©2005 PJM 1 A ROMP THROUGH RESTRUCTURING… LOOKING BACKWARD TO LOOK F ORWARD In-Depth Introduction to Electricity Markets Conference New Brunswick,

©2005 PJMwww.pjm.com 1

A ROMP THROUGH RESTRUCTURING…LOOKING BACKWARD TO LOOK FORWARD

In-Depth Introduction toElectricity Markets ConferenceNew Brunswick, New JerseyMarch 17, 2015

Craig GlazerVice President-Federal Government PolicyPJM Interconnection



• Need slide that is black.


And What Were They Mad About???

At the Wholesale Level…• Transmission access

– Negotiation of “wheeling rights”– Discriminatory treatment– Lengthy litigation: “Refunds to a Corpse”

• Build-out costs• “Reliability” and “native load” as code • TLRs, demand ratchets, price squeeze

you name it…


And What Were They Mad About?

At the Retail Level---

• Rates significantly above the national average

• Industrial subsidies for public interest programs

• Investment stagnation

• Hit to global competitiveness


The Regulatory World Circa 2006

• Reminding the Regulator What We Got Right: Taking credit for our accomplishments

• Building on Past Experience: Learning What Needs Further Work

• Avoiding the Quagmire of Inaction


Restructuring: The Good, the Bad and the Ugly

Accomplishment No. 1:

We moved the risk allocation formula:

aka “There was no Enron rate case!”


Pre-and post Enron prices

Mean PJM RTO LMP

$0

$5

$10

$15

$20

$25

$30

$35

2/5/

2002

2/6/2

002

2/7/2

002

2/8/

2002

2/9/2

002

2/10

/200

2

2/11

/200

2

2/12

/200

2

2/13

/200

2

2/14

/200

2

2/15

/200

2

2/16

/200

2

2/17

/200

2

2/18

/200

2

2/19

/200

2

$/M

Wh

Enron Collapse


Shifting the Risk

• Consumers are paying for higher commodity costs not “bail-outs”

• If anything, capacity prices too low

• Markets delivering signals: We need to react to them wisely


• Market heat rate declines– Provides fuel adjusted measure of efficiency– Equivalent heat rate at Western Hub reduced

from 11 MMBTU/ MWh in 1999 to 7.3 MMBTU/MWh in 2004

Increased Innovation

Heat Rates - Major Pricing Hubs

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

Jan

-99

Ju

l-99

Jan

-00

Ju

l-00

Jan

-01

Ju

l-01

Jan

-02

Ju

l-02

Jan

-03

Ju

l-03

Jan

-04

Ju

l-04

Jan

-05

Ju

l-05

MM

Btu

/MW

h

AEP CINERGYONTARIO PJMTVA ZONEAVACAR Comed/NI


Restructuring: The Good, the Bad and the Ugly

Accomplishment No. 2:

We got the fundamentals right!


A Look at Other Industries: Paths Already Explored

• Regulatory solutions: Order 436, FCC Carterphone Decision

• Behavorial solutions: Order 436, Telecomm Act of 1992

• Structural solutions: Order 636, AT&T Divestiture


The Development of RTOs

• Structural Solutions Have Worked– Eliminating multiple control areas– Regional planning– Redispatch in lieu of TLRs– Maximizing use of the Grid– Allowing customers to make economic

decisions– Transparency


PJM as Part of the Eastern Interconnection

www.pjm.com

KEY STATISTICSPJM member companies 900+millions of people served 61 peak load in megawatts 165,492MWs of generating capacity 183,604miles of transmission lines 62,5562013 GWh of annual energy 791,089generation sources 1,376square miles of territory 243,417area served 13 states + DCexternally facing tie lines 191

• 27% of generation in Eastern Interconnection

• 28% of load in Eastern Interconnection• 20% of transmission assets in

Eastern Interconnection

21% of U.S. GDP produced in PJM

As of 4/1/2014


Energy Market: Increased Efficiency

• Lower energy prices across the expanded PJM region– ESAI’s technical study: region-wide energy price without

integration would be $0.78/MWh higher in 2005 than with integration.

– Spreading these savings over the total PJM RTO’s energy demand of 700 terawatt-hours (TWh) per year yields aggregate savings of over $500 million per year.

Pre-Integration Price Pattern Post-integration Energy Price Pattern


eData


A PJM Overview:

The Basics…


PJM Focus on Just 3 Things‒

Market Operation• Energy• Capacity• Ancillary Services

Market Operation• Energy• Capacity• Ancillary Services

Regional Planning• 15-Year Outlook

Regional Planning• 15-Year Outlook

Reliability• Grid Operations• Supply/Demand Balance• Transmission monitoring

Reliability• Grid Operations• Supply/Demand Balance• Transmission monitoring

22

11

33


PJM’s Control Room

www.pjm.com


PJM Governance

Independent BoardIndependent Board

Members CommitteeMembers Committee

GenerationOwnersGenerationOwners

TransmissionOwnersTransmissionOwners

Other Suppliers Other Suppliers

ElectricDistributorsElectricDistributors

End-UseCustomersEnd-UseCustomers


Managing a Sea-Change


Proposed Generation (MW)

www.pjm.com

As of March 2013


Renewable Energy in PJM

www.pjm.com


Increasing Demand Resources


PJM Wholesale Cost


PJM Average Emissions (lbs/MWh)


Evolution of Markets


Markets History Timeline


How PJM Secures Capacity

PJM Capacity MarketPJM Capacity Market

Reliability Pricing Model (RPM)

PJM secures capacity on behalf of Load Servers to satisfy capacity obligations not satisfied through self-supply.

