In meeting its retail sales obligations, management of a local distribution company (LDC) must determine the extent to which it should rely on spot markets, forward contracts, and the increasingly popular long-term tolling agreements under which it pays a fee to reserve generator capacity. We address these issues by solving a mathematical programming model to derive the efficient frontier that summarizes the optimal tradeoffs available to the LDC between procurement risk and expected cost. To illustrate the approach, we estimate the expected procurement costs and associated variances that proxy for risk through a spot-price regression for the spot-purchase alternative and a variable-cost regression for the tolling-agreement alternative.The estimated regressions yield the estimates required to determine the efficient frontier. We develop several such frontiers under alternative assumptions as to the forward-contract price and the tolling agreement's capacity payment, and discuss the implications of our results for LDC management.

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Marginal costs of electricity vary by time and location. Past researchers attributed these variations to factors related to electricity generation and transmission. Those authors, however, did not fully analyze the large variations in marginal distribution capacity costs (MDCC) by area and time. Thus, the objectives of this paper are: (1) to propose a method to estimate MDCC; (2) to demonstrate the significant intra-and inter-utility variations in MDCC; and (3) to discuss the usefulness of these cost estimations in integrated resource planning. Acknowledgment and disclaimer -This paper is partially funded by EPRI. The views expressed in the paper are entirely ours and do not reflect the position of EPRI. All errors are ours.