Retail Treatment of
Zonal Generation Prices
in Massachusetts
Alvaro E. Pereira
Director of Economic & Policy Analysis
Massachusetts Division of Energy Resources
September 13, 2002
Electric Restructuring Roundtable
LMP in New England
• Transmission congestion is substantial in NE
– location of generation does not match demand
– some congestion is economic
– but current pricing prevents an economic solution
• Locational Marginal Pricing (LMP) will
– eliminate most cross-subsidies between zones
– encourage competitive suppliers to reduce inefficiencies
(and offer hedges?)
– encourage economic location of new resources
2
– generation, transmission, demand response
Supply Outlook and Transmission :
New England, 2002-2006
NB
BHE
HQ
ME
Deficient
Marginal
VT
Adequate
SME
Locked In
NH
NY
WMA
CMA/
NEMA
BO ST
SEMA
CT
RI
SWCT
NOR
Source : IS O-NE Regional Transm ission Plan
3
8 LMP Zones in NE
•740+ Nodes aggregated
into 8 LMP Zones (or
CMS Load)
•Differ from RTEP sub
areas (13)
•LMP zones based on
load-service territories
and potential congestion
problems
Hub
4
LMP should be an Energy Cost
• Generators will charge zonal prices to wholesalers
• Wholesalers will charge zonal prices to retailers
• Retailers must recover zonal generation costs
• Recover these costs in the energy part of the bill:
– make costs subject to competitive pressure
– keep a level playing field between SO/DS and others
5
Distribution Territories and Zones
• Some distribution territories are within one zone
– Western Mass, Fitchburg, Cambridge, Commonwealth
• Boston Edison is in two zones
– 32 towns in NEMA, 7 towns in SEMA
• Massachusetts Electric is in three zones
– 26 towns in NEMA, 44 in SEMA, 94 in WMA
6
3 LMP Zones in MA
7
Charging a Zonal Price
• Customers in low cost zones no longer subsidize
those in high cost zones
• Competitive suppliers can compete with SO/DS
• Customers in high cost zones less likely to return
to DS
• Customers who can to respond to congestion price
signals encouraged to do so
• Competitive suppliers compete to hedge congestion
8
Charging an Average Price
• Congestion costs should be socialized for
– customers with little ability to change consumption
– customers with few or no competitive options
– customers whose small demand provides little
incentive to change behavior
• An anti-competitive advantage is tolerable
– when competitive suppliers are not likely to
differentiate zonal prices
9
DOER Recommendations
• Include LMP cost recovery in the energy portion
of the bill
• Differentiate cost recovery by type of customer
• Charge zonal price for large customers,
– permanently
• Charge average price for mass market,
– through end of the Standard Offer
• Prior to end of Standard Offer, re-evaluate policy
10