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The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry

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  • Severin Borenstein
  • James Bushnell
  • Steven Stoft

Abstract

In an unregulated electricity generation market, the degree to which generators in" different locations compete with one another depends on the capacity to transmit electricity" between the locations. We study the impact of transmission capacity on competition among" generators. We show that there may be no relationship between the effect of a transmission line" in spurring competition and the actual electricity that flows on the line. We then investigate the" equilibria that are likely to result as transmission lines between previously unconnected locations" are built and expanded. We demonstrate that limited transmission capacity can give a firm the" incentive to restrict its output in order to congest transmission into its area of dominance. This" analysis is applied to a model of California's forthcoming deregulated electricity market. Our" results indicate that at least one firm could have an incentive to strategically induce transmission" congestion and that relatively small investments in transmission may yield surprisingly large" payoffs in terms of increased competition.

Suggested Citation

  • Severin Borenstein & James Bushnell & Steven Stoft, 1997. "The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry," NBER Working Papers 6293, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6293
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    1. Fudenberg, Drew & Levine, David, 1998. "Learning in games," European Economic Review, Elsevier, vol. 42(3-5), pages 631-639, May.
    2. Cardell, Judith B. & Hitt, Carrie Cullen & Hogan, William W., 1997. "Market power and strategic interaction in electricity networks," Resource and Energy Economics, Elsevier, vol. 19(1-2), pages 109-137, March.
    3. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-953, October.
    4. Shmuel S. Oren, 1997. "Economic Inefficiency of Passive Transmission Rights in Congested Electricity Systems with Competitive Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 63-83.
    5. Frank A. Wolak & Robert H. Patrick, 2001. "The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market," NBER Working Papers 8248, National Bureau of Economic Research, Inc.
    6. Borenstein, Severin & Bushnell, James & Kahn, Edward & Stoft, Steven, 1995. "Market power in California electricity markets," Utilities Policy, Elsevier, vol. 5(3-4), pages 219-236.
    7. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    8. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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