IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 20, NO.
3, AUGUST 2005
Allocation of Expansion Transmission Costs:
Areas of Influence Method versus Economical
Benefit Method
Rodolfo Reta, Alberto Vargas, Senior Member, IEEE, and Johannes Verstege, Senior Member, IEEE
Abstract—The open access to the transmission network and
the methods to allocate its costs are the key point that allows free
competition in deregulated electric markets. All existing allocation
methodologies have advantages and disadvantages that depend
on their own features, the power system characteristics, and the
price structure of the market. The comparison of network cost
allocation methods has been the aim of many studies in order to
improve them. In this paper, the analytical relation between areas
of influence method and a method based on the economical benefit
for allocation of transmission costs is presented. Common points
of both methodologies are discussed as well as their advantages
to be applied to pay transmission network expansions. It is con-
cluded that both methodologies are equivalent only under certain
conditions.
Index Terms—Competitive markets, network pricing, spot
pricing, transmission costs allocation.
I. INTRODUCTION
T HE electric power market deregulation carried out in many
countries has allowed free competition. Markets have been
restructured and, accordingly, generation, transmission, and dis-
tribution utilities should work as independent business units.
Some markets have adopted spot prices based on the marginal
price theory and/or transactions based on bilateral contracts.
Open access to the transmission network is the key point that
allows free competition in deregulated power markets. If there
is open and nondiscriminatory access to transmission network,
all generators are able to compete for supplying energy to any
system customers.
In order to guarantee an open and nondiscriminatory access
to the network, it is necessary to use methods that allow the net-
work operator to recover its costs and to obtain an appropriate
level of benefits. On the other hand, payments should be fair
and equitable for those agents who use the network. Network
costs could be divided into two main components: one compo-
nent that covers the total operative costs and another component
associated with transmission system expansion.
Transmission expansion plays an important role in competi-
tive power markets, mainly in large countries and in developing
Manuscript received November 22, 2004; revised February 18, 2005. Paper
no. TPWRS-00611-2004.
R. Reta and A. Vargas are with the Instituto de Energía Eléctrica, Facultad de
Ingeniería, Universidad Nacional de San Juan, San Juan J5400ARL, Argentina
(e-mail: avargas@iee.unsj.edu.ar).
J. Verstege is with the Lehrstuhl für Elektrische Energieversorgung, Bergische
Universität Wuppertal, 42119 Wuppertal, Germany.
Digital Object Identifier 10.1109/TPWRS.2005.852104
0885-8950/$20.00 © 2005 IEEE
1647
countries. For example, in Brazil, transmission costs represent
approximately 30% of total electrical power investments.
In competitive markets, the expansion of the transmission
system is necessary not only due to the growth of the demand but
also due to geographical change of generation injection points.
As there is competition, new generators can replace at the eco-
nomic dispatch those generators that have higher operative cost.
These changes produce a redistribution of load flows in the net-
work that may produce the capacity overloads of some network
facilities, and in some cases, it could be necessary to expand the
network. Moreover, due to interconnections with other power
systems, additional network capacity reinforcements in system
areas affected by import-export transactions are often necessary.
Therefore, the need for appropriate methods that allow allo-
cating transmission expansion costs among agents that use the
network is coming up. In the last years, many regulatory agen-
cies, system operators, and other utilities, especially in Latin
American power markets, have analyzed and compared alloca-
tion methods in order to find an appropriate one for its markets.
This paper is structured in the following way. The theory of
spot prices applied to electrical markets, and the transmission
remuneration is presented briefly in Section II. Some methods
for allocation of transmission expansions costs are analyzed in
Section III. In Section IV, the mathematical relation between the
method of areas of influence and the method based on the eco-
nomical benefit is developed, with this formulation being the
main contribution of this paper. In Section V, a test case is pre-
sented in order to verify analytical results obtained in the pre-
vious section. Finally, main conclusions are presented in Sec-
tion VI.
II. SPOT PRICE MARKETS
A. Spot Price of the Energy
The optimal spot prices [1], [2] consider power system
operation costs, and they are based on short-term marginal costs.
This methodology has being adopted by many countries that
have transformed the structure of their electric markets.
From the customer’s point of view, the optimum is obtained
if demand is chosen to maximize the difference between
total customers’ benefit and the charges that they pay at
price . is the total benefits that all customers receive
for using kWh of electrical energy during hour
(1)
1648
After solving, optimal price results
(2)
In an electric power system, the optimal spot price is formu-
lated through the following optimization problem:
(3)
subject to the following operational constraints:
— Active power balance constraints
(4)
— Active power transmission limits
(5)
— Active power generating limits
(6)
where
generation total cost for the system;
demand benefit;
social cost;
quantity of system demands;
quantity of system generators;
quantity of system lines;
active power demand in bus ;
active power generation in bus ;
active power flow through line ;
system losses.
After solving the previous optimization problem and taking
into account (2), the final expression of the spot price is obtained
(7)
where is the Lagrange multiplier associated to the balance
equation representing the marginal cost of generation, and is
the Lagrange multiplier associated to network constraints.
The previous problem has been solved subject to a reduced
set of operational constraints. This set of constraints and the
resulting spot price expression had been widespread accepted,
and it is used in some countries.
Other factors that should be considered are reactive energy,
security, reserve, reliability, stability, etc. These factors are con-
sidered in the spot price equation through modifications of the
objective function and mainly through the inclusion of new con-
straints that generate additional terms in the expression of spot
price. Nevertheless, there is not a unique criterion to consider
these factors, and most methods that consider them are theoret-
ical developments that have not been put into practice yet.
In fact, some power markets consider these factors through
additional charges or penalties computed independently from
spot prices.
IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 20, NO. 3, AUGUST 2005
B. Transmission System Revenue
In an electrical power market, the optimum is reached when
the energy and services associated to the supply of such energy
(e.g., transmission service) are paid at marginal prices and either
the generation or the transmission system are perfectly adapted.
This means that generators sell their energy at marginal
