Regulation of an Electric Power Transmission Company.

Thomas-Olivier Leautier [*]

Designing regulatory contracts for the operators of power transmission networks has become a critical policy issue in the United States. In this paper, a regulatory contract is proposed that induces network operators to optimally expand the grid, which is crucial for the emergence of efficient wholesale power markets, while also satisfying the other traditional regulatory objectives. The proposed mechanism is readily implementable, since it builds on a contract currently in place in England and Wales.

1. INTRODUCTION

The last decade has witnessed far-ranging changes in the structure and organization of the electric power industry in the United States and around the world. Economists and policy makers have faced and solved numerous issues, ranging from market design to stranded cost recovery. This article examines one issue that has now become critical in the United States: regulation of a for-profit transmission company. [1]

After a few years of uncertainty, regulated, for-profit transmission companies now appear a likely end-state in the United States. The Federal Energy Regulatory Commission has recently issued Order 2000, [2] that mandates the creation of Regional Transmission Organizations (RTOs) by December 2001. RTOs would operate, maintain, and expand the transmission grid (i.e., the high voltage network that links generation to demand centers), thereby providing the necessary locus for competitive wholesale power markets. While FERC does not explicitly require RTOs be for-profit, several transmission asset owners have expressed interest in creating for-profit transmission companies, for example Entergy in the Southeast, the Alliance in the Midwest (American Electric Power, Consumers' Energy, Detroit Edison, FirstEnergy, and Virginia Power), and the National Grid Company, the grid operator in England and Wales that has started to roll-up transmission assets in the Northeast. Since operation of the grid remains a natural m onopoly, these for-profit RTOs will have to be regulated.

Regulation of a power transmission company must balance different objectives: (1) ensure the financial viability of the regulated entity, (2) promote adequate usage/availability of the service (including fair access, etc.), (3) induce cost minimization by the operator while ensuring a share of the economic rent is extracted from the operator and passed on to customers, and (4) induce optimal expansion of the network, i.e., congestion alleviation.