LMPs are based on actual flow of energy, not the contract path. So the LMP pricing methodology is a flow-based pricing system.
Read the second set of bullets.
When transmission constraints occur, delivery limitations prevent the use of the next least-cost generator. In these cases, a higher cost generator(s) that is located closer to the load must be used to meet demand. This cost is expressed as “security constrained redispatch”. Therefore LMPs during constrained conditions include not only the marginal energy cost, but also include the increased cost to deliver energy due to transmission system congestion. Therefore, LMPs on the receiving side of the constraint are generally higher than those on the sending side.
