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Transmission Rights and Market Power on Electric Power Networks. II: Physical Rights

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  • Joskow, Paul L
  • Tirole, Jean

Abstract

We examine whether and how the allocation of physical rights to utilize congested transmission links affects the behavior of electricity generators and electricity consumers with market power in the electricity market. The paper extends the analysis of financial transmission rights contained in a companion paper to the physical rights case. The analysis recognizes that the ultimate allocation of transmission rights is endogenous, depending both on whether transmission rights can enhance market power and the microstructure of the rights market. Three alternative rights market microstructures are examined. The analysis initially focuses on a two-node network where there are cheap supplies available in an exporting region, expensive supplies in an importing region, and a congested transmission link betveen the two regions. Several other market power configurations are examined in less detail. The allocation of physical rights can cause production inefficiency due to withholding of physical rights from the market, an effect that is not observed for financial rights. Extension to a three-node network to allow for loopflows does not change the basic results, but does reveal complications associated with the creation of and accounting for physical transmission rights when there is loop flow. Alternative ``capacity release'' rules are considered as a response to rights withholding problems. The paper concludes with a comparison of the welfare properties of financial and physical rights from a market power enhancement perspective.

Suggested Citation

  • Joskow, Paul L & Tirole, Jean, 1999. "Transmission Rights and Market Power on Electric Power Networks. II: Physical Rights," CEPR Discussion Papers 2087, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2087
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    References listed on IDEAS

    as
    1. Chao, Hung-Po & Peck, Stephen, 1996. "A Market Mechanism for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 10(1), pages 25-59, July.
    2. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
    3. 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.
    4. Bushnell, James, 1999. "Transmission Rights and Market Power," The Electricity Journal, Elsevier, vol. 12(8), pages 77-85, October.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Borenstein, Severin & Bushnell, James & Wolak, Frank, 1999. "Diagnosing Market Power in California's Deregulated Wholesale Electricity Market," Competition Policy Center, Working Paper Series qt3rx965d5, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    2. SMEERS, Yves, 2005. "Long term locational prices and investment incentives in the transmission of electricity," CORE Discussion Papers 2005030, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Alexander Galetovic, 2003. "Integración Vertical en el Sector Eléctrico: Una guía para el usuario (Vertical integration in the electricity sector)," Documentos de Trabajo 158, Centro de Economía Aplicada, Universidad de Chile.
    4. 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.
    5. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 358-387, November.
    6. Hu, X. & Ralph, D. & Ralph, E.K. & Bardsley, P. & Ferris, M.C., 2004. "Electricity Generation with Looped Transmission Networks: Bidding to an ISO," Cambridge Working Papers in Economics 0470, Faculty of Economics, University of Cambridge.
    7. Enzo Sauma & Shmuel Oren, 2006. "Proactive planning and valuation of transmission investments in restructured electricity markets," Journal of Regulatory Economics, Springer, vol. 30(3), pages 261-290, November.

    More about this item

    Keywords

    Congestion; physical rights; Power markets; Restructuring; Transmission;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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