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Pitfalls in Restructuring the Electricity Industry

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  • Georg Meran
  • Reimund Schwarze

Abstract

. This paper models some reductions in output that may follow the opening of electricity markets to competition. Specifically, we show that vertical separation of electricity generation, transmission and distribution could reduce welfare compared to the previous system of vertically integrated monopoly, if grid owners can act as monopolistic retailers or, alternatively, set access prices that maximize merchandizing surplus. Moreover, we show that a rule of non‐discriminatory pricing would not remedy any of these problems. Hence, to secure the efficiency gains of deregulation, the re‐regulation of the remaining monopolistic core – the electric grid – cannot rely on simple rules like cost‐based non‐discriminatory pricing.

Suggested Citation

  • Georg Meran & Reimund Schwarze, 2004. "Pitfalls in Restructuring the Electricity Industry," German Economic Review, Verein für Socialpolitik, vol. 5(1), pages 81-101, February.
  • Handle: RePEc:bla:germec:v:5:y:2004:i:1:p:81-101
    DOI: 10.1111/j.1465-6485.2004.00095.x
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    1. Takayama,Akira, 1985. "Mathematical Economics," Cambridge Books, Cambridge University Press, number 9780521314985, November.
    2. Sheshinski, Eytan, 1971. "Welfare Aspects of a Regulatory Constraint: Note," American Economic Review, American Economic Association, vol. 61(1), pages 175-178, March.
    3. Sioshansi, Fereidoon P., 2001. "Opportunities and perils of the newly liberalized European electricity markets," Energy Policy, Elsevier, vol. 29(6), pages 419-427, May.
    4. Paul L. Joskow, 1997. "Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 119-138, Summer.
    5. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-165, September.
    6. Joskow, Paul L, 1996. "Introducing Competition into Regulated Network Industries: From Hierarchies to Markets in Electricity," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 5(2), pages 341-382.
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    Cited by:

    1. Markus Ksoll, 2001. "Two stages of uniform delivered pricing and a monopolistic network in competitive electricity markets," ERSA conference papers ersa01p280, European Regional Science Association.

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