Available online at www.sciencedirect.

com

Energy Economics 30 (2008) 249 – 270

www.elsevier.com/locate/eneco

Can generalized distribution factors lead to “objective”

transmission toll allocations? Some lessons from
the recent Chilean experience ☆
Alexander Galetovic a,⁎, Rodrigo Palma-Behnke b,1
a
Facultad de Ciencias Económicas y Empresariales, Universidad de los Andes,
Av. San Carlos de Apoquindo 2200, Santiago, Chile
b
Department of Electrical Engineering, University of Chile, Av. Tupper 2007, Santiago, Chile
Received 21 July 2005; received in revised form 12 May 2006; accepted 6 June 2006
Available online 18 July 2006

Abstract

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

☆
This paper was funded by AES Gener S.A., but the opinions expressed herein are our own and do not commit AES Gener
S.A. in any way. We are grateful for assistance provided by Carlos Aguirre and Cristián Muñoz of AES Gener, and by Juan
Pérez of the University of Chile. Palma also gratefully acknowledges the financial support of Fondecyt (grant #1020801) and,
the Facultad de Ciencias Físicas y Matemáticas of the University of Chile. We are also grateful for comments from four
anonymous referees, Andrea Butelmann, Juan Ricardo Inostroza, and participants at the Third Electric Power Legislation
workshop organized by the Catholic University in Santiago.
⁎ Corresponding author. Tel.: +562 412 9259; fax: +562 214 2006.
E-mail addresses: agaletovic@uandes.cl (A. Galetovic), rodpalma@cec.uchile.cl (R. Palma-Behnke).
1
Tel.: +562 978 4201; fax: +562 695 3881.

0140-9883/$ - see front matter © 2006 Elsevier B.V. All rights reserved.
doi:10.1016/j.eneco.2006.06.002
250 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

unresolved question in the literature: what is the structure of tolls that gives economically adequate
expansion incentives.
© 2006 Elsevier B.V. All rights reserved.

JEL classification: L51; L94

Keywords: Distribution factors; GGDF; GLDF; Transmission pricing

1. Introduction and motivation

How to charge for transmission lines in liberalized electricity markets is still a conceptually
unresolved issue. For one, while it is generally accepted that high-voltage transmission is a natural
monopoly, there is a surprising variety of methods that are used around the world to set and regulate
tolls and to price the different components of a transmission network, like main transmission lines and
substations; and its services, like measurement and control equipment or reactive power compensation
devices. For another, in systems where there is open access to the grid, there is still no agreement on
how to determine who “uses” a given line, let alone how to distribute tolls among different users.
So far there are five families of methods to allocate tolls (see Fig. 1): those based on short- or long-
run marginal costs2; some adaptation of so-called postage stamp methods3; methods that identify
flows and attribute use based on an electrical model4; graph-theory methods5; and according to
economic benefits, usually using game theory6. But at least there seems to be some agreement that
once a method is chosen, the allocation of tolls among the users of the system is a technical issue with
a fairly unambiguous outcome. This paper suggests, however, that this belief is unwarranted. We
apply one power flow identification method – generalized distribution factors – to allocate the
transmission tolls among users of the Chilean transmission system and show that almost any
allocation of tolls can be achieved by suitably choosing the value of the model's key parameters.
The study was motivated by the recent changes of toll allocation rules in Chile. Right after the
discussion of the new law began, there was agreement that transmission charges should be set to
pay the replacement cost of each line and be shared among the users of the system with
generalized generation distribution factors (GGDF) and generalized load distribution factors
(GLDF). But a protracted negotiation among generators, the transmission company and the
regulator ensued, because it became immediately apparent that toll allocations among generators,
and between generators and users varied a lot depending on the parameters chosen to implement
the method. Protracted bargaining reflected that each company stood to gain or loose a lot
depending of the specific parameters chosen.
Our study is based on Chile's central interconnected power system (SIC by its acronym)
during 2002. The tolls paid by each agent are estimated in three stages. Firstly, power flows in
each transmission segment are estimated for a representative set of expected possible operating
conditions, which seeks to reflect the “use” of the main high voltage transmission system made by
each agent — whether generator or customer. Flows are determined by the loads and dispatch of

2
See, for example, Rudnick et al. (1995).
3
See, for example, Jing et al. (2003).
4
See, for example, Kirby and Rahman (2000), Marangon (1995), Pantos and Gubina (2004), and Phichaisawat and
Song (2000).
5
These are the methods of Kirschen (1997) and Bialek (1997, 1998).
6
See, for example, Hobbs and Rijkers (2004), Hobbs et al. (2004), and Rudnick and Zolezzi (2000).
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 251

Fig. 1. Toll allocation methods.

power plants and vary according to the month of the year, the time of day and, because Chile is
highly dependent on hydro generation, on hydrological conditions. Secondly, for each generator
and each load in the system, their participation in the power flow is determined for each operating
condition — this determines the “use” of the transmission system made by each agent. Thirdly,
we use the given allocation rule to determine the toll payable by each agent, user or generator.
The main conclusion of this paper is that by appropriately choosing the allocation rule and
certain parameters, GGDF and GLDF factors make it possible to achieve almost any allocation of
toll payments among system agents. This indeterminacy indicates that these methods may be used
to set economically sensible charges and emit economically appropriate signals. Nonetheless, the
conceptual framework that determines what is “economically appropriate” logically precedes the
use of GGDF or GLDF methods and must be defined before setting the values of the specific
parameters. Accordingly such methods may be suitable for sharing out the tolls on a given
transmission line, but only after deciding who should pay based on the economic rationale of the
problem. In contrast, these methods are inappropriate for choosing which of the agents that
participate in the system should pay for a given line.
Our paper is related to a growing literature on the allocation of transmission tolls to users of the
system, recently surveyed by, among others, Green (1997), Jing et al. (2003), Marangon (1995)
and Rudnick et al. (1999).
Following this introduction, Section 2 briefly discusses two basic concepts that are needed to
understand the discussion on who pays the tolls. Section 3 then explains the calculation meth-
odology in greater detail, while Appendix A specifies the assumptions and the data sources used.
Section 4 presents the results, and Section 5 concludes.

2. Concepts: who pays for a transmission line?

2.1. Accounting

Our aim is to study the distribution of transmission tolls under alternative allocation rules. But
to do this we must firstly ask who pays for each line. To answer this question, the following basic
concepts need to be defined: allocation rule; transmission line use, payer, and direct charge.
252 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

Fig. 2. Allocation rules.

