1. ©2005 PJMwww.pjm.com 1 A ROMP THROUGH RESTRUCTURING… LOOKING BACKWARD TO LOOK F ORWARD In-Depth Introduction to Electricity Markets Conference New Brunswick, New Jersey March 17, 2015 Craig Glazer Vice President- Federal Government Policy PJM Interconnection

2. ©2005 PJMwww.pjm.com 2

3. ©2005 PJMwww.pjm.com 3 Need slide that is black.

4. ©2005 PJMwww.pjm.com 4 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…

5. ©2005 PJMwww.pjm.com 5 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

6. ©2005 PJMwww.pjm.com 6 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

7. ©2005 PJMwww.pjm.com 7 Restructuring: The Good, the Bad and the Ugly Accomplishment No. 1: We moved the risk allocation formula: aka “There was no Enron rate case!”

8. ©2005 PJMwww.pjm.com 8 Pre-and post Enron prices

9. ©2005 PJMwww.pjm.com 9 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

10. ©2005 PJMwww.pjm.com 10 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

11. ©2005 PJMwww.pjm.com 11 Restructuring: The Good, the Bad and the Ugly Accomplishment No. 2: We got the fundamentals right!

12. ©2005 PJMwww.pjm.com 12 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

13. ©2005 PJMwww.pjm.com 13 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

14. ©2005 PJMwww.pjm.com 14 PJM as Part of the Eastern Interconnection www.pjm.com KEY STATISTICS PJM member companies 900+ millions of people served 61 peak load in megawatts 165,492 MWs of generating capacity183,604 miles of transmission lines 62,556 2013 GWh of annual energy 791,089 generation sources 1,376 square miles of territory243,417 area served 13 states + DC externally 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

15. ©2005 PJMwww.pjm.com 15 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 PatternPost-integration Energy Price Pattern

16. ©2005 PJMwww.pjm.com 16 eData

17. ©2005 PJMwww.pjm.com 17 A PJM Overview: The Basics…

18. ©2005 PJMwww.pjm.com 18 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 2 2 1 1 3 3

19. ©2005 PJMwww.pjm.com 19 PJM’s Control Room www.pjm.com

20. ©2005 PJMwww.pjm.com 20 PJM Governance Independent Board Members Committee Generation Owners Generation Owners Transmission Owners Transmission Owners Other Suppliers Other Suppliers Electric Distributors Electric Distributors End-Use Customers End-Use Customers

21. ©2005 PJMwww.pjm.com 21 Managing a Sea-Change

22. ©2005 PJMwww.pjm.com 22 Proposed Generation (MW) www.pjm.com As of March 2013

23. ©2005 PJMwww.pjm.com 23 Renewable Energy in PJM www.pjm.com

24. ©2005 PJMwww.pjm.com 24 Increasing Demand Resources

25. ©2005 PJMwww.pjm.com 25 PJM Wholesale Cost

26. ©2005 PJMwww.pjm.com 26 PJM Average Emissions (lbs/MWh)

27. ©2005 PJMwww.pjm.com 27 Evolution of Markets

28. ©2005 PJMwww.pjm.com 28 Markets History Timeline

29. ©2005 PJMwww.pjm.com 29 How PJM Secures Capacity PJM 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%

30. ©2005 PJMwww.pjm.com 30 RPM Structure Base Residual Auction Delivery Year 3 Years Second Incremental Auction Third Incremental Auction June May 3 months 10 months First Incremental Auction 20 months EFORd Fixed Ongoing Bilateral Market May Feb. July Sept

31. ©2005 PJMwww.pjm.com 31 2017/2018 Base Residual Auction Clearing Prices ($/MW-Day)

32. ©2005 PJMwww.pjm.com 32 2017/2018 Base Residual Auction Clearing Prices ($/MW-Day) Region 2017/2018 Price 2016/2017 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%

33. ©2005 PJMwww.pjm.com 33 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 Day PJM continually re-evaluates and sends out individual generation schedule updates, as required (Generation Control Application) 12:00 noon 4:00 P. M. 6:00 P. M. 12:00 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

34. ©2005 PJMwww.pjm.com 34 Overall Market Timeline Ancillary Service Markets Generation Capacity Market

35. ©2005 PJMwww.pjm.com 35 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

36. ©2005 PJMwww.pjm.com 36 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

37. ©2005 PJMwww.pjm.com 37 Regional Market Benefits Total – as much as $2.3 billion in savings to the region each year

38. ©2005 PJMwww.pjm.com 38 KEY ISSUES GOING FORWARD Market Design Transmission Planning, Cost Allocation & Siting Reliability Financial Regulation

39. ©2005 PJMwww.pjm.com 39 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?

40. ©2005 PJMwww.pjm.com 40 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

41. ©2005 PJMwww.pjm.com 41 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?

42. ©2005 PJMwww.pjm.com 42 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?

43. ©2005 PJMwww.pjm.com 43 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?

44. ©2005 PJMwww.pjm.com 44 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?

45. ©2005 PJMwww.pjm.com 45 An Added Complication: Who Decides?

46. ©2005 PJMwww.pjm.com 46 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.

47. ©2005 PJMwww.pjm.com 47 Avoiding The Quagmire Of Inaction “Hanging in mid-air”: a dangerous place

48. ©2005 PJMwww.pjm.com 48 A restructured industry or “Golden memories of yesteryear…” –The choice is ours

49. ©2005 PJMwww.pjm.com 49 LET’S TALK… Craig Glazer Vice President-Federal Government Policy PJM Interconnection Washington, D.C., USA 1-202-423-4743 craig.glazer@pjm.com