Fernando Coloma () (Instituto de Economía. Pontificia Universidad Católica de Chile.) Salvador Valdés () (Instituto de Economía. Pontificia Universidad Católica de Chile.)
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Electricity tariffs based on marginal-cost pricing allow efficient operation and investment decisions provided technology exhibits constant or decreasing returns to scale. This paper analyzed the case of an infrastructure -a natural gas pipeline- that exhibits increasing returns to scale and can serve several independent electricity generators. As electricity tariffs in Chile are set according to marginal cost, and in the case of natural gas-based generators this includes just the marginal transport cost through the pipeline, we find that competitive generators are unable to obtain rents that may be passed along to the builders of the pipeline to cover their fixed cost. This causes an inefficient delay in the entry date of the pipeline. The paper proposes a modification of marginal cost pricing that alleviates this delay without distorting operation nor investment decisions.
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Article provided by Instituto de Economía. Pontificia Universidad Católica de Chile. in its journal Cuadernos de Economía.