Fig. 2 shows two toll allocation rules. As can be seen such a rule indicates two things: firstly it
identifies the payer, i.e. the agent responsible for writing the check to the transmission company.
Secondly, it identifies who uses each segment of the transmission system. Broadly speaking, the use
of the transmission system may be attributed to the power plants that feed energy into it (i.e. to its
injections), or to the customers who purchase energy from it (i.e. to loads), or a combination of both.
One way of interpreting a given rule is by adding the cells in each row of the matrix, which
determine payment by use. For example, in both cases depicted in Fig. 2, 50% of the use of the
line is attributed to power plant energy injections, and 50% to loads — on this dimension, both
rules are the same.
On the other hand, the allocation rule can be viewed by adding the cells in each column of the
matrix, to show how much each payer pays. Here the two allocation rules depicted in Fig. 2 differ
sharply. In the first case (matrix (a)), 50% of tolls are paid by generators, and the other 50% appear
in the electricity bills that customers pay. In the second case (matrix (b)), 100% of the trans-
mission charge is paid by generators.
Now, what is actually meant by “use”? In the case of a highway, for example, this is easy to
determine, because an automobile traveling from Boston to New York is identifiable. In the case of
electric power systems, however, use is hard to define, because when a power plant injects or a
customer loads an additional kilowatt, the flows adjust throughout the system, obeying Kirchoff's
Laws in form of a nonlinear relationship. Thus, for example, it is impossible to physically identify the
electrons injected into the system by a given power plant. For this fundamental reason, the methods
that exist to determine the use made of a transmission line are accounting breakdowns of the flows
(accounting breakdowns in the sense that they obey certain basic but to a great extent arbitrary
consistency rules), which, nonetheless, are deduced from electrical properties. In the exercises we
present below, we determine the use that each power generating plant makes of each line with the
GGDF method; and to determine the use made by each customer, we use the GLDF method.

2.2. Economics: incidence, location decisions and redistribution

It is necessary to distinguish between the payer and the use-allocation rule because the incidence
of a transmission toll (i.e. who ultimately bears the cost of the line) and hence its economic effects,
depend on the criterion employed to determine who “uses” a given line, rather than who actually
writes the check in payment. In fact, provided the legislation does not expropriate transcos by setting
tolls below costs, in the long run users will end up paying transmission tolls almost independently of
who writes the check. Nevertheless, plant location decisions will depend on the use attribution rule.
To see this, we briefly discuss how use allocation rules affect generators' competitive positions.
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 253

2.2.1. Plant location decisions

To begin consider transmission charges attributed to loads (cells (2,1) and (2,2) in the matrices
in Fig. 2). Consider firstly matrix (a), where 50% of the use is attributed to loads and customers
must make the check for the transmission company. Clearly, tolls allocated to customers are
irrelevant from the standpoint of competition between generators, because on this account costs of
serving customers do not differ across generators. Thus, the outcome of competition among
generators will not be affected by the transmission toll.7
In a similar way, the transmission charge is also irrelevant when the payer is the generator (as
in matrix (b) in Fig. 2). To see this, suppose a group of generators that competes for a contract with
a customer whose assigned transmission charge is T. Then charge T would form part of the costs
of whoever wins the contract. Thus, as before, any competitive difference among generators must
stem from cost factors other than the transmission toll.
We can now link plant location decisions with use attributions. Because generators ignore
payments originated by use attributed to loads, they will not consider them when deciding where
to locate plants. At the extreme, if all use is attributed to loads, plant location decisions will be
based only on plant construction costs and resource availability.
By contrast, uses allocated to injections give quite different economic signals and they do
affect plant location decisions: if attributed line use varies with plant location, transmission tolls
give a competitive advantage to those generators with plants that pay smaller charges, ceteris
paribus. To see this, consider two generators who must decide whether to build a plant. In their
chosen locations generator 1 must pay a toll equal to T1 and generator 2 a toll T2 < T1. Then on this
dimension generator 1 has a competitive cost advantage, and will require a lower long-run
electricity price to break even.
More generally, in the long run generators will favor locations where they can save in trans-
mission tolls, ceteris paribus. If plant construction costs vary less with location than transmission
tolls, then only tolls paid in the most favorable location will be passed on to final-user tariffs, for only
these will affect the costs of the marginal generator.8 Those plants that cannot choose their location
(for example, a run-of-the-river hydro plant) will bear most of their transmission toll themselves.

2.2.2. Toll redistributions

A legislative change not only affects the incentives where to locate, but also redistributes
wealth. Distributive effects are of three sorts. First, tolls attributed to injections will be
redistributed among generators who have already sunk capacity. Similarly, tolls attributed to loads
will redistribute charges among users, and there will be regional winners and losers accordingly.
Last, in the long run the change of the transmission toll paid by the injections of the marginal plant
in the most favorable location will determine how much of the tolls determined by injections and
paid by existing plants will be shifted to users in the long run.
Our calculations below estimate the first two effects; the third one we do not estimate for two
reasons. First, we would have to estimate where the marginal plant would locate in equilibrium, a task
well beyond the scope of this paper. Second, and more important, it is not necessary to establish our
main point, viz. almost any distribution of tolls can be achieved by suitably choosing parameter values.

7
Note that the toll is irrelevant regardless of the intensity of competition among generators.
8
This statement assumes a perfectly competitive generation market. An argument similar to the one developed by
Bulow and Pfleiderer (1983) shows that the pass through to customers will depend on the intensity of competition and the
shape of the demand curve.
254 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

3. Methodology

In this section, we describe the methodology used to estimate toll payments. This is done in three
stages: (i) determination of the operating conditions and flows for each line; (ii) allocation of flows on
each line among agents connected to the system for each operating condition, and calculation of the
respective pro rata amounts; (iii) calculation of the payment corresponding to each agent.

3.1. Operating conditions

3.1.1. Dispatch
Chilean electric power systems are operated in centralized fashion to minimize the expected
cost of supply and unserved energy.9 The Economic Load Dispatch Center (CDEC) centrally
dispatches power plants in merit order, ranking them from lowest to highest operating costs, and
coordinating into the system until the amount of power demanded at each point in time is covered.
Thus, run-of-river hydroelectric plants are dispatched first. If the amount produced by run-of-river
plants is insufficient, thermal and reservoir hydro plants are activated in increasing order of
operating costs. The opportunity cost of reservoir water is calculated at each instant and hydro
plants are dispatched accordingly.
Regulation in Chile stipulates that CDEC orders are compulsory and independent of each
firm's energy and power supply contracts. As a result, transfers are often made between gen-
erators to enable them to meet their commercial commitments, which are valued at the instan-
taneous nodal marginal cost, or the spot price calculated hourly. The separation between dispatch
and contracts allows the system to minimize short-run total production cost. This implies that the
power flow along each transmission line is determined exclusively by hydrology, consumption at
the different nodes of the system, and use of water from reservoirs; it does not depend on the
contracts between generators and customers.10
Dispatch rules are illustrated by Fig. 3. Run-of-the-river and thermal plants are ordered according
to their variable cost of operation. It can be seen that the amount of electricity generated by thermal
power plants at each point in time depends on system load; the availability of run-of-river hydro-
electric generation; and the amount generated from water stored in reservoirs. The amount generated
with reservoir water, in turn, is determined by equating its marginal opportunity cost equals to the
variable cost of the most expensive thermal plant running. If that is so, reservoir water will exactly
cover the difference between system load and thermal plus run-of-the-river generation.11
We assume that in each month there are three periods of demand – peak, medium and low –
each of which is represented by a demand block. Following standard practice in Chile, we also
assume that each month 40 levels of rainfall are possible (these are the actual precipitations
recorded during the previous 40 years). Lastly, each month the hydrology is different. Thus we
have 3 × 12 × 40 = 1440 operating conditions. We denote a given condition with the letter t.

