1. Wholesale Electricity Costs
May 19, 2006
Massachusetts Electricity Restructuring Roundtable
Bob Ethier, Chief Economist and
Director, Resource Adequacy

2. Overview Power prices have increased
Higher fuel prices
Increased power use
Average and on-peak
Steps can be taken to reduce electricity costs
New England must become more efficient (price responsive)
Time-differentiated retail rates can encourage consumers to use power when its cheaper
Market investment in lower cost base load resources needed
MA Roundtable © 2006 ISO New England Inc.

3. Dispatching Resources
ISO uses least expensive mix of resources to meet minute-to-minute power needs of the region
Accounting for transmission constraints and potential outages
Most expensive needed resource sets market clearing price for all (Uniform Clearing Price Auction)
Sends a clear signal to investors and the region on what resources should be developed
Responds immediately to changed market conditions
Encourages marginal-cost based offers so that the most efficient units are dispatched
Region-wide economic dispatch in place for 35 years in New England
MA Roundtable © 2006 ISO New England Inc.

4. Dispatching Resources: All Resources Needed to Meet Demand Paid Uniform Clearing Price
$65
Demand Forecast
Actual
Demand
UCP $0
$10
$30
$45
$100
Demand and generation (MW)
MA Roundtable © 2006 ISO New England Inc.

5. Electricity Prices Increased in 2005
Average system price of $79.96/MWh was 47% higher than 2004
Increase is due to increased fuel costs and increased demand
44% increase in natural gas prices
Increase in peak and average use over previous years
Higher cost gas and oil units set price more than 80% of the time
Changes in the prices of these fuels are quickly reflected in wholesale electricity prices
Retail price increases for the 05/06 winter were also significant
In most states the timing of the increase lags behind wholesale market conditions
Reduces the ability of consumer behavior to lower wholesale prices
MA Roundtable © 2006 ISO New England Inc.

6. New England’s Generation Mix: More Than 60% Natural Gas and Oil
MA Roundtable © 2006 ISO New England Inc.

7. Electricity Prices Track Fuel Prices
Average Monthly Electricity, Natural Gas and Oil Prices $0
$20
$40
$60
$80
$100
$120
$140
Mar-03
Aug-03
Jan-04
Jun-04
Nov-04
Apr-05
Sep-05
Feb-06
$/MWh $2 $4 $6 $8
$10
$12
$14
$16
$/MMBTu
Hub
Nat Gas
Oil
MA Roundtable © 2006 ISO New England Inc.

8. Which Units Are Setting Prices in the Energy Market?
MA Roundtable © 2006 ISO New England Inc.

9. Electricity Use on the Rise
New England set new record for electricity use in 2005
Peak growth
Average consumption
Projected annual growth in New England peak demand : 1.9%
MA Roundtable © 2006 ISO New England Inc.

10. Addressing Increased Prices
Reduce demand
Energy efficiency
Demand Response
Peak shaving
Conservation
Investment in lower cost resources
Efficient units, and those with lower fuel costs
MA Roundtable © 2006 ISO New England Inc.

11. Higher Prices Drive Investment
Higher electricity prices provide increased incentives for investing in resources that don’t use higher-priced natural gas
Large increase in interest in wind power
Interest in developing coal gasification plants
Siting of generating resources is difficult in New England
MA Roundtable © 2006 ISO New England Inc.

12. Analyzing Electricity Costs
2006 Regional System Plan (RSP06) will estimate how certain actions can affect costs
RSP06 will model a number of scenarios to determine their effect on prices, including:
Addition of a 1,000 MW base load resource
Addition of a 1,000 MW clean-coal generator
5% load growth without generation addition
5% on-peak conservation
Addition of 500 MW of load response
MA Roundtable © 2006 ISO New England Inc.

13. Controlling Electricity Costs: Results
1 Add baseload -
5.70%
$600 million
$470 million
2 Add
coal
5.60%
$590 million
$300 million
3 5% growth
5.80%
$420 million
$90 million
4 5% reduction
4.70%
$490 million
$360 million
5 Load response
0.02%
$2 million
$0.5 million
$30 million
% Change in Wholesale Electricity Price
Change in Total Consumer Costs
Change in Total Production Costs
Change in Total Capacity Costs
Note: RSP06 will provide an indication of the relative market and reliability benefits from different resources in each sub-area.
MA Roundtable © 2006 ISO New England Inc.

14. Wholesale-Retail Linkages
Retail and wholesale markets are disconnected
Flat retail pricing provides no incentive to reduce use when wholesale prices are highest
States can encourage energy efficiency and conservation by adopting time-differentiated retail rates
Consumers shifting power use to cheaper hours of the day will make better use of the existing power system
Lowers energy market prices
Reduces capacity payments by deferring need to build infrastructure
MA Roundtable © 2006 ISO New England Inc.

15. Recommendations for Massachusetts
Adopt time-differentiated retail pricing for large customers
Encourage efficiency
Offer opportunity to manage energy costs
The more eligible consumers, the better
Adopt policies that encourage a more diverse set of resources (i.e. nuclear, clean coal, renewables)
Including facility siting and air permits that provide flexibility needed for reliability and economics
Continue active involvement in the regional planning process for the power system and wholesale markets
MA Roundtable © 2006 ISO New England Inc.