Transmission rights and market power on electric power networks

We analyze whether and how the allocation of transmission rights associated with the use of electric power networks affects the behavior of electricity generators and consumers with market power. We also examine how the allocation of transmission rights is affected by the microstructure of the markets for these rights. Both financial and physical transmission rights are considered. The analysis focuses on a two-node network where there are cheap generating supplies in an exporting region and expensive generating supplies in an importing region. Extensions to a network with loop flow are developed. Regulatory mechanisms for detecting and mitigating the market-power-enhancing effects of transmission rights holdings are discussed.