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

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 examin...

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Bibliographic Details
Published inJournal of regulatory economics Vol. 30; no. 3; pp. 233 - 260
Main Authors Brunekreeft, Gert, Newbery, David
Format Journal Article
LanguageEnglish
Published Norwell Springer 01.11.2006
Springer Nature B.V
Subjects
Economic regulation
Economic theory
Electricity
Electricity distribution
Investments
Monopolies
Power supply
Production capacity
Public economics
Regulation
Regulatory policy
Studies
U.S.A
Utilities
Europe
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Summary: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. [PUBLICATION ABSTRACT]
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ISSN:0922-680X
1573-0468
DOI:10.1007/s11149-006-9002-z