Regulation of transmission line capacity and reliability in electric networks

Abstract

This thesis is composed of two essays that analyze the incentives and optimal regulation of a monopolist line owner in providing capacity and reliability. Similar analyses in the economic literature resulted in under-investment by an unregulated line owner when line reliability was treated as an exogenous variable. However, reliability should be chosen on the basis of economic principles as well, taking into account not only engineering principles but also the preferences of electricity users. When reliability is treated as a choice variable, both over- and under-investment by the line owner becomes possible. The result depends on the cross-cost elasticity of line construction and on the interval in which the optimal choices of capacity take place. We present some sufficient conditions that leads to definite results about the incentives of the line owner. We also characterize the optimal regulation of the line owner under incomplete information. Our analysis shows that the existence of a line is justified for the social planner when the reliability of other lines on the network is not too high, or when the marginal cost of generation at the expensive generating plant is high. The expectation of higher demand in the future makes the regulator less likely to build the line if it will be congested and reliability of other lines is high enough. It is always optimal to have a congested line under complete information, but not necessarily under incomplete information.