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The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry

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  • Severin Borenstein
  • James. Bushnell
  • Steven Stoft

Abstract

In an unregulated electricity generation market, the capacity of transmission lines will determine the degree to which generators in different locations compete with one another. We show, however, that there may be no relationship between the effect of a transmission line in spurring competition and the actual electricity flows on the line in equilibrium. We also demonstrate that limited transmission capacity can give a firm the incentive to restrict its output in order to congest transmission into its area of dominance. As a result, relatively small investments in transmission may yield surprisingly large payoffs in terms of increased competition. We demonstrate these effects in the context of the deregulated California electricity market.

Suggested Citation

  • Severin Borenstein & James. Bushnell & Steven Stoft, 2000. "The Competitive Effects of Transmission Capacity in A Deregulated Electricity Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 294-325, Summer.
    • Handle: RePEc:rje:randje:v:31:y:2000:i:summer:p:294-325
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    References listed on IDEAS

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