On congestion rent, transfer pricing, and orphaned hydrological signals
Three systems appear unrelated: a Nordic electricity market dispute over congestion rent, hyperscale data centre transfer pricing, and an unregulated Finnish lake operating below its historical minimum water level. CN-013 argues they are instances of a single architecture. In each case, a spatial constraint generates topological value, which institutional rules then allocate — or fail to. The "theft" rhetoric applied to each case misidentifies the mechanism. The productive question is not who is stealing but who holds the right to define the allocation rule before the value crystallises.
Political and economic systems are typically described in terms of their self-declared identity: capitalist, democratic, authoritarian, socialist, market-based. These labels are not primarily descriptive — they are the narratives that systems use to maintain internal coherence and external legitimacy. They describe how a system wants to be seen, not how it operates.
When behaviour is examined rather than declared identity, a different picture emerges. Large states — regardless of their ideological label — share a common operational logic: strategic resources (energy infrastructure, data infrastructure, financial infrastructure) are controlled by state or state-adjacent actors; market mechanisms are permitted where they serve system objectives and constrained where they do not; and the allocation of value generated at points of scarcity is determined by rules that concentrate control before external parties can contest it.
This is not a critique. It is a description. The pattern is not corruption or conspiracy — it is the natural behaviour of systems optimising for their own persistence. But it means that the vocabulary of "-isms" generates more heat than light when applied to specific allocation disputes. What looks like a principled conflict between capitalism and regulation, or between national sovereignty and supranational governance, is usually a dispute about a much more tractable question: who defined the allocation rule, when, and in whose interest?
CN-013 proposes a framework that cuts across ideological labels by focusing on the structural logic shared by three apparently unrelated systems. The framework identifies a common architecture — spatial constraint generating topological value, allocated by institutional rule — and shows why the disputes that arise in each case have the same shape regardless of context.
The Nord Pool electricity market divides Scandinavia into bidding zones. When transmission capacity between zones is insufficient to equalise prices, a price differential emerges. This differential — multiplied by the constrained volume — generates a cash flow called congestion rent. The rent is not created by any actor; it is a mathematical consequence of the price spread and the transmission limit. It exists because the constraint exists.
EU regulation determines where this rent goes: to transmission system operators (TSOs), directed toward network investment. Individual countries — particularly Sweden, whose southern zones (SE3, SE4) are frequent high-price areas — experience this as value leaving national control. The political framing is "theft." The technical reality is that a rule written at one level (EU) allocates value generated at another level (national network topology) before national policy can claim it.
A hyperscale data centre in Finland or Ireland performs computation. The economic value of that computation is captured not by the entity that operates the facility but by the entity that holds the intellectual property rights, the service contract, and the customer relationship — typically a parent company or IP-holding subsidiary in a different jurisdiction. Internal pricing (transfer pricing) determines how revenue flows between entities in the corporate structure.
The local economy provides land, power, cooling, and connectivity. The local tax base captures some of this through payroll, property, and energy taxes. The margin — the difference between the cost of computation and its market value — accrues to the IP-holding entity. This is not concealment. It is a legal structure that was designed to place the value-capture point in the optimal jurisdiction before national tax authorities could contest the allocation.
Virmasvesi/Iisvesi, part of the Rautalammin reitti in Pohjois-Savo, Finland, is a free-flowing lake in a fully unregulated waterway. In spring 2026, following two dry years and a low-snow winter, the lake's water level reached approximately 97.50 m NN — near its historical minimum winter level — at a time when it should have recovered. No intervention occurred because no intervention mechanism exists: no weirs, no regulated outflow, no operator holding a licence that could trigger a review.
The endurance deficit — the accumulated multi-layer storage depletion described in TN-014 — generates no institutional signal. The data exists (SYKE, WSFS, FMI). The physical condition is measurable. But the value of maintaining a functional lake system — recreational, ecological, groundwater, property — is not captured anywhere in the institutional architecture. Unlike the electricity and data cases, the value here is not being captured by someone else. It is simply not being captured at all. The signal is orphaned.
