1 Do Generation Firms in Restructured Electricity Markets Have Incentives to Support Socially - Efficient Transmission Investments ? *

This paper examines the incentives that generation firms have in restructured electricity markets for supporting long-term transmission investments. In particular, we study whether generation firms, which arguably play a dominant role in the restructured electricity markets, have the incentives to fund or support social-welfare-improving transmission investments. We examine this question and explore how such incentives are affected by the ownership of financial transmission rights (FTRs) by generation firms. We investigate the way in which the allocation of FTRs may be used to both align the incentives for supporting transmission expansions of the different market participants and mitigate conflicts of interest when such expansions are socially beneficial. Specifically, we show that if all FTRs were allocated or auctioned off to generation firms that are net exporters, then these firms would have the correct incentives to support socialwelfare-improving transmission expansions. We illustrate these ideas in a simple two-node network. JEL Classifications: D43, L22, L51, L94.