9
A detailed description of the Omsic model can be found in Galetovic et al. (2002).
10
In the literature this market design is usually called a compulsory pool with audited costs. This model is not used in
countries like Germany or the United States, where bilateral physical contracts between generating firms and customers
tend to prevail.
11
The size of the wedge between, on the one hand, system load and, on the other, the amount generated by thermal and
run-of-the-river plants varies over time, and depends on the expected cost of future generation. Optimal reservoir use
equals the opportunity cost of not using water today (generating one additional kWh with thermal plants) with the
marginal benefit of having one additional kWh of reservoir water available to generate tomorrow and substitute for
thermal generation. See Galetovic et al. (2002) for a description of the dynamic optimization performed in Chile.
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 255

Fig. 3. Dispatch by merit order. The figure schematically shows how plant is centrally dispatched in Chile's Central
Interconnected System. All run-of-river and thermal plants are ordered according to merit order and dispatched
accordingly; reservoirs are operated optimally according to a stochastic dynamic optimization which equates the expected
intertemporal value of reservoir water across time. At the optimum, the intertemporal value of reservoir water equals the
variable cost of the most expensive thermal plant running. Reservoir water covers exactly the difference between system
load and the sum of the generation of thermal and run-of-river plants.

What exactly does an operating condition consist of? If Gg,b(t) represents the power generated
by power plant g that injects into busbar b under operating condition t, we can denote by G(t) the
column vector that contains the amounts generated by each of the N power plants connected to the
system under operating condition t. On the other hand, if Cc,b(t) represents the energy purchased
by consumption load c located in bar b, we can denote by C(t) the column vector that contains the
amount of energy loads by each of the M loads connected to the system under operating condition
t. Thus, each operating condition consists of an N-dimensional column vector G(t) showing the
inputs from each power plant, and a M-dimensional column vector C(t) indicating the energy
loads of each customer.
At all times generators are required by law to serve demand at the lowest expected energy
costs. This optimal quantity is calculated by the CDEC using the so-called OMSIC12 stochastic
dynamic programming model, which optimizes the use of water in the, by far largest reservoir, the
Laja lake.13 We use the OMSIC model to simulate the operation of the system, and to obtain the
1440 operating conditions.

3.1.2. Flows through each line

OMSIC is a single node model. In other words, it assumes that all power plant dispatch occurs
at a single node in the system, so losses are not obtained from the model solution as a function of
the location of energy dispatches and inputs. Nonetheless, the estimation of system demand that is
used to determine the dispatch includes a loss factor — i.e. losses do affect the amount generated.

12
“OMSIC” is an acronym that stands for monthly SIC operation.
13
Lake Laja can store 7000 GWh of energy when full, although annual generating capacity is about 2500 GWh; it can
also store water for several years. For further details see Galetovic et al. (2002) and Olmedo (2001).
256 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

To take account of losses, we adjust the energy loads column vector C(t) prorating total system
generation over each consumption load. This share out is different for each demand block and
each month (i.e. 3 × 12 = 36 prorating schemes are used), and it is also independent of injections.
Overall, energy injections and consumptions, which are summarized by the pair {C(t); G(t)},
determine the power flow on the line joining points l and k under operating condition t, which we
denote by Pl→k(t). We denote by P(t) the column vector of dimension L that contains the flows in
each of the L lines in the system, under operating condition t.
Given the quantities generated and consumed, and their electrical location for each operating
condition, we will use the so-called linear load flow or DC load flow model to obtain the 1440 P(t)
vectors. This model is linear and makes approximates the steady state operation of an electric power
system that would normally be represented by a system of nonlinear equations. An approximation of
this type is reasonably accurate in high voltage systems such as the one being studied. In addition,
losses are neglected in the load flow model. This turns out to be consistent with using the OMSIC
model, which already includes an approximation of the system's ohmic losses.
Hence we have a linear system that relates net power injections (generation less consumption)
at each system node, to power flows along each of the transmission lines. To simulate we use a
simplified model of the SIC system with 463 bars, 438 lines, 158 transformers, 58 generators and
258 loads.

3.2. The “use” of the lines: GGDF and GLDF factors

Once the flows have been calculated for each segment under each operating condition (the
1440 P(t) vectors), we obtain the “use” that each agent makes of the transmission system under
each operating condition using GGDF and GLDF factors.14

3.2.1. Power plants and injections

The “use” that a power plant makes of each line under each operating condition is determined
using GGDF factors. Below we describe how to obtain each power plant's pro rata share in each
segment of interest on the basis of such factors.
It can be shown that the power flow along the line joining points l and k can be broken down as
follows:
X
N
PlYk ðtÞ ¼ ½DblYk  Gg;b ðtÞ ð3:1Þ
g¼11

b
where Dl→k is the GGDF factor for line l → k, which is the same for each of the generators that
feed energy into bar b. If D is the L × N matrix of GGDF factors, then it follows from Eq. (3.1) that
PðtÞ ¼ D GðtÞ:

GGDF factors have three properties worth describing. Firstly, the matrix D is independent of
the reference bar of the system, but depends on the operating condition t. Nonetheless it can be
shown that when a linear DC approximation of the transmission system is used, and zero losses
are assumed, the GGDF factors depend only on the distribution of consumption in the system and
not on the load dispatch of the generators. In this study, this is valid for the 40 hydrologies of each
simulation block, since the distribution of consumption loads is unique and does not depend on
14
See Ng (1981) and Rudnick et al. (1995).
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 257

hydrology or on dispatch. To simplify the notation, in the pro rata formulas discussed below we
shall assume that the GGDF factors do not depend on the operating condition under study.
Secondly, GGDF factors are unique and there is a single matrix D, such that P(t) = D G(t).
Thirdly, a power plant's GGDF factor may be negative on some lines, for example when a
power plant feeds energy into a node that is a net importer.
In view of these properties, it is possible to define the pro
g
rata share of power plant g on the
line l → k, under operating condition t. This is denoted as λl→k(t) and is defined as

DblYk  Gg;b ðtÞ DblYk  Gg;b ðtÞ

kglYk ðtÞu ¼ :
DlYk dGðtÞ PlYk ðtÞ

By definition, the pro rata shares sum to unity. The prorated share of each of the N power
plants in segment l → k under operating condition t can be grouped together in the row vector of
dimension N, Λl→k(t). These vectors in turn are grouped in the matrix Λ(t) of order L × N. By
definition, each row of the matrix sums to one, and the row l → k corresponds to the pro rata
shares of each power plant on the line l → k. At the same time, column g of this matrix indicates
the prorated shares of power plant g on each of the lines of the system.
As an example, imagine a system consisting of two power plants and three lines,
2 3
k11 ðtÞ k21 ðtÞ
KðtÞ ¼ 4 k12 ðtÞ k22 ðtÞ 5
k13 ðtÞ k23 ðtÞ

Row 2 gives the pro rata shares of each of the power plants on line 2, while column 2 gives the
prorated shares of power plant 2 on each of the three lines.
Despite being unique, the GGDF factors (and also the GDLF factors) are an accounting
breakdown, and to some extent an arbitrary measure, of the flows of an electric power system. The
breakdown is not deduced from economic but electrical principles. Accordingly, the conceptual
framework that determines what is “economically appropriate” logically precedes the GGDF or
GLDF methods. As a result, such methods may be appropriate for prorating the tolls on a given
line, but only if it has been previously decided who should pay them, in accordance with the
economic rationale of the problem.

