Skip to main content
SpringerLink
Log in

Toward a combined merchant-regulatory mechanism for electricity transmission expansion

  • Original Article
  • Published:
Journal of Regulatory Economics Aims and scope Submit manuscript

Abstract

Electricity transmission pricing and transmission grid expansion have received increasing attention in recent years. 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). 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. The monopoly transmission firm (Transco) is regulated through benchmark or price regulation to provide long-term investment incentives. The two-part tariff approach used can be analyzed analytically only for well-behaved cost and demand functions. We explore a series of simplified transmission grids to argue that in a variety of circumstances those 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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Awad, M., Broad, S., Casey, K. E., Chen, J., Geevarghese, A. S., Miller, et al. (2004). The California ISO transmission economic assessment methodology. Paper presented at the First Carnegie-Mellon Conference on Electricity, Pittsburgh, PA. http://www.ece.cmu.edu/~electriconf/2004/Hobbs_IEEE_TEAM.pdf

  • Blumsack, S. (2006). Network topologies and transmission investment under electric industry restructuring. Ph.D. Dissertation, Carnegie Mellon University, PA

  • Blumsack S., Lave L., Ilic M. (2007) A quantitative analysis of the relationship between congestion and reliability in electric power networks. The Energy Journal 28: 73–100

    Google Scholar 

  • Brunekreeft G., Neuhof K., Newbery D. (2005) Electricity transmission: An overview of the current debate. Utilities Policy 13(2): 73–93

    Article  Google Scholar 

  • Bushnell J. B., Stoft S. E. (1996) Electric grid investment under a contract network regime. Journal of Regulatory Economics 10: 61–79

    Article  Google Scholar 

  • Bushnell J. B., Stoft S. E. (1997) Improving private incentives for electric grid investment. Resource and Energy Economics 19: 85–108

    Article  Google Scholar 

  • California ISO and London Economics International. (2003). A Proposed methodology for evaluating the economic benefits of transmission expansions in a restructured wholesale electricity market. Ethiopia. http://www.caiso.com/docs/2003/03/25/2003032514285219307.

  • Gans J. S., King S. P. (1999) Options for electricity transmission regulation in Australia. University of Melbourne, Melbourne

    Google Scholar 

  • Grande O.S., Wangensteen I. (2000) Alternative models for congestion management and pricing impact on network planning and physical operation. CIGRE, Paris

    Google Scholar 

  • Gribik P. R., Shirmohammadi D., Graves J. S., Kritikson J. G. (2004) Transmission rights and transmission expansion. IEEE Transactions on Power Systems 20: 1728–1737

    Article  Google Scholar 

  • Hogan W. (1992) Contract networks for electric power transmission. Journal of Regulatory Economics 4: 211–242

    Article  Google Scholar 

  • Hogan, W. (2000). Flowgate Rights and Wrongs, Mimeo. JFK School of Government, Harvard Electricity Policy Group Harvard University. http://www.ksg.harvard.edu/people/whogan.

  • Hogan, W. (2002a). Financial transmission right incentives: Applications beyond hedging. Presentation to HEPG Twenty-Eight Plenary Sessions, May 31. http://www.ksg.harvard.edu/people/whogan.

  • Hogan, W. (2002b). Financial transmission right formulations, Mimeo. JFK School of Government, Harvard Electricity Policy Group Harvard University. http://www.ksg.harvard.edu/people/whogan.

  • Joskow P. (2005a). Transmission policy in the United States Utilities Policy, 13(Winter), 95–115

  • Joskow, P. (2005b). Patterns of transmission investment Electricity infrastructure investment workshop. Paris, France: CRE. March 15, 2005. http://econ-www.mit.edu/fileq/1174.

  • Joskow P., Tirole J. (2000) Transmission rights and market power on electric power networks. RAND Journal of Economics 31: 450–487

    Article  Google Scholar 

  • Joskow P., Tirole J. (2005) Merchant transmission investment. The Journal of Industrial Economics 53: 233–264

    Article  Google Scholar 

  • Krellenstein, G. (2004). Transmission financing. Paper Presented at the first Carnegie Mellon conference on electricity, Pittsburgh, PA. http://www.ece.cmu.edu/~electriconf/old2004.

  • Kristiansen T., Rosellón J. (2006) A merchant mechanism for electricity transmission expansion. Journal of Regulatory Economics 29(2): 167–193

    Article  Google Scholar 

  • Laffont J. J., Tirole J. (1996) Creating competition through interconnections: Theory and practice. Journal of Regulatory Economics 10: 227–256

    Article  Google Scholar 

  • Léautier T.-O. (2000) Regulation of an electric power transmission company. The Energy Journal 21: 61–92

    Google Scholar 

  • Martzoukos S., Teplitz-Sembitzky W. (1992) Optimal timing of transmission line investments in the face of uncertain demand: An option valuation approach. Energy Economics 14: 3–10

    Article  Google Scholar 

  • O’Neill, R. P., Helman, U., Hobbs, B. F., Stewart Jr., W. R., & Rothkopf M. H. (2002) A joint energy and transmission rights auction: Proposal and properties. http://crri.rutgers.edu/pub/wp/IEEEJETRA.pdf.