prices, customers buy their energy at marginal prices, and the
difference between both amounts is the transmission variable
charge RT, that is, what the transmission system receives (8)
RT RD RG (8)
When marginal prices are used to assess energy transactions
and the system is perfectly adapted, the transmission system
can recover its own costs, and it provides signals for an optimal
expansion of the network [3].
In fact, transmission systems are not adapted [4], and it is
necessary to create a complementary charge in order to cover
the difference between revenues and costs.
III. ALLOCATION OF TRANSMISSION SYSTEM
EXPANSION COSTS
Nowadays, there are many methodologies to allocate trans-
mission costs among market agents. Some methodologies are
actually used in real markets, and others are still theories under
development. These methodologies could allocate total trans-
mission costs or only a specific part of transmissions costs (e.g.,
expansion transmission costs) or the complementary transmis-
sion charge required in spot price markets.
There is not a satisfactory methodology that can allocate
transmission costs in any power system. All existing approaches
have advantages and disadvantages that depend on their own
characteristics, the characteristics of the power system, and the
price structure of the market [5]–[8].
Two types of methodologies are put forward for the allocation
of transmission charges, focusing the study to those charges cor-
responding to network expansions: methodologies based on the
system use and methodologies based on the economical benefit.
A. Methodologies Based on the System Use
These methodologies are the most commonly used in prac-
tice, since they are relatively simple to understand and to im-
plement. Within these methodologies, the most common ones
are postage stamp methodology, contract path, and many others
based on power flow computation.
Within this last group, the method MW-mile, using factors
or mean participation factors methodology and the method of
areas of influence that is described in the following section, can
be mentioned.
Postage stamp and contract path methods have no appropriate
justification either from the physical or from the economical
point of view. On the other hand, those methods based on dc
load flow have physical justification, but they lack an appro-
priate economical justification. Another disadvantage of these
methods is that there are system facilities that allow increasing
the transmission capacity, which are not directly associated to
RETA et al.: ALLOCATION OF EXPANSION TRANSMISSION COSTS
the “ways” through which active current flows, like lines and
transformers. In order to consider these facilities, the applica-
tion of these methods is not efficient.
The method of areas of influence is presented as follows. The
method is used in Argentina and Chile to allocate transmission
network costs among its users. In Argentina, where the expan-
sion of the transmission system has the particularity of being
carried by network users and not by the transmission utility,
this method is used to determine which percentage of expansion
costs has to be paid by each market agent [9]. This methodology
has been applied in this country with some disadvantages since
their results are not equitable enough.
The methodology, described below, is based on the electric
marginal use of the network. A load flow, called basic load flow,
is calculated for a representative state of load. Later, unitary in-
creases of generated or demanded power are successively
applied in each bus. The area of influence of a specific bus in
which the increase was applied is the set of lines in which the
corresponding power flow variation with respect to the basic
load flow has results that are positive (see Fig. 1).
Based on power flow increases through lines, it is possible to
calculate a participation factor FPN of each demand for using a
line (for generators, analogue expressions could be obtained)
FPN if (9)
FPN if (10)
is the quantity of system buses, whose areas of influence
include line .
Areas of influence could be also computed by means of distri-
bution factors, which are computed based on dc load flow equa-
tions.
Finally, transmission expansion costs are paid proportionally
to participation factors.
B. Methodologies Based on Economical Benefit
This methodology to allocate transmission expansion costs is
based on variations of economical benefits that market agents
receive due to the network expansion. The economical benefit
should be computed from the comparison of flows of money
between the present system and the system with the expansion.
Therefore, the method requires the simulation of the system op-
eration during the study period with and without the new net-
work facility.
The economic benefit (EB) obtained by a consumer caused
by the use of the new network facility is (terms indicated with
apostrophe correspond to the system with the network expan-
sion)
EB (11)
The expression of benefits obtained by generators is similar,
but the production costs should be discounted
EB (12)
1649
Fig. 1. Area of influence methodology.
It should be noted that in (11) and (12), demand power is
a negative value, and generated power is positive.
To compute benefits, negative benefit components should not
be taken into account. There is no reason for allocating extra pay
for agents that received additional revenue when the network
capacity was not adapted.
Finally, the expansion costs have to be paid by agents pro-
portionally to the benefit that they receive. This method results
are attractive due to its economical basis and to the fact that
it is appropriate to evaluate facilities not connected in series
such as parallel compensators. Although this method is simple
from the conceptual point of view, its main disadvantage is the
complexity in the calculation to determine benefits. The ben-
efit received by each market agent caused by network expan-
sions is extremely volatile hour by hour. Consequently, it is re-
quired to compute hourly spot prices during the study period
using computational models that must take into account network
constraints, network losses, and all system variables accurately.
Furthermore, the simultaneous computation of benefits caused
by two or more network expansions introduces additional com-
plexity.
IV. RELATION BETWEEN ECONOMICAL BENEFIT
AND AREAS OF INFLUENCE
The comparison of network cost allocation methods has been
the aim of many studies in order to find their advantages and
disadvantages. A comparative analysis of areas of influence
method (also called marginal participation method) and eco-
nomic benefit method is performed in [10]. Both methods have
been quantitatively compared, and it is concluded that their
numerical results are closer but different. In this paper, both
methods are analytically compared in order to find a mathe-
matical justification of their closer results, and it is proved that
both methodologies are equivalent under certain conditions.
The areas of influence method measure the marginal use of
the network, and the economical benefit method computes the
benefit caused by the use of the network on the base of marginal
prices; thus, both methods are related.
A power system with a new transmission line is evaluated.
From (7) and (11), the EB obtained by a consumer due to the
use of the new line is
EB
(13)
If the elasticity of the demand is neglected and it is assumed
that there was nonserved energy, the consumer demand would
1650 IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 20, NO. 3, AUGUST 2005

