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Vertical Separation of Transmission Control and Regional Production Efficiency in the Electricity Industry

This study investigates the divestiture of transmission control from vertically-integrated power producers, aimed to maintain non-discriminatory access of the transmission network. I ask whether the vertical separation is sufficient to enhance how efficiently production is allocated among generators (i.e., regional production efficiency). Using a difference-in-difference strategy, I compare the treated region, Southwest Power Pool (SPP), with a control region, where no restructuring activities were implemented. Based on robust empirical results, I fail to find significant market wide evidence of improvement in regional production efficiency associated with the vertical separation of transmission control. However, looking into subgroups of generators, I find mixed evidence of cost savings via reallocation of production resources: (1) coal units are dispatched more efficiently after the restructuring; (2) this is not true for two types of gas units with different combustion technologies and cost efficiency.

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Keywords: Vertical separation, Transmission network, Market restructuring, Electricity industry, Regional production efficiency

DOI: 10.5547/01956574.42.1.ychu

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Published in Volume 42, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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