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

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.