On January 8th, 2006, I posted the following message under the article Playing with Fire – Part II:
Thanks Len for your insistence against LMPs.
What you intuitively think is "the ideal price" seems to me what a monopolist wants. It is completely wrong in a market where demand has elasticity.
There are a lot of risks involve for the generator under competition. Just one example suffices: if the generating unit is not available they need to pay somebody else the LMPs to cover for him, under Model 3.
In addition, LMPs are much lower when demand has enough price elasticity. In a robust supply and demand market there should no be very often significant overpayment, nor very often significant underpayment.