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Should Merchant Transmission Investment be Subject to a Must-offer Provision?

By Gert Brunekreeft and David Newbery

Abstract

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

Topics: Classification-JEL: L51, L94, L4, investment, must-offer, capacity withholding, regulation, electricity
Publisher: Faculty of Economics
Year: 2006
OAI identifier: oai:www.repository.cam.ac.uk:1810/131601
Provided by: Apollo

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