Invested Related Pricing for Transmission Use: Drawbacks and Improvements in Brazil

The deregulation of electrical power sector aimed to introduce market mechanisms and divided the sector in four segments: generation, transmission, distribution and commercialization. Transmission has characteristics of natural monopoly and needs to have economic regulation. The transmission tariffs must collect the transmission allowed revenue (TAR), but the problem is to allocate it among the network users. Brazil adopted the investment cost related price (ICRP) method to design these tariffs. This method which is applied at Great Britain is based on a proxy of the long-run incremental cost and depends on where the agent is located. It suits well when there is just one big load center, but in the case of Brazil with its continental dimensions and a sparse load center the method has shown some drawbacks. It has been observed that the Brazilian transmission tariff is not producing the desired economic signals for the users of the transmission facilities. This paper shows the main shortcomings of the current method and proposes improvements to adapt to the characteristics of the Brazilian network. The paper also shows the main results with the actual Brazilian system.