Should merchant transmission investment be subject to a must-offer provision? |
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| Authors: | Gert Brunekreeft David Newbery |
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| Institution: | (1) Tilburg Law and Economics Center (TILEC), Tilburg University, P.O. Box 90153, 5000, LE, Tilburg, The Netherlands;(2) Faculty of Economics, University of Cambridge, Sidgwick Avenue, Cambridge, CB3 9DE, England |
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| Abstract: | Merchant electricity transmission investment is a practically relevant example of an unregulated investment with monopoly
properties. However, while leaving the investment decision to the market, the regulator may decide to prohibit capacity withholding
with a must-offer provision. This paper examines the welfare effects of a must-offer provision prior to the capacity choice, given three reasons for capacity withholding: uncertainty, demand growth and pre-emptive investment.
A must-offer provision will decrease welfare in the first two cases, and can enhance welfare only in the last case. In the
presence of importer market power, a regulatory test might be needed.
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| Keywords: | Investment Must-offer Capacity withholding Regulation Electricity |
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