The AE (Auroral Electrojet) index was originally introduced by Davis and Sugiura
in 1966 as a measure of global electrojet activity in the auroral zone.
The index is derived from geomagnetic variations in the horizontal component observed at 12 observatories in a geomagnetic latitude range of 61°-70° in the northern hemisphere.
The geomagnetic field variations from the observatories are superimposed, and the upper envelope gives the AU index and the lower envelope, the AL index.
The difference, AU minus AL, defines the AE index.
More detailed explanation is shown in Davis and Sugiura  or in the WWW page of WDC for Geomagnetism, Kyoto (http://wdc.kugi.kyoto-u.ac.jp/aedir/index.html).
When substorm is initiated, auroral electrojet is developed. Westward electrojet makes the AL index decrease and eastward electrojet causes the AU index increase, resulting in increase of the AE index at substorm onset. Common way to identify substorm onset from this index is to find prompt decreases of the AL index and/or prompt increases of the AE index.
Davis, T. N. and Sugiura M., Auroral electrojet activity index AE and its universal time variations, J. Geophys. Res., 71, 785-801, 1966.