Toward a Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion
Electricity transmission pricing and transmission grid expansion have received increasing regulatory and analytical attention in recent years. Since electricity transmission is a very special service with unusual characteristics, such as loop flows, the approaches have been largely tailor-made and not simply taken from the general economic literature or from the more specific but still general incentive regulation literature. An exception has been Vogelsang (2001), who postulated transmission cost and demand functions with fairly general properties and then adapted known regulatory adjustment processes to the electricity transmission problem. A concern with this approach has been that the properties of transmission cost and demand functions are little known but are suspected to differ from conventional functional forms. The assumed cost and demand properties in Vogelsang (2001) may actually not hold for transmission companies (Transcos). Loop-flows imply that certain investments in transmission upgrades cause negative network effects on other transmission links, so that capacity is multidimensional. Total network capacity might even decrease due to the addition of new capacity in certain transmission links. The transmission capacity cost function can be discontinuous. There are two disparate approaches to transmission investment: one employs the theory based on long-run financial rights (LTFTR) to transmission (merchant approach), while the other is based on the incentive-regulation hypothesis (regulatory approach). An independent system operator (ISO) handles the actual dispatch and operational pricing. The transmission firm is regulated through benchmark or price regulation to provide long-term investment incentives while avoiding congestion. In this paper we consider the elements that could combine the merchant and regulatory approaches in a setting with price-taking electricity generators and loads. Methods: Based on LTFTRs, merchant mechanisms are easiest to understand for incrementally small expansions in meshed networks under an ISO environment. The price-cap method seeks to regulate a monopoly Transco. The regulatory goal in this paper is an extension of Vogelsang (2001) for meshed projects. Transmission output is redefined in terms of incremental LTFTRs (or total LTFTRs, if a long period is assumed) so as to be able to apply the Vogelsang’s incentive mechanism to a meshed network. For lumpy and large transmission projects a fixed part of the tariff plays the role of a complementary charge. The variable part of the tariff is based on nodal prices; pricing for the different cost components of transmission is such that they do not conflict with each other (fixed costs are allocated so that the variable charges are able to reflect nodal prices); variations in fixed charges over time partially counteract the variability of nodal prices giving some price insurance to the market participants. Results: We consider two types of price index weights: chained Laspeyres weights and idealized weights. Laspeyres weights are easily calculated and have shown good economic properties under well-behaved, stable cost and demand conditions. Idealized weights correspond to perfectly predicted quantities and posses strong efficiency properties. With idealized weights provide incentives for marginal cost pricing. Regarding transmission cost functions, we explore a series of simplified cases to argue that in a variety of circumstances the cost functions could have reasonable economic properties. The results suggest directions for further research to explore the properties of the cost functions and implications for design of practical incentive mechanisms and the integration with merchant investment in organized markets with LTFTRs. Conclusions: This paper addresses institutional frameworks, transmission cost and demand functions. It is a step in a continuing research agenda to extend incentive regulation while maintaining compatibility with operation of electricity markets.
|Date of creation:||Jun 2007|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 01 800 021 2433
Web page: http://www.cide.edu/divisiones-academicas/economia/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jean-Daniel Saphores & Eric Gravel & Jean-Thomas Bernard, 2004. "Regulation and Investment under Uncertainty: An Application to Power Grid Interconnection," Journal of Regulatory Economics, Springer, vol. 25(2), pages 169-186, 03.
- Martzoukos, Spiros H. & Teplitz-Sembitzky, Witold, 1992. "Optimal timing of transmission line investments in the face of uncertain demand : An option valuation approach," Energy Economics, Elsevier, vol. 14(1), pages 3-9, January.
- Brunekreeft, Gert & Neuhoff, Karsten & Newbery, David, 2005.
"Electricity transmission: An overview of the current debate,"
Elsevier, vol. 13(2), pages 73-93, June.
- Brunekreeft, G. & Neuhoff, K. & Newbery, D., 2004. "Electricity transmission: an overview of the current debate," Cambridge Working Papers in Economics 0463, Faculty of Economics, University of Cambridge.
- Ordover, Janusz A & Panzar, John C, 1982. "On the Nonlinear Pricing of Inputs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 659-75, October.
- Bushnell, James B. & Stoft, Steven E., 1997.
"Improving private incentives for electric grid investment,"
Resource and Energy Economics,
Elsevier, vol. 19(1-2), pages 85-108, March.
- Bushnell, James & Stoft, Steven, 1997. "Improving Private Incentives for Electric Grid Investment," Staff General Research Papers 31549, Iowa State University, Department of Economics.
- Robert Wilson, 2002. "Architecture of Power Markets," Econometrica, Econometric Society, vol. 70(4), pages 1299-1340, July.
- Fischbeck, Paul & Vajjhala, Shalini, 2006.
"Quantifying Siting Difficulty: A Case Study of U.S. Transmission Line Siting,"
dp-06-03, Resources For the Future.
- Vajjhala, Shalini P. & Fischbeck, Paul S., 2007. "Quantifying siting difficulty: A case study of US transmission line siting," Energy Policy, Elsevier, vol. 35(1), pages 650-671, January.
- Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-42, September.
- Joskow, P.L., 2005.
"Patterns of Transmission Investment,"
Cambridge Working Papers in Economics
0527, Faculty of Economics, University of Cambridge.
- Ingo Vogelsang, 2006.
"Electricity Transmission Pricing and Performance-based Regulation,"
The Energy Journal,
International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
- Ingo Vogelsang, 2005. "Electricity Transmission Pricing and Performance-Based Regulation," CESifo Working Paper Series 1474, CESifo Group Munich.
- Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
- Tarjei Kristiansen & Juan Rosellón, 2006. "A Merchant Mechanism for Electricity Transmission Expansion," Journal of Regulatory Economics, Springer, vol. 29(2), pages 167-193, 03.
- 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.
- Seth Blumsack & Lester B. Lave & Marija Ilic, 2007. "A Quantitative Analysis of the Relationship Between Congestion and Reliability in Electric Power Networks," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 73-100.
- Frank Wolak, 2000. "An Empirical Analysis of the Impact of Hedge Contracts on Bidding Behavior in a Competitive Electricity Market," International Economic Journal, Taylor & Francis Journals, vol. 14(2), pages 1-39.
- Stoft, Steven & Graves, Frank, 2000. "PBR Designs for Transcos: Toward a Comparative Framework," The Electricity Journal, Elsevier, vol. 13(7), pages 32-45.
- Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-56, November.
- 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.
- Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-65, September.
- Joshua S. Gans & Stephen P. King, 2000. "Options for Electricity Transmission Regulation in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 33(2), pages 145-160.
When requesting a correction, please mention this item's handle: RePEc:emc:wpaper:dte389. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Daniel Ventosa-Santaulària)
If references are entirely missing, you can add them using this form.