3.2.2. Loads and purchases

The “use” of each line made by a load under each operating condition, is calculated using
GLDF factors, which are obtained analogously to the GGDF factors. Thus,

X
m
PlYk ðtÞ ¼ ½ElYk
b
 Cc;b ðtÞ ð3:2Þ
c¼1

b
where El→k is the GLDF factor for the line l → k, which is the same for each Cc,b load that is
purchased in busbar b. Similarly, the pro rata share of load c on line l → k is defined as

b
ElYk  Cc;b ðtÞ ElYk
b
 Cg;b ðtÞ
UclYk ðtÞu ¼
ElYk d CðtÞ PlYk ðtÞ
258 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

Thus, the matrix Φ(t) of order L × M and analogous to Λ(t), summarizes the pro rata shares of
each load in each line: the row l → k corresponds to the prorated shares of each load in the line
l → k; and column c gives the pro rata shares of load c on each line.

3.3. The payment corresponding to each agent

The outcome of the first two stages is a set of 1440 tuples {Λ(t), Φ(t), P(t), G(t), C(t)} and
vectors. To determine each agent's annual toll payment, in addition to the tolls payable on each
line we also need to know the allocation rule. An allocation rule may be simple or complex, but
generally specifies three things:

• A rule for choosing which of the 1440 operating conditions will be considered in calculating
each agent's toll payment, for each line l → k. For example, among others, in this paper we use
the upper percentile rule. This consists of (i) ranking the modules of the 1440 power flows on
line l→k, |Pl→k(t)| in descending order; (ii) choosing those in percentile p or above. Thus, if
p = 90, the rule selects the 144 largest power flows. We denote by τl→k the set of operating
conditions to be used in calculating the toll payment on line l → k for each agent under the rule.
τ is the vector of dimension L that summarizes the operating conditions for each of the L lines
that will be used to calculate the tolls.
• Another possibility is to exclude power plants (or loads, as the case may be) whose partic-
ipation falls below a given cut-off threshold. For example, if the threshold is 10%, in each
segment we would exclude those power plants whose unadjusted pro rata share would be less
than 10%. Similarly to the previous case, elements of the matrices Λ(t) and Φ(t) that are below
10% are replaced by zeros, and remaining pro rata shares are scaled to ensure that each row
adds up to one. In this paper, however, we always assume that the cut-off threshold is 0%.
• For each line, the fraction of the toll to be assigned to power plant inputs (we denote this by ηl→k)
and the fraction to be allocated to load 1 − ηl→k. For example, the originally bill sent to Congress
by the Chilean government set ηl→k = 0.5 for all lines. And during the heated discussions and
bargaining that followed the government changed its mind and proposed to set a different ηl→k for
each line and to calculate it following a cumbersome procedure. Hereinafter, we denote by η the
L-dimensional vector that shares out the toll payments between power plants and loads.

Of course, many of these rules may seem arbitrary, and in fact they are! We used them because
they were explored during the discussion that ended with the modification to Chilean transmission
law. These will suffice to show our point — by suitably choosing parameter values almost any
allocation of transmission tolls can be obtained.
With the vector τ and the adjusted matrices, the average pro rata shares are calculated for each
line. This yields vectors
P þ
þ slYk KlYk
KlYk ¼
jτ lYk j
and
P
slYk Fþ
Fþ
lYk
lYk ¼ ;
jτ lYk j
where |τl→k| is the cardinality of the vector τl→k.
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 259

Fig. 4. A five busbar example of GGDF and GLDF factors.

Lastly, if πl→k is the total toll receivable by the transmission firm for the line l → k, then the
vector

ηlYk  πlYk  Kþ
lYk ð3:3Þ

gives the toll corresponding each power plant, and

ð1−ηlYk Þ  π1Yk  Fþ
lYk ð3:4Þ

is the toll corresponding to each load. Using expressions (3.3) and (3.4) it is easy to obtain the
total toll payment attributable to each power plant and each load, and to calculate the aggregate
amount for each generator. These results are reported next in Section 4. Assumption and data
sources are found in Appendix A.

3.4. Toll payment allocation with GGDF and GLDF factors: a simple five busbar example

Before proceeding to the results, and to get a better feel about how toll payments are deter-
mined using GGLF and GLDF factors, we now calculate them for a simple five busbar system
with seven lines (see Fig. 4).15 In this system there are three generators located in busbars A
(GAA = 80 MW), B (GBB = 55.3 MW) and E (GEE = 34.7 MW) respectively. Loads, on the other
hand, are located in each of the five busbars.
The toll payment due by each agent is obtained in three steps. First, we determine the flow and
operating condition of each line. Next, GGDF and GLDF factors are calculated; the flow in each
line is allocated to each generator and load accordingly. Last, using GGDF factors and line tolls,
we allocate the toll of each line to each generator. Mutatis mutandis, we do the same for loads
using GLDF factors.

15
The example is taken from the appendix of Rudnick et al. (1995).
260 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

Table 1
GGDF and GLDF factors
Direction Flow GGDF factors (nodes with GLDF factors (nodes with loads)
of flow (in MW) injections)
A B E A B C D E
80 MW 53.3 MW 34.7 MW 1 MW 20 MW 45 MW 40 MW 60 MW
Line 1 A→B 48.03 0.716 − 0.127 − 0.070 −0.430 0.413 0.199 0.241 0.356
Line 2 A→C 30.43 0.275 0.118 0.061 −0.094 0.063 0.277 0.234 0.120
Line 3 B→C 24.57 0.128 0.200 0.104 0.018 − 0.054 0.304 0.232 0.042
Line 4 B→D 26.15 0.150 0.208 0.087 0.005 − 0.052 0.234 0.310 0.069
Line 5 B→E 30.12 0.314 0.342 − 0.385 −0.135 − 0.163 − 0.020 0.018 0.564
Line 6 C→D 9.50 0.133 0.047 − 0.105 −0.076 0.009 − 0.419 0.467 0.162
Line 7 D→E − 4.55 0.044 0.016 − 0.257 −0.071 − 0.043 − 0.185 −0.224 0.230

