Power Flows: Transmission Lines, Allocative Efficiency, and Corporate Profits

Economists, energy experts, and policymakers have called for accelerating investment in the U.S. electricity transmission network. Additional transmission lines could better integrate markets, reducing the total cost of electricity generation. They could also allow for the better integration of renewable energy sources such as wind and solar, located in areas that traditionally did not have much generation capacity and that are far away from centers of demand. In this paper, I document the magnitude of static allocative inefficiencies induced by transmission congestion in two major U.S. electricity markets. I show that the allocative inefficiencies have risen over time, totaling more than $2 billion in 2022. Moreover, I document an important political economy dimension not yet explored in the literature: the magnitudes of gains and losses from this market integration at some individual firms is surprisingly large: four firms would have experienced a collective $1.6 billion drop in net revenues in 2022 had the market been integrated. I then tie some of these firms to reports of transmission hold-up in these markets. I argue that understanding firm-level gains and losses is just as important as understanding overall inefficiencies, particularly in an environment where incumbents may have the power to block new lines.