Using game theory to analyze electric transmission pricing policies in the United States

Abstract

US public policy towards the private electric power industry is moving away from restrictive regulation and towards promotion of competition. Alternative policies concerning access to and pricing of transmission are now being discussed. Similar issues may arise in Europe as trade barriers fall. Our purpose is to show how game theory can help illuminate that debate and identify desirable policies. Game theory models are used to estimate the possible effects of various policies upon productive efficiency and the distribution of gains among sellers, transmitters, and buyers of power. Static cooperative models are used to calculate the possible outcomes of short-run transmission games. Long-run games in which the amount of transmission capacity is a decisition variable are modeled as dynamic noncooperative Stackelberg games. One conclusion is that, under some conditions, price regulation and mandatory access could hurt power buyers by removing incentives for building transmission capacity. Another conclusion is that, under a system of voluntary access and price regulation, it may be better to allow wheeling prices to exceed the marginal cost of transport rather than to risk losing the benefits of cooperation.