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Extended Price Cap Mechanism for Efficient Transmission Expansion under Nodal Pricing

  • Makoto Tanaka

    ()

This paper examines the regulatory incentive mechanisms for efficient investment in the transmission network under the ISO and Gridco institutional framework. By considering a new element associated with power flow, we develop an extended price cap mechanism that can properly internalize technological externalities among transmission lines. We show that the new mechanism can induce the Gridco to achieve the long-term optimal capacity expansion in the presence of technological externalities, while the ISO continuously promotes efficient capacity utilization in the short run under nodal pricing. Copyright Springer Science+Business Media, LLC 2007

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File URL: http://hdl.handle.net/10.1007/s11067-006-9016-1
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Article provided by Springer in its journal Networks and Spatial Economics.

Volume (Year): 7 (2007)
Issue (Month): 3 (September)
Pages: 257-275

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Handle: RePEc:kap:netspa:v:7:y:2007:i:3:p:257-275
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  1. Paul Joskow & Jean Tirole, 2003. "Merchant Transmission Investment," NBER Working Papers 9534, National Bureau of Economic Research, Inc.
  2. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-47, June.
  3. 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.
  4. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September.
  5. Hogan, William W., 2003. "Transmission Market Design," Working Paper Series rwp03-040, Harvard University, John F. Kennedy School of Government.
  6. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
  7. 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.
  8. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-83, June.
  9. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring.
  10. 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.
  11. 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, June.
  12. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
  13. Roger E. Bohn & Michael C. Caramanis & Fred C. Schweppe, 1984. "Optimal Pricing in Electrical Networks over Space and Time," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 360-376, Autumn.
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