Improving private incentives for electric grid investment

One of the most disputed issues of the electricity industry restructuring process has been the organization of the transmission sector of this industry. It has been widely held that this sector must remain tightly regulated due to the external costs and benefits that arise from the operation and construction of transmission resources. In this paper we discuss the traditional approaches to managing these network externalities and examine the potential for a system of tradeable transmission rights, such as transmission congestion contracts, to successfully manage these externalities in a lightly regulated environment.