The three cases share a structure that can be stated compactly. In each system, three layers interact:
| Layer | Nord Pool | Data centre | Lake system |
|---|---|---|---|
| Physical local constraint |
Transmission capacity limit between zones | Computation capacity, energy, latency | Hydrology: snow, soil moisture, groundwater, inflow |
| Topological value formation |
Price differential across constrained link | Margin between cost of computation and market price | Endurance deficit: gap between storage state and functional minimum |
| Institutional allocation rule |
EU regulation: rent → TSO → network investment | Corporate structure: margin → IP-holding entity | No rule: signal unallocated, no actor responsible |
Value does not reside in a place. It is generated in the relationship between places — in the differential, the spread, the gap. The physical layer creates the conditions for value formation. The topological layer is where the value actually emerges. The institutional layer determines who captures it.
Formally, the value generated in each system can be written as:
where ΔS is the spatial differential (price spread, computation-to-value margin, storage deficit) and Cconstraint is the binding constraint that prevents equalisation (transmission limit, jurisdictional boundary, absence of regulation). The institutional layer then maps V to a recipient according to whatever rule is in place — or fails to map it at all.
Modern infrastructure systems do not produce value in places. They convert the spatial value of topological constraints into institutional cash flows. The disputes that arise around these systems — "theft," tax avoidance, regulatory failure — are always disputes about who holds the right to define the allocation rule, and when that right was established relative to the moment of value formation.
The theft frame requires a prior owner — someone who possessed the value before it was taken. In all three cases, no prior owner exists in the relevant sense. Congestion rent did not belong to Sweden before EU regulation; it was not yet constituted as a claim. Transfer pricing margins did not belong to Finland; they were defined as belonging to the IP-holder before any Finnish tax claim was established. The lake's endurance value does not belong to anyone; it has never been institutionally constituted as a claim at all.
What feels like theft is the experience of a slower actor watching a faster actor define the allocation rule before the slower actor could. Sweden's political establishment is slower than EU rulemaking. Finnish municipalities are slower than corporate tax structuring. Finnish water authorities — where they exist — are slower than the hydrology that produces the endurance deficit. In each case, the "theft" is actually the establishment of an allocation rule by an actor with sufficient Dp (decision-processing capacity) to act before others could contest the terms.
The correct frame is therefore not ownership but timing of rule definition. The actor who defines the allocation rule before the value crystallises captures the value without theft — legally, legitimately, and often invisibly to those who experience it as loss.
This does not mean the theft frame is without function. It is analytically incorrect but politically effective, precisely because it retroactively constitutes an owner. The actor who successfully narrates theft has won the allocation race twice: once by defining the rule early, and again by defining the grievance. Sweden's "our electricity money" is not a category error made in confusion — it is a claim staked in the second race, after the first has already been decided. Recognising this is important: the theft narrative is itself a Dp instrument, deployed by slower actors who lost the rule-definition race and are attempting to reopen it through political framing.
SM-011 proposes a two-tier grid connection flexibility mechanism for Fingrid's capacity market. Its core logic is the introduction of an anchor — a public, time-stamped reference point (the flexibility premium) that makes the topological value of grid constraint explicit before it is institutionally allocated to any specific actor.
Read through the CN-013 framework, SM-011 is an attempt to solve the timing problem. By establishing a public auction before the congestion value is absorbed into bilateral contracts or regulatory defaults, it creates a contestable allocation moment. The anchor is not a price control. It is a device for making the value formation event visible at a point when competitive allocation is still possible.
This is structurally identical to the function that EU congestion rent regulation performs — except that SM-011 proposes the anchor as a market mechanism rather than a regulatory mandate. The underlying logic is the same: prevent the value from being captured by the fastest actor before the allocation rule is publicly constituted.
The lake system (Case C) is the limiting case of the spatial value capture problem: no institutional allocation rule exists at all. The endurance value of a functional lake — its contribution to groundwater, ecology, recreation, property, and agricultural water supply — is not captured by any actor. It simply dissipates without record when the system is under stress.
HEM (the Hydrological Endurance Monitor) does not solve this allocation problem. It does something prior: it constitutes the signal. By computing HEPP — a composite endurance index that integrates storage, persistence, and recharge failure — HEM makes the topological value of the lake's endurance state visible as a time-stamped indicator. This is the precondition for any future allocation rule. An allocation rule cannot be contested or designed until the thing to be allocated can be observed.
In the language of CN-013: SM-011 proposes a new allocation rule for a system where value is already being captured (imperfectly). HEM constitutes the signal for a system where value is not being captured at all. The two instruments operate at different points in the same architecture.
