BACKGROUNDER on the first fully functioning regional transmission organization in the United States: PJM Interconnection

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BACKGROUNDER on the first fully functioning regional transmission organization in the United States: PJM Interconnection The Transmission and Delivery of Electricity Electricity transmission refers

1 BACKGROUNDER on the first fully functioning regional transmission organization in the United States: PJM Interconnection The Transmission and Delivery of Electricity Electricity transmission refers to the movement of large amounts of electricity over highvoltage/high-capacity lines from power stations to substations. Electricity distribution refers to the delivery of electricity from the substations to homes or businesses through smaller power lines that are located along streets. The vast majority of customers are served from distribution lines. A few large electricity users, like major manufacturing facilities, are served directly from the larger transmission lines. Transmission lines are also commonly used to supply electricity to wholesale customers such as rural electric cooperatives. Wholesale customers buy electricity from producers at wholesale, and contract for that electricity to be delivered to their own distribution system. They, in turn, resell the electricity to homes and businesses located along their distribution lines. Restructuring of the electricity industry has encouraged power utilities to join regional transmission organizations (RTOs), and is seen as a way to foster robust competition by opening up the electricity highway system to more participants. More competition among participants promotes innovation and provides consumers with more choices about who supplies their electricity. PJM Interconnection an Industry Leader For more than 75 years, PJM has ensured that electricity is reliably provided to residents and businesses in its region. PJM opened the country s first wholesale energy market in 1997 and is a fully functioning regional transmission organization (RTO). PJM champions the development of fair and competitive wholesale electricity markets and provides the foundation for state retail choice programs. PJM currently serves all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. The company formed in 1927, as one of the world s first power pools, when three utilities in Pennsylvania and New Jersey realized the benefits and efficiencies of sharing resources. In 1997, PJM became the first fully functioning Independent System Operator responsible for the safe and reliable operation of the transmission system as well as the administration of the competitive wholesale electric power market. On Dec.18, 2002, the Federal Regulatory Energy Commission (FERC) granted PJM full status as an RTO.

2 BACKGROUNDER page 2 How PJM Works To run the electric system for its members, PJM acts as an information/data clearinghouse and decision maker. PJM forecasts how much electricity will be needed and receives offers to supply electricity from producers and other suppliers of electricity. PJM decides what generation offers to accept by selecting which power plants will make electricity over the next 24-hour period. Using its locational marginal pricing model, PJM bases its decisions on the overall least cost for the whole region, considering the pattern of demand and the availability of supply. Locational marginal pricing rewards efficient operations and deters congestion. PJM directs the operation of the generating power plants by agreements with their owners. Once generated, the electricity flows through high voltage lines to local utilities distribution stations and from there the electricity is sent on local distribution lines to homes, factories and businesses. PJM anticipates electricity needs years ahead of when it may be needed and plans with its member companies on adding generating plants and transmission lines. Feasibility and impact studies are part of the planning process. PJM Day-ahead and Real Time Energy Market 8 a.m. Noon PJM receives bids for the sale and purchase of energy for the next day. At noon, the window for entering day-ahead bids closes. Noon 2 p.m. PJM reviews latest demand forecast, receives transaction data for imports and exports, and performs initial evaluation of bids for the next day. 2 4 p.m. PJM performs final evaluation of bids and offers, and issues schedules for the next day by 4 p.m.. Schedules indicate output levels for generating plants each hour, and the locational marginal price (LMP) that will be paid. These schedules are financially binding. 4 6 p.m. During the rebidding period, any generator not selected may make a revised offer to supply for the next day.

