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Price Regulation for Independent Transmission Companies

Ingo Vogelsang

Journal of Regulatory Economics, 2001, vol. 20, issue 2, 65 pages

Abstract: This paper considers methods of price structure regulation of electricity transmission in the context of an independent transmission company (TRANSCO). The focus is on two-part tariffs where the variable part would reflect congestion charges (and ancillary services) while the fixed part would reflect capacity costs. The two-part tariffs form a price-cap index, and the firm could rebalance prices, as long as the index satisfies the price-cap constraint. The firm would then have incentives to trade off congestion against capacity expansion in such a way that it becomes profitable to expand, whenever the costs of congestion on average exceed the costs of expansion. However, with chained Laspeyres weights in the price-cap index expansion may be suboptimal. We therefore discuss ways to improve the expansion factor. Implementing the regulatory schemes considered suggests a hybrid approach combining a TRANSCO with an independent system operator (ISO). Copyright 2001 by Kluwer Academic Publishers

Date: 2001
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