Efficient frontiers for electricity procurement by an LDC with multiple purchase options

Chi-Keung WOO*, Ira Horowitz, Arne Olson, Brian Horii, Carmen Baskette

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    77 Citations (Scopus)


    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.

    Original languageEnglish
    Pages (from-to)70-80
    Number of pages11
    Issue number1
    Publication statusPublished - Jan 2006

    Scopus Subject Areas

    • Strategy and Management
    • Management Science and Operations Research
    • Information Systems and Management

    User-Defined Keywords

    • Cross hedging
    • Efficient frontier
    • Forward contracts
    • Partial-adjustment model
    • Tolling agreements


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