CN-013 functions as the theoretical framework for both instruments. TN-014 (the HEM pilot case for Virmasvesi/Iisvesi) and SM-011 (the Fingrid flexibility quota proposal) were developed independently and in different domains. CN-013 makes explicit what they share: both are responses to the same structural problem — spatial constraint generating value that institutional architecture fails to allocate stably — applied at different points in the value capture chain. HEM at the signal-constitution end; SM-011 at the rule-definition end.
CN-007 introduced Dp (decision-processing capacity) as a measure of an institution's ability to act within the relevant time window of a decision. CN-013 adds a specific application: in spatial value capture systems, Dp is the decisive variable in the allocation race. The actor who defines the rule captures the value; the actor who defines the rule first wins the allocation race; the actor with sufficient Dp to act in the constitutive window defines the rule.
This explains why the three cases produce their characteristic political responses:
| System | Low-Dp actor | High-Dp actor | Political response |
|---|---|---|---|
| Nord Pool | Swedish national government | EU rulemaking apparatus | "Brussels is stealing our electricity money" |
| Data centres | Finnish/Irish national tax authorities | Corporate tax structuring teams | OECD BEPS, minimum tax proposals |
| Lake systems | Local communities, ELY-centres | No high-Dp actor exists | No political response — signal is unregistered |
The lake system case is again the limiting one. In the electricity and data cases, the low-Dp actor at least generates a political response — it can identify that something has been captured and direct anger toward the capturing actor. In the lake case, no political response is generated because no capturing actor exists. The value dissipates without an addressable target. This is why the institutional gap in Case C is structurally harder to close than the allocation disputes in Cases A and B: there is no opponent to negotiate with and no capture event to reverse.
CN-013's framework does not resolve the allocation disputes it describes. It does three things that may be useful preconditions for resolution.
First, it provides a common vocabulary that works across the three domains without requiring domain-specific expertise. The three-layer model (physical → topological → institutional) and the timing-of-rule-definition frame apply equally to electricity markets, corporate tax, and water management. This enables cross-domain recognition: someone working on congestion rent reform can immediately understand the HEM project, and vice versa, because the structural problem is the same.
Second, it reframes the policy question. The question is not "who is stealing" or "how do we stop the theft." The question is "when is the constitutive window for the allocation rule, and how do we ensure that the rule-defining moment is public and contestable rather than private and pre-emptive." This is a soluble engineering problem, not a moral one.
Third, it identifies the lake system as a distinctive case requiring a different kind of intervention. In Cases A and B, the intervention point is the allocation rule — rewrite the EU regulation, implement the minimum tax, design a new auction mechanism. In Case C, the intervention point is earlier: constitute the signal. HEM's role is not to propose an allocation rule for lake endurance value. It is to make the value observable in a form that could eventually support a rule. The sequence matters: observation precedes allocation.
| Case | Current position | Productive next step |
|---|---|---|
| Nord Pool / congestion rent | Allocation rule exists (EU regulation) but is contested. Sweden frames dispute as ownership, not rule design. | Reframe: negotiate the allocation rule explicitly rather than contesting its legitimacy. SM-011-style auction mechanism could constitute a public, contestable reference point below the EU level. |
| Data centre / transfer pricing | OECD Pillar Two minimum tax attempts to establish a floor — a dragging anchor at the global level. | Move toward ground tackle: jurisdiction-specific value attribution rules tied to observable physical activity (energy consumed, computation performed), not declared IP location. |
| Lake systems / HEM | No signal, no allocation rule, no institutional actor. HEM v1.2 constitutes the signal for Iisvesi/Virmasvesi. | Extend signal constitution to additional basins. Once the signal is established and time-series validated, the institutional question (who is responsible for responding?) becomes addressable. Observation precedes allocation. |
The "varkaus" (theft) frame applied to congestion rent, transfer pricing, and hydrological neglect is politically effective but analytically unproductive. It attributes to malice what is better explained by the structural advantage of the actor who defines the allocation rule before others can contest it. The productive response is not moral but architectural: make the value formation event visible, make the allocation moment public, and ensure that the Dp required to participate in the constitutive window is not prohibitively high for the actors who bear the cost of the allocation outcome.
SM-011 attempts this for grid flexibility. HEM attempts the prior step — signal constitution — for lake endurance. Both are applications of the same architectural logic to different points in the value capture chain.
The analysis in §02–§06 assumed that institutional allocation rules exist and can be contested. The EU case introduces a complication: the institutional layer itself may be structurally incapable of producing stable allocation rules. This is not a failure of will or competence. It is a consequence of the EU's constitutional design.