Step 1 The operating condition of each line is calculated with a by DC-load flow that considers
ohmic losses modeled at the end of each transmission line. A is the slack or reference busbar. The
magnitude and direction of each flow on each line is shown in Table 1. For example, on line 3,
24.57 MW flow from busbar B to busbar C.
Step 2 Next we calculate GGDF factors on each line for injections with Eq. (3.1); and GLDF
factors on each line for loads with Eq. (3.2). Results are shown in Table 1. For example, on line 3,
the generator who injects in busbar A has a GGDF factor of D3A = 0.128; the generator who injects
in busbar B has a GGDF factor D3B = 0.200; and the generator who injects in busbar E has a GGDF
factor D3E = 0.104.
Step 3 Last, we calculate the share of the toll of each line paid by each agent, and the result is
shown in Table 2. Consider again line 3, and consider use by injections: 41.77% is used by
generator A; 43.52% is used by generator B; and 14.71% is used by generator E. How do we
arrive to these pro rata shares? Note that,
P3 ¼ GAA d D3A þ GBB d D3B þ GEE d D3E ¼ 80d 0:128 þ 53:3d 0:200 þ 34:7d 0:104
¼ 24:5088:
Thus, the share paid by generator A is

GAA d D3A 80d 0:128

¼ c0:4177 ¼ 41:77%:
P3 24:5088:

A similar procedure is used to allocate use of a given line among loads.16 Finally, total payments
made by each generator will depend on the share allocated to loads and injections in each line.
It can now be seen why load distribution factors give a lot of flexibility to distribute tolls
among agents. While the distribution factors shown in Table 1 are unique, there are several
parameters that are independent of them but crucial to arrive to the toll allocation. First, the cut-off
threshold is arbitrary and can be chosen line-by line. More important, the share allocated to loads
and injections can also be chosen line by line. Last, over a year systems will have several
operation conditions, which vary with load distribution, plant availability and hydrology. As we

16
Note that the pro rata share of generator A in line 1 is 100%. This is so because B's and E's GGDF factors are
negative in that line, and it is assumed that they do not use the line.
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 261

Table 2
GGDF and GLDF payments (% of annuity)
GGDF factors (nodes with injections) GLDF factors (nodes with loads)
A B E A B C D E
80 MW 53.3 MW 34.7 MW 1 MW 20 MW 45 MW 40 MW 60 MW
Line 1 100 – – – 17.56 18.55 19.93 43.96
Line 2 72.33 20.75 6.92 – 4.27 41.27 30.82 23.64
Line 3 41.77 43.52 14.71 0.11 – 53.79 36.34 9.76
Line 4 46.01 42.49 11.50 0.03 – 39.05 45.76 15.16
Line 5 57.80 42.20 – – – – 2.06 97.94
Line 6 80.83 19.17 – – 0.678 – 65.38 33.94
Line 7 – – 100 0.59 4.79 45.82 48.80 –

will show next for the Chilean case, this gives enough freedom to choose any arbitrary toll
allocation among agents.

4. Results: toll distribution with alternative parameter values

In this section we report the results of several exercises which distribute tolls using GGDF and
GLDF factors. GGDF factors can be used to allocate payments for “use” made by plants injecting
electricity into the system (first row in Fig. 2) and GLDF can be used to allocate payments
originated in the “use” made by loads. In turn, whether the bill is paid by generators or customers
depends on who is responsible for making the check to the transmission company. But, as we will
see, toll allocation among users can vary widely.
Table 3 shows the payment of tolls that would have been made by the three main generating
companies (Colbún, Endesa and Gener) and the rest of the generators (Other) under alternative
allocation rules (columns 2 through 6). As a reference, column 1 shows payments that each
generator made during 2002 according to their contracts with the transmission company while the
old law was still in place. We estimate that in 2002 Colbún paid just over 11% of the US$
78.95 million in tolls attributable to the main transmission system, while Endesa paid 79% and
Gener the remaining 10%. The reason why much of the system is being paid for by Endesa is that
its power plants, which are mostly hydroelectric, tend to be located far from the main consump-
tion centre, namely Santiago. The method used to calculate tolls before the law was changed – the
area of influence method – tended to attribute the full toll to Endesa's hydro plants. The five rules
we study (columns 2 through 6) are summarized in Fig. 5.

4.1. Injections and loads: tolls calculated with GGDF and GLDF

As discussed at length, GGDF factors attribute a line's flows to energy injections made by the
power plants, whereas GLDF factors attribute flows to energy loads. Column 2 therefore represents a
100–0 rule, in that it allocates 100% of a line's use to injections (see Fig. 5). By contrast, column 3
represents a 0–100 rule by allocating 100% of line use to agents that draw energy from it (see Fig. 5).
Of course, as shown in Fig. 5, the allocation of tolls as shown in column 3 assumes that it is the
generating firms that actually make the payments for their customers' use of transmission lines.
Column 2 shows that, compared with contracts under the old law, this rule would have lowered
the payment made by Endesa by US$ 8.55 million, which are almost entirely shifted to the “other”
262 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

Table 3
Toll payments 2002; generating groups as payers (millions of dollars)
(1) Payments according (2) GGDF (3) GLDF (4) GOV1 (5) GOV2 (6) GOV3
to contracts 100–0 0–100 50–50 50–50
Colbún 8.95 9.94 7.89 4.97 8.91 9.70
Endesa 61.86 53.31 35.53 26.65 44.42 42.25
Gener 7.82 7.72 28.67 3.86 18.20 18.05
Other 0.32 7.99 6.87 3.99 7.43 8.96
Total tolls 78.95 78.95 78.95 39.47 78.95 78.95
IT 4.81 4.81 4.81 4.81 4.81 4.81
AVNR + COyM 83.76 83.76 83.76 83.76 83.76 83.76
Notes: Column 1 reports toll payments actually made by generators under the old law in 2002. The source for total tolls
(US$ 78.95 million), tariff revenues IT (US$ 4.81 million) and AVNR + COyM (US$ 83.76 million) is CDEC-SIC (2003).
Column 2 reports estimated toll payments for each generating group, calculated using the GGDF method and taking all
1440 operating conditions into account. Each power plant's toll is calculated for each main transmission system line. The
sum is the power plant's total toll payment. Then the payments by power plants in each group are added up, and the result
is shown in column 2. We call this column “100–0” because 100% of the tolls are allocated to injections.
Column 3 shows toll payments estimated for each generating group, calculated with the GLDF method and taking all 1440
operating conditions into account. For each load, we calculate the toll payable for each main transmission system line. The
total is the toll payable by the generator on behalf of its contracted customers. We call this “0–100” since 100% of the tolls
are allocated on the basis of loads. Nonetheless, the actual payer is the generator that has the contract with the load. The
source of information on contracts, which makes it possible to assign each load to a generating group, is AES-Gener S.A.
Column 4 shows the toll payment that would have been payable by the generating group under the bill sent to Congress in
May 2002, and is equivalent to 50% of column 2. Under this bill, 50% of the tolls for each line would be attributed to
injections and the other 50% to loads, hence the name “50–50”. In this case, however, it is the customers who actually
make the payments for loads rather than the generating firms. It was the first rule proposed by the government.
Column 5 is equivalent to the simple mean of columns 2 and 3. As in the previous case, 50% of the tolls for each line would
be assigned to injections and the other 50% to loads. Nonetheless, this time it is the generators that make the payments for
loads rather than the customers. It was the second rule proposed by the government.
Column 6 reports toll allocation with third rule proposed by the government.

