L - Industrial Organization
The purpose of this paper is to present a general framework for electricity market design in Latin American Countries (LACs) that addresses the current problems facing electricity supply industries (ESIs) in this region. The major issue addressed is what market rules, market structures, and legal and regulatory institutions are necessary to establish a competitive wholesale market that provides the maximum possible benefits to consumers consistent with the long-term financial viability of the ESI.
This paper assesses the costs and benefits of further re-structuring of the Indian electricity supply industry. The poor financial condition of the State Electricity Boards (SEBs) has led to a significant decline in private sector participation in new generation investment projects. Agricultural tariffs set far below average cost and massive rates of technical and commercial transmission and distribution losses have necessitated subsidies to electricity consumption that are close to 1 percent the Gross Domestic Product (GDP) of India.
Consider a bottleneck monopoly that sells “access” at a regulated price and may compete with independent downstream firms through a subsidiary. We systematically study the vertical integration decision and the optimal intensity of sabotage. The main results are as follows. First, unless the subsidiary is implausibly more efficient than independent firms, vertical integration never benefits consumers. Moreover, sabotage may prompt inefficient vertical integration, in which case welfare unambiguously falls.
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.
This paper reviews competition policies in Chile. It argues that competition policy should strive to reduce entry, fixed and variable costs where that is technically feasible; reduce the costs of reallocating resources across firms and sectors; and foster tough price competition. It also shows that reducing concentration is the wrong policy goal because tougher price competition will increase equilibrium concentration, ceteris paribus. While Chile’s competition policies are not bad by international standards, there is considerable room for improvement.
Public-private partnerships (PPPs) cannot be justified because they free public funds. When PPPs are desirable because the private sector is more efficient, the contract that optimally trades demand risk, user-fee distortions and the opportunity cost of public funds is characterized by a minimum revenue guarantee and a cap on the firm’s revenues. Yet income guarantees and revenue sharing arrangements observed in practice differ fundamentally from those suggested by the optimal contract.