3 BACKGROUNDER page 3 4 p.m. 8 a.m. During the night, PJM continually evaluates bids and offers to optimize the operating plan. Day-ahead Real Time Throughout the day, PJM continually adjusts generation output to match demand. The real time market is settled based on deviations between actual and bid supply and demand. At PJM s control centers, an expert staff monitors the grid 24 hours a day, seven days a week. As demand for electricity shifts, PJM keeps supply and demand in balance by directing how much energy should be supplied and adjusting production to accommodate changes in demand. They also adjust production to allow for scheduled import and export transactions. PJM is vigilant about protecting the supply of electricity. PJM staff studies hundreds of what if scenarios and prepares to deal with virtually any event. Each variable that conceivably might affect supply and demand for electricity is carefully considered from extreme weather conditions, emergency situations and equipment failures to the more easily anticipated cycles of hours, days, weeks and seasons. PJM s markets daily, hourly PJM coordinates the continuous buying, selling and delivery of wholesale electricity through robust, open and competitive markets. In operating the markets, PJM balances the needs of suppliers, wholesale customers and other market participants, and continuously monitors market behavior. PJM s Energy Market is similar to a stock exchange: the market establishes a price for electricity by matching supply with demand. The market operates on a day-ahead basis, with participants submitting offers to sell and bids to purchase electricity for each hour of the following day. PJM determines the most economical solution for the entire system and publishes hourly clearing prices for the next day by 4 p.m. The PJM Energy Market uses locational marginal prices (LMPs), which reflect the value of the energy at the specific location and time it is delivered. If the lowest price energy can reach all locations, prices are the same over the entire system. When there is transmission congestion, energy cannot flow freely to certain locations. More expensive energy is ordered to meet that demand and the LMP is higher in those locations. Because the electric system is dynamic, the actual hourly clearing price may vary due to system changes such as plant maintenance or unexpected weather changes. Real-time prices are calculated from the dispatch orders every five minutes and posted on the PJM Web site, PJM settles each hour, and issues invoices monthly.

4 BACKGROUNDER page 4 PJM is responsible for maintaining the integrity the grid the complex, interconnected system that supplies wholesale electricity that ultimately reaches more than 44 million people in 12 states and the District of Columbia. PJM s planning process The landscape changes constantly as new homes and businesses are built all of which require electricity to thrive. PJM has responsibility for managing changes and additions to the grid so that future needs are anticipated, growth occurs in an orderly fashion and reliability is never jeopardized. The decision to construct new electric generating plants or transmission lines is a serious undertaking, since these costly construction projects can take years to complete. More importantly, such decisions cannot be made unilaterally, since these projects impact the overall configuration of the electric grid, and the ability of the electric system to reliably deliver power to customers. PJM encourages all interested parties to participate in the transmission expansion planning process. The comprehensive and open planning process conducted by PJM is the only one of its kind in the country. Through it, the PJM region will have the generation resources it needs for the future. I. Proposals New project proposals are submitted to PJM and entered in a calendar-based queue. II. Feasibility Studies PJM conducts feasibility studies by queue to estimate interconnection costs and construction time, and provides feedback to project owners. III. Impact Studies PJM conducts impact studies to develop more specific recommendations for system additions and costs. Permits are required at this point. IV. Approval The plan is publicly reviewed by the Transmission Expansion Advisory Committee, and finally considered for approval by the PJM Board of Managers. Ensuring neutrality and independence PJM s two-tiered governance model ensures independent decisions. Through its active committee processes, PJM serves as the mediator that empowers competitors to reach compromise and move forward.

5 BACKGROUNDER page 5 PJM s Board of Managers is charged with ensuring that PJM safely and reliably operates the power grid and creates and operates fair energy markets. To establish neutrality, the eight Board members can have no affiliation with or any financial stake in any PJM market participant. PJM s Board is also required to prevent the undue exercise of market power. To support this goal, PJM s Market Monitoring Unit constantly monitors market data and takes action to make structural or rule changes to resolve any issues. PJM s Members Committee, on which each member company has a representative, provides advice to the Board by proposing and voting on changes and new programs. The Members Committee is composed of five voting sectors. Only one affiliate of a member corporate entity may vote in the Members Committee. Numerous committees and user groups provide ongoing forums for issue resolution through discussion and negotiation. PJM staff is specially trained to facilitate consensus. PJM cooperates closely with state regulatory commissions to support state initiatives and provide timely information. PJM has created systems for data transfer to help implement state retail choice programs. PJM s technology in real time, using esuite For markets to function effectively, participants need information and the ability to act on it. PJM s suite of Internet tools provides a continuous flow of real-time data, enabling members to make informed and timely decisions. Price information is supplied continuously so participants can follow market fluctuations and make rapid buy and sell decisions. If the price is high, sellers can come to the market, while buyers may choose to shift their operations or purchase power elsewhere. PJM s Internet tools enable participants to take a variety of market and system control actions. Dated 10/1/04 For the most recent update of this document, contact PJM Corporate Communications at 866- PJM-NEWS ( ).

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