Border Flow Rights and Contracts for Differences of Differences: Models for Electric Transmission Property Rights

In this paper, a property rights model for electric transmission is proposed and its properties analyzed. The proposed rights, called "border flow rights," support financial hedging of transmission risk and merchant transmission expansion through associated financial rights, called "contracts for differences of differences." These financial rights allow for forward trading of both energy and transmission by a unified exchange, avoiding the bifurcation in current markets between decentralized long-term energy trading and centralized long-term transmission trading. Such long-term trading can help to support the financing of both generation and transmission assets. We consider incentive properties of such a right in the absence of lumpiness, economies of scale, and market power.