Welfare effects of discriminatory two-parts tariffs constrained by price caps

Bertoletti, Paolo; Poletti, Clara

doi:10.1016/s0165-1765(97)00190-0

“…Compared to tariff-basket regulation, this confers the firm greater flexibility in tariff rebalancing but lack of convergence to a welfare-maximizing equilibrium. 6 The literature proves that, under non-stochastic (or stable) conditions of costs and demand and myopic profit maximization (that is, when the firm does not take into account future periods in its current profit maximizing behavior), the use of the chained Laspeyres index makes the prices of the regulated firm intertemporally converge to Ramsey-Boiteaux pricing (Vogelsang, 2001, Vogelsang, 1989, Bertoletti and Poletti, 1997, Loeb and Magat, 1979, and Sibley, 1989. The chained Laspeyres structure simultaneously reconciles two opposing objectives: the maximization of social welfare and the individual rationality of the firm (i.e., non-negative profits).…”

Section: Literature Reviewmentioning

confidence: 99%

Power System Transformation toward Renewables: An Evaluation of Regulatory Approaches for Network Expansion

Egerer¹,

Rosellón²,

Schill³

2015

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. July 2013 Terms of use: Documents in AbstractWe analyze various regulatory regimes for electricity transmission investment in the context of a transformation of the power system towards renewable energy. We study distinctive developments of the generation mix with different implications on network congestion, assuming that a shift from conventional power plants towards renewables may go along with exogenous shocks on transmission requirements, which may be either of temporary or permanent nature. We specifically analyze the relative performance of a combined merchant-regulatory price-cap mechanism, a cost-based rule, and a nonregulated approach in dynamic generation settings. Through application in a stylized twonode network, we find that incentive regulation may perform satisfactorily only when appropriate weights are used. While quasi-ideal weights generally restore the beneficial properties that incentive regulatory mechanisms are well-known for in static settings, pure Laspeyres weights may either lead to overinvestment (stranded investments) or delayed investments as compared to the welfare optimum benchmark. Stranded investments could then be avoided through proper handling of weights. Model results indicate that using average Laspeyres-Paasche weights appears to be an appropriate strategy in the context of permanently or temporarily increasing network congestion. Our analysis motivates further research aimed to characterize optimal regulation for transmission expansion in the context of renewable integration.

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“…Average-revenue regulation allows for greater flexibility in the Transco's tariff rebalancing strategy, but then lacks a method to converge to the welfare maximizing equilibrium. The literature has demonstrated that with a myopic (short-term oriented) profit maximization outlook and under stable (non-stochastic) cost and demand conditions, a chained Laspeyres index will cause firm prices to converge intertemporally to the Ramsey-Boiteaux pricing (Vogelsang 2001;Vogelsang 1989;Bertoletti and Poletti 1997;Loeb and Magat 1979;and Sibley 1989). This is accomplished by simultaneously reconciling between social welfare maximization and the individual rationality of the regulated firm.…”

Section: Related Literaturementioning

confidence: 99%

On distributive effects of optimal regulation for power grid expansion

Herrera

¹

,

Rosellón

²

2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractTo date, the distributive implications of incentive regulation on electricity transmission networks have not been explicitly studied in the literature. More specifically, the parameters that a regulator might use to achieve distributive efficiency under price-cap regulation have not yet been identified. To discern these parameters is the motivation for the research presented in this paper. We study how different weight parameters affect the distributive characteristics of optimal price-cap incentive regulation for electricity transmission. We find that a regulator's use of ideal (Laspeyres) weights tends to be more beneficial for the Transco (consumers) than for consumers (the Transco).

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“…Compared to tariff-basket regulation, this confers the firm greater flexibility in tariff rebalancing but lack of convergence to the welfare maximizing equilibrium. The literature has proved that, under non-stochastic (or stable) conditions of costs and demand and myopic profit maximization (that is, when the firm does not take into account future periods in its current profit maximizing behavior), the use of the chained Laspeyres index makes the prices of the regulated firm intertemporally converge to Ramsey-Boiteaux pricing (Vogelsang, 2001, Vogelsang, 1989, Bertoletti and Poletti, 1997, Loeb and Magat 1979, and Sibley, 1989. The chained-Laspeyres structure simultaneously reconciles two opposing objectives: the maximization of social welfare and the individual rationality of the firm (i.e., non-negative profits).…”

Section: Literature Reviewmentioning

confidence: 99%

Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion

Egerer

¹

,

Rosellón

²

,

Schill

³

2013

SSRN Journal

2

0

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. July 2013 Terms of use: Documents in AbstractWe analyze various regulatory regimes for electricity transmission investment in the context of a transformation of the power system towards renewable energy. We study distinctive developments of the generation mix with different implications on network congestion, assuming that a shift from conventional power plants towards renewables may go along with exogenous shocks on transmission requirements, which may be either of temporary or permanent nature. We specifically analyze the relative performance of a combined merchant-regulatory price-cap mechanism, a cost-based rule, and a non-regulated approach in dynamic generation settings. Through application in a stylized two-node network, we find that incentive regulation may perform satisfactorily only when appropriate weights are used. While quasi-ideal weights generally restore the beneficial properties that incentive regulatory mechanisms are well-known for in static settings, pure Laspeyres weights may either lead to overinvestment (stranded investments) or delayed investments as compared to the welfare optimum benchmark. Stranded investments could then be avoided through proper handling of weights. Model results indicate that using average LaspeyresPaasche weights appears to be an appropriate strategy in the context of permanently or temporarily increasing network congestion. Our analysis motivates further research aimed to characterize optimal regulation for transmission expansion in the context of renewable integration.

show abstract

Welfare effects of discriminatory two-parts tariffs constrained by price caps

Cited by 13 publications

References 4 publications

Power System Transformation toward Renewables: An Evaluation of Regulatory Approaches for Network Expansion

Power System Transformation toward Renewables: An Evaluation of Regulatory Approaches for Network Expansion

On distributive effects of optimal regulation for power grid expansion

Power System Transformation towards Renewables: An Evaluation of Regulatory Approaches for Network Expansion

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