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The Competitive Effects of Ownership of Financial Transmission Rights in a Deregulated Electricity Industry

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  • Manho Joung
  • Ross Baldick
  • You Seok Son

Abstract

In this paper, we investigate how generators’ ownership of financial transmission rights (FTRs) may influence the effects of the transmission lines on competition. In order for concrete analysis, a simple symmetric market model is introduced and FTRs are modeled in two different forms: FTR options and FTR obligations. This paper shows that introducing FTRs in an appropriate manner may reduce the physical capacity needed for the full benefits of competition. Among the competitive effects of ownership of FTRs, we focus on the effects on two possible pure strategy equilibria: the unconstrained Cournot equilibrium and the passive/aggressive equilibrium. We also analyze an extension of the model: asymmetric markets. Finally, a numerical illustration of applying the analysis is presented.

Suggested Citation

  • Manho Joung & Ross Baldick & You Seok Son, 2008. "The Competitive Effects of Ownership of Financial Transmission Rights in a Deregulated Electricity Industry," The Energy Journal, , vol. 29(2), pages 165-184, April.
    • Handle: RePEc:sae:enejou:v:29:y:2008:i:2:p:165-184
    DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-9
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    References listed on IDEAS

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    1. Severin Borenstein & James. Bushnell & Steven Stoft, 2000. "The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 294-325, Summer.
    2. Bert Willems, 2002. "Modeling Cournot Competition in an Electricity Market with Transmission Constraints," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 95-125.
    3. Richard Gilbert & Karsten Neuhoff & David Newbery, 2004. "Allocating Transmission to Mitigate Market Power in Electricity Markets," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 691-709, Winter.
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