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Electricity Policy and Market Context

Electricity supply and use in local communities are shaped largely by two events that occurred in 1997. The Electric Utility Restructuring Act was passed to deregulate the electricity industry in Massachusetts, with the intent being to reduce rates and broaden choice for consumers. In addition, the New England electricity marketplace was created, under the administration of an entity known as ISO New England, to support the deregulation of the industry throughout the six-state region. Click on the links below for additional information.

Massachusetts Electric Utility Restructuring Act

New England Electricity Marketplace

Market & Grid Operations: Contract Path &Physical Path:;

Massachusetts Electric Utility Restructuring Act
In Massachusetts and throughout the United States, electricity consumers have historically been served by localized monopolies. Utilities have owned and operated electricity supply, transmission, and distribution facilities power plants, power lines, and substations and consumers have had little or no choice regarding how power is produced and how much it costs. The Electric Utility Restructuring Act was signed into law by the Massachusetts legislature in 1997. Among other things, the act required utilities within the Commonwealth to sell off their power plants, transforming them into wires only entities. This created an opportunity for unregulated companies to purchase existing electricity generating facilities and to compete for the right to supply consumers with power at the wholesale and retail levels.

Four key types of organizations now exist to provide energy services to Cape & Islands and other consumers in the restructured marketplace:

• Wholesale power suppliers: These unregulated companies own and operate power plants or other generating sources, or they are brokers that buy electricity from others. They sell power into the competitive market at the wholesale level. Mirant, owner of the Canal Generating Station in Sandwich, and Dominion, owner of the Brayton Point Plant on the Massachusetts-Rhode Island border, are prominent examples.
  
  
• Distribution companies: These regulated companies own and operate transmission and distribution (T&D) networks, over which they deliver power to all consumers. They are also required to purchase power in the wholesale market and to make it available to retail consumers as basic service. Their rates for power supply and delivery services must be approved by the Massachusetts Department of Public Utilities. Local examples include NStar Electric (formerly Commonwealth Electric) and National Grid (formerly Nantucket Electric).
  
  
• Retail power suppliers: These unregulated companies generate and/or purchase power in the wholesale market, and they compete for the right to sell power to residents, small businesses, and other retail consumers. Some suppliers operate only in the retail market, acting as brokers between other suppliers and consumers. Retail suppliers and brokers must be licensed by the state, but the rates they charge are not regulated.
  
  
• Aggregators: These unregulated entities are supposed to increase the buying power of individual consumers by banding them together to purchase electricity in the competitive marketplace. Some aggregators serve specific types of consumers; others, known as municipal aggregators, serve consumers within specified geographic areas. A municipal aggregrator does not require direct authorization from individual consumers to become their supplier. The Cape Light Compact acts as a municipal aggregator for retail consumers on Cape Cod and Marthas Vineyard.

Industry restructuring was intended to create a robust market in which multiple suppliers would compete to serve consumers. To date, however, large industrial and commercial consumers have realized most of the economic benefits of competition, with residential consumers typically having little or no choice among suppliers.

Several other important provisions of the 1997 act are summarized below:

• The act mandated the creation of a renewable energy portfolio standard to expand the role of green power sources in supplying electricity within the state. (See Supply Portfolio: Massachusetts for more information.)
  
  
• The act created revenue streams to support programs designed to promote the more efficient use of electricity and to encourage the development of renewable energy resources within the state.
  
  
• The act required the development of rules and regulations for reducing adverse impacts on environmental and public health associated with emissions from fossil-fuel-fired electricity generating facilities.

New England Electricity Marketplace
The New England marketplace was formed to support the deregulation of the electric power industry in Massachusetts and throughout the northeastern United States. The market is defined physically by the New England power grid, which generally coincides with the borders of the six-state region. The wholesale production, delivery, and marketing of electricity on this grid are managed by ISO New England (ISO-NE), a not-for-profit corporation created in 1997.

The New England grid serves a population of more than 14 million people. It includes more than 8,000 miles of high-voltage, higher-efficiency transmission lines and many times more miles of lower-voltage distribution lines. It also includes high-voltage interconnections with systems in the state of New York and the provinces of Quebec and New Brunswick.

The grid connects more than 6.5 million consumers to several hundred power plants and other generating facilities. In 2003, natural gas-, oil-, and coal-fired plants supplied almost 60% of the regions electricity, while nuclear plants accounted for more than 25%. Hydroelectric facilities and power plants burning wood and/or trash generated most of the remaining 15%. Wind, solar, and other renewable resources provided an almost negligible fraction of total electricity generation. (For more recent information from ISO-NE on trends in generation, click here.)

Wholesale electricity was priced uniformly throughout the region until March 1, 2003, when ISO-NE instituted a system known as locational marginal pricing (LMP). Eight different LMP zones exist, three in Massachusetts and one each in Connecticut, Maine, New Hampshire, Rhode Island, and Vermont. Cape Cod, Marthas Vineyard, and Nantucket are within the southeastern Massachusetts zone (SEMA). LMP provides clearer signals to market participants by more accurately reflecting the costs of wholesale power in different zones. In areas where prices are higher, clearer economic incentives exist for efforts to reduce electricity demand and to invest in new power supply and delivery capacity. (See Locational Marginal Pricing, a fact sheet from ISO-NE.)

Market & Grid Operations: Contract Path & Physical Path
Consumers can buy power produced anywhere within the New England marketplaceor electricity imported through interconnections to power grids in New York, Quebec, and New Brunswick. However, the power purchased by individual consumers usually is not the same electricity that is actually consumed:

• Agreements between licensed suppliers, consumers, and other market participants define the contract paththe electricity that is purchased.
  
  
• Power supply and delivery infrastructure define the physical paththe electricity that is consumed.

These distinctions are best understood by analogy: Imagine that the New England power grid represents a big tube and electrons represent water. Water flows into and out of the tube at equivalent rates because electricity cannot be stored. This rate continuously varies, reflecting fluctuations in total supply and demand throughout the region. Generating facilities pour water into the top of the tube, and consumers withdraw water from the bottom of the tube. Water takes the easiest route possible through the tube because electricity flows according to the laws of physics, taking the path of least resistance.

On the contract path, each generator dumps a quantity of water into the tube based on the price agreements it has established with market participants located anywhere in New England. Wholesale and retail consumers covered by these agreements simultaneously remove water from the tube. The amount contributed by a generator at a certain price is balanced by the total amount withdrawn by its consumers at this price.

On the physical path, all generators pour water into the tube through their transmission interconnections, and all consumers withdraw water through their local distribution networks. The water withdrawn by individual consumers may come from the nearest generator, or it may come from one located some distance away, depending on the easiest pathway through the tube.

In the Cape & Islands region, NStar and National Grid (National Electric) have traditionally determined the contract path for the majority of consumers. These organizations may be buying electricity generated locally, elsewhere in New England, or in New York, Quebec, or New Brunswick. In 2005, the contract path for most consumers on Cape Cod and Martha's Vineyard began to be defined by the Cape Light Compact under its competitive power supply agreement with ConEdison Solutions.

In many areas of New England, the power grid is too complex to isolate the physical path of the electricity delivered to individual consumers. But Cape Cod, Marthas Vineyard, and Nantucket have a much simpler grid: When the Canal Power Plant in Sandwich, one of the dirtiest facilities in Massachusetts, is operating, it generates the power consumed in local communities. When it is not operating, the nearest sources generally supply the power imported over tranmission lines crossing the canal and connecting the islands to the mainland: Brayton Point, the dirtiest plant in New England, and Pilgrim, the only nuclear plant in the state.

Last updated 09.10.07.