not vary with the incorporation of the new line , and

the final expression is

EB

(14)

From (7) and (12), the EB obtained by a generator is

EB
Fig. 2. Five-bus test system.

(15) Analyzing the previous equation, the equality is fulfilled

when the marginal cost does not vary with the incorporation of
For generators that produce the same power with or without the new line .
the network expansion , the benefit is An analogue equation for generators could be obtained. Con-
sequently, it can be affirmed that the economical benefit and
EB marginal use methods are equivalent when the new line does
not produce a change in the marginal generator and when the
generation of all other generators remains constant.
(16) This situation is present in low demand hours of the system,
where the only effect that the new line produces is a decrease
On the other hand, the following equations show the marginal in ohmic losses of the system that are compensated by the mar-
use UM of a line either for consumers or for generators: ginal generator. Strictly, in order that the marginal cost does not
change, a linear cost function of generation must be assumed or
UM (17) at least linearized in the operation region.
In other situations, when, for instance, the new network
facility allows clearing up network constraints and produces
UM (18) changes in the marginal generator, the methods are not
equivalent. Therefore, the “areas of influence” method is not
If participation percentages over the new line computed
appropriate to allocate network expansion costs, since expan-
through economical benefit and through areas of influence
sion is necessary if there are network constraints.
should be equal, the quotient of the obtained benefits by two
generic agents ( and ) should be equal to the quotient of
marginal use corresponding to the same agents. Thus, for two V. TEST CASE
consumers whose demands are and and considering In order to verify the conclusions obtained in the previous
nonelastic demand ( and ), yields section, a test case is computed. Fig. 2 shows a five-bus 500-kV
test system. The aim of the test case is to analyze the impact of
a second line 1–4.
Two load states (peak and base) with equal time duration are
taken into account. Load and generation data are presented in
Table I, and network data are presented in Table II.
(19) An economic dispatch model is used in order to compute spot
prices. The objective function of economic dispatch model is
the minimization of generation costs and takes into account net-
Operating and grouping
work losses and system restrictions such as network constraints.
Using a linear iterative procedure, network losses are included
in dispatch optimization by means of dc load flow equations.
Economic dispatch is computed for both cases (with and
without the expansion), and results are shown in Table III. The
power capacity of line 1–4 is 550 MW. Considering only one
line 1–4, this line is constrained for peak load state but in base
do not. When two lines 1–4 are included, there are no network
constraints for both load states.
Table IV shows the economic benefits caused by the second
(20) line 1–4 that are computed using the methodology presented
in Section III-B, using the economic dispatch results. Negative
RETA et al.: ALLOCATION OF EXPANSION TRANSMISSION COSTS
TABLE I
LOAD AND GENERATION DATA
TABLE II
NETWORK DATA
TABLE III
ECONOMIC DISPATCH RESULTS
benefits have not been taken into account. For example, in Peak
Case, Generator 3 results with a negative benefit because it was
located in an area without network constraints.
In order to compare the method based on economic benefit
with the method based on marginal use of the network (areas
of influence), marginal use for the new line 1–4 is computed. A
computer model based on dc load flow equations is used, and
results are shown in Table V.
Comparing Tables IV and V, both methodologies are very
similar for Base Case because there are no active network con-
straints. Theoretically, both results have to be exactly equal, as
shown in Section IV, but differences are caused by small errors
in the iterative procedure that consider network losses using a
1651
TABLE IV
ECONOMIC BENEFIT CAUSED BY THE SECOND LINE 1–4
TABLE V
