Transmission expansion in Argentina 2: The Fourth Line revisited

In 1992, Argentina introduced the Public Contest method, which required transmission users to propose, vote and pay for major expansions of the electricity transmission system. Economists, consultants, the regulator and others held the application of this method to be unsuccessful, mainly on the ground that "for many years" it delayed investment in a "much needed" Fourth Line to Buenos Aires. The commentators blamed externalities, free-rider problems, the Area of Influence method used to define voting rights, and transactions costs. This paper re-examines the history and economics of the Fourth Line. The delay to the Fourth Line was short (a year and a half rather than many years) and enabled a significant reduction in construction costs. Externalities, free-riding, the Area of Influence method and transactions costs were not problematic. The Fourth Line was initially rejected because it was unprofitable to key beneficiaries. Far from being much needed, the Fourth Line was not economic because the congestion it avoided was worth less than the cost of building it. It had become more economic to transport gas to generate electricity near Buenos Aires than to transmit electricity over long distances. The location of subsequent power stations reflected this. Even though the presence of a subsidy meant that the Public Contest method did not prevent the building of the Fourth Line, it nonetheless forced a much-needed reappraisal of traditional transmission investment policy.