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Reconsidering the Regulation of Merchant Transmission Investment in the Light of the Third Energy Package: The Role of Dominant Generators

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  • Adrien de Hauteclocque
  • Vincent Rious
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    Abstract

    Following the grant of exemptions from the EC rules on third party access to the interconnectors BritNed, Estlink and East West Cables, the regulation of merchant transmission investment has become an important issue in the electricity sector. The creation of a new Agency for the Cooperation of Energy Regulators (ACER), which will enjoy decision powers on this issue, is therefore a unique occasion to question and maybe re-design the current strategy. This paper shows that the recent decisions evidence a strong bias against dominant generators and that incumbent or new entrant TSOs are generally favoured by European regulators and the European Commission. It argues that this strategy is misguided as it fails to recognize both the conflict of interest between the regulated and non-regulated activities of incumbent TSOs and the new incentives of generators. The opportunity to let dominant generators undertake merchant investment is then investigated and we find that it is generally welfare-improving as long as potential abuses of dominance can be mitigated. To deter possible anti-competitive effects, the paper proposes a new and feasible allocation of regulatory powers based on a clear demarcation between the monitoring of transparency requirements by ACER and antitrust enforcement by the European Commission.

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    Paper provided by European University Institute in its series RSCAS Working Papers with number 2009/59.

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    Date of creation: 04 Nov 2009
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    Handle: RePEc:rsc:rsceui:2009/59

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    Keywords: Merchant transmission investment; European Union; third energy package;

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    1. François Lévêque & Jean-Michel Glachant & Marcelo Saguan & Gildas de Muizon, 2009. "How to rationalize the debate about 'EU Energy Third Package'? Revisiting criteria to compare electricity transmission organizations," RSCAS Working Papers 2009/15, European University Institute.
    2. Olmos Camacho, Luis & Perez-Arriaga, Ignacio J., 2007. "Comparison of several inter-TSO compensation methods in the context of the internal electricity market of the European Union," Energy Policy, Elsevier, vol. 35(4), pages 2379-2389, April.
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    13. Jean-Michel Glachant & François Lévêque, 2005. "Electricity Internal Market in the European Union - What to do next?," Working Papers 0515, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
    14. Roques, Fabien A. & Newbery, David M. & Nuttall, William J., 2008. "Fuel mix diversification incentives in liberalized electricity markets: A Mean-Variance Portfolio theory approach," Energy Economics, Elsevier, vol. 30(4), pages 1831-1849, July.
    15. Brunekreeft, Gert, 2004. "Market-based investment in electricity transmission networks: controllable flow," Utilities Policy, Elsevier, vol. 12(4), pages 269-281, December.
    16. Brunekreeft, Gert, 2005. "Regulatory issues in merchant transmission investment," Utilities Policy, Elsevier, vol. 13(2), pages 175-186, June.
    17. Joshua Gans & Stephen King, 2003. "Access Holidays for Network Infrastructure Investment," Development Research Unit Working Paper Series archive-39, Monash University, Department of Economics.
    18. R.A. Hakvoort & L.J. De Vries, 2002. "An economic assessment of congestion management methods for electricity transmission networks," Competition and Regulation in Network Industries, Intersentia, vol. 3(4), pages 425-467, September.
    19. Roques Fabien A. & Newbery David M. & Nuttall William J., 2005. "Investment Incentives and Electricity Market Design: the British Experience," Review of Network Economics, De Gruyter, vol. 4(2), pages 1-36, June.
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