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AROMP THROUGH RESTRUCTURING: LOOKING BACKWARD TO LOOK FORWARD

This conference provides an in-depth introduction to electricity markets and discusses the challenges and accomplishments of restructuring the energy industry. It explores the regulatory world of 2006 and highlights the good, the bad, and the ugly aspects of restructuring. The conference also discusses the development of Regional Transmission Organizations (RTOs) and their role in maximizing the use of the grid.

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AROMP THROUGH RESTRUCTURING: LOOKING BACKWARD TO LOOK FORWARD

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  1. A ROMP THROUGH RESTRUCTURING… LOOKING BACKWARD TO LOOK FORWARD In-Depth Introduction to Electricity Markets Conference New Brunswick, New Jersey March 17, 2015 Craig Glazer Vice President- Federal Government Policy PJM Interconnection

  2. Need slide that is black.

  3. 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…

  4. 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

  5. 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

  6. Restructuring: The Good, the Bad and the Ugly Accomplishment No. 1: We moved the risk allocation formula: aka “There was no Enron rate case!”

  7. Pre-and post Enron prices

  8. 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

  9. Increased Innovation • 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

  10. Restructuring: The Good, the Bad and the Ugly Accomplishment No. 2: We got the fundamentals right!

  11. 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

  12. 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

  13. PJM as Part of the Eastern Interconnection www.pjm.com • 27% of generation in Eastern Interconnection • 28% of load in Eastern Interconnection • 20% of transmission assets in Eastern Interconnection KEY STATISTICS PJM 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 791,089 generation sources 1,376square miles of territory 243,417area served 13 states + DCexternally facing tie lines 191 21% of U.S. GDP produced in PJM As of 4/1/2014

  14. Energy Market: Increased Efficiency Pre-Integration Price PatternPost-integration Energy Price Pattern • 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.

  15. eData

  16. A PJM Overview: The Basics…

  17. PJM ‒ Focus on Just 3 Things • Reliability • Grid Operations • Supply/Demand Balance • Transmission monitoring • Regional Planning • 15-Year Outlook 1 3 2 • Market Operation • Energy • Capacity • Ancillary Services

  18. PJM’s Control Room www.pjm.com

  19. End-Use Customers Other Suppliers Generation Owners Transmission Owners Electric Distributors PJM Governance Independent Board Members Committee

  20. Managing a Sea-Change

  21. Proposed Generation (MW) www.pjm.com As of March 2013

  22. Renewable Energy in PJM www.pjm.com

  23. Increasing Demand Resources

  24. PJM Wholesale Cost

  25. PJM Average Emissions (lbs/MWh)

  26. Evolution of Markets

  27. Markets History Timeline

  28. How PJM Secures Capacity PJM Capacity Market 15% 85% 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.

  29. RPM Structure 3 Years 20 months May 10 months Sept 3 months July Feb. May June Delivery Year EFORd Fixed Base Residual Auction First Incremental Auction Third Incremental Auction Second Incremental Auction Ongoing Bilateral Market

  30. 2017/2018 Base Residual AuctionClearing Prices ($/MW-Day)

  31. 2017/2018 Base Residual AuctionClearing Prices ($/MW-Day)

  32. Day-Ahead Market Timeline 12:00 noon 4:00 p.m. PJM posts day-ahead LMPs and hourly schedules 12:00 – 4:00 p.m. Day-Ahead Market is closed for evaluation by PJM 4:00 p.m. Up to 12:00 noon PJM receives bids and offers for the next Operating Day 4:00 – 6:00 p.m. Re-bidding Period 6:00 p.m. Throughout Operating Day PJM continually re-evaluates and sends out individual generation schedule updates, as required (Generation Control Application) 12:00 midnight

  33. Overall Market Timeline • Ancillary Service Markets • Generation Capacity Market

  34. Regional Market Benefits Reliability – resolving transmission constraints, gains in economic efficiency from regional reliability planning – from $470 million to $490 million in annual savings • Generation 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

  35. Regional Market Benefits 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

  36. Regional Market Benefits Total – as much as $2.3 billion in savings to the region each year

  37. KEY ISSUES GOING FORWARD • Market Design • Transmission Planning, Cost Allocation & Siting • Reliability • Financial Regulation

  38. KEY ISSUES GOING FORWARD 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?

  39. KEY ISSUES GOING FORWARD 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

  40. KEY ISSUES GOING FORWARD 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?

  41. KEY ISSUES GOING FORWARD 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?

  42. KEY ISSUES GOING FORWARD 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?

  43. KEY ISSUES GOING FORWARD 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?

  44. An Added Complication: Who Decides?

  45. 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.

  46. Avoiding The Quagmire Of Inaction “Hanging in mid-air”: a dangerous place

  47. A restructured industry or “Golden memories of yesteryear…” • The choice is ours

  48. LET’S TALK… Craig Glazer Vice President-Federal Government Policy PJM Interconnection Washington, D.C. , USA 1-202-423-4743 craig.glazer@pjm.com

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