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Should Merchant Transmission Investment be Subject to a Must-offer Provision?

  • Brunekreeft, G.
  • Newbery, D.

Merchant electricity transmission investment is a practically relevant example of an unregulated investment with monopoly properties. However, while leaving the investment decision to the market, the regulator may decide to prohibit capacity withholding with a must-offer provision. This paper examines the welfare effects of a must-offer provision prior to the capacity choice, given three reasons for capacity withholding: uncertainty, demand growth and pre-emptive investment. A must-offer provision will decrease welfare in the first two cases, and can enhance welfare only in the last case. In the presence of importer market power, a regulatory test might be needed.

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File URL: http://www.electricitypolicy.org.uk/pubs/wp/eprg0503.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0534.

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Length: 34
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:cam:camdae:0534
Note: EPRG
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Tanga McDaniel & Neuhoff, K., 2002. "Auctions to gas transmission access: The British experience," Cambridge Working Papers in Economics 0234, Faculty of Economics, University of Cambridge.
  2. Richard J. Gilbert., 1988. "Mobility Barriers and the Value of Incumbency," Economics Working Papers 8895, University of California at Berkeley.
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  7. Joshua S. Gans & Stephen P. King, 2004. "Access Holidays and the Timing of Infrastructure Investment," The Economic Record, The Economic Society of Australia, vol. 80(248), pages 89-100, 03.
  8. Brunekreeft, G. & Newbery, D., 2005. "Should Merchant Transmission Investment be Subject to a Must-offer Provision?," Cambridge Working Papers in Economics 0534, Faculty of Economics, University of Cambridge.
  9. Newbery, D. & Tanga McDaniel, 2002. "Auctions and trading in energy markets -- an economic analysis," Cambridge Working Papers in Economics 0233, Faculty of Economics, University of Cambridge.
  10. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  11. Brunekreeft, Gert, 2005. "Regulatory issues in merchant transmission investment," Utilities Policy, Elsevier, vol. 13(2), pages 175-186, June.
  12. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  13. Joskow, Paul L & Tirole, Jean, 1999. "Transmission Rights and Market Power on Electric Power Networks I: Financial Rights," CEPR Discussion Papers 2093, C.E.P.R. Discussion Papers.
  14. Joshua Gans & Stephen King, 2003. "Access Holidays for Network Infrastructure Investment," Monash Economics Working Papers archive-39, Monash University, Department of Economics.
  15. Brunekreeft, Gert, 2004. "Market-based investment in electricity transmission networks: controllable flow," Utilities Policy, Elsevier, vol. 12(4), pages 269-281, December.
  16. Richard Gilbert & Neuhoff, K. & Newbery, D., 2002. "Allocating Transmission to Mitigate Market Power in Electricity Networks," Cambridge Working Papers in Economics 0225, Faculty of Economics, University of Cambridge.
  17. Gert Brunekreeft, 2002. "Regulation and Third-Party Discrimination in the German Electricity Supply Industry," European Journal of Law and Economics, Springer, vol. 13(3), pages 203-220, May.
  18. Hogan, William W., 2003. "Transmission Market Design," Working Paper Series rwp03-040, Harvard University, John F. Kennedy School of Government.
  19. Katz, Michael L & Shapiro, Carl, 1987. "R&D Rivalry with Licensing or Imitation," American Economic Review, American Economic Association, vol. 77(3), pages 402-20, June.
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