properly priced because the node prices reflect the true cost, including unintended flows, or sending power across any path, whether or not that path is the physical circuit used for sending power from one node to another.

The main difference between the Schweppe version of node pricing and the Hogan version involves timing and information. Schweppe envisioned true spot markets. In the case of electricity this could mean a substantial degree of fluctuation and large informational burdens as the relevant spot price would vary from minute to minute. Other commodity markets settle trades over much longer time intervals. In natural gas, for example, the spot interval is one month. Furthermore, because of real-time network interdependencies, the true spot price, is in some sense the result of dispatchers' decisions that are easier to report ex post than to forecast or communicate instantaneously. Therefore, Hogan (1992) proposes that the system be operated in the current fashion by a number of loosely coordinated control centers, and that node prices be computed ex post assuming the dispatch was efficient.

Efficient dispatching is an important element of node pricing. Without efficient dispatch, generation costs at each node would not correspond to the marginal value of power, and the transmission prices would be meaningless as a measure of social value. Efficient dispatch does not mean that prices must be determined in a perfectly competitive market. Monopoly owners of transmission services may dispatch their resources efficiently. If their internal marginal generation costs were public knowledge, they could be used as the basis for transmission prices. Unfortunately, if internal values are private knowledge, a monopolist could misrepresent them in a way that codifies monopolistic pricing.

Consider a transmission monopolist who serves demand at point D, owns a line from point O to point D, and owns a generating resource with a marginal cost m at point O. Suppose the line has no losses or capacity constraints. Let $ p^{m} $ be the monopoly price at point D ( $ Pp^{m} = \frac{m}{1 - 1/\eta} $ ), where $ \eta $ is the magnitude of the elasticity of demand at D. The monopolist's internal marginal value of power is m at both ends of the transmission line. However, suppose the monopolist could misrepresent that the internal value at point D is $ p^{m} $ . Node pricing would result in a cost of transmission equal to $ p^{m} - m $ , which merely would serve to sustain the transmission owner's monopoly. Of course, this inefficiency would be mitigated if the monopolist's power to misrepresent values were limited, perhaps as a result of auditing of actual transmission operations.

A second problem with node pricing is that it does not necessarily provide efficient signals for the expansion of a transmission network. Economies of scale and cost complementarities in a transmission network suggest that local prices may be a poor signal of the most desirable way to expand the network, although this is a subject for further study.

The Hogan (1992) version of node pricing is argued to be compatible with the existing institutional structure. There is some reason to question this assertion. Implementing node pricing