generators group, whose toll payments would rise from just US$ 320,000 to nearly US$ 8 million.
By contrast, Colbún and Gener's payments barely change.
But payments would have been distributed very differently if system “use” had been based on
energy loads, as column 3 shows. In this case, Endesa's bill would have fallen to nearly half (from US$
61.86 million to US$ 35.53 million). In contrast, the Gener group would have paid US$ 28.67 million,
four times what it paid under contracts signed under the old law (US$ 7.82 million). Colbún and the
remaining generators would have paid similar amounts to those determined by the GGDF. It is not
surprising, thus, that while bargaining the new law, Endesa favored shifting “use” to loads.

4.2. Two 50–50 rules

Columns 2 and 3 are useful because many allocation rules are weighted averages of these
columns. Column 4 summarizes what each firm would have had to pay with the original proposal
made by the government (call this proposal GOV1). 50% of tolls would have been allocated to
injections and 50% to loads. Nonetheless, the payers for the loads were the individual customers, and
not the generating firms with which they had contracts (in other words, in terms of panel “Column
Nr. 4” in Fig. 5, the relevant cells would have been (1, 1) and (2, 2)), since the transmission firm
would have charged customers directly. Column 4 shows that in that case the direct payment by
Colbún, Gener and Endesa would have fallen by about half. Endesa toll payments fall furthest — by
US$ 35.21 million, from US$ 61.86 million to US$ 26.65 million.
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 263

Fig. 5. Who pays under alternative allocation rules.

But, as shown in panel 4 in Fig. 5, a 50–50 rule can also mean that generators must pay all the bill,
despite of the fact that 50% of “use” is determined by the loads served by each generator. In fact,
along the way in the discussion of the bill, the government decided that it was unacceptable to make
customers pay directly for transmission (contrary to what had been the custom in Chile) and switched
to this option. Column 5 shows the payments that would have been due from each generator in 2002.
Column 5 is in fact just an average of columns 2 and 3. In view of this, it is no longer surprising
that Endesa's payment decreases by slightly over US$ 17 million (from US$ 61.86 million to US$
44.42 million), and that the Gener payment rises by just over US$ 10 million (from US$ 7.82 million
to US$ 18.20 million). But it is interesting to compare columns 4 and 5, which differ sharply.
264 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

Essentially, tolls are redistributed from the three main generator groups towards customers. The
second “50–50” rule, by contrast, redistributes from Endesa towards Gener and “other” generators,
barely changing Colbún's bill.

4.3. The government's third proposal

So far we have we have reported exercises that combine GGDF and GLDF use attribution in
linear and straightforward manner. But in January 2003, responding to Colbún and Gener's vocal
opposition against having Endesa's bill sharply reduced, the government presented a very com-
plicated scheme which was quite hard to understand. Nevertheless, while convoluted and very
different from GOV2, it yields a very similar toll distribution. We will use this method to show that
by suitably choosing parameters, almost any toll allocation can be reached.
The method made generators the sole agents responsible for paying the transmission company.
But charges for injections and loads were to be combined as follows.

• The pro rata for each load c was calculated in each of the segments of the main transmission
system, averaging the different operating conditions. These pro rata shares were ranked in
descending order, to calculate the maximum pro rata of load c (which we call maximum
proratac).
• In all segments where load c reached a pro rata of at least 0.7 × (maximum proratac), the
generating firm that had a contract with load c had to pay a percentage equal to the load pro rata.
If the pro rata is less than 0.7 × (maximum proratac), then the generator would pay nothing for
load c in that segment. For example, suppose (maximum proratac) = 0.45, then the generating
firm that has a contract with c will have to pay for load c in every segment where the pro rata of
c is at least 0.7 × 45 = 0.315. If the pro rata of c in the segment l → k is 0.1 for example, then the
generating firm does not pay a toll in respect of c in that segment. On the other hand,
• If the pro rata of c was 0.38, the generating firm would pay 38% of the toll corresponding to
that segment.

For each segment the exercise would calculate a set of loads that will pay, and the sum total of
payments received by the transmission company, which we call (payments for flowl→k).This
amount would be less than the l → k toll, πl→k, because some loads with positive GLDF factors
were exempt from payment. The difference πl→k − (payments for flowl→k) would be charged
directly to generating firms according to the inputs from their power plants, as follows:

• Analogously with the loads, for each generating plant g, we calculate the corresponding pro
rata in each segment of the main transmission system. These pro rata shares are ranked in
descending order to calculate (maximum proratag).
• In every segment where the pro rata of generator g is at least 0.1 × (maximum proratag), the
generating firm will have to pay a percentage equal to the pro rata of the power plant. It is less
than 0.1 × (maximum proratac), then the generator pays nothing for power plant g in that
segment. In other words, the cut-off threshold of power plant g in each segment is 10% of the
maximum pro rata.
• For all segments, having excluded power plants with pro rata shares below their cut-off
thresholds, the remaining pro rata shares are scaled to ensure that they add up to 1.
• The toll payment attributed to power plant g on segment l → k therefore corresponds to its
corrected pro rata multiplied by the difference πl→k − (payments for flowl→k).
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 265

Table 4
Distribution of tolls, 2002 using the January 2003 CNE method (CNE3) (millions of dollars)
(1) Injections (2) Loads (3) Total
Colbún 6.25 3.45 9.70
Endesa 29.97 12.28 42.25
Gener 5.15 12.90 18.05
Others 5.10 3.85 8.96
Total 46.47 32.48 78.95
58.86% 41.14%
Note: This table is a breakdown of column 6 in Table 3.

Table 4 and Fig. 5 shows the result obtained with this method. Now 58.86% of payments are
attributed to injections, and 41.14% to loads. Nonetheless, when the two are added together, and
the result is transferred to Table 3 as columns 6, something remarkable occurs. As can be seen
comparing columns 5 and 6, the payments by each firm are very similar to a simple average of the
GGDF and GLDF!
We need not dwell here on why the government chose to substitute a complicated scheme for
an earlier proposal which maintained almost exactly the same distribution of tolls among
generators. The point we want to stress is that a method that seemed very different from a simple
average of GGDF and GLDF, produces an almost identical distribution of tolls among generating
companies. The underlying reason is that there are many degrees of freedom, because the final
payment made by each agent is the outcome of various parameters and rules — e.g. the cut-off
threshold, the percentile of operating conditions from which the pro rata shares are calculated, the
weighting of injections and loads. The general lesson is that, regardless of the method chosen to
prorate the tolls, the value of the parameters is a central part of transmission regulation and not
merely accessory. If these parameters are not set transparently, the authority responsible for them
could in principle distribute tolls between the different agents in any way it chose.

