TECHNOLOGY AND REGULATION INELECTRICITY 8.1 APPROACHES TO TRANSMISSION PRICING: A DISCUSSION

Even in a situation of markets for generation and supply which the Electricity Act 2003 hopes to lead to, transmission remains a natural monopoly, not only because of sub-additivity of costs but also because of externalities arising out of the loop flow characteristics of electricity. This means that there is no alternative to regulation of the sector. Indeed, the way transmission is priced and managed has large effects for the realization and conduct of competition in generation and supply. No theoretical solution exists to the problem of pricing to ensure both efficient short run operations of the system, and its expansion. Therefore, transmission needs regulatory oversight for its expansion, to ensure that such expansion is system cost (including of generation) minimizing (CERC 2001). Transmission ownership and management of operations needs to be kep