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

  • Galetovic, Alexander
  • Inostroza, Juan Ricardo
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    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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    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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    1. repec:cup:cbooks:9780521549486 is not listed on IDEAS
    2. Klemperer, P., 1999. "Auction Theory: a Guide to the Literature," Economics Papers 1999-w12, Economics Group, Nuffield College, University of Oxford.
    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, June.
    4. repec:cup:cbooks:9780521840187 is not listed on IDEAS
    5. 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.
    6. 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.
    7. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-30, July.
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