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CHAPTER 1
TRANSMISSION PRICING & WHEELING

1.1 Introduction
The electric power industry in all the developed countries and in few
developing Countries has undergone a major change from the way it
used to be operated some years back. Earlier, the power industry was
operated as an integrated monopoly. The same company (utility) owned
generation, transmission and distribution. Restructuring was carried out
in power sector, by the way of de-regulation (or re-regulation) and
utilities were broken down into separate entities. In the developed
countries, the aim behind it was to provide the consumer with cheaper
energy and for more efficient operations, whereas in the developing
nations this was resorted as a means of attracting investment for the
growth of the sector and to better the performance of the existing
utilities.
Since transmission is an important link in the process of supplying
power to the consumers, the typical nature of this segment has been
debated for long. Moreover, for the consumers to get cheaper power it
was important that the transmission industry should have such tariff
which allows the generators and the distribution companies to interact
better and at the same time makes most efficient use of the transmission
assets. Hence, the economics related to tariffs for transmission of power
assumed importance and are therefore under continuous development.
Further, since transmission is complement to generation to some extent,
the tariffs charged by transmission industry should be allocated fairly to
the user of this asset. Tariffs charged arbitrarily can lead to wrong
signals to the consumers and the investors. This can further lead to
improper development of both generation resources as well as in the
pattern of the consumption of power.
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1.2 What is Transmission Pricing & Wheeling
Transmission pricing is the cost of transferring power between any
two points on the transmission network. Wheeling means the
operation whereby the transmission system and associated facilities of
the transmission utility are used by another person for conveyance
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The
second definition of wheeling is the change in power flows in
transmission lines owned by other parties, when a seller sells power to a
buyer
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.

1.3 Transmission Pricing Models
1.3.1 Postage Stamp Pricing Model
A postage stamp rate is a flat per kW charge for network access within a
particular zone, based on average system costs. Postage stamp
transmission tariffs allocate total system costs to consumers on the basis
of load share/Energy share: a customer pays a transmission charge
equal to the total system cost-weighted according to their consumption
divided by total consumption. This method results in higher costs above
marginal costs because it incorporates historical fixed costs. The cost for
transmitting power within the zone is independent of the transmission
distance. A generator transmitting to a load in a different zone would
have to pay the postage stamp charges for the zone of origin and the zone
of delivery, and also any intervening zones. This accumulation of zone
access charges is often called pan-caking. Although transmission
within a zone is independent of distance, longer distances increase the
likelihood that more than one zone will be crossed, which would increase
the total transmission cost. Although postage stamp rates provide a way
to recover the fixed costs of the network, but they provide no information
about congestion.
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CRRC Definition
2 FERC Definition
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The advantage of using this method is that it is easy to administer. It
does not reflect marginal costs except in a special circumstance where all
generators are at equal distances from load and where the load on each
line is equal.
1.3.2 MW-Mile Pricing Model
In this method rates explicitly reflect the fact that the cost of
transmission depends on the distance the power transmitted and how
much power is transmitted. Traditional contract path pricing identifies a
particular transmission path over which the transmitted power could
flow. Such rates do not price transmission accurately because they fail to
take into account the total effects of the transaction on the network.
Flow-based pricing schemes, such as megawatt-mile pricing were
developed as an alternative to contract-path pricing. Megawatt mile
pricing involves load flow analysis to model the power flows on the
transmission network to determine transmission charge. These distances
and power flow, if computed correctly, more accurately reflect the impact
of a transmission arrangement on the system. The cost of transmission
per megawatt mile is the total cost averaged over megawatt- miles of
usage.
1.3.3 Contract path pricing Model
Contract path-pricing calls for transmission from point A to point B
based on the cost of single identified path. The price includes a capacity
charge to cover the capital costs, and energy charges based on losses and
other operating costs. Suppose two parties want to move 400 MW of
power between two points, and choose a transmission line as contract
path between the two points, then even knowing that the power will
actually move on different parallel paths between the two stations, they
calculate the costs to be paid based on this contract path.
1.3.4 Distance based Pricing Model
This method allocates costs on the basis of the distance between the
point of input of power to the transmission network and the point of
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consumption. This method is not optimal where the costs to be allocated
include historical costs. It cannot reflect marginal or congestion costs.
1.3.5 Locational Marginal Price (LMP) (or Nodal Pricing) based
Pricing Model
It is an advanced pricing model, based on distance-based pricing to
model the relationship between demand and load flow in the
transmission network and to price each location in the network
according to costs imposed on the system through location marginal
consumption. For allocating common costs, economic optimum is to
charge a price inversely related to elasticity of demand (Ramsey pricing).
Such a thing is difficult to implement in practice due to much
information requirements. It is more conventional to allocate costs along
accounting lines. For e.g. according to share in total consumption. The
nodal pricing approach manages congestion and sets transmission prices
through a centralized energy market based on economic dispatch. The
basic idea of the method is to organize the market as a pool in which
generators and loads submit hourly bids for node specific injections and
withdrawals of power to an Independent System Operator (ISO) with full
coordination and price setting authority. In this pricing ISO also
minimizes the total systems gain from trade, subjected to transmission
and reliability constraints.

