[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/diw/diwwpp/dp1696.html
   My bibliography  Save this paper

A Simple Regulatory Incentive Mechanism Applied to Electricity Transmission Pricing and Investment

Author

Listed:
  • Mohammad Reza Hesamzadeh
  • Juan Rosellón
  • Steven A. Gabriel
  • Ingo Vogelsang
Abstract
The informationally simple approach to incentive regulation applies mechanisms that translate the regulator’s objective function into the firm’s profit-maximizing objective. These mechanisms come in two forms, one based on subsidies/taxes,the other based on constraints/ price caps. In spite of a number of improvements and a good empirical track record simple approaches so far remain imperfect. The current paper comes up with a new proposal, called H-R-G-V, which blends the two traditions and is shown to apply well to electricity transmission pricing and investment. In particular, it induces immediately optimal pricing/investment but is not based on subsidies. In the transmission application, the H-RG- V approach is based on a bilevel optimization with the transmission company (Transco) at the top and the independent system operator (ISO) at the bottom level. We show that HR- G-V, while not perfect, marks an improvement over the other simple mechanisms and a convergence of the two traditions. We suggest ways to deal with remaining practical issues of demand and cost functions changing over time.

Suggested Citation

  • Mohammad Reza Hesamzadeh & Juan Rosellón & Steven A. Gabriel & Ingo Vogelsang, 2017. "A Simple Regulatory Incentive Mechanism Applied to Electricity Transmission Pricing and Investment," Discussion Papers of DIW Berlin 1696, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1696
    as

