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Retail Choice Study
Issues and Options for Electric Generation Service:
A Report for Public Comment
T
ABLE OF
C
ONTENTS
1. EXECUTIVE SUMMARY........................................................................................... 1
2. STUDY CONTEXT AND OBJECTIVES .................................................................... 5
2.1
What is Retail Choice? ..................................................................................... 5
2.2 Restructuring
Act Requirements....................................................................... 7
2.3 Electric
Supply
Study Approach ....................................................................... 8
2.4 Electric
Supply
Study Objectives ...................................................................... 9
3. BELMONTS ELECTRICITY SUPPLY TODAY ....................................................... 10
3.1 Belmonts
Electric
System Characteristics ..................................................... 10
3.2
BMLDs Recent History For Overall Electricity Prices..................................... 11
3.3
BMLDs Recent History For Generation Service Costs .................................. 12
3.3 BMLD
Generation Costs Outlook ................................................................... 15
4. OVERVIEW OF RETAIL CHOICE AND ELECTRIC DEREGULATION .................. 18
4.1
Retail Choice Development in US Electric Markets ........................................ 18
4.2 Massachusetts
Retail
Choice Developments ................................................. 21
4.3
New England Retail Choice Developments .................................................... 23
4.4
Other US Retail Choice Developments .......................................................... 26
4.5
Retail Choice and Public Power ..................................................................... 29
4.6
Key Observations for Belmonts Situation ...................................................... 30
5. RETAIL CHOICE OPTIONS.................................................................................... 31
5.1
Potential Benefits and Costs from Retail Choice for Belmont......................... 31
5.2
Approaches to Retail Choice for Belmont....................................................... 35
5.3
All Customer Opt Out Approach ..................................................................... 37
5.4 Large
Customer
Opt Out Model...................................................................... 39
5.5
All Retail Supplier Approach........................................................................... 41
5.6
The Status Quo Approach............................................................................ 42
5.7
Retail Choice Implementation Issues ............................................................. 45
6. POLICY ISSUES FOR THE TOWN OF BELMONT ................................................ 47
Belmont Electricity Supply Study Committee
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Appendices
A. Bibliography of Retail Choice Reports, Studies and Articles ................................... 51
B. The Restructuring of New Englands Wholesale Power Market .............................. 53
C. Competitive Suppliers of Retail Generation Service in Massachusetts ................... 56
D. Examples in Retail Choice ...................................................................................... 57
E. Financial Performance Assurance in the Electric Power Industry ........................... 62
F. Retail Choice Implementation Issues ...................................................................... 66
G. Glossary of Terms ................................................................................................... 73
H. About La Capra Associates..................................................................................... 78
Belmont Electricity Supply Study Committee
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La Capra Associates
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1. Executive Summary
The Belmont Electricity Supply Study Committee (the Committee) was formed in 2003 following
a vote of the 2003 Annual Town Meeting. The Committee has been asked to:
1. conduct a study of the potential for opening Belmonts electric system to allow electric
consumers in Belmont the option to take generation service from competitive suppliers
(retail choice);
2. hold a public hearing on this matter; and
3. make recommendations regarding the future of retail choice in Belmont.
This study was initiated to comply with a requirement in Massachusetts 1997 Electric Industry
Restructuring Act. The Act granted customers of the Commonwealths investor-owned utilities the
ability to select suppliers of generation service of their choice, rather than take the generation supply
offered by their electric utility. The Act also required municipal utilities to conduct a study addressing
whether they should offer their customers the same choice.
The Committee has found that this is an appropriate time to address that statutory requirement for
a study, and to develop a longer-term vision of the electric supply preferences of the community.
Substantial changes in the regional electric markets have been made in recent years and more changes are
expected in the next few years. The Belmont Municipal Lighting Department (BMLD) supplies are set
under favorable terms through 2007. However, BMLD will need to make significant decisions in the next
two to three years on longer-term power supply for Belmont decisions that would best reflect the
communitys power supply preferences.
The required study, documented in this report, has been conducted to assess whether retail choice,
in any form, has the potential to deliver benefits to the Town and its electricity consumers. The
Committee, with support from BMLD and the consulting firm La Capra Associates, assembled
information on (1) BMLDs power supply, (2) retail choice systems in Massachusetts and throughout the
US, and (3) New Englands power markets. With this information, the Committee has produced this
report to describe the context, and set forth the most realistic options and policy questions that Belmont
should consider in deciding whether it wishes to pursue retail choice.
The municipal utility approach to power supply has served the community well over time. In
particular, this approach has provided a generation supply at prices that were lower and more stable
during the past several years when compared to the prices paid by customers of investor-owned utilities in
the Commonwealth. As a municipal utility, BMLD has had, and may continue to have, advantages as a
buyer of power on behalf of the Town. These advantages include access to inexpensive hydropower
made available to public power entities and a good credit position in the market. In addition, BMLD
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currently holds a favorable supply contract through 2007. Nevertheless, looking forward into a
fundamentally changing market environment, it is not certain that BMLDs traditional approach to power
supply will maintain the advantages in the longer term.
Since its beginning in 1998, 17 states and Washington, D.C. have opened their retail electric
generation markets to competition, Massachusetts being one of the first three to do so in March 1998.
Because each state has adopted its own, unique approach to retail choice, good information is available on
several alternative approaches to implementation of retail choice for Belmont to consider.
However, the actual development of competitive retail markets is still a work in progress. Most
states, including Massachusetts, are still in a transition from regulation to full competition. Much like
telephone deregulation in the 1980s, deregulation of electric markets has evolved and continues to evolve
with time. The vast majority of the competitive market activity has been targeted to large commercial and
industrial customers, with very low participation by residential and other smaller customers. Today, only
one supplier in the Massachusetts market offers competitive supplies to residential customers.
Looking forward, it is possible that competition in retail power markets will develop more rapidly
over the next few years. Massachusetts transition phase is ending in early 2005. There is a continued
commitment to the retail competition model throughout New England. These factors are expected to
provide a more attractive opportunity for competitive suppliers, an opportunity that has been largely
absent over the past few years because of the constraints that developed during the transition phase.
While some states in the US have backed away from the move to retail competition or have extended their
transition periods, Massachusetts and much of New England remain on a path to develop retail
competition. However, it is not entirely clear how this competitive retail market will develop and on
what timeframe.
The reasons that retail competition has been pursued in many states are several. Primary among
them is the prospect that, through competition, costs of generation service to consumers will be lower
than under continued regulation. Competition also is expected to bring a broader range of electricity
products and services to consumers. In addition to the benefits that might accrue to consumers
participating in choice, there also may be benefits to BMLD derivin