Can Simple Regulatory Mechanisms Realistically be used for Electricity Transmission Investment? The Case of H-R-G-V

Abstract

While simple regulatory mechanisms in the form of price caps have been implemented with success in the telecommunications sectors of many countries, they are much less used in the electricity sector and if so not as a tool to guide transmission investment. This paper takes one particular mechanism from a very abstract concept to an approach that deserves serious consideration as the regulatory approach for electricity transmission investment. For this purpose, some adjustments of the original mechanism have to be made to take care of the rent extraction issue and to provide fairness among user groups. To the extent that reliability can be assessed and measured in monetary terms, it can also become part of the reward structure of the Transco. Most of the environmental issues associated with transmission investment can best be addressed by environmental rather than electricity regulators. A comparison of the adjusted mechanism with a central planning approach and a stakeholder bargaining approach to transmission investment brings out tradeoffs between the approaches but leads to a favorable assessment of the mechanism for practical applications.