Should an incumbent generator be allowed to buy import transmission capacity?

Abstract

A small region has a high cost monopolistic electricity generator. It is connected through a low capacity transmission line with a large, competitive low cost region. Access to the transmission line is auctioned. I show that, if consumers arbitrate on the regional price differences, the monopolist will buy the transmission capacity. It is then welfare improving not to allow the monopolist to buy transmission rights. In theory, if consumers could co-ordinate and overcome free-riding, then they would bid more than the monopolist.electricity, congestion, network, monopoly