PJM © APEx Annual Conference Audrey A. Zibelman EVP and COO PJM Interconnection October 31, 2005

©2005 PJM 2 PJM as Part of the Eastern Interconnection KEY STATISTICS PJM member companies 350+ millions of people served 51 peak load in megawatts 135,000 MWs of generating capacity 165,738 miles of transmission lines 56,070 GWh of annual energy 700,000 generation sources 1,082 square miles of territory164,260 area served 13 states + DC

©2005 PJM 3 Regulation Regulation was intended as a surrogate for competition –Necessary due a lack of ability to transmit and analyze information quickly (for price transparency or reliability). –System of small, balkanized regulated monopolies was the “best we could do”. But technologies changed all that –Control systems –Information flow (information traveling as fast as the energy) –Where competition is possible (as it now is) it is the best way to bring consumer benefits.

©2005 PJM 4 Regulatory Paradigm Public Bears the Risk Supply the Demand at the Regulated Price

©2005 PJM 5 ENRON Paradigm Public Bears the Price Meet the Demand at Any Price

©2005 PJM 6 The Economic Balance of Working RTO Markets In RTO markets, supply and demand respond to price. Benefits Are Balanced Public Wins

©2005 PJM 7 “…markets don’t always operate efficiently because buyers and sellers don’t always have access to the information they need to make optimal choices.” Akerlof, Spence, & Stiglitz Nobel prize winners for economics

©2005 PJM 8 Real Time Real Information Real Requirements Owners, Users (i.e. the public) Government Physics Real Relationships

©2005 PJM 9 Information Flows Competitive markets are driven by fundamentals. All market participants need information. Where restructuring occurs –Markets become more complex. –Product selection and innovation increase. –Participants develop new capabilities to structure forward transactions More information is available and needed.

©2005 PJM 10 The Networked Energy Information Value Chain Acquire and deliver fuel Convert fuel to electricity Transmission of electricity Distribution of electricity Consumption of electricity Commodities trading Wholesale tradingFERC regulated transmission State regulated distribution End usage Speed of Light Production and delivery of fuel Transparent dataTransmission & bulk subsystems SCADA Wire & substations Local control little data Choose supplier

©2005 PJM 11 Public Information Markets Prices Available transfer capability Transmission limits & flows Forecasts Data trends PJM transforms data to information in real time Data to Information Traditional Processes Models Forecasts Actual Markets Reports Investigative Data Silos Agencies Customers Generators Transmission Owners Utilities Environmental Regulatory 6,000,000,000,000 Items 3,000 Items Key User- Selected Data Aggregated prices Specific prices Available transfer capability Transmission limits Forecasts Loads 10 Items PJM systems process

©2005 PJM 12 Information Tailored to User Needs

©2005 PJM 13 Competitive Market Benefits Three benefits of a competitive market: 1.Efficiency 2.Innovation 3.Reliability

©2005 PJM 14 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 PatternPost-integration Energy Price Pattern

©2005 PJM 15 Increased Efficiency Effective competitive market has unbiased forward prices –PJM Western Hub bias is relatively small and has been improving. –Selected PJM FTRs have no systematic bias. Market increases customers’ access to forward hedging. Removes $2/Mwh in energy price –Net benefit $1.4 billion per year

PJM ©2005 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

©2005 PJM 17 Increased Innovation Regional security constrained economic dispatch impacts –Higher level of regional reliability –More efficient transmission utilization –Most efficient generation utilization $85 million benefit

©2005 PJM 18 Technology Challenges in Markets Processing large data volumes Speed of human interactions Ability of humans to assimilate large and complex data Security constrained, bid-based economic dispatch

©2005 PJM 19 Advanced Technologies Data Mining Inference Engines Fuzzy Logic Expert Systems Genetic Algorithms Neural Networks Artificial Intelligence Advanced technologies tools can achieve plan objectives.

©2005 PJM 20 Advanced Technology at PJM PJM’s business involves many knowledge-based interactions with both customers and staff. PJM Operational Processes Scheduling, Dispatch & Pricing Settlement & Billing Security & Real-Time Control System Planning Demand Forecasting Credit Management Market Monitoring Customer Care Bidding Market Information Inference- Based Logic Expert Systems Visualization Neural Networks Genetic Algorithms Data Mining

©2005 PJM 21 Increased Reliability Organized markets enhance reliability. –Availability and transparency of information in large integrated markets run by independent entities (such as RTOs) strongly support real- time reliability. –RTOs and market participants share an interest in accurate, timely, and granular information about the performance of the grid.

©2005 PJM 22 Regional Planning Process Tiers Reliability 5 year baseline, load growth impacts beyond 5-10 years prescribed reliability criteria tests and assumptions, e.g. firm transfers, load growth bright line – build for violation Current Economics 10 year projections typical transfers, reliability criteria tests criteria ? – build for combination of violation and economic benefit Market Efficiency 10 year baseline scenario planning, econometric cost/benefit analysis criteria ? – build for economic benefit Scenario Planning multi-year analysis, >5 years typical transfers, prescribed reliability criteria tests, at risk gen, others? criteria ? – (to be determined) Solutions integrating all drivers and benefits – opportunities for technological innovation Integrate transmission, generation and demand response ConsensusUnder discussion

©2005 PJM 23 Little Steps for Little Feats

©2005 PJM 24 “The future requires a higher sophistication in acknowledging and dealing with differences…” Peter F. Drucker