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Electricity Transmission Pricing and Performance-based Regulation

Performance-based regulation (PBR) is influenced by the Bayesian and non-Bayesian incentive mechanisms. While Bayesian incentives are impractical for direct implementation, the insights from their properties can be combined with practical non-Bayesian mechanisms for application to transmission pricing. This combination suggests an approach based on the distinction between ultra-short, short and long periods. Ultra-short periods are marked by real-time pricing of point-to-point transmission services. Pricing in short periods involves fixed fees and adjustments via price-cap formulas or profit sharing. Productivity-enhancing incentives have to be tempered by long-term commitment considerations, so that profit sharing may dominate pure price caps. Investment incentives require long-term adjustments based on rate-of-return regulation with a �used and useful� criterion.

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Energy Specializations: Electricity – Transmission and Network Management; Electricity – Local Distribution; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
D44 - Auctions
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electricity transmission, regulation, Performance-based pricing (PB)

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No4-5

Published in Volume 27, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.