5. Concluding remarks

Policy makers in charge of electricity reform can choose among a wide variety of methods to
set transmission tolls, many of them yet untested. By contrast, far less has been written about the
practical implications of each method and the difficulties that policy makers will find when
applying them. In this paper we suggest that it is not enough to choose a conceptual method. We
have shown that the freedom that a given method may leave can be so wide that, in the end, many
possible allocations of toll payments are allowed. In practice, the outcome yielded by a given
method will depend on the specific parameter values that are chosen.
Thus, unless these parameters are set in a transparent fashion, the authority empowered to set
them could distribute tolls in many different and arbitrary ways among the agents of the system. A
breakdown of the tolls paid by each plant (not reported in the paper) also suggests that the toll paid
by a given power plant may vary considerably, depending on the level at which the parameters are
set. Thus, the same method may give very different location signals to plants.
This indeterminacy puts into perspective the role that a given conceptual method can play in
toll regulation. Indeterminacy implies that, among the many alternatives, it possible to select
parameters that produce economically sensible tolls and gives appropriate economic signals. But
the conceptual framework that determines what is “economically appropriate” is logically prior to
the different methods, and should be defined before setting specific parameters. In other words,
266 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

most methods that have been proposed in the literature may be appropriate for sharing out the tolls
on a given transmission line, but only if it has previously been decided who should pay them, in
accordance with the economic rationale of the problem. If no such rationale is available, then the
regulation will be more likely to be the result of bargaining among agents. Once a deal is struck,
parameters will be chosen to implement it.
This is probably what happened in Chile. An interesting (and somewhat unexpected) happening
during the discussion of the new transmission regulation in Chile is that there was almost instant
agreement in using generalized distribution factor methods. But agents heatedly bargained for
almost two years, about the coefficients and parameter values needed to apply the method.
Generalized distribution factors are a very good tool to conduct negotiations. On the one hand,
once parameter values were specified, obtaining the allocation of tolls was a purely computational
exercise. On the other hand, any deal that is negotiated could then be implemented by choosing the
adequate parameter values and it was easy to monitor compliance.

Appendix A. Assumptions and data sources

A.1. The main transmission system

Facilities included in the main transmission system. The installations contained in the main
transmission system are the transmission lines of 220 kV or higher running between the Puerto
Montt busbar in the south of Chile, and the Diego de Almagro busbar in the north, as reported by
the National Energy Commission (CNE by its Spanish acronym); see CNE (2002).
Valuation of installations in the main transmission system. The main transmission system
was valued using the new replacement values reported in the January 2003 CDEC-SIC tolls report
Informe de Peajes (hereinafter referred to as CDEC-SIC, 2003). This report assesses all trans-
mission facilities installed in 2002. The prorating considers the annuity factors of each segment of
the main transmission system and their annual operating and maintenance costs, deducting the
estimated tariff revenue for each segment, based on the CDEC-SIC tolls report of December 2001.
After adjustments, it is concluded that the total value to be distributed is US$ 78.95 million.

A.2. Operating conditions

To define the 1440 conditions representing system operation in 2002, a one-node version of the
OMSIC model was used. The model draws on the database used by the CNE in the October 2001 price-
setting round. The results are therefore consistent with data available and validated at the end of 2001.
The planning horizon. The OMSIC version that we use models the monthly variation in
demand through a three-block load duration curve, over a seven-year horizon. At the end of the
seven years, this is spliced with the GOL model, through the strategic value curve at the end of the
study horizon. This procedure is in line with CDEC practice when preparing the system operating
program. The GOL model is optimized for a 10-year planning horizon (see CNE, 2001).
Demand projection for the planning horizon. The demand projection corresponds to that
made by the CNE when setting the node price in October 2001. This consumption projection
assumes an average growth rate of 7.5% per year and a loss factor of 4%.
Load blocks. The total projected energy demand for each month has been distributed in three
blocks. In each case power demand is assumed to be uniform, but different between blocks. The
differences in power demanded between blocks approximate the load curves observed empir-
ically. The demand in each block is represented as a percentage of the demand of the peak block,
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 267

and its duration is expressed in hours. Depending on the month, the duration of the blocks varies
between 240 and 248 h.
Hydrologies. To model the random nature of rainfall, we used statistics prepared by the CDEC
for 40 hydrological years from 1959–60 to 1998–99.17 Optimisation of the OMSIC model, which
is necessary to obtain the operation of the Laja dam under each operating condition, is done using
full hydrological variability with deterministic snowmelt stages (see Galetovic et al., 2002, for a
detailed explanation of the stochastic optimization).
To operate the system and obtain our operating conditions we take the 40 × 12 monthly
hydrological conditions that occurred in the 40 hydrological years between 1959–60 and 1998–
99. Each month is divided into three demand blocks, so each one provides three operating
conditions. For the simulation stage (see Galetovic et al., 2002) historical series have been used.
For the first year, the 40 simulations chosen as a result correspond to the 40 historical sequences.
Energy contributed by run-of-river and dam power plants in each of the 40 hydrologies.
River flows are transformed into energy, and summarized in matrices. These matrices are of order
40 × 12 (40 hydrological years of 12 months each). For example, the matrix entry (1971–72,
August) represents the amount of energy that would have been generated by run-of-river power
plants during the month of August in the 1971–72 hydrological year.
The energy to be contributed by power plants using water from the other SIC reservoirs (Colbún,
Cipreses, Canutillar and Rapel) is also summarized in the matrices. To obtain the operating conditions,
we have used the long-term monthly matrices calculated by the CDEC-SIC. Broadly speaking, this is
equivalent to assuming that the monthly energy generated by each power plant is equal to the quantity
that can be generated from the water flow entering the reservoir during the month for each hydrology,
without generating anything from the stock of water held in the reservoir between the start and end of
the hydrological year.
Unlike run-of-river power plants, dammed water can be put on peak demand conditions — in
other words, its energy can be shifted from hours when the marginal cost is low to peak hours
when the marginal cost is high. To represent this, each generator was given a peaking priority, so
as to distribute the energy from the matrix to the highest demand blocks according to the
regulation capacity of each reservoir.
Energy in Laja. The initial level of the Laja lake is 1343.20 m.a.s.l as of early October 2001,
which was used by the CNE when it set the node prices.
Availability of thermal power plants. Thermal power plants may fail without warning. To
take account of this fact we adjust the capacity of each plant, multiplying it by (1 − the failure
rate). Note that in practice the power plant is either available or not, so this is clearly an imperfect
approximation. Data on failure rates is sourced from CDEC-SIC.
Entry of power plants. The projected entry of power plants affects system operation not only
directly as result of the energy they contribute, but also indirectly because they affect optimal
operation of the Laja lake. For example, the announcement of a new power plant reduces the
value of storing water, which explains why nowadays more energy is generated from water stored
in reservoirs. The power plant entry plan (or works plan) is the one used by the CNE to set the
node price in October 2001.
Power plant maintenance schedules. Power plants have to go out of service periodically to
allow maintenance to be carried out. The information used corresponds to typical maintenance

