A simple regulatory incentive mechanism applied to electricity transmission pricing and investment

Reza Hesamzadeh, Mohammad; Gabriel, Steven A.; Vogelsang, Ingo

doi:10.1016/j.eneco.2018.08.033

A simple regulatory incentive mechanism applied to electricity transmission pricing and investment

Journal

Energy Economics

ISSN

0140-9883

Date Issued

2018

Author(s)

Reza Hesamzadeh, Mohammad

Gabriel, Steven A.

Facultad de Ciencias Económicas y Empresariales - CampCM

Vogelsang, Ingo

Type

text::journal::journal article

DOI

10.1016/j.eneco.2018.08.033

URL

https://scripta.up.edu.mx/handle/20.500.12552/1713

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 in simulations 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-R-G-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 H-R-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. © 2018 Elsevier B.V.