    Download full text from publisher

    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.567334.de/dp1696.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. William Hogan & Juan Rosellón & Ingo Vogelsang, 2010. "Toward a combined merchant-regulatory mechanism for electricity transmission expansion," Journal of Regulatory Economics, Springer, vol. 38(2), pages 113-143, October.
    2. Semih Koray & Ismail Saglam, 2005. "The Need for Regulating a Bayesian Regulator," Journal of Regulatory Economics, Springer, vol. 28(1), pages 5-21, July.
    3. Sharkey, W W, 1979. "A Decentralized Method for Utility Regulation: A Comment," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 405-407, October.
    4. Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
    5. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    6. Paul L. Joskow, 2006. "Incentive Regulation for Electricity Networks," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(02), pages 3-9, July.
    7. Paul L. Joskow, 2006. "Incentive Regulation for Electricity Networks," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(2), pages 3-9, 07.
    8. Paul L. Joskow, 2014. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344, National Bureau of Economic Research, Inc.
    9. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-930, July.
    10. Fraser, Rob, 1995. "The Relationship between the Costs and Prices of a Multi-product Monopoly: The Role of Price-Cap Regulation," Journal of Regulatory Economics, Springer, vol. 8(1), pages 23-31, July.
    11. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    12. Vogelsang, Ingo, 2001. "Price Regulation for Independent Transmission Companies," Journal of Regulatory Economics, Springer, vol. 20(2), pages 141-165, September.
    13. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
    14. Schill, Wolf-Peter & Egerer, Jonas & Rosellón, Juan, 2015. "Testing Regulatory Regimes for Power Transmission Expansion with Fluctuating Demand and Wind Generation," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 47(1), pages 1-28.
    15. Bernstein, Jeffrey I & Sappington, David E M, 1999. "Setting the X Factor in Price-Cap Regulation Plans," Journal of Regulatory Economics, Springer, vol. 16(1), pages 5-25, July.
    16. Ingo Vogelsang & Jorg Finsinger, 1979. "A Regulatory Adjustment Process for Optimal Pricing by Multiproduct Monopoly Firms," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 157-171, Spring.
    17. David Sappington, 1980. "Strategic Firm Behavior under a Dynamic Regulatory Adjustment Process," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 360-372, Spring.
    18. Henze, B., 2016. "Laboratory experiments on the regulation of European network industries," Other publications TiSEM b18fcfca-2b95-4b01-91e2-0, Tilburg University, School of Economics and Management.
    19. Neu, Werner, 1993. "Allocative Inefficiency Properties of Price-Cap Regulation," Journal of Regulatory Economics, Springer, vol. 5(2), pages 159-182, June.
    20. Vogelsang, Ingo, 1989. "Two-part tariffs as regulatory constraints," Journal of Public Economics, Elsevier, vol. 39(1), pages 45-66, June.
    21. repec:ces:ifodic:v:4:y:2006:i:2:p:14567496 is not listed on IDEAS
    22. Joshua S. Gans & Stephen P. King, 2000. "Options for Electricity Transmission Regulation in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 33(2), pages 145-160, June.
    23. Blackmon, B Glenn, Jr, 1992. "The Incremental Surplus Subsidy and Rate-of-Return Regulation," Journal of Regulatory Economics, Springer, vol. 4(2), pages 187-196, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Biggar, Darryl R. & Hesamzadeh, Mohammad Reza, 2022. "An integrated theory of dispatch and hedging in wholesale electric power markets," Energy Economics, Elsevier, vol. 112(C).
    2. Davi-Arderius, Daniel & Jamasb, Tooraj & Rosellon, Juan, 2024. "Network Operation and Constraints and the Path to Net Zero," Working Papers 8-2024, Copenhagen Business School, Department of Economics.
    3. Ingo Vogelsang, 2018. "Can Simple Regulatory Mechanisms Realistically be used for Electricity Transmission Investment? The Case of H-R-G-V," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    4. Kerstin Dächert & Sauleh Siddiqui & Javier Saez-Gallego & Steven A. Gabriel & Juan Miguel Morales, 2019. "A Bicriteria Perspective on L-Penalty Approaches – a Corrigendum to Siddiqui and Gabriel’s L-Penalty Approach for Solving MPECs," Networks and Spatial Economics, Springer, vol. 19(4), pages 1199-1214, December.
    5. D. Khastieva & M. R. Hesamzadeh & I. Vogelsang & J. Rosellón, 2020. "Transmission Network Investment Using Incentive Regulation: A Disjunctive Programming Approach," Networks and Spatial Economics, Springer, vol. 20(4), pages 1029-1068, December.
    6. Hesamzadeh, Mohammad Reza & Biggar, Darryl R., 2021. "Generalized FTRs for hedging inter-nodal pricing risk," Energy Economics, Elsevier, vol. 94(C).
    7. Paul L. Joskow, 2024. "The Expansion of Incentive (Performance-Based) Regulation of Electricity Distribution and Transmission in the United States," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 65(2), pages 455-503, September.
    8. Varawala, Lamia & Hesamzadeh, Mohammad Reza & Dán, György & Bunn, Derek & Rosellón, Juan, 2023. "A pricing mechanism to jointly mitigate market power and environmental externalities in electricity markets," Energy Economics, Elsevier, vol. 121(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ingo Vogelsang, 2006. "Electricity Transmission Pricing and Performance-based Regulation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 97-126.
    2. Paul L. Joskow, 2014. "Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks," NBER Chapters, in: Economic Regulation and Its Reform: What Have We Learned?, pages 291-344, National Bureau of Economic Research, Inc.
    3. Ismail Saglam, 2024. "The Bayesian approach to monopoly regulation after 40 years," Journal of Regulatory Economics, Springer, vol. 65(1), pages 108-136, June.
    4. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    5. Jonas Egerer & Juan Rosellon & Wolf-Peter Schill, 2015. "Power System Transformation toward Renewables: An Evaluation of Regulatory Approaches for Network Expansion," The Energy Journal, , vol. 36(4), pages 105-128, October.
    6. Anne Neumann & Juan Rosellón & Hannes Weigt, 2015. "Removing Cross-Border Capacity Bottlenecks in the European Natural Gas Market—A Proposed Merchant-Regulatory Mechanism," Networks and Spatial Economics, Springer, vol. 15(1), pages 149-181, March.
    7. Prieger, James E. & Sanders, Nicholas J., 2012. "Verifiable and non-verifiable anonymous mechanisms for regulating a polluting monopolist," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 410-426.
    8. Dagobert Brito & Juan Rosellón, 2011. "Lumpy Investment in Regulated Natural Gas Pipelines: An Application of the Theory of the Second Best," Networks and Spatial Economics, Springer, vol. 11(3), pages 533-553, September.
    9. Ramirez, Jose Carlos & Rosellon, Juan, 2002. "Pricing natural gas distribution in Mexico," Energy Economics, Elsevier, vol. 24(3), pages 231-248, May.
    10. Kim, Jae-Cheol & Lee, Sang-Ho, 1995. "An optimal regulation in an intertemporal oligopoly market: The Generalized Incremental Surplus Subsidy (GISS) scheme," Information Economics and Policy, Elsevier, vol. 7(3), pages 225-249, September.
    11. Juan Rosellón & Hannes Weigt, 2011. "A Dynamic Incentive Mechanism for Transmission Expansion in Electricity Networks: Theory, Modeling, and Application," The Energy Journal, , vol. 32(1), pages 119-148, January.
    12. Benford, Frank A., 1998. "On the Dynamics of the Regulation of Pollution: Incentive Compatible Regulation of a Persistent Pollutant," Journal of Environmental Economics and Management, Elsevier, vol. 36(1), pages 1-25, July.
    13. Makoto TANAKA, 2005. "Optimal Transmission Capacity under Nodal Pricing and Incentive Regulation for Transco," Discussion papers 05021, Research Institute of Economy, Trade and Industry (RIETI).
    14. Varawala, Lamia & Hesamzadeh, Mohammad Reza & Dán, György & Bunn, Derek & Rosellón, Juan, 2023. "A pricing mechanism to jointly mitigate market power and environmental externalities in electricity markets," Energy Economics, Elsevier, vol. 121(C).
    15. Willington, Manuel & Li Ning, Jorge, 2014. "Regulating a monopoly with universal service obligations: The role of flexible tariff schemes," Telecommunications Policy, Elsevier, vol. 38(1), pages 32-48.
    16. Ingo Vogelsang, 2018. "Can Simple Regulatory Mechanisms Realistically be used for Electricity Transmission Investment? The Case of H-R-G-V," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    17. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 325-366, June.
    18. Alessandro Marra, 2006. "Mixed Public-Private Enterprises in Europe: Economic Theory and an Empirical Analysis of Italian Water Utilities," Bruges European Economic Research Papers 4, European Economic Studies Department, College of Europe.
    19. Herrera, Luis Ángel & Rosellón, Juan, 2014. "On distributive effects of optimal regulation for power grid expansion," Energy Policy, Elsevier, vol. 69(C), pages 189-204.
    20. Laffont, Jean-Jacques, 1994. "The New Economics of Regulation Ten Years After," Econometrica, Econometric Society, vol. 62(3), pages 507-537, May.

    More about this item

    Keywords

    Electricity transmission; incentive regulation; multi-level optimization;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp1696. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.