Merchant Transmission Investment

We examine the performance attributes of a merchant transmission investment framework that relies on �market driven� transmission investment to provide the infrastructure to support competitive wholesale markets for electricity. Under a stringent set of assumptions, the merchant investment model appears to solve the natural monopoly problem and the associated need for regulating transmission companies traditionally associated with electric transmission networks. We expand the model to incorporate imperfection in wholesale electricity markets, lumpiness in transmission investment opportunities, stochastic attributes of transmission networks and associated property rights definition issues, the effects of the behaviour system operators and transmission owners on transmission capacity and reliability, co-ordination and bargaining considerations, forward contract, commitment and asset specificity issues. This significantly undermines the attractive properties of the merchant investment model. Relying primarily on a market driven investment framework to govern investment is likely to lead to inefficient investment decisions and undermine the performance of competitive markets

Incentive Regulation in Theory and Practice: Electricity Distribution and Transmission Networks

Modern theoretical principles to govern the design of incentive regulation mechanisms are reviewed and discussed. General issues associated with applying these principles in practice are identified. Examples of the actual application of incentive regulation mechanisms to the regulation of prices and service quality for 'unbundled' transmission and distribution networks are presented and discussed. Evidence regarding the performance of incentive regulation in practice for electric distribution and transmission networks is reviewed. Issues for future research are identified.

The Future of Nuclear Power in the United States: Economic and Regulatory Challenges

This paper examines the economic and regulatory challenges that must be faced by potential investors in new nuclear power plants in the United States. The historical development of the existing fleet of over 100 nuclear plants and their recent performance history are discussed. The pattern of re-licensing of existing plants and the implications for the role of the extended operation of the existing fleet in the overall electricity supply portfolio over the next 50 years is examined. The economic competitiveness of investments in new nuclear power plants compared to investments in alternative base load technologies is discussed under a variety of assumptions about construction costs, fuel costs, competitive and economic regulatory environments and various levels of carbon emissions prices affected competing fossil-fueled technologies. The paper then turns to a discussion of federal government efforts to facilitate investment in new nuclear power plants. These include streamlined licensing procedures and financial incentive provided by the Energy Policy Act of 2005. The regulatory and financial changes make investment in new nuclear power plants significantly more attractive to investors. However, in the longer run a combination of lower and more stable construction costs combined with carbon emissions charges are likely to be necessary to make investments in new nuclear plants significantly more attractive than investments in pulverized coal plants. Unresolved waste disposal policies and local opposition to new nuclear plants are likely to represent barriers to investment in new nuclear power plants in some areas of the country. First mover plants that can benefit from federal financial incentives are most likely to be built in states that continue to regulate generating plants based on cost-of-service principles, transferring construction cost and operating performance risks to consumers, and where there is room on existing sites to build additional nuclear capacity.

Incentive Regulation for Electricity Networks

Elektrizitätswirtschaft, Anreizregulierung, Electric utility industry, Incentive regulation

Comments in Response to FERC Rulemaking on Regional Transmission Organizations

On May 13, 1999 the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) on Regional Transmission Organizations (RTO). The purpose of the NOPR is to seek comments on proposed regulatory rules that would encourage transmission system owners to participate in regional transmission organizations. Such organizations would manage various aspects of the operation and expansion of the nation's high voltage electric transmission system to support developing competitive wholesale and retail electric generation service markets that rely on these transmission networks. Regional integration of transmission systems is thought to be required to manage more effectively transmission network operations, to internalize various network externalities, and to facilitate the development of competitive electricity markets. Four non-profit Independent System Operators (ISOs) have already been created from the three existing tight power pools covering the Northeastern states and in California. However, the development of similar RTOs in other parts of the country has been slow. The FERC initiative aims at speeding up the development of such regional organizations. My comments focus primarily on the future structure of the regulatory framework that governs how transmission owners and operators will be compensated for providing transmission service. I also present a framework for evaluating the benefits and costs of not-for-profit ISOs that operate transmission facilities owned and maintained by others vs. for-profit Independent Transmission Companies (Transcos) that own, maintain, and operate their own transmission facilities. The success of the ongoing restructuring of the nation's electricity sector and its reliance on decentralized competitive generation service markets depends heavily on the existence of a robust transmission network that operates efficiently. Indeed, the new decentralized industry structure with a large number of economic agents pursuing their own self interests requires a more robust transmission network and enhanced operating capabilities than was the case during the era of vertically integrated regulated monopolies. Recent historical evidence suggests, however, that resources devoted to maintaining, operating, and expanding the nation's transmission networks are declining rather than increasing in relative terms. Continuing to rely on FERC's historical transmission regulatory framework is not likely to foster the kind of robust transmission networks that are required to support efficient competitive electricity markets. Traditional transmission regulatory procedures pay too much attention to the direct costs of transmission (capital and operating costs) and too little attention to the indirect costs of transmission (congestion, ancillary services, and local market power mitigation costs). It is very important for the FERC to adopt new regulatory mechanisms that provide transmission owners and operators with powerful economic incentives to operate transmission networks efficiently and to invest the resources necessary to expand their capabilities efficiently. These incentives should be an integral component of a performance-based regulatory (PBR) framework for the regulation of transmission rates that rewards transmission owners for achieving these objectives and penalizes them for failing to do so. There is a growing debate over whether RTOs should be non-profit ISOs or for-profit Transcos or some combination of the two organizational forms. This debate raises important issues, though the signal to noise ratio that has characterized this debate has not been very high. There are potentially significant costs resulting from the separation of ownership and maintenance decisions from transmission operating decisions, as is the case with ISOs. On the other hand, there are potential benefits associated with independence of the transmission operator from generation and marketing activities and the internalization of significant regional loop flow and related network externalities within a single organization. There are significant incentive issues that must be addressed both for non-profit ISOs and for-profit Transco monopolies. Viewed properly, it is not so much a choice between a not-for-profit ISO and a for-profit Transco, as it is a choice about the distribution of responsibilities between them.

