Economies of Scale and Pricing in the Chilean Electricity Sector

Abstract

According to the Law, electricity rates should be set so that the assets on the electricity industry have a rate of return of 10%. However, during the last years, the Chilean firms in generation and transmission both individually and as a group have obtained rates of return substantially lower than 10% making investments in this sector less attractive. This paper argues that one of the reasons for the low return has to do with the way in which the problems of economics of scale in transmission has been dealt with in the setting of electricity rates. Four alternative rates systems are proposed to solve this problem.