After extensive stakeholder discussions and settlement negotiations, FERC conditionally approved a settlement filed by PJM Interconnection, L.L.C. (PJM) to establish new market rules based on Reliability Pricing Model (RPM) auctions which FERC and PJM believe will spur new investment in generation. The primary focus of the settlement is to encourage investment in generation in PJM. According to Chairman Kelliher, demand in PJM has been steadily increasing while new entry has slowed down and older generation units have been retired. These factors have contributed to volatile prices and insufficient revenue to ensure reliability, which in turn have created an unattractive environment for investors.

The primary features of the approved settlement are as follows:

Each company providing electricity to customers throughout PJM is required to supply or purchase resources to supply sufficient electricity to meet the reliability targets for newly created Locational Delivery Areas (LDAs) within PJM. The LDAs will also reflect existing transmission constraints. Accordingly, both generation and transmission to those areas must be sufficient to provide reliable service.
Utilities may supply energy needs through a combination of generation, transmission, and demand response, including energy efficiency.
Prices will be set in each area according to the RPM and will reflect the needs of individual areas. Key elements of the RPM include the following:

A downward-sloping demand curve where prices change gradually based on the balance between the amount of supply offered and the amount of supply required for reliability;
A commitment by load-serving entities to procure sufficient supply of energy with three years of lead time; and
Incremental creation of 23 LDAs for the determination of prices.

A number of design features to discourage the exercise of market power and market manipulation through physical or economic withholding.
(Docket No. ER05-1410; ER05-148)