmetry between the regulator and the transmission company (Transco). First, by adding extra constraints associated with the power flow, we develop an extended price cap mechanism that can internalize technological externalities among transmission lines. We show that this new mechanism induces the Transco to choose the optimal transmission capacity under its budget constraint. An extended form of the Vogelsang and Finsinger (V-F) mechanism is also introduced. Next, we examine the surplus-based scheme with government transfers. We provide a formal analysis of the incremental surplus subsidy (ISS) scheme specifically for the Transco, demonstrating that it induces the Transco to choose the optimal transmission capacity without the budget constraint.

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Bibliographic Info

Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 05021.

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Length: 19 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:eti:dpaper:05021

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References

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  1. 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.
  2. Bushnell, James & Stoft, Steven, 1997. "Improving Private Incentives for Electric Grid Investment," Staff General Research Papers 31549, Iowa State University, Department of Economics.
  3. Joskow, Paul & Tirole, Jean, 2004. "Merchant Transmission Investment," IDEI Working Papers 263, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Rosellón Juan, 2003. "Different Approaches Towards Electricity Transmission Expansion," Review of Network Economics, De Gruyter, vol. 2(3), pages 1-32, September.
  5. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September.
  6. 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.
  7. Joshua S. Gans & Stephen P. King, 2000. "Options for Electricity Transmission Regulation in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 33(2), pages 145-160.
  8. Finsinger, Jorg & Vogelsang, Ingo, 1985. "Strategic Management Behavior under Reward Structures in a Planned Economy [Reward Structures in a Planned Economy: The Problem of Incentives and Efficient Allocation of Resources]," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 263-69, February.
  9. 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.
  10. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
  11. Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
  12. 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.
  13. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
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Cited by:
  1. Prieger, James E. & Sanders, Nicholas J., 2012. "Verifiable and non-verifiable anonymous mechanisms for regulating a polluting monopolist," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 410-426.
  2. Lantz, Bjorn, 2007. "A non-Bayesian piecewise linear approximation adjustment process for incentive regulation," Information Economics and Policy, Elsevier, vol. 19(1), pages 95-101, March.

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