Common use of Revenue Adequacy Clause in Contracts

Revenue Adequacy. As with FTRs, revenue adequacy for ARRs must be distinguished from the adequacy of ARRs as an offset to total congestion. Revenue adequacy is a narrower concept that compares the revenues available to ARR holders to the value of ARRs as determined in the Annual FTR Auction. ARRs have been revenue adequate for every auction to date. Customers that self schedule ARRs as FTRs have the same revenue adequacy characteristics as all other FTRs. The adequacy of ARRs as an offset to total congestion compares ARR revenues to total congestion sinking in the participant’s load zone as a measure of the extent to which ARRs offset market participants’ actual, total congestion into their zone. Customers that self schedule ARRs as FTRs provide the same offset to congestion as all other FTRs. ARR holders received a projected $568.8 million in credits from the FTR auctions during the 2013 to 2014 planning period. During the 2013 to 2014 planning period, ARR holders received $506.2 million in ARR credits. Table 13-24 lists projected ARR target allocations from the Annual ARR Allocation, and net revenue sources from the Annual and Monthly Balance of Planning Period FTR Auctions for the 2012 to 2013 planning period and the 2013 to 2014 planning periods. Total FTR auction net revenue $568.8 $752.9 Annual FTR Auction net revenue $558.4 $748.6 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 $4.2 ARR target allocations $506.2 $732.2 ARR credits $506.2 $732.2 Surplus auction revenue $62.6 $20.6 ARR payout ratio 100% 100% FTR payout ratio* 72.8% 100.0% * Shows twelve months for 2013/2014 and four months for 2014/2015.

Revenue Adequacy. As with FTRs, revenue adequacy for ARRs must be distinguished from the adequacy of ARRs as an offset to total congestion. Revenue adequacy is a narrower concept that compares the revenues available to ARR holders to the value of ARRs as determined in the Annual FTR Auction. ARRs have been revenue adequate for every auction to date. Customers that self schedule ARRs as FTRs have the same revenue adequacy characteristics as all other FTRs. The adequacy of ARRs as an offset to total congestion compares ARR revenues to total congestion sinking in the participant’s load zone as a measure of the extent to which ARRs offset market participants’ actual, total congestion into their zone. Customers that self schedule ARRs as FTRs provide the same offset to congestion as all other FTRs. ARR holders received a projected $568.8 626.7 million in credits from the FTR auctions during the 2012 to 2013 to 2014 planning period, with a projected average hourly ARR credit of $0.66 per MW. During the 2013 comparable 2011 to 2014 2012 planning period, ARR holders received $506.2 1,055.9 million in ARR creditscredits with an average hourly ARR credit of $1.06 per MW. Table 1312-24 34 lists projected ARR target allocations from the Annual ARR Allocation, and net revenue sources from the Annual and Monthly Balance of Planning Period FTR Auctions for the 2011 to 2012 and the 2012 to 2013 planning period and the 2013 to 2014 planning periods. Total FTR auction net revenue $568.8 626.7 $752.9 559.5 Annual FTR Auction net revenue $602.9 $558.4 $748.6 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 23.9 $4.2 1.1 ARR target allocations $506.2 570.5 $732.2 502.4 ARR credits $506.2 570.5 $732.2 502.4 Surplus auction revenue $62.6 56.2 $20.6 57.1 ARR payout ratio 100% 100% 100 100 FTR payout ratio* 72.8% 100.0% 67.8 74.7 * Shows twelve months for 2013/2014 2012/2013 and four months one month for 2014/20152013/2014.

