Governance of competitive transmission investment in weak institutional systems

Despite progress in economic analysis in recent years, transmission investment governance still poses policy design challenges in competitive electricity systems. The degree of regulatory intervention in allocating investment costs is a central issue. Scholars tend to agree that centralized solutions are almost inevitable, mainly due to free riding and coordination problems. In systems with weak institutional endowments and pressures of distributive politics, however, there is an increased likelihood of regulators acting opportunistically or imposing arbitrary changes to the cost allocation rules, which makes centralized solutions less desirable. We provide some examples from Argentina, El Salvador and Peru and suggest that a two-tier governance scheme composed of a self-governing Forum of transmission stakeholders, with regulation as a subsidiary measure, may be a more adequate design to restraint undue government interference. The expected outcome is twofold: a better match with users' preferences and a restraint to government opportunism and arbitrariness. Measuring the robustness of this scheme in minimizing the risks for either too much or too little investment will certainly require further research. (c) 2008 Elsevier B.V All rights reserved.