Retail Issues Associated With Locational Marginal Cost Pricing

Retail Issues Associated With Locational Marginal Cost Pricing Presented by: Laura Manz September 13, 2002

Why LMP? LMP works with an open spot market that serves as a solid foundation for retail choice where even small Load Serving Entities without large portfolios can obtain market-priced balancing to manage their contract and delivery risk. LMP makes the balancing prices fair and efficient.

Retail Choice Rests on a Solid Wholesale Foundation • LMP provides transparency in spot energy and transmission pricing to provide the platform for retail choice – No hidden congestion uplift – ARRs/FTRs/CRRs for price certainty • Provides short run signals for energy and transmission prices and long run signals for planning and expansion • Provides information that enables choices on how to use the price signals to benefit customers – Economic signals to regulators, market participants, and (ultimately) consumers • For settlements, LMPs can be individual nodes or aggregated blends 3

LMP, Based on Integrated Dispatch Functions Market Inputs RTO Functions Market Support Ensure Reliability Generator Bids Cover Imbalances A/S Markets Co-Optimized Load Bids Bilateral Schedules Self Schedules Regional Security. Constrained Economic Dispatch Calculate Nodal Spot Prices Settlements at LMP Prices Real-Time Balancing Congestion Redispatch Allocate & Auction FTRs $$$ Buy and Sell Spot Energy Buy Through Congestion (LMPB - LMPA) Hedge Congestion (LMPB - LMPA) Market-Driven Decisions 4

Value Added Services • LMP prices the security-constrained economic dispatch and thus provides the correct signals for managing and expanding the grid • This efficiency requires retailers to focus on value added services • Once wholesale prices are reasonably reflected to customers, the focus of retailers will necessarily shift away from arbitraging price disconnects and seasonal shifting to capture economic value from wholesale/retail price disconnects 5

Why Fixed Retail Credits Require Restrictions on Switching Retailers will seek and retain customers in these periods Fixed shopping credit/default Price Spot prices Retailers may dump old and avoid new customers in these months Months 6

The Importance of Demand Response • A well-functioning market encompasses bids and offers from supply and demand • Day-ahead markets are very helpful in enabling market-based demand response • Although “jump start” programs may be necessary in the short run, they will distort values over the long run – The correct way to compensate for demand reduction is to not charge for energy not used • Customers with interval meters can be credited and charged for market-based purchases and sales 7

Creating a Level Playing Field Demand - 1 MW @ LMP Supply - 1 MW @ LMP 1 less MW paid at its LMP Transmission D 1 MW @ LMP 1 less MW charged at its LMP 8

Creating a Level Playing Field Demand + 1 MW @ LMP Supply + 1 MW @ LMP 1 more MW paid at its LMP Transmission D 1 MW @ LMP 1 more MW charged at its LMP 9

States play a key role • Transparent market prices at wholesale provide the foundation for states to connect customers to market prices • States can connect customers to markets by basing retail rates on LMP spot prices • Measurement is a key factor to enabling meaningful behavior – Ability to measure response and credit/charge at the real-time price – Interval meters, not necessarily real-time (reliability) meters to measure interval usage 10

LMP is Key LMP pricing provides the correct signals for demand-side response - the most important missing element in most markets Laura. Manz@pseg. com 973 -430 -3831 11