1. 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

2. 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
generation, transmission, demand response

3. Supply Outlook and Transmission : New England, 2002-20063

4. 8 LMP Zones in NE 740+ Nodes aggregated into 8 LMP Zones (or CMS Load)
Hub
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 4

5. 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

6. 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

7. 3 LMP Zones in MA

8. 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

9. 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

10. 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