The EU is not a state, not a traditional international organisation, and not a federation in any operational sense. It is a regulatory network whose nodes are occupied by three distinct types of actor: national coalitions with divergent interests (the German-French core, north versus south, east versus west); industrial lobbying coalitions that cut across national lines (automotive, agriculture, finance, data infrastructure); and the Commission bureaucracy, which has institutional weight but no independent Dp. None of these actors can produce a unilateral allocation rule. All rules emerge from the intersection of their competing claims — and that intersection is, by design, slow.
Permanently low Dp. Too many actors, too divergent interests, too slow a consensus mechanism. The EU is a system deliberately engineered for deceleration: no single member can impose, no coalition can permanently dominate. This is a feature, not a defect — it prevents the kind of rapid capture that CN-013 identifies as the mechanism of value appropriation. But it also means the EU systematically arrives late to every crisis. The allocation rule is always constituted after the value has begun to crystallise elsewhere.
Allocation in institutional density rather than institutional vacuum. The lake system (§01, Case C) had no institutional layer at all — the signal was orphaned because no actor existed to receive it. The EU presents the mirror image: too many institutional layers, loosely coupled. Congestion rent is regulated by the Commission, contested by member states, and lobbied by TSOs and industrial consumers simultaneously. The value is not uncaptured — it is over-contested, generating heat rather than stable allocation. The result is similar to the orphaned signal: no single actor can act on the value in a coherent, time-consistent way.
Interpretive rather than invariant anchors. The EU's formal anchors — treaties, Court of Justice rulings, stability criteria — are all subject to interpretive revision under pressure. When ∂A/∂Dp ≠ 0 — when the anchor shifts as institutional stress increases — it ceases to function as an anchor in the technical sense that SM-011 requires. The Greek debt crisis, the COVID recovery fund, the energy crisis each produced a renegotiation of what the rules meant. Each renegotiation was the fastest actor defining the new allocation rule before others could contest the terms. The pattern is identical to §03, but occurring within the institutional layer rather than between layers.
This structural diagnosis explains a pattern that might otherwise seem anomalous: technical actors operating well below the EU level — Fingrid, Svenska kraftnät, national TSOs — attempting to build allocation anchors through market mechanisms rather than waiting for regulatory clarity from above. SM-011's flexibility auction proposal is one example. The proliferation of bilateral capacity agreements, interconnector contracts, and Nordic market design initiatives are others.
These are not deviations from the proper institutional order. They are rational responses to anchor deficit at the higher institutional level. When the EU cannot produce a stable allocation rule for congestion rent — because its Dp is too low and its anchors are too interpretive — the value will be allocated by whatever mechanism fills the gap. Technical actors with sufficient Dp to act in the constitutive window build their own anchors not because they are bypassing the system, but because the system has left the window open.
The EU's regulatory architecture is a case of institutional density producing anchor deficit — the opposite of the orphaned signal in Case C, but with a structurally similar outcome: no stable, time-consistent allocation rule for the topological value generated by spatial constraints. The congestion rent dispute is not primarily about money. It is about the EU's structural inability to constitute an invariant anchor at the speed required by the value formation process it is trying to govern.
This is why Fingrid-level actors building market-design anchors is not a workaround. It is the appropriate response to a system whose upper institutional layer cannot produce the anchors the lower layers require. CN-013's framework predicts this: where Dp is too low to define the allocation rule before value crystallises, the actors closest to the physical layer will define it instead.
A useful navigational analogy clarifies the distinction. A dragging anchor (laahusankkuri) is not a defective device — it is a device designed for deep water where conventional anchoring is impossible. It uses water resistance to slow and stabilise a vessel, reducing drift speed by over 50% and making operation in difficult conditions manageable. It does not grip the bottom. It does not lock position. It is precisely right for the conditions it was designed for.
The EU's regulatory architecture is a dragging anchor used well: it slows the system when political depth makes conventional anchoring impossible, stabilises it against destabilising forces, and prevents uncontrolled drift. In ordinary conditions this is adequate. The problem arises when the situation demands a ground tackle anchor — a device that grips a fixed point and holds position regardless of load. Congestion rent allocation requires a fixed reference point: who receives what, on what terms, invariantly. A dragging anchor produces only relative deceleration. SM-011's auction premium is ground tackle: it attaches to something concrete. Both instruments are legitimate. They are designed for different operational conditions — and the error is deploying the dragging anchor when the situation requires the fixed grip.