The future of nuclear power in the United States : economic and regulatory challenges

This paper examines the economic and regulatory challenges that must be faced by potential investors in new nuclear power plants in the United States. The historical development of the existing fleet of over 100 nuclear plants and their recent performance history are discussed. The pattern of re-licensing of existing plants and the implications for the role of the extended operation of the existing fleet in the overall electricity supply portfolio over the next 50 years is examined. The economic competitiveness of investments in new nuclear power plants compared to investments in alternative base load technologies is discussed under a variety of assumptions about construction costs, fuel costs, competitive and economic regulatory environments and various levels of carbon emissions prices affected competing fossil-fueled technologies. Federal government efforts to facilitate investment in new nuclear power plants, including streamlined licensing procedures and financial incentive provided by the Energy Policy Act of 2005 are discussed.(cont.) These regulatory changes and financial incentives improve the economic competitiveness of nuclear power. First mover plants that can benefit from federal financial incentives are most likely to be built in states that continue to regulate generating plants based on cost-of-service principles, transferring construction cost and operating performance risks to consumers, and where there is room on existing sites to build additional nuclear capacity. Once federal financial incentives come to an end lower and more stable construction costs combined with carbon emissions charges are likely to be necessary to make investments in new nuclear plants significantly more attractive than investments in pulverized coal plants. Unresolved waste disposal policies and local opposition to new nuclear plants are likely to represent barriers to investment in new nuclear power plants in some areas of the country

Retail Electricity Competition

We analyze a number of unstudied aspects of retail electricity competition. We first explore the implications of load profiling of consumers whose traditional meters do not allow for measurement of their real time consumption, when consumers are homogeneous up to a scaling factor. In general, the combination of retail competition and load profiling does not yield the second best prices given the non price responsiveness of consumers. Specifically, the competitive equilibrium does not support the Ramsey two-part tariff. By contrast, when consumers have real time meters and are billed based on real time prices and consumption, retail competition yields the Ramsey prices even when consumers can only partially respond to variations in real time prices. More complex consumer heterogeneity does not lead to adverse se1ection and competitive screening behavior unless consumers have real time meters and are not rational. We then examine the incentives competitive retailers have to install one of two types of advanced metering equipment. Competing retailers overinvest in real time meters compared to the Ramsey optimum, but the investment incentives are constrained optimal given load-profiling and retail competition. Finally effects of physical limitations on the ability of system operators to cut off individual customers. Competing retailers have no incentive to determine the aggregate value of non-interruption of consumers in the zones they serve instead to free ride on other retailers serving consumers in the same zones.

CEO Pay and Firm Performance: Dynamics, Asymmetries, and Alternative Performance Measures

This study explores the dynamic structure of the pay-for- performance relationship in CEO compensation and quantifies the effect of introducing a more complex model of firm financial performance on the estimated performance sensitivity of executive pay. The results suggest that current compensation responds to past performance outcomes, but that the effect decays considerably within two years. This contrasts sharply with models of infinitely persistent performance effects implicitly assumed in much of the empirical compensation literature. We find that both accounting and market performance measures influence compensation and that the salary and bonus component of pay as well as total compensation have become more sensitive to firm financial performance over the past two decades. There is no evidence that boards fail to penalize CEOs for poor financial performance or reward them disproportionately well for good performance. Finally, the data suggest that boards may discount extreme performance outcomes -both high and low - relative to performance that lies within some `normal' band in setting compensation.