  • Ordover J., Panzar J. (1982) On the nonlinear pricing of inputs. International Economic Review 23: 659–675

    Article  Google Scholar 

  • Oren S. (1997) Economic inefficiency of passive transmission rights in congested electricity systems with competitive generation. The Energy Journal 18: 63–83

    Google Scholar 

  • Pérez-Arriaga J. I., Rubio F. J., Puerta Gutiérrez J. F. et al (1995) Marginal pricing of transmission services: An analysis of cost recovery. IEEE Transactions on Power Systems 10: 546–553

    Article  Google Scholar 

  • Ramírez J. C., Rosellón J. (2002) Pricing natural gas distribution in Mexico. Energy Economics 24(3): 231–248

    Article  Google Scholar 

  • Rosellón J. (2007) A regulatory mechanism for electricity transmission in Mexico. Energy Policy 35: 3003–3014

    Article  Google Scholar 

  • Rosellón, J., Weigt, H. (2007). A combined merchant-regulatory mechanism for electricity transmission in Europe Paper presented at the Trans-Atlantic INFRADAY Conference on Applied Infrastructure Modeling and Policy Analysis, University of Maryland, College Park, November 2, 2007.

  • Rubio-Odériz J., Pérez-Arriaga I. J. (2000) Marginal pricing of transmission services: A comparative analysis of network cost allocation methods. IEEE Transactions on Power Systems 15: 448–454

    Article  Google Scholar 

  • Saphores J., Gravel E., Bernard J. (2004) Regulation and investment under uncertainty: An application to power grid interconnection. Journal of Regulatory Economics 25: 169–186

    Article  Google Scholar 

  • Sappington D., Sibley D. (1988) Regulating without cost information: The incremental surplus subsidy scheme. International Economic Review 29: 297–306

    Article  Google Scholar 

  • Schweppe F. C., Caramanis M. C., Tabors R. D., Bohn R. E. (1988) Spot pricing of electricity. Kluwer, Boston

    Google Scholar 

  • Sheffrin A., Wolak F. A. (2001) Methodology for analyzing transmission upgrades: Two alternative proposals. Mimeo, California ISO

    Google Scholar 

  • Stigler H., Todem C. (2005) Optimization of the Austrian electricity sector (control zone of VERBUND APG) under the constraints of network capacities by nodal pricing. Central European Journal of Operations Research 13: 105–125

    Google Scholar 

  • Stoft S. (2006) Transmission investment in a deregulated power market, chapter 4 in in F. Lévêque, Competitive electricity markets and sustainability. Edward Elgar Publishing Limited, Cheltenham

    Google Scholar 

  • Stoft S., & Graves F. (2000) PBR designs for transcos: Towards a comparative framework. The Electricity Journal, 13(7), August 2000.

  • Thomas, R., Mount, T., Schuler, R., Schulze, W., & Zimmerman, R. (2006). Markets for reactive power and reliability: A white paper. Engineering and Economics of Electricity Research Group, Cornell University, December. http://www.pserc.wisc.edu/ecow/get/generalinf/presentati/psercsemin1/3psercsemin/schulze_pserc_seminar_dec06.pdf.

  • Vajjhala S. P., Fishbeck P. S. (2007) Quantifying siting difficulty: A case study of U.S. transmission Line Siting. Energy Policy 35(1): 650–671

    Article  Google Scholar 

  • Vogelsang I. (2001) Price regulation for independent transmission companies. Journal of Regulatory Economics 20: 141–165

    Article  Google Scholar 

  • Vogelsang I. (2006) Electricity transmission pricing and performance-based regulation. Energy Journal 27: 97–126

    Google Scholar 

  • Wilson R. (2002) Architecture of power markets. Econometrica 70(4): 1299–1340

    Article  Google Scholar 

  • Wolak F. A. (2000) An empirical model of the impact of hedge contract on bidding behavior in a competitive electricity market. International Economic Journal 14: 1–40

    Article  Google Scholar 

  • Yu C., Leotard J., Ilic M. (1999) Dynamic transmission provision in competitive electric power industry. Discrete Event Dynamic Systems: Theory and Applications 9: 351–388

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Kennedy School of Government, Harvard University, Cambridge, MA, USA

    William Hogan

  2. Centro de Investigación y Docencia Económicas (CIDE), Carretera México-Toluca 3655, Mexico, DF, 01210, Mexico

    Juan Rosellón

  3. German Institute for Economic Research, (DIW Berlin), Mohrenstr. 58, 10117, Berlin, Germany

    Juan Rosellón

  4. Department of Economics, Boston University, 270 Bay State Road, Boston, MA, 02215, USA

    Ingo Vogelsang

Authors
  1. William Hogan
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Juan Rosellón
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Ingo Vogelsang
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ingo Vogelsang.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Hogan, W., Rosellón, J. & Vogelsang, I. Toward a combined merchant-regulatory mechanism for electricity transmission expansion. J Regul Econ 38, 113–143 (2010). https://doi.org/10.1007/s11149-010-9123-2

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11149-010-9123-2

Keywords

JEL Classification

Search

Navigation