Common use of FTR Forfeitures Clause in Contracts

FTR Forfeitures. An FTR holder may be subject to forfeiture of any profits from an FTR if it meets the criteria defined in Section 5.2.1 (b) of Schedule 1 of the PJM Operating Agreement. If a participant has a cleared increment offer or decrement bid for an applicable hour at or near the source or sink of any FTR they own and the day-ahead congestion LMP difference is greater than the real-time congestion LMP difference the profits from that FTR may be subject to forfeiture for that hour. An increment offer or decrement bid is considered near the source or sink point if 75 percent or more of the energy injected or withdrawn, and which is withdrawn or injected at any other bus, is reflected on the constrained path between the FTR source or sink. This rule only applies to increment offers and decrement bids that would increase the price separation between the FTR source and sink points. Figure 13-1 demonstrates the FTR forfeiture rule for INCs and DECs. The INC or DEC distribution factor (dfax) is compared to the largest impact withdrawal or injection dfax. If the absolute difference between the virtual bid and its counterpart is greater than or equal to 75 percent, the virtual bid is considered for forfeiture. This is the metric in the rule which defines the impact of the virtual bid on the constraint. In the first part of the example in Figure 13-1, the INC has a dfax of 0.25 and the maximum withdrawal dfax on the constraint is -0.5. The difference between the two dfaxes is -0.75 (0.25 minus -0.5). The absolute value is

FTR Forfeitures. An FTR holder may be subject to forfeiture of any profits from an FTR if it meets the criteria defined in Section 5.2.1 (b) of Schedule 1 of the PJM Operating Agreement. If a participant has a cleared increment offer or decrement bid for an applicable hour at or near the source or sink of any FTR they own and the day-ahead congestion LMP difference is greater than the real-time congestion LMP difference the profits from that FTR may be subject to forfeiture for that hour. An increment offer or decrement bid is considered near the source or sink point if 75 percent or more of the energy injected or withdrawn, and which is withdrawn or injected at any other bus, is reflected on the constrained path between the FTR source or sink. This rule only applies to increment offers and decrement bids that would increase the price separation between the FTR source and sink points. Figure 13-1 2 demonstrates the FTR forfeiture rule for INCs and DECs. The INC or DEC distribution factor (dfax) is compared to the largest impact withdrawal or injection dfax. If the absolute difference between the virtual bid and its counterpart is greater than or equal to 75 percent, the virtual bid is considered for forfeiture. This is the metric in the rule which defines the impact of the virtual bid on the constraint. In the first part of the example in Figure 13-12, the INC has a dfax of 0.25 and the maximum withdrawal dfax on the constraint is -0.5. The difference between the two dfaxes is -0.75 (0.25 minus -0.5). The absolute value isis 0.75. In the second part of the example in, the DEC has dfax of 0.5 and the maximum injection dfax on the constraint is -0.25. The difference between the two dfaxes is 0.75 (-0.25 minus 0.5). The absolute value is also 0.75. Figure 13-3 shows the FTR forfeitures values for both physical and financial participants for each month of June 2010 through December 2013. Currently, FTRs that alleviate a constraint are not subject to forfeiture regardless of INC or DEC positions. Total forfeitures for the 2012 to 2013 planning period were $539,580 (0.09 percent of total FTR target allocations). 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 2010/2011 2011/2012 2012/2013 2013/2014 Financial Physical Figure 13-4 shows the FTR forfeitures on just INCs and DECs, FTR forfeitures on INCs, DECs and UTCs using the method proposed by PJM and FTR forfeitures on INCs, DECs and UTCs using the method proposed by the MMU from January 2013 through December 2013. The method proposed by PJM for calculating forfeitures associated with UTCs was implemented on September 1, 2013, and for each month thereafter. UTC forfeitures before September 2013 were not billed, but are included to illustrate the impact of the different methods of calculating forfeitures. The UTC curves include all forfeitures for the month associated with INCs, DECs and UTCs. INCs/DECs PJM UTC MMU UTC $800,000 $700,000 $600,000 Forfeiture Amount $500,000 $400,000 $300,000 $200,000 $100,000 $0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 The credit issues reported here were not necessarily related to FTR positions. Ten participants defaulted during 2013 from 16 default events. The average of these defaults was $255,611 with ten based on inadequate collateral and six based on nonpayment. The average collateral default was $93,749 and the average nonpayment default was $352,729. The majority of these defaults were promptly cured, with one partial cure.

