ELECTRICITY WHEELING AND INCENTIVE REGULATION

This paper relates social contract regulation strategies to a particularly important comtemporary issue in energy regulation-electricity wheeling; we find that substantial gains in economic efficiency may be possible. First, social contracts give potential wheelers more monetary incentive than traditional regulatory procedures to provide wheeling services to interested third parties. Second, social contract regulation gives potential wheelers better incentives to measure marginal costs accurately. Third, under social contract regulation, wheelers have proper incentives to install efficient amounts of transmission capacity, thereby avoiding Averch-Johnson and other regulatory distortions that emerge in traditional regulation. © 1990 Kluwer Academic Publishers.