Electricity markets are different in a number of ways from other types of markets. One crucial difference is that, unlike many other products, the ability to trade electricity between different geographic areas is physically constrained by “transportation” (i.e., transmission) limits. Another difference is that estimating the value of increased inter-regional transmission capability is difficult, because of complications in determining when physical or institutional barriers to electricity trading are actuallyencountered.

Regulators have long been concerned about the lack of market incentives for providing efficient levels of electricity transmission capacity. Due to its “natural monopoly” characteristics, where a single provider of transmission within a specified geographic area enjoys scale and scope economies and other network efficiencies (e.g., internalization of loop flows and increased reliability arising from synchronized control of transmission resources), transmission and distribution companies covering a specified area traditionally have been regulated to ensure adequate investment and system reliability.
Nonetheless, concerns abound that the current U.S. transmission system is inadequate to handle the demands created by a deregulated wholesale electricity trading environment.

Despite widespread concerns about transmission adequacy, little empirical work has attempted to estimate the value of additional transmission capability. Here, we describe an innovative methodology that uses market data to determine the economic value of increased transmission capability between two geographic areas. Our analysis focuses specifically on electricity trade between the New York ISO and ISO–New England.

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Estimating the Economic "Trade" Value of Increased Transmission Capability