FTR Forfeitures. An FTR holder may be subject to forfeiture of any profits from an FTR if it meets the criteria defined in Section 5.2.1 (b) of Schedule 1 of the PJM Operating Agreement. If a participant has a cleared increment offer or decrement bid for an applicable hour at or near the source or sink of any FTR they own and the day-ahead congestion LMP difference is greater than the real-time congestion LMP difference the profits from that FTR may be subject to forfeiture for that hour. An increment offer or decrement bid is considered near the source or sink point if 75 percent or more of the energy injected or withdrawn, and which is withdrawn or injected at any other bus, is reflected on the constrained path between the FTR source or sink. This rule only applies to increment offers and decrement bids that would increase the price separation between the FTR source and sink points. Figure 13-1 16 demonstrates the FTR forfeiture rule for INCs and DECs. The INC or DEC distribution factor (dfax) is compared to the largest impact withdrawal or injection dfax. If the absolute difference between the virtual bid and its counterpart is greater than or equal to 75 percent, the virtual bid is considered for forfeiture. This is the metric in the rule which defines the impact of the virtual bid on the constraint. In the first part of the example in Figure 13-116, the INC has a dfax of 0.25 and the maximum withdrawal dfax on the constraint is -0.5. The difference between the two dfaxes dfax values is -0.75 (0.25 minus -0.5). The absolute value is

FTR Forfeitures. An FTR holder may be subject to forfeiture of any profits from an FTR if it meets the criteria defined in Section 5.2.1 (b) of Schedule 1 of the PJM Operating Agreement. If a participant has a cleared increment offer or decrement bid for an applicable hour at or near the source or sink of any FTR they own and the day-ahead congestion LMP difference is greater than the real-time congestion LMP difference the profits from that FTR may be subject to forfeiture for that hour. An increment offer or decrement bid is considered near the source or sink point if 75 percent or more of the energy injected or withdrawn, and which is withdrawn or injected at any other bus, is reflected on the constrained path between the FTR source or sink. This rule only applies to increment offers and decrement bids that would increase the price separation between the FTR source and sink points. Figure 13-1 16 demonstrates the FTR forfeiture rule for INCs and DECs. The INC or DEC distribution factor (dfax) is compared to the largest impact withdrawal or injection dfax. If the absolute difference between the virtual bid and its counterpart is greater than or equal to 75 percent, the virtual bid is considered for forfeiture. This is the metric in the rule which defines the impact of the virtual bid on the constraint. In the first part of the example in Figure 13-116, the INC has a dfax of 0.25 and the maximum withdrawal dfax on the constraint is -0.5. The difference between the two dfaxes dfax values is -0.75 (0.25 minus -0.5). The absolute value isis 0.75. In the second part of the example in, the DEC has dfax of 0.5 and the maximum injection dfax on the constraint is -0.25. The difference between the two dfax values is 0.75 (-0.25 minus 0.5). The absolute value is also 0.75. Figure 13-17 shows the FTR forfeiture values for both physical and financial participants for each month of June 2010 through December 2015. Currently, counter flow FTRs are not subject to forfeiture regardless of INC or DEC positions. Total forfeitures for the 2015 to 2016 planning period were $0.17 million (0.03 percent of total FTR target allocations).

