Essays on electricity transmission investment and financial transmission rights

The U.S. electric power industry has been going through fundamental restructuring and realignment since the 1990's. Many issues and problems have emerged during the transition, and both economists and engineers have been looking for the solutions fervently. In this dissertation, which consists primarily of three essays, we apply economics theory and techniques to the power industry and address two related issues, transmission investment and financial transmission rights (FTRs). The first essay takes the decentralized perspective and investigates the efficiency attribute of market-based transmission investment under perfect competition. We clarify, for the first time, the nature of the externality created by loop flows that causes transmission investment to be inefficient. Our findings have important implications for better understanding of transmission market design and creating incentives for efficient transmission investment. In the second essay, we define several rules for allocating transmission investment cost within the framework of cooperative game theory. These rules provide fair, stable or efficient cost allocations in theory and are good benchmarks against which the allocation mechanism in practice can be compared and improved upon. In the last essay, we make exploratory efforts in analyzing and assessing empirically the performance of the Midwest independent system operator (MISO) FTR auction market. We reveal some stylized facts about this young market and find that it is not efficient under the risk-neutrality assumption. We also point out and correct the drawbacks in previous related work and suggest about more complete empirical work in future. In all, this dissertation makes both theoretic and empirical analysis of the two hot issues related to the power industry and comes up with findings that have important implications for the development of this industry.