Optimal Transmission Regulation in Restructured Electricity Markets

February 28, 2014 - 12:00pm - 1:00pm
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This project quantifies the welfare effects and economic distortions in the Texas restructured electricity market under current policy versus first-best and second-best benchmark transmission policies. Restructured electricity markets are a recent policy innovation to separate wholesale and retail functions from traditional electric utility firms, leaving only the transmission functions regulated. A regulator's choice in transmission pricing policy affects the entire wholesale market which relies on transmission firms for fulfillment. I find that, if one were to keep the current legal structures in place, switching to a second-best policy would result in a 73% reduction of dead weight loss, or a welfare improvement of $1.1 billion of $1.4 billion in a $20 billion annual market.

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