FTR Forfeitures. An FTR holder may be subject to forfeiture of any profits from an FTR if it meets the criteria defined in Section 5.2.1 (b) of Schedule 1 of the PJM Operating Agreement. If a participant has a cleared increment offer or decrement bid for an applicable hour at or near the source or sink of any FTR they own and the day-ahead congestion LMP difference is greater than the real-time congestion LMP difference the profits from that FTR may be subject to forfeiture for that hour. An increment offer or decrement bid is considered near the source or sink point if 75 percent or more of the energy injected or withdrawn, and which is withdrawn or injected at any other bus, is reflected on the constrained path between the FTR source or sink. This rule only applies to increment offers and decrement bids that would increase the price separation between the FTR source and sink points. Figure 13-1 11 demonstrates the FTR forfeiture rule for INCs and DECs. The INC or DEC distribution factor (dfax) is compared to the largest impact withdrawal or injection dfax. If the absolute difference between the virtual bid and its counterpart is greater than or equal to 75 percent, the virtual bid is considered 26 FTR Credits does not include any end of planning period excess or shortfall distribution. for forfeiture. This is the metric in the rule which defines the impact of the virtual bid on the constraint. In the first part of the example in Figure 13-111, the INC has a dfax of 0.25 and the maximum withdrawal dfax on the constraint is -0.5. The difference between the two dfaxes dfax values is -0.75 (0.25 minus -0.5). The absolute value is

FTR Forfeitures. An FTR holder may be subject to forfeiture of any profits from an FTR if it meets the criteria defined in Section 5.2.1 (b) of Schedule 1 of the PJM Operating Agreement. If a participant has a cleared increment offer or decrement bid for an applicable hour at or near the source or sink of any FTR they own and the day-ahead congestion LMP difference is greater than the real-time congestion LMP difference the profits from that FTR may be subject to forfeiture for that hour. An increment offer or decrement bid is considered near the source or sink point if 75 percent or more of the energy injected or withdrawn, and which is withdrawn or injected at any other bus, is reflected on the constrained path between the FTR source or sink. This rule only applies to increment offers and decrement bids that would increase the price separation between the FTR source and sink points. Figure 13-1 11 demonstrates the FTR forfeiture rule for INCs and DECs. The INC or DEC distribution factor (dfax) is compared to the largest impact withdrawal or injection dfax. If the absolute difference between the virtual bid and its counterpart is greater than or equal to 75 percent, the virtual bid is considered for forfeiture. This is the metric in the rule which defines the impact of the virtual bid on the constraint. In the first part of the example in Figure 13-111, the INC has a dfax of 0.25 and the maximum withdrawal dfax on the constraint is -0.5. The difference between the two dfaxes dfax values is -0.75 (0.25 minus -0.5). The absolute value is

FTR Forfeitures. An FTR holder may be subject to forfeiture of any profits from an FTR if it meets the criteria defined in Section 5.2.1 (b) of Schedule 1 of the PJM Operating Agreement. If a participant has a cleared increment offer or decrement bid for an applicable hour at or near the source or sink of any FTR they own and the day-ahead congestion LMP difference is greater than the real-time congestion LMP difference the profits from that FTR may be subject to forfeiture for that hour. An increment offer or decrement bid is considered near the source or sink point if 75 percent or more of the energy injected or withdrawn, and which is withdrawn or injected at any other bus, is reflected on the constrained path between the FTR source or sink. This rule only applies to increment offers and decrement bids that would increase the price separation between the FTR source and sink points. Figure 13-1 demonstrates the FTR forfeiture rule for INCs and DECs. The INC or DEC distribution factor (dfax) is compared to the largest impact withdrawal or injection dfax. If the absolute difference between the virtual bid and its counterpart is greater than or equal to 75 percent, the virtual bid is considered for forfeiture. This is the metric in the rule which defines the impact of the virtual bid on the constraint. In the first part of the example in Figure 13-1, the INC has a dfax of 0.25 and the maximum withdrawal dfax on the constraint is -0.5. The difference