Network Regulation Through Ownership Structure: An Application to the Electric Power Industry

30 Pages Posted: 22 Apr 2008 Last revised: 25 Jun 2015

See all articles by Federico Boffa

Federico Boffa

Università degli Studi di Macerata

L. Lynne Kiesling

Purdue University - Department of Economics

Date Written: September 2014

Abstract

We illustrate the properties of a competitive joint venture (CJV) institution as an alternative to traditional natural monopoly regulation of the distribution wires portion of the electricity supply chain. This CJV institution consists of an endogeneous ownership rule and a wires access charge determination rule, with wires use and control rights determined by a firm's market share in the downstream retail market. By exploiting the vertical structure of the electricity supply chain, this CJV institution can generate superior efficiency results in a model presented and analyzed here. The role of the regulator is one of ex post contractual enforcement; thus this institution is not prone to the information problems associated with traditional natural monopoly regulation. We demonstrate that first-best efficiency characterizes equilibrium in a pricing model without investment.

Keywords: electricity, electric power distribution, regulation, joint venture, market design

JEL Classification: D02, D23, K23, L51, L94

Suggested Citation

Boffa, Federico and Kiesling, L. Lynne, Network Regulation Through Ownership Structure: An Application to the Electric Power Industry (September 2014). Available at SSRN: https://ssrn.com/abstract=1123772 or http://dx.doi.org/10.2139/ssrn.1123772

Federico Boffa

Università degli Studi di Macerata ( email )

Via Angeloni 3
Jesi, Ancona 60035
Italy
+393358218861 (Phone)

L. Lynne Kiesling (Contact Author)

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

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