Price-cap regulation for transmission: objectives and tariffs

Abstract

In this paper, the authors construct a mathematical metric for measuring the performance of the transmission provider (TP) under the newly proposed price cap regulation scheme. The heart of the problem lies in developing the systemwide social welfare function which captures the unique role of the TP in the new industry environment where the electricity is provided through the market mechanism. The restructuring of the electric power industry is still a relatively recent event at the time of this writing, and there is yet to be a consensus on the actual implementation scheme for regulating the TP based on the guaranteed rate-of-return. In this paper, one of the implementation schemes referred to as ex-ante flow tax scheme is described. Starting from this implementation scheme the price cap regulation (PCR) is proposed as a possible alternative regulation scheme to be imposed on the TP. Then, the authors develop the systemwide social welfare function associated with the PCR.