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Electricity System Reliability as a Club Good
Malcolm Ainspan
Israel Public Utilities Authority – Electricity
malcolm@pua.gov.il
Advanced Workshop in Regulation and Competition
Annual Eastern Conference
May 17, 2007
Abstract:
The objective of this paper is to build upon previous research on classifying electricity
services as public goods, private goods, and club goods. Electricity reliability services
are generally assumed to be public goods, even though the infrastructure providing
these services is comprised largely of congestible facilities (e.g., transmission
networks). This paper will address only the reliability services that are club goods,
and will focus on club good issues common to most reliability organizations, such as
heterogeneous membership, multigenerational network facilities, usage uncertainty,
and “exit” potential. The paper will develop optimality conditions for club
membership and provision, and will propose second-best alternatives that address the
problem of first-best optima that are not implementable “politically”, but are
nevertheless improvements over the current ratemaking practices of reliability
organizations in the US and Europe.
I. Introduction
Paying for reliability-related elements of electricity supply has become one of the
most controversial and politically-charged issues associated with electricity market
reform. While electric energy may fit the standard microeconomic model for private
goods that may be competitively supplied, reliability services such as capacity and
transmission services (including ancillary services) do not. In public finance terms,
these services are not simultaneously excludable and non-rival. That is, an individual
market participant can exclude others from enjoying reliability services only at a
significant cost, but that participant’s consumption does not diminish others’
consumption of those services. 1
The question of "who pays" for incentives to provide efficient levels of non-private
services is ge