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MERCHANT TRANSMISSION INVESTMENT *
Author(s) -
Joskow Paul,
Tirole Jean
Publication year - 2005
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.0022-1821.2005.00253.x
Subject(s) - transmission (telecommunications) , investment (military) , industrial organization , business , electricity market , electricity , monopoly , power transmission , electric power transmission , natural monopoly , set (abstract data type) , microeconomics , commerce , economics , power (physics) , telecommunications , computer science , engineering , programming language , physics , electrical engineering , quantum mechanics , politics , political science , law
We examine the performance attributes of a merchant transmission investment framework that relies on ‘market driven’ investment to increase transmission network capacity needed to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model has a remarkable set of attributes that appears to solve the natural monopoly problem and the associated need for regulating electric transmission companies. We expand the merchant model to incorporate several attributes of wholesale power markets and transmission networks that the merchant model ignores. These include market power in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, strategic behavior by potential merchant transmission investors and issues related to the coordination of transmission system operators and merchant transmission owners. Incorporating these more realistic attributes of transmission networks and the behavior of transmission owners and system operators leads to the conclusion that several potentially significant inefficiencies may result from reliance on the merchant transmission investment framework. Accordingly, it is inappropriate for policymakers to assume that they can avoid dealing with the many challenges associated with stimulating efficient levels of investment in electric transmission networks by adopting the merchant model.