An operational and institutional modular analysis of Transmission and System Operator

As far as the management of the power flows on a transmission network is concerned by externality, Transmission and System Operators (TSOs) are externality market designers, and so can be studied thanks to a modular analysis grounded on Wilson [2002], Brunekreeft et al. [2005] and Glachant et al. [2005]. Since TSOs are institutional entities, the design of each module that they implement are constrained by compatibility requirement or “weak institutional complementarity” (Pagano [1993], Aoki [2001]) from their governance structure. The governance structure of TSOs is set by transmission ownership unbundling, governmental energy policy and political economy. Our paper develops such a framework and such an argumentation. Then, although the economic theory specifies a unique arrangement – that we will call “ideal first-best TSO” – to manage efficiently a power transmission network, we can understand why there is such a diversity of TSO arrangements and of heterogeneous results among TSOs. Our comparison between the “ideal first-best TSO” and two reference TSOs, PJM and NGC concludes that some network management schemes may be inefficient compared to an “ideal first-best TSO”. But these schemes may be relatively satisfactory regarding the institutional context that frames their design especially as regulation may limit inefficiency