Reliability Pricing Model (RPM)

PJM secures capacity on behalf of Load Servers to satisfy capacity obligations not satisfied through self-supply.

Fixed Resource Requirement Alternative (FRR) (self-supply)

Load Server secures capacity to satisfy their load obligation.

Fixed Resource Requirement Alternative (FRR) (self-supply)

Load Server secures capacity to satisfy their load obligation.

85% 15%


RPM Structure

Base Residual AuctionBase Residual Auction

Delivery Year

3 Years

Second Incremental Auction

Second Incremental Auction

Third Incremental Auction

Third Incremental Auction

June May

3 months

10 months

First Incremental Auction

First Incremental Auction

20 months

EFORd Fixed

Ongoing Bilateral MarketOngoing Bilateral Market

May

Feb.Feb.JulyJuly

SeptSept


2017/2018 Base Residual AuctionClearing Prices ($/MW-Day)


2017/2018 Base Residual AuctionClearing Prices ($/MW-Day)

Region2017/2018

Price2016/2017

Price%

Change

Rest of RTO

$120.00 $59.37 +102%

ATSI $120.00 $114.23 +5%

MAAC $120.00 $119.13 +0.7%

PS $215.00 $219.00 -1.8%


Day-Ahead Market Timeline

Up to 12:00 noon PJM receives bids and

offers for the next Operating Day

12:00 – 4:00 p.m.Day-Ahead Market

is closed for evaluation by PJM

4:00 – 6:00 p.m.Re-bidding Period

Throughout Operating DayPJM continually re-evaluates and sends out individual generation schedule updates, as required

(Generation Control Application)

12:00 noon12:00 noon

4:00 P.M.4:00 P.M.

6:00 P.M.6:00 P.M.

12:00 midnight12:00 midnight

4:00 p.m.PJM posts day-ahead LMPs and hourly schedules

4:00 p.m.PJM posts day-ahead LMPs and hourly schedules


Overall Market Timeline

• Ancillary Service Markets

• Generation Capacity Market


Regional Market Benefits

Reliability –

resolving transmission constraints, gains in

economic efficiency from regional reliability

planning – from $470 million to $490 million

in

annual savingsGeneration investment –

reduced reserve requirements and increased

demand response result in decreased need for

infrastructure investment – from $640 million

to

$1.2 billion in annual savings



Energy production cost –

efficiency of centralized dispatch over a large

region – from $340 million to $445 million

in annual savings

Grid services –

cost-effective procurement of synchronized

reserve, regulation – from $134 million to

$194 million in annual savings



Total – as much as

$2.3 billion in savings to the

region each year


KEY ISSUES GOING FORWARD

• Market Design

• Transmission Planning, Cost Allocation & Siting

• Reliability

• Financial Regulation



Market Design

• The “Half Slave/Half Free” Problem

• Incenting New Generation

• The Role of States over

Capacity Adequacy

• Demand Response: A

Capacity Resource or a

load forecast adjustment?



EPA Clean Power Plan

•Individual state compliance plans

•Compliance options that the market can reflect

•Compliance options that the market can’t reflect

•Initial conclusions

•Requests to EPA



Transmission Planning– Competitive Transmission? Competitive

Bidding vs. “Rights of First Refusal”– The Driver of The Transmission Grid

• Grid as an Enabler or Competitor?• Strong Grid vs. Localized Grid?• What are the drivers of

expansion?



Transmission Cost Allocation– A key debate or a costly distraction?– “Cross-border cost allocation: Voluntary

agreement? Differing rules? Overarching policy?

Transmission Siting– What is truly broken? State role? Identlfying

what constitutes need? Or differing visions of this asset?



Reliability– FERC’s enforcement regime---prosecutorial?

Industry-based? INPO-model?– Cybersecurity

• Reliance on the NERC model?• Who has overarching authority over all aspects of

the industry?



Financial Regulation

• CFTC Exemption for RTO Products?

• Moving the industry toward centralized clearing vs. the “end user” exemption?

• Harmonization of regulation between FERC/CFTC?

• Harmonization of enforcement between FERC/CFTC?


An Added Complication:

Who Decides?


Who Decides?

• States: – State Energy Policies:

Governors/legislators– State PUCs

• FERC – FERC Review of Planning

• Order 890: Regulating Process or Results?

• Environmental Agencies– Non-attainment areas– RGGI et al.


Avoiding The Quagmire Of Inaction

“Hanging in mid-air”: a dangerous place


• A restructured industry or “Golden memories of yesteryear…”

– The choice is ours


LET’S TALK…

Craig GlazerVice President-Federal Government Policy

PJM InterconnectionWashington, D.C. , USA

[email protected]

Documents

©2005 PJM 1 A ROMP THROUGH RESTRUCTURING… LOOKING BACKWARD TO LOOK F ORWARD In-Depth Introduction to Electricity Markets Conference New Brunswick,