The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry

Severin Borenstein, James Bushnell and Steven Stoft

No 6293, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In an unregulated electricity generation market, the degree to which generators in" different locations compete with one another depends on the capacity to transmit electricity" between the locations. We study the impact of transmission capacity on competition among" generators. We show that there may be no relationship between the effect of a transmission line" in spurring competition and the actual electricity that flows on the line. We then investigate the" equilibria that are likely to result as transmission lines between previously unconnected locations" are built and expanded. We demonstrate that limited transmission capacity can give a firm the" incentive to restrict its output in order to congest transmission into its area of dominance. This" analysis is applied to a model of California's forthcoming deregulated electricity market. Our" results indicate that at least one firm could have an incentive to strategically induce transmission" congestion and that relatively small investments in transmission may yield surprisingly large" payoffs in terms of increased competition.

Date: 1997-11
Note: IO
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Published as Borenstein, Severin, James Bushnell and Steven Stoft. "The Competitive Effects Of Transmission Capacity In A Deregulated Electricity Industry," Rand Journal of Economics, 2000, v31(2,Summer), 294-325.

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Journal Article: The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry (2000)
Working Paper: The Competitive Effects of Transmission Capacity in a Deregulated Electricity Industry (2000)
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