AREAS OF INFLUENCE OF THE SECOND LINE 1–4
dc load flow model. On the other hand, when there are network
constraints (Peak Case), both methodologies are very different;
thus, it is clear that the areas of influence methodology is not
appropriate to allocate transmission expansion costs.
VI. CONCLUSION
It has been shown the analytical relation between methods of
influence areas and economical benefit, taking into account a
power market price system that uses marginal spot prices.
Both methods are equivalent when there are no active trans-
mission constraints. Therefore, the areas of influence method is
an appropriate method to allocate transmission operative costs
in unconstraint networks, because the method reflects the eco-
nomic benefit that market agents receive for using transmission
network. Moreover, the method is easier to compute than the
economic benefit method. The first one requires only load flow
computation, while the latter requires economic dispatch com-
putation.
Nevertheless, both methods are not equivalent when there are
active transmission constraints. From this point, it arises that the
method of areas of influence is not appropriate to pay network
1652
expansion costs, since they are necessary if there are network
constraints. Thus, the economic benefit method is more appro-
priate to allocate the transmission expansion cost. The method
has other advantages; for example, it could consider facilities
nonassociated to “active current ways,” such as parallel com-
pensators.
Computation of economic benefit considers only active
power, losses, and network constraints. However, effects pro-
duced by other factors, such as reactive power, reliability,
stability, etc., may be relevant. Thus, economical effects of
these factors should be deeply analyzed, but this task is out of
the reach of this paper.
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IEEE TRANSACTIONS ON POWER SYSTEMS, VOL. 20, NO. 3, AUGUST 2005
Rodolfo Reta was born in San Juan, Argentina. He received the electrical engi-
neer degree in 1994 and the Ph.D. degree in 2004 from the Universidad Nacional
de San Juan, San Juan, Argentina.
He was a Postgraduate Fellow at the University of Wuppertal, Wuppertal,
Germany, in 1998 and 1999. Currently, he is a Professor with the Instituto de
Energía Eléctrica (IEE)—Universidad Nacional de San Juan. He has partici-
pated in consultancy and research projects concerning competitive electrical
energy markets, transmission pricing, and economic dispatch of interconnected
hydrothermal systems in several countries.
Alberto Vargas (M’97–SM’02) was born in San Juan, Argentina. He received
the electromechanics engineer degree at Universidad Nacional de Cuyo, Men-
doza, Argentina, in 1975. In 2001, he received the Ph.D. degree from Univer-
sidad Nacional de San Juan, San Juan, Argentina.
Currently, he is a Postgraduate Professor with the Instituto de Energía
Eléctrica (IEE)—Universidad Nacional de San Juan, San Juan, Argentina.
Since 1985, he has been the Chief Researcher of the Optimization Team, IEE,
London, U.K., and has directed more than 15 different research projects, mainly
on competitive electrical energy markets, economic dispatch of interconnected
hydrothermal systems, and optimal planning of electric and energy systems.
Dr. Vargas is a Senior Member of the IEEE Power Engineering Society.
Johannes Verstege (M’77–SM’93) was born in Herten, Germany, in 1945. He
received the Dipl.-Ing. degree in electrical engineering and the Dr.-Ing. degree
from Aachen University of Technology, Aachen, Germany, in 1970 and 1975,
respectively.
From 1970 to 1979, he was with Aachen University of Technology, Institute
of Power Systems, as a Research Assistant and later as Senior Researcher. From
1979 to 1982, he was with STEAG, Essen, in charge of the Long Range Plan-
ning Department. In 1982, he was appointed Full Professor for Power System
Engineering at the University of Wuppertal, Wuppertal, Germany. His research
activities have been focused on power system control, security assessment and
enhancement, and optimization problems. From 1999 to 2003, he was Vice Pres-
ident for Finance at the University of Wuppertal.
Prof. Verstege is a Member of VDE and VDI, Germany.