add to the cost of providing transmission services. LRIC also fails to provide users with the right signals for expansion of the network.

Another approach using centrally mandated-prices would be to set a price cap, perhaps at LRIC, and allow utilities to negotiate lower prices when the market allows (see Einhorn, 1990). Although this would make regulation more flexible, it would not solve the basic problem of asymmetric information about transmission costs. The greatest potential for efficient application of a price-cap approach to the pricing of transmission access would be in geographical regions where there are competition is already relatively strong, as evidenced by many buyers and sellers that can access a high-voltage transmission bus. The Palo Verde switchyard in Arizona is an example, but this is more the exception than the rule in the U.S.

Prices that are mandated centrally by the FERC would amount to a de facto open access system with no limits on the parties seeking to make transactions. It is difficult to imagine exactly how such a system would work in the absence of a centralized grid authority that would apply some kind of rationing method through either price or non-price mechanisms. Nonetheless, FERC does not have the legal authority to require reorganization of wholesale market institutions by mandating power pools, for example. In some regions there will be movements toward greater cooperative activity to manage a regime of greater access, but conditions differ so much across regions that no single national policy is likely to emerge.

### C. Geographical Spot Pricing (Node Pricing)

This proposal is a version of the spot pricing theory of transmission cost pricing developed by Caramanis, Bohn and Schweppe (1986), Schweppe et. al. (1988) and more fully articulated by Hogan (1992). When an electric power network is efficiently dispatched, the marginal value of transmission between any two points in the system is equal to the difference in the cost of generation at those points. The costs of generation at two points in the system may differ because there are line losses in moving power from one point to another or because transmission capacity constraints impose a congestion cost. The generation cost difference is a natural choice for the price of transmission services. At these prices, a generator should supply power to the grid if, and only if, the marginal cost of the generator plus the price of transmission to the destination is less than the marginal cost of generation at the destination.

One of the main virtues of node pricing is that it is able to deal with the troublesome problem of loop flow, also called unintended power flows. In the Hogan proposal, generation is dispatched efficiently conditional on transmission constraints. Implicit prices for transmission between node i and node j are determined ex post and are equal to the differences between the costs of generation at the two nodes. If unintended power flows cause congestion on a transmission path, the implicit transmission price is increased. This occurs because congestion limits the capacity on the transmission path, so that the difference in nodal generation costs increases. Each user of transmission has to pay for the right to send power across a desired path. Provided all users subscribe to the principle of node pricing for transmission, unintended flows are