An incentive mechanism for electricity transmission expansion in Mexico

This study proposes an incentive regulatory framework for expanding electricity transmission in Mexico. A two-part pricing model is implemented within a combined merchant-regulatory structure. Three cases are considered. In the first, a monopolist with “postage stamp tariffs” serves the whole country using uniform prices. In the second case, one firm holds a regional monopoly in each of the five electricity areas. In the third, a monopolist operates in all areas of the national electricity system and discriminates in the prices it charges in each of the regions. This approach is described and then applied to the Mexican electricity transmission network. Using real data, the study compares all three cases in terms of profits, capacity increases, and network expansion. The results are found to depend on two effects: the “economies-of-scale effect”, in which the maximum level is reached with a single network; and the “discriminatory effect” that results when a firm can discriminate among types of consumers. The economies-of-scale effect produces greater capacity and network expansion, whereas the discriminatory effect increases profits.