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Utilities exchange electricity with one another in order to increase operating efficiency and system reliability. At present, the Federal Energy Regulatory Commission regulates the prices charged by privately owned utilities for the sale or transmission of bulk power. There is now increased interest in relaxing the regulation of such trades, and permitting market forces to constrain prices. In order to identify the factors that must be present for the wholesale electricity market to function efficiently, this Note examines the economics of bulk power market exchanges and analyzes the effects of regulation on the incentives to exchange power. It explores the possibility that relaxing regulation of wholesale transactions may promote increased efficiency in electricity supply; discusses the economics of coordination among utilities; examines how current incentives, regulations, and institutions affect trades; and considers how new arrangements, or modified regulation, might cause changes.

This report is part of the RAND Corporation Note series. The note was a product of the RAND Corporation from 1979 to 1993 that reported other outputs of sponsored research for general distribution.

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