Abstract
As competition is introduced into the electric power industry, access and pricing policy for transmission will play a pivotal role in shaping future market structure and performance. The externalities associated with the loop flow phenomenon in an electric power network constitute a significant barrier to the formation of efficient markets for electricity and transmission services. In this paper, we present a new approach to the design of an efficient market mechanism for transmission access that resolves these externalities. Under a trading rule that combines the Coasian and the Pigouvian principles to resolution of externalities, property rights are defined so that a competitive market could be established for transmission services and electricity to achieve a social optimum within a power pool. We characterize a dynamic trading process which is Lyapunov stable and always converges to a competitive equilibrium. Finally, we discuss some practical applicability and long-term investment issues.
Similar content being viewed by others
References
Blumstein, Carl, and James Bushnell. 1994. “A Guide to the Blue Book: Issues in California's Electric Industry Restructuring and Reform.” The Electricity Journal (September): pp 18–29.
Budhraja, Vikram, and Fiona Woolf. 1994. “POOLCO: An Independent Power Pool Company for an Efficient Power Market.” The Electricity Journal (September): pp 42–47.
Chao, Hung-po, and Robert Wilson. 1987. “Priority Service: Pricing, Investment, and Market Organization.” American Economic Review Vol. 77 (no. 5): 899–916.
California Public Utility Commission. 1994. Proposed Policies Governing Restructuring California's Electric Service Industry and Reforming Regulation. (R.94–04–031), Sacramento, California.
California Public Utility Commission. 1995. CPUC Offers Electric Restructuring Proposals for Comments. (May 24) Sacramento, California.
Coase, R. 1960. “The Problem of Social Cost.” The Journal of Law and Economics (3, October): pp 1–44.
Dandachi, N. H., M. J. Rawlins, O. Alsac, M. Prais, and B. Stott. 1995. “OPF for Reactive Pricing Studies on the NGC System.” Presented at IEEE PES PICA Conference, Salt Lake City, May.
Elgerd, O.I. 1982. Electric Energy Systems and Theory2nd ed. New York: McGraw-Hill Book Company.
Federal Energy Regulatory Commission. 1995. Notice of Proposed Rule-making (Open Access NOPR) (March 29, Docket No. RM95-8-000) Washington D. C.
Gale, David. 1960. The Theory of Linear Economic Models. Chicago, Illinois: The University of Chicago Press.
Garber, D., W.W. Hogan, and L. Ruff. 1994. “An Efficient Electricity Market: Using a Pool to Support Real Competition.” The Electricity Journal (June): pp 48–60.
Graves, Frank. 1995. A Primer on the Economics of Electric Power Flow. EPRITR-104604, Electric Power Research Institute, Palo Alto, California.
Henney, Alex. 1994. A Study of the Privatization of the Electricity Supply Industry in England and Wales. EEE Limited, 38 Swains Lane, London, N6 6QR.
Hogan, William. 1992. “Contract Networks for Electric Power Transmission.” Journal of Regulatory Economics Vol. 4 (September): 211–242.
Hogan, William. 1993. “Electric Transmission: A New Model for Old Principles.” The Electricity Journal (March).
Hogan, William. 1994. “Reshaping the Electricity Industry.” presented at the Federal Energy Bar Conference: Turmoil for the Utilities (November 17) Washington D.C.
Hogan, William W., Brendan Ring, and Grant Read. 1995. Using Mathematical Programming for Electricity Spot Pricing. New Zealand: University of Canterbury, Department of Management.
Joskow, Paul and Richard Schmalensee. 1983. Markets for Power. Cambridge, Massachusetts: The MIT Press.
Newbery, David and Richard Green. 1993. Regulation, Public ownership and Privatization of the English Electricity Industry. Presented at the conference on International Comparisons of Electricity Regulation, Toulouse, France, on May 14–15, 1993. Cambridge, United Kingdom, Department of Applied Economics.
Oren, S., S. Smith, R. Wilson and H. Chao. 1986. “Priority Service: Unbundling the Quality Attributes of Electric Power.” Electric Power Research Institute. EA-4851, Palo Alto, California.
Oren, Shmuel and Stephen Smith. 1989. eds., Service Opportunities for Electric Utilities: Creating Differentiated Products. Boston, MA: Kluwer Academic Publishers.
Rothkopf, Michael, Thomas Teisberg, and Edward Kahn. 1990. “Why Are Vickrey Auctions Rare? Journal of Political Economy 98: 94–109.
Schweppe, Fred C. 1980. “Homeostatic Utility Control.” Technical Paper, MIT Energy Lab.
Schweppe, F.C., M.C. Caramanis, R.D. Tabors and R.E. Bohn (1988) Spot Pricing of Electricity, Kluwer Academic Publishers: Norwell, MA.
Turner, A.J. 1995. eds.,“Principles for Pricing Electricity Transmission.” Report, Trans Power New Zealand Ltd, Wellington, New Zealand.
Vickrey, William. 1971. “Responsive Pricing of Public Utilities.” Bell Journal of Economics and Management Science 2 (No. 1): 337–346.
Wilson, Robert. 1989. “Efficient and Competitive Rationing.” Econometrica 57: 1–40.
Wu, F., P. Varaiya, P. Spiller and S. Oren. 1994. “Folk Theorems on Transmission Access: Proofs and Counter Examples.” University of California: Program on Workable Energy Regulation (POWER).
Author information
Authors and Affiliations
Additional information
The authors are indebted to Charles Clark, Shmuel Oren, Pravin Varaiya, Robert Wilson, Felix Wu, and two referees for helpful comments and suggestions and particularly to William Hogan for many incisive comments and constructive suggestions. An earlier version of this paper was presented at the Annual Meeting of International Association of Energy Economists in Washington D.C., June 20, 1995, and at the Joint LBS/IFORS International Symposium on Energy Models for Policy and Planning in London on July 18–20, 1995. This paper does not represent the views of EPRI or its members. The authors remain solely responsible for the errors in this paper.
Rights and permissions
About this article
Cite this article
Chao, HP., Peck, S. A market mechanism for electric power transmission. J Regul Econ 10, 25–59 (1996). https://doi.org/10.1007/BF00133357
Issue Date:
DOI: https://doi.org/10.1007/BF00133357