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International Handbook on the Economics of Energy

Edited by Joanne Evans and Lester C. Hunt

As an essential component for economic growth, energy has a significant impact on the global economy. The need to meet growing energy demand has prompted cutting-edge innovation in clean technology in an attempt to realise environmental and cost objectives, whilst ensuring the security of energy supply. This Handbook offers a comprehensive review of the economics of energy, including contributions from a distinguished array of international specialists. It provides a thorough discussion of the major research issues in this topical field of economics.
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Chapter 22: The Economics and Regulation of Power Transmission and Distribution: The Developed World Case

Lullit Getachew and Mark N. Lowry


Lullit Getachew and Mark N. Lowry 1 Introduction In this chapter we focus on the economics and regulation of power transmission and distribution (T&D) in the developed world. These wires businesses are natural monopolies. Both involve large fixed costs to transmit and distribute power, a commodity that cannot be stored. Once set up, the T&D assets provide power using variable inputs and exhibit declining average costs indicating the presence of scale economies over a large range of outputs. Thus, it is not economic to have two companies providing ‘wires’ services to customers in the same area. Traditionally, this situation has led to provision of a ‘wires’ license to a business over a defined service territory. To prevent monopoly abuses, countries have historically set up mechanisms to regulate their rates and service provisions and/or have placed them under state ownership. Regulation of T&D utilities has evolved remarkably in the last two decades. Statistical research on the cost of T&D services plays an increasingly prominent role in the regulatory process. The licensing agreements under which T&D utilities operate compel them to provide service to all customers in their service territories. The number of customers connected to their systems is one important ‘driver’ of cost as firms must plan for and invest to accommodate the number of connections. Their planning also takes into consideration the maximum amount of power they expect to wheel or deliver through their systems. The volume of energy delivered, often measured in megawatt hours...

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