Optimal transmission tariff regulation for the Southern Baja-Californian electricity network system

The tariff imposed over the use of electricity transmission networks is one critical factor to achieve efficiency in electricity markets. In Mexico, the current transmission network tariffs are based on long run marginal costs. We propose an incentive pricecap mechanism and apply it to the meshed network system in the isolated electricity system of Southern Baja California, Mexico. We further compare the current transmission tariffs set by the Mexican regulator (cre) with the tariffs resulting from our regulatory scheme. We show that our mechanism prices the network at tariffs rendering superior welfare compared to the tariffs determined by Mexican authorities.