1.4 Transmission pricing methodologies adopted in India:
The transmission pricing and wheeling charges issue is very new to
India, so proper methodology is not defined. Some states like Orrisa are
imposing these charges, based on postage stamp (energy division)
method but the components of ARR and loss % have been taken different
in each case. So there is a huge difference in the transmission /wheeling
charges from state to state. The charges imposed in few states are as
follows:
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1.4.1 Orissa
The Transmission charges are 32 paisa/unit and the approved
transmission losses are 3.88 % for FY 2002-03.
1.4.2 Andhra Pradesh
The Andhra Pradesh electricity regulatory commission passed a separate
order for 2003-04 fixing the wheeling charges on the Joint petitions filed
by APTRANSCO and DISCOMs. By this order the wheeling charges
allowed to be levied are (i) 50 paisa per unit in cash and (ii)
Compensation in kind for system losses of 28.40%.
1.4.3 Tamilnadu
The state of Pondicherry has proposed the wheeling rate to Tamilnadu
Electricity commission 10 paisa/unit and loss of 4% of energy.

1.5 International experience in Transmission pricing:
Table 1.1 summarizes the energy market pricing approaches followed in
various countries.
Table 1.1: Energy Market Pricing Approaches by Country

S. No. Country Energy Market
1 Argentina Limited form of nodal pricing in a radial
system
2 Chile Limited form of nodal pricing in a linear
network
3 England & Wales Spot market without locally
differentiated energy
4 New Zealand Nodal Pricing approach where energy
prices at a particular grid location or
node, are set by the marginal cost of
generation set to meet the demand at
that node.
5 Norway Zonal spot market
6 Pennsylvania
Maryland
Interconnection (PJM)
Nodal pricing reflecting hourly
locational marginal pricing at each node
7 Sweden Zonal system but locational price
differences only reflected to generators
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8 Western Power
Exchange - WEPEX
(US)
Zonal spot market


1.5.1 Argentina
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The Argentine transmission network has a number of entry and exit
nodes at which hourly spot market prices for electrical energy are
determined. Differences in these energy prices define the short-run
marginal cost of transmission between nodes. When transmission
between two nodes is constrained, the difference in spot prices reflects
the differences in the marginal costs of supply between the two nodes.
This difference comprises not only marginal losses but also congestion
rent. Congestion rent is what is left over after deducting that portion of
the difference in energy prices that is attributed to marginal losses.
Energy prices are determined with reference to nodal factors. The utility
computes these nodal factors for each hour in a day ahead pre-dispatch
program. The system load center has a nodal factor of 1. At exporting
nodes, nodal factors are less than one, and at importing nodes, nodal
factors are greater than one.
Nodal factor is calculated as incremental energy losses between the load
center and node when a unit variation of demand or supply is simulated
at each node.
Nodal Factor = 1 + (dLosses / dLoading)

The hourly nodal factor for a generator, distributor, or large user is a
weighted average of the nodal factors for all the nodes to which that
network user is linked during the hour. The weights are the relative

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Kent P. Anderson & Amy McCarthy, Transmission Pricing and Expansion Methodology: Lessons from
Argentina, Utilities Policy, Volume 8, No. 1, pp. 199 ,1999

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energy flows at each node. Given the nodal factors, the hourly spot
market price at the load center is determined as follows:

Market Price at Load Center = Marginal Generators Offer Price/(Marginal
Generators Nodal Factor)

Given the market price at the load center, the nodal factors are then
used to compute prices at other nodes. In areas that are not experiencing
transmission constraints, the price is computed as follows:

Nodal Price = Market Price * Nodal Factor

Participants in the Mercado Electrica Mayorista (MEM) pay both variable
and fixed charges for transmission service. For the most part, these
charges produce revenues for transmission providers. In particular, the
use of nodal factors and adaptation factors gives rise to locational
differences in energy and capacity prices. In addition, each network user
pays a connection charge and a fixed capacity charge termed a
complementary charge. Transmission concessionaires receive two types
of fixed charge: the connection charge and the complementary charge.
The connection charge compensates a transmission concessionaire for
the operation and maintenance of equipment dedicated to connecting the
user to the transmission system. The complementary charge
compensates the concessionaire chiefly for the operation and
maintenance of the rest of the network, but the complementary charge
also includes a balancing component to adjust for over- or under-
collection of expected variable charges.



