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

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.