Can generalized distribution factors lead to "objective" transmission toll allocations? Some lessons from the recent Chilean experience

How to charge for transmission lines in a liberalized electricity market is still a conceptually unresolved issue and the literature offers many methods to determine who "uses" a given line and how to allocate tolls among users. But there seems to be some agreement that once a given method is chosen, calculating use and toll allocations is a mere technical matter. We suggest, by contrast that this belief is not warranted. We apply one power flow identification method - generalized load distribution factors - to allocate transmission tolls among the users of the Chilean transmission system and show that almost any allocation of tolls can be achieved by suitably choosing parameter values. Essentially, the method affords many degrees of freedom to the person responsible for setting the parameters needed to apply it. We argue that this suggests that setting parameter values is a central feature of transmission regulation. Moreover, our results suggest that an allocation method cannot answer the key unresolved question in the literature: what is the structure of tolls that gives economically adequate expansion incentives. (c) 2006 Elsevier B.V. All rights reserved.