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A lesson from Argentina: Setting transmission tolls in a competitive auction is much better than regulating them

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  • Galetovic, Alexander
  • Inostroza, Juan Ricardo
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    Abstract

    There are at least two procedures for setting the tolls paid by power line users. One consists of regulating them in a standard process. The other, which is used in Argentina, involves auctioning the lines to the lowest toll. In this paper we show that an auction yields higher expected social welfare if n >= 2 bid. Expected social welfare is even higher if, as in Argentina, those who benefit from the line can also bid and build. Moreover, when the social welfare is utilitarian, an auction beats regulation even when the regulator can perfectly audit costs ex post. We describe and examine the auction of the fourth Comahue transmission line in Argentina. Assuming that the regulator's information about costs is similar to the information held by the industry, the model suggests that had tolls been regulated, they would have been at least 61% higher.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 30 (2008)
    Issue (Month): 4 (July)
    Pages: 1334-1366

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    Handle: RePEc:eee:eneeco:v:30:y:2008:i:4:p:1334-1366

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    Web page: http://www.elsevier.com/locate/eneco

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    1. Paul Klemperer, 1999. "Auction Theory: A Guide to the Literature," Economics Series Working Papers 1999-W12, University of Oxford, Department of Economics.
    2. David P. Baron & Roger B. Myerson, 1979. "Regulating a Monopolist with Unknown Costs," Discussion Papers 412, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    4. Chisari, Omar O. & Dal-Bo, Pedro & Romero, Carlos A., 2001. "High-tension electricity network expansions in Argentina: decision mechanisms and willingness-to-pay revelation," Energy Economics, Elsevier, vol. 23(6), pages 697-715, November.
    5. Laffont,Jean-Jacques, 2005. "Regulation and Development," Cambridge Books, Cambridge University Press, number 9780521840187.
    6. Rafael Di Tella & Alexander Dyck, 2008. "Cost Reductions, Cost Padding, and Stock Market Prices: the Chilean Experience with Price-Cap Regulation," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
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    Cited by:
    1. Littlechild, Stephen C. & Ponzano, Eduardo A., 2008. "Transmission expansion in Argentina 5: The regional electricity forum of Buenos Aires province," Energy Economics, Elsevier, vol. 30(4), pages 1491-1526, July.
    2. Littlechild, Stephen C. & Skerk, Carlos J., 2008. "Transmission expansion in Argentina 1: The origins of policy," Energy Economics, Elsevier, vol. 30(4), pages 1367-1384, July.
    3. Littlechild, Stephen C. & Skerk, Carlos J., 2008. "Transmission expansion in Argentina 3: The evolution of policy," Energy Economics, Elsevier, vol. 30(4), pages 1420-1461, July.
    4. Littlechild, Stephen C. & Skerk, Carlos J., 2008. "Transmission expansion in Argentina 4: A review of performance," Energy Economics, Elsevier, vol. 30(4), pages 1462-1490, July.

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