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1.5.2 Chile
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The current pricing structure for the use of the transmission system
evolved from 1982 to 1990. It receives income from energy and capacity
charges, which are derived from spot price differences, corresponding to
nodal price differences for energy and power. Fixed costs are recovered
through wheeling rates charged to generators. The Energy Law provides
payments for each line allocated among all users in proportion to the
maximum transported power by each user, in respect of the total
maximum transmitted power.
1.5.3 England & Wales
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National Grids (NGC) (Transmission Utility) method Investment Cost-
Related Pricing (ICRP), has been calculated in a very transparent
manner. The company uses a simple model to assess the cost of
expanding the system to cope with additional demand or generation at
each node in turn. The model is a linear program, which minimizes the
MW-Km of transport, assuming that electricity flows along the shortest
route between nodes with net generation and net demand.
The distances are measured along NGCs existing wayleaves and
increased along those where the wayleave is an underground line, to
reflect the higher cost of those lines. The demand at each node is equal
to the forecast peak demand at that node, while the generation capacity
at each node is scaled down by the ratio of the forecast level of demand
to total generation capacity. The model calculates the extra transmission
capacity required by additional demand at each node, which is multiplied
by an expansion constant to give the marginal cost of that demand.
Points with similar costs are grouped into zones, and the transport
charge for each zone is based on the average cost of the points with it.
The linear program assumes electricity flows by shortest route, while

4
Review of Australian Transmission Pricing: A report for the Australian Competition and Consumer
Commission, London Economics, London, Annexure III, pp. 28-32, 1999.
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Richard Green, Transmission Pricing in England and Wales, Utilities Policy, Volume 6, No. 3, pp. 185,
1997
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Kirchoffs laws imply that power flows would increase on other circuits,
thereby increasing the MW-km traveled. Also, the expansion constant
assumes that the line is operated at full capacity
1.5.4 Japan
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In 1996, the major utilities published wholesale electricity wheeling price
lists for Independent Power Producers (IPPs). Although wholesale
wheeling prices are similar to the megawatt mile approach, the
transmission line cost and the average local transmission costs are
treated separately.
The present transmission charges are predetermined based on
generating capacity and peak demand. Utilities have set their
transmission charges to recover all of the revenue that the government
allows.
1.5.5 New Zealand
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A market based on full nodal AC pricing is still under consideration but
since October 1996, a market has been operated using a DC flow
approximation with piecewise linear losses. The model produces prices
for approximately 600 nodes in the physical network, and active power
prices are published for some 150 points at which power is bought and
sold.
1.5.6 Norway
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From 1993, a system with point tariffs has been implemented at all grid
levels. This system implies that the price for access and utilization of the
grid is unaffected by the power contracts of the grid customers. The
tariffs in the central grid consist of four elements: two elements that are
dependent on the short-run utilization of the grid and two elements that

6. Hiroshi Asano and Yukitoki Tsukamoto, Transmission Pricing in Japan, Utilities Policy, Volume 6,
No. 3, pp. 203, 1997

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E.G. Read, Transmission pricing in New Zealand, Utilities Policy, Volume 6, No. 3, pp. 230, 1997

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Jan Braten, Transmission Pricing in Norway, Utilities Policy, Volume 6, No. 3, pp. 219, 1997

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are fixed on an annual basis. The variable elements are compensation for
loses and congestion fees. Congestion fees are only intended to generate
income rather than influence the behavior of producers or consumers.
1.5.7 Pennsylvania-New Jersey Maryland Interconnection (PJM)
In April 1998, PJM implemented locational marginal prices
corresponding to a nodal pricing market where prices at each location
correspond to the marginal cost of supplying an increment of energy to
that location on the system. This includes the marginal cost of
generation, the marginal cost of system transmission losses and the
effect of congestion. The PJM ISO began posting locational prices for
1,277 locations. The price paid for energy bought and sold in the PJM
Interchange Energy Market reflects the hourly Locational Marginal Price
at each load and generation bus.
1.5.8 Sweden
As of January 1, 1995, Sweden reformed its transmission-pricing model,
new tariff model is more market oriented. Transmission tariffs consist of
a power fee, an energy fee and in some cases, an investment fee. The
power fee is based on subscribed maximum input and output at
connection points. The energy fee is calculated by applying a marginal
loss factor to energy off takes and injections. Marginal loss coefficients
have been determined for 150 connection points. An investment fee is
applied if a new connection is planned requiring significant investment.
The fee is intended to recover any additional costs imposed on the
national grid.
1.5.9 WEPEX
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Transmission pricing comprise connection charges, access fees and
usage charges. The costs of any connection facilities are borne by the
party requesting connection. There are three types of access charges

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Review of WEPEX Transmission Pricing: A report for the WEPEX Competition and Consumer
Commission, London Economics, London,Annexure III, pp. 69-90, 1999.

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Non-self sufficient access charges between utilities, Wheeling Access
Charges between utilities and Direct Access end- user access charges.
Access charges for transmission services are charged at point of delivery
and are paid to the participating operator. These charges are intended to
recover that portion of the transmission revenue requirement not
recovered through transmission revenue credits. Transmission usage
charges are based on nodal pricing principle, but this approach has been
simplified by combining nodes into pricing zones.