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Setting electric transmission tariffs is a classical multi-objective problem. The tariff problem is particularly challenging in modern power markets where transmission has been separated from generation and distribution. This paper shows how the transmission tariff problem should be formulated. The principles - and their application in reality - are illustrated by the recent development of new transmission tariffs for Peru, for which the authors were responsible. The cost allocation in Peru was based on economic benefits and use of system. This paper shows how setting tariffs is an interplay between fundamental principles and practicalities, including local law and circumstances. Tariff factors are identified that that could impede development of the transmission system by creating unnecessary business risks and that can create serious inequities.

Transmission Tariffs by Use of System and Economic Benefits