17
The hydrological year starts in April and ends the following March. Accordingly, hydrological year 1959–60 began in
April 1959 and ended in March 1960.
268 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

Fig. A1. Cut-off criteria for calculating pro rata shares. The figure shows two cut-off criteria for choosing the operating
conditions to be used in calculating the pro rata shares. The dotted line represents the upper percentile criterion, in this
case 90%. In other words, to calculate the pro rata shares, only the 144 hydrologies that produce greatest line flows are
considered (i.e. 10% of 1440). The solid line represents the percentage of maximum flow criterion, in this case also 90%. In
this case, the pro rata share is calculated with operating conditions in which the flow is at least 90% of the maximum flow
along the line in question. Both criteria are very sensitive on the power flow profile of the selected line.

procedures used by the CDEC-SIC: 15 days per year for gas-fired power plants and 20 days per
year for coal-burning generators.
Fuel prices. Fuel prices are assumed constant during the 10-year planning horizon. They were
used to set the regulated node price in October 2001.

A.3. Payment of tolls

Tolls with current contracts. The total value of tolls charged by Transelec in 2001 was
obtained from its annual report for that year (Transelec, 2001).
Tolls for energy loads. When toll payments are calculated on the basis of loads, in most cases
we continue to assume that the generating firms continue to act as payers. To attribute energy loads
to generators we need to know with which firm each customer is contracted. The allocation of loads
from each busbar to each generating firm was made using contract data provided by AES-Gener.
Tariff revenues. In our calculations we use the tariff revenues estimated in CDEC-SIC (2003).
These are calculated with the penalty factors published by the CNE in its node price report of
October each year, and are obtained from the simulated operation of the system.18

A.4. Modelling of the transmission system

The transmission system is added to the model with ohmic loss factors for total system
demand, including the mandatory dispatch from Guacolda power plant to fulfill technical minima.

18
Tariff revenues come from the price differences between nodes, which in turn reflect marginal power losses. Under
current legislation, tariff revenues pay part of the annuity factor and maintenance costs corresponding to a generator in
accordance with its contract; the rest is paid by basic and additional tolls.
 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270 269

A.5. Calculation of pro rata shares

To calculate each line's pro rata share, we exclude power plants or loads that have negative
GGDF or GLDF factors, depending on the case, but we set the cut-off threshold at 0%. In other
words, any power plant or load with a positive factor participates in the prorating. It is also
necessary to specify the criterion used to select the conditions that will be included in calculating
the pro rata shares. In this paper we use the “upper percentile” and the “percentage of maximum
flow” criteria.
Fig. A1 shows both criteria. The 1440 operating conditions give rise to 1440 power flows on
each line. For each line, the absolute values of the flows are ranked in descending order, and the
pro rata shares are calculated using flows from the selected operating conditions only. Using the
percentile criterion, operating conditions are chosen that have flows in the upper percentiles of the
distribution. In the figure, the threshold is percentile 90; in other words, operating conditions are
included if the size of their flow is in the top 10% of the distribution.
Using the percentage flow criterion, operating conditions with flows equal to or greater than
x% of the maximum flow were chosen. In the figure, x = 90, which means that the pro rata shares
were calculated using operating conditions that cause flows of at least 90% of the maximum
flow.

References

Bialek, J., 1997. Topological generation and load distribution factors for supplement charge allocation in transmission
open access. IEEE Transactions en Power Systems 12, 1185–1192.
Bialek, J., 1998. Allocation of transmission supplementary charge to real and reactive loads. IEEE Transactions en Power
Systems 13, 749–754.
Bulow, J., Pfleiderer, P., 1983. A note on the effect of cost changes on prices. Journal of Political Economy 81, 182–185.
CDEC-SIC, 2003. Informe de Peajes, enero 2003. CDEC-SIC, Santiago.
Comisión Nacional de Energía, 2001. Informe técnico definitivo: Fijación de precios de nudo, Sistema Interconectado
Central (SIC), October 2001. Comisión Nacional de Energía, Santiago.
Comisión Nacional de Energía, 2002. Propuesta del Ejecutivo, Sistema Transmisión Troncal SIC.
Galetovic, A., Olmedo, J.C., Soto, H., 2002. ¿Qué tan probable es una crisis eléctrica. Estudios Públicos 87, 175–212.
Green, R., 1997. Electricity transmission pricing: an international comparison. Utilities Policy 6, 177–184.
Jing, Z., Duan, X., Wen, F., Ni, Y., Wu, F., 2003. Review of transmission fixed costs allocation methods power
engineering. Society General Meeting, IEEE 2585–2592.
Hobbs, B.F., Rijkers, F.A.M., 2004. Strategic generation with conjectured transmission price responses in a mixed
transmission pricing system — Part I: Formulation. IEEE Transactions on Power Systems 19, 707–717.
Hobbs, B.F., Rijkers, F.A.M., Wals, A.F., 2004. Strategic generation with conjectured transmission price responses in a
mixed transmission pricing system — Part II: Application. IEEE Transactions on Power Systems 19, 872–879.
Kirby, C., Rahman, M.A., 2000. Generator contribution coefficients for pricing transmission services. IEEE Power
Engineering Society Winter Meeting 2, 968–974.
Kirschen, D., 1997. Contributions of individual generators to load and flows. IEEE Transactions in Power Systems 12,
52–60.
Marangon, J.W., 1995. Allocation of Transmission Fixed Charges: An Economic Interpretation. IEEE/KTH Stockholm
Power Tech Conference, pp. 716–721.
Ng, W., 1981. Generalized generation distribution factors for power system security evaluations. IEEE Transactions on
Power Apparatus and System PAS-100, 1001–1005.
Olmedo, J.C. (2001), “El modelo GOL”, mimeo.
Pantos, M., Gubina, F., 2004. Ex-ante transmission-service pricing based on load-flow patterns. IEEE Transactions on
Power Systems 19, 796–801.
Phichaisawat, S., Song, Y., 2000. Transmission pricing using improved sensitivity indices. IEEE Power Engineering
Society Winter Meeting 3, 1250–1255.
270 A. Galetovic, R. Palma-Behnke / Energy Economics 30 (2008) 249–270

Rudnick, H., Zolezzi, J., 2000. Tarificación del sistema de transmisión eléctrica: aproximación mediante juegos
cooperativos”, paper presented at the VII Symposium of Specialists in Electric Operational and Expansion Planning,
VII SEPOPE, Curitiba, Brazil.
Rudnick, H., Palma, R., Fernández, J., 1995. Marginal pricing and supplement cost allocation in transmission open access.
IEEE Transactions on Power Systems 10, 1125–1142.
Rudnick, H., Soto, M., Palma, R., 1999. Use of system approaches for transmission open access. International Journal of
Electrical Power and Energy Systems 21, 125–135.
Transelec (2001), Memoria anual, Santiago: Transelec.