between the two dfaxes is -0.75 (0.25 minus -0.5). The absolute value isis 0.75. In the second part of the example in, the DEC has dfax of 0.5 and the maximum injection dfax on the constraint is -0.25. The difference between the two dfaxes is 0.75 (-0.25 minus 0.5). The absolute value is also 0.75. Figure 13-2 shows the FTR forfeiture values for both physical and financial participants for each month of June 2010 through December 2014. Currently, counter flow FTRs are not subject to forfeiture regardless of INC or DEC positions. Total forfeitures for the first seven months of the 2014 to 2015 planning period were $0.2 million (0.04 percent of total FTR target allocations). Financial Physical Figure 13-3 shows the FTR forfeitures on just INCs and DECs, FTR forfeitures on INCs, DECs and UTCs using the method proposed by PJM and FTR forfeitures on INCs, DECs and UTCs using the method proposed by the MMU from January 2013 through December 2014. The method proposed by PJM for calculating forfeitures associated with UTCs was implemented on September 1, 2013, and for each month thereafter. UTC forfeitures before September 2013 were not billed, but are included to illustrate the impact of the different methods of calculating forfeitures. The UTC curves include all forfeitures for the month associated with INCs, DECs and UTCs. INCs/DECs PJM UTC MMU UTC $1,400,000 $1,200,000 $1,000,000 Forfeiture Amount $800,000 $600,000 $400,000 $200,000 $- Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 The current implementation of the FTR forfeiture rule submitted by PJM is not consistent with the application of the forfeiture rule for INCs and DECs. Under PJM’s method the simple net dfax of the UTC transaction is the only consideration for forfeiture, representing the contract path of the UTC transaction. Under this method, the net dfax is the sink dfax of the UTC minus the source dfax of the UTC. The net dfax alone cannot be used as an indication of helping or hurting a constraint, rather, the direction of the constraint must also be considered. In addition, the PJM method only considers UTC transactions whose net dfax is positive. This logic not only passes transactions that should fail the forfeiture test, but fails transactions that should pass the forfeiture test. PJM’s logic also does not hold when one of the points of the UTC is far from the constraint. In this case, one side of the UTC would have a dfax of zero, indicating no connection to the constraint being considered. If a point of the UTC transaction has no connection to the constraint, there can be no power flow directly between the two UTC points, so the simple net dfax, cannot logically be used in this case to indicate whether a UTC is eligible for forfeiture. Under the MMU method this UTC would be treated as an INC or DEC and follow the same rules as the current INC/DEC FTR forfeiture rule. Figure 13-4 shows an example of the two proposed FTR forfeiture rules for UTC transactions. In both cases, the net dfax of the UTC is taken. Under the PJM method the net dfax of the UTC is calculated by subtracting the dfax of the sink bus A (0.2) from the dfax of the source bus B (0.5) to get a net dfax of -0.3. If this net dfax value is greater than 0.75 the UTC is subject to forfeiture. Under the MMU method, the net dfax is calculated by subtracting the dfax of sink A (0.2) from the dfax of source bus B (0.5) to get a net dfax of 0.3. This net dfax is then compared to the withdrawal point with the largest impact on the constraint. The MMU method compares the net UTC dfax to a withdrawal because the UTC is a net injection on this constraint. In this example, the net dfax is 0.3 and it is compared to the largest withdrawal dfax at C (-0.5). The absolute value of the difference is calculated from these two points to determine if the UTC fails the FTR forfeiture rule. In this case, the absolute value of the difference is the dfax of bus C (-0.5) minus the net UTC dfax (0.3) for a total impact of 0.8, which is over the 0.75 threshold for the FTR forfeiture rule. The result is that this UTC fails the FTR forfeiture rule. The MMU proposes to apply the same rules to UTC transactions as is applied to INCs and DECs, treat the UTC as equivalent to an INC or a DEC depending on its net impact on a given constraint. A UTC transaction is essentially a paired INC/DEC, it has a net impact on the flow across a constraint, as an INC or DEC does. While total system power balance is maintained by a UTC, local flows may change based on the UTC’s net impact on a constraint. The MMU method captures this impact. Figure 13-5 demonstrates where the assumption of contract path for UTCs in