After passage of the Energy Policy Act of 1992, utilities and the governmental entities that regulate them realized a greater need for oversight and coordination in the newly deregulated electricity market. Seeking to promote an independent system to foster competition and better coordination, the Federal Regulatory Commission (FERC) proposed the creation of Independent System Operators (ISOs) and, later, Regional Transmission Organizers (RTOs). FERC Order 888 and Order 2000 were aimed at ensuring fair participation between traditional utilities and the new non-utility entities that began to take a role in the new competitive market.
ISO’s and RTO’s, which operate independently from any market participant and oversee electricity grid operations and regional planning needs, sprang up across the country. In a nutshell, RTOs and ISOs are responsible for moving electricity across the country over interstate areas.
Originally operating to provide a wholesale competitive market for electricity, ISOs and RTOs have gradually taken on a greater role in providing a reliable and coordinated power grid by forecasting power supply and demand. ISOs and RTOs do not own transmission or generation facilities, nor are they involved in the retail markets. Rather, they serve to coordinate the electricity supply and demand, work to improve transmission service by scheduling the use of lines and coordinating interconnection of new generation.
In Ohio, PJM Interconnection LLC (PJM) has filled this role and will soon become the only RTO serving our state. So what is PJM and how does it impact Ohio electricity markets? Andrew Ott, the Vice President for Markets at PJM, recently answered that question for the Ohio House Public Utilities Committee. A summary of his November 2, 2011 testimony, plus some additional information about PJM follows.
What is PJM?
PJM is the RTO that serves Ohio and all or part of Delaware, Indiana, Illinois, Kentucky, Maryland, Michigan, New Jersey, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. Founded in 1927, PJM is headquartered in Valley Forge Pennsylvania. According to its 2010 Annual Report, PJM included 67 member companies which produced 745 million megawatt-hours and total billings of $34.8 billion in 2010.
PJM provides wholesale electricity, capacity and other services to the member utilities in its region, which serve 58 million people over a 211,000 square mile area. PJM acts as a neutral oversight body coordinating the production and use of power by utilities in the region. PJM and other RTOs also serve a long-term planning function to assure efficient and effective improvements to the grid.
How does PJM create a competitive market for wholesale power?
Under FERC’s oversight, PJM and other RTO’s administer rules for utilities in their territories that regulate the purchase and sale of energy. Those rules work to balance electricity demands and discourage anti-competitive behavior between the utilities in the region. Information provided by PJM allows utilities and governmental regulators to view the cost of power and operational costs of all member providers throughout the territory. PJM also supports a pool of regional generation resources from which providers can purchase power at wholesale prices. By operating regionally, PJM can allow its members to shop between large utilities and smaller producers throughout the region.
Unlike a local utility, PJM's footprint is large, allowing it to buy, sell and deliver power on the spot market. PJM can quickly match electricity demand in one area of the country to electricity surplus elsewhere and supports a platform for parties to competitively bid supply and demand. How does PJM assure adequate power capacity?
PJM conducts numerous studies to prepare a forecast for customer demand, which is then met through an auction to purchase power capacity three years in advance of projected need. In addition to meeting forecasted customer demand, PJM also calculates and purchases sufficient capacity to meet a “reserve margin” designed to meet increases in customer demand beyond the forecasted needs.
The PJM capacity market encourages the growth and expansion of power generation by fostering a competitive regional market. PJM reports that its capacity market has created over 14,000 MW of new or upgraded generation, 15,000 MW of demand and over 800 MW of energy efficiency projects in the region. While not favoring any particular type of electricity generation, PJM encourages the use of renewables and alternatives means of electricity creation. PJM works with its member companies, academic institutions, and industry experts to advance the capacity and efficiency of the grid in various ways.
Looking toward the future, PJM is currently exploring Smart Grid concepts, storage technologies, and plug-in hybrid electric vehicles, among other innovations.