Abstract: This thesis analyzes the efficiency of the investment in and operation of the U.S. electricity transmission system under different incentive structures. In particular, we explore the causes of the current underinvestment in transmission and propose a three-period model for studying how the exercise of local market power by generation firms affects the equilibrium investment between the generation and the transmission sectors. Specifically, we evaluate the impact on social welfare of transmission investments based on equilibrium models characterizing the competitive interaction among generation firms whose decisions in generation capacity investments and production are affected by both the transmission investments and the congestion management protocols of the transmission system operator. We compare the social welfare implications of the transmission investment decisions made by a 'proactive' network planner (who proactively plans transmission investments) with the social welfare implications of the decisions made under other three regimes. Our analysis shows that both the magnitude of the welfare gains associated with transmission investments and the location of the best transmission expansions may change when the generation expansion response is taken into consideration. We illustrate our theoretical results using a 30-bus network example. This thesis also illustrates the high complexity of the operation of the electricity transmission system. Moreover, we show (through a simple example) how different optimizing objectives can result in divergent optimal expansions of a network and, consequently, how difficult could be the task of determining a unique optimal expansion.