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Journal of Regulatory Economics

, Volume 38, Issue 2, pp 113–143 | Cite as

Toward a combined merchant-regulatory mechanism for electricity transmission expansion

  • William Hogan
  • Juan Rosellón
  • Ingo Vogelsang
Original 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.

Keywords

Electricity transmission Financial transmission rights Incentive regulation Loop-flow problem 

JEL Classification

D24 L51 L94 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  • William Hogan
    • 1
  • Juan Rosellón
    • 2
    • 3
  • Ingo Vogelsang
    • 4
  1. 1.Kennedy School of GovernmentHarvard UniversityCambridgeUSA
  2. 2.Centro de Investigación y Docencia Económicas (CIDE)MexicoMexico
  3. 3.German Institute for Economic Research, (DIW Berlin)BerlinGermany
  4. 4.Department of EconomicsBoston UniversityBostonUSA

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