PJM’s method does not hold with actual system conditions when either the source or sink of the UTC does not have any impact on the constraint being considered. In this case, the UTC is effectively an INC or a DEC relative to the constraint, as the other end of the UTC has no impact on the constraint. However, the PJM approach would not treat the UTC as an INC or DEC, despite the effective absence of the other end of the UTC. This is a flawed result. As demonstrated in Figure 13-5, the UTC is no different than an INC on the constraint being considered. Using the PJM method this UTC would pass the FTR forfeiture rule. The net dfax would be calculated as the dfax of bus B (0) minus the dfax of bus A (0.25) for a net dfax of -0.25, with no comparison to any withdrawal bus. Since the dfax is negative, it would pass the PJM FTR forfeiture rule. Under the MMU’s method, the net dfax is calculated as an injection with a dfax of 0.25, and then the absolute value of the difference is calculated between that injection and the dfax of the largest withdrawal on the constraint. In this example that is bus C, with a dfax of -0.5. The result is an absolute value of the dfax difference of 0.75, meaning that this UTC fails the FTR forfeiture test. The MMU recommends that the FTR forfeiture rule be applied to UTCs in the same way it is applied to INCs and DECs. People’s Power and Gas, LLC and CCES, LLC defaulted on their collateral calls and payment obligations in January 2014. Customers of these members have been reallocated accordingly, and neither company held any financial transmission rights. These two load-serving members accounted for 17 of the total 33 default events. People’s Power and Gas, LLC defaulted on three collateral calls totaling approximately $687,000 and then defaulted on four related payment obligations totaling approximately $554,000. CCES, LLC defaulted on two collateral calls totaling approximately $308,000 and then defaulted on eight related payment obligations totaling approximately $2.6 million. On March 6, 2014, PJM filed with the FERC to terminate membership of these two companies. The FERC authorized this request effective April 24, 2014 and PJM utilized the default allocation assessment to apply their defaulting charges of approximately $1.9 million (total defaults of these two members less collateral held) to PJM’s non- defaulting members in accordance with section 15.2.2 of the OATT to non-defaulting members’ March 2014 monthly invoices.8 Of the remaining 17 defaults not from People’s Power and Gas, LLC and CCES, LLC, in January through December 2014, 13 were from collateral defaults, averaging $822,493, and four were from payment defaults, averaging $3,151. These remaining defaults were all promptly cured. In April 2014, CCES, LLC defaulted on its last month-end invoice related to its first quarter 2014 activity for a total of $59,899. The default allocation assessment was assigned to non- defaulting members resulting in 18 payment defaults in April 2014 totaling $4,017, nine of which were promptly cured. These defaults were not necessarily related to FTR positions.

FTR Forfeitures. An FTR holder may be subject to forfeiture of any profits from an FTR if it meets the criteria defined in Section 5.2.1 (b) of Schedule 1 of the PJM Operating Agreement. If a participant has a cleared increment offer or decrement bid for an applicable hour at or near the source or sink of any FTR they own and the day-ahead congestion LMP difference is greater than the real-time congestion LMP difference the profits from that FTR may be subject to forfeiture for that hour. An increment offer or decrement bid is considered near the source or sink point if 75 percent or more of the energy injected or withdrawn, and which is withdrawn or injected at any other bus, is reflected on the constrained path between the FTR source or sink. This rule only applies to increment offers and decrement bids that would increase the price separation between the FTR source and sink points. Figure 13-1 demonstrates the FTR forfeiture rule for INCs and DECs. The INC or DEC distribution factor (dfax) is compared to the largest impact withdrawal or injection dfax. If the absolute difference between the virtual bid and its counterpart is greater than or equal to 75 percent, the virtual bid is considered for forfeiture. This is the metric in the rule which defines the impact of the virtual bid on the constraint. In the first part of the example in Figure 13-1, the INC has a dfax of 0.25 and the maximum withdrawal dfax on the constraint is -0.5. The difference between the two dfaxes dfax values is -0.75 (0.25 minus -0.5). The absolute value is