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The Competitive Effects of Ownership of Financial Transmission Rights in a Deregulated Electricity Industry

In this paper, we investigate how generatorsÕ ownership of financial transmission rights (FTRs) may influence the effects of the transmission lines on competition. In order for concrete analysis, a simple symmetric market model is introduced and FTRs are modeled in two different forms: FTR options and FTR obligations. This paper shows that introducing FTRs in an appropriate manner may reduce the physical capacity needed for the full benefits of competition. Among the competitive effects of ownership of FTRs, we focus on the effects on two possible pure strategy equilibria: the unconstrained Cournot equilibrium and the passive/aggressive equilibrium. We also analyze an extension of the model: asymmetric markets. Finally, a numerical illustration of applying the analysis is presented.

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Energy Specializations: Electricity – Transmission and Network Management; Electricity – Policy and Regulation

JEL Codes: D47: Market Design, L11: Production, Pricing, and Market Structure; Size Distribution of Firms, L13: Oligopoly and Other Imperfect Markets, Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, D42: Market Structure, Pricing, and Design: Monopoly, D21: Firm Behavior: Theory, D22: Firm Behavior: Empirical Analysis

Keywords: Electricity industry, deregulation, Financial transmission rights (FTR), Cournot, asymmetry

DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-9

Published in Volume 29, Number 2 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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