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Toward a combined merchant-regulatory mechanism for electricity transmission expansion

Journal of Regulatory Economics volume 38, pages 113–143 (2010)Cite this article

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.

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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

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  1. William Hogan
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  2. Juan Rosellón
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  3. Ingo Vogelsang
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Correspondence to Ingo Vogelsang.

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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

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

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