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Should merchant transmission investment be subject to a must-offer provision?

  • Gert Brunekreeft
  • David Newbery
Original Article

Abstract

Merchant electricity transmission investment is a practically relevant example of an unregulated investment with monopoly properties. However, while leaving the investment decision to the market, the regulator may decide to prohibit capacity withholding with a must-offer provision. This paper examines the welfare effects of a must-offer provision prior to the capacity choice, given three reasons for capacity withholding: uncertainty, demand growth and pre-emptive investment. A must-offer provision will decrease welfare in the first two cases, and can enhance welfare only in the last case. In the presence of importer market power, a regulatory test might be needed.

Keywords

Investment Must-offer Capacity withholding Regulation Electricity 

JEL Classifications

L51 L94 L4 

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Copyright information

© ©Springer Science+Business Media, LLC 2006 2006

Authors and Affiliations

  1. 1.Tilburg Law and Economics Center (TILEC)Tilburg UniversityTilburgThe Netherlands
  2. 2.Faculty of EconomicsUniversity of CambridgeCambridgeEngland

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