Revenue Adequacy. As with FTRs, revenue adequacy for ARRs must be distinguished from the adequacy of ARRs as an offset to total congestion. Revenue adequacy is a narrower concept that compares the revenues available to ARR holders to the value of ARRs as determined in the Annual FTR Auction. ARRs have been revenue adequate for every auction to date. Customers ARRs that are self schedule ARRs scheduled as FTRs have the same revenue adequacy characteristics as all other FTRs. The adequacy of ARRs as an offset to total congestion compares ARR revenues to total congestion sinking in the participant’s load zone as a measure of the extent to which ARRs offset market participants’ actual, total congestion into their zone. Customers ARRs that are self schedule ARRs scheduled as FTRs provide the same offset to congestion as all other FTRs. ARR holders received a projected will receive $568.8 565.4 million in credits from the Annual FTR auctions Auction during the 2012 to 2013 to 2014 planning period, with an average hourly ARR credit of $0.63 per MW. During the 2013 comparable 2011 to 2014 2012 planning period, ARR holders received $506.2 947.3 million in ARR credits, with an average hourly ARR credit of $1.06 per MW. Table 1312-24 16 lists projected ARR target allocations from the Annual ARR Allocation, and net revenue sources from the Annual and Monthly Balance of Planning Period FTR Auctions for the 2011 to 2012 and the 2012 to 2013 planning period and the 2013 to 2014 (through September 30, 2012) planning periods. 2011/2012 2012/2013 Total FTR auction net revenue $568.8 1,055.9 $752.9 614.8 Annual FTR Auction net revenue $558.4 1,029.6 $748.6 602.9 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 26.3 $4.2 11.9 ARR target allocations $506.2 947.3 $732.2 565.4 ARR credits $506.2 947.3 $732.2 565.4 Surplus auction revenue $62.6 108.6 $20.6 49.4 ARR payout ratio 100% 100% FTR payout ratio* 72.880.6% 100.079.1% * Shows twelve months for 2013/2014 and 2011/2012 four months for 2014/20152012/2013.

Revenue Adequacy. As with FTRs, revenue adequacy for ARRs must be distinguished from the adequacy of ARRs as an offset to total congestion. Revenue adequacy is a narrower concept that compares the revenues available to ARR holders to the value of ARRs as determined in the Annual FTR Auction. ARRs have been revenue adequate for every auction to date. Customers that self schedule ARRs as FTRs have the same revenue adequacy characteristics as all other FTRs. The adequacy of ARRs as an offset to total congestion compares ARR revenues to total congestion sinking in the participant’s load zone as a measure of the extent to which ARRs offset market participants’ actual, total congestion into their zone. Customers that self schedule ARRs as FTRs provide the same offset to congestion as all other FTRs. ARR holders received a projected $568.8 761.1 million in credits from the FTR auctions during the 2013 first seven months of the 2014 to 2014 2015 planning period. During the 2013 first seven months of the 2014 to 2014 2015 planning period, ARR holders received $506.2 733.7 million in ARR credits. Table 13-24 40 lists projected ARR target allocations from the Annual ARR Allocation, and net revenue sources from the Annual and Monthly Balance of Planning Period FTR Auctions for the 2012 2013 to 2013 2014 planning period and the 2013 2014 to 2014 2015 planning periods. Total FTR auction net revenue $568.8 $752.9 761.1 Annual FTR Auction net revenue $558.4 $748.6 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 $4.2 12.5 ARR target allocations $506.2 $732.2 733.7 ARR credits $506.2 $732.2 733.7 Surplus auction revenue $62.6 $20.6 27.4 ARR payout ratio 100% 100% 100 100 FTR payout ratio* 72.8% 100.0% 72.8 100.0 * Shows twelve months for 2013/2014 and four seven months for 2014/2015.. Figure 13-16 shows the dollars per ARR MW held for each month of the 2010 to 2011 through 2014 to 2015 planning periods. The ARR MW held do not include self scheduled FTRs and do include Residual ARRs starting in August 2012. FTR prices increased in the 2014 to 2015 Annual FTR Auction as a result of reduced supply caused by a more conservative model used to allocate Stage 1B and Stage 2 ARRs. The increased FTR prices result in an increase in dollars paid per ARR MW. Some of the ARR MW lost from proration were provided in the Residual ARR process, but the residual allocations are not comparable to the ARRs awarded in the annual process because residual ARR allocations change each month and cannot be self scheduled as FTRs. 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 $/ARR MW 2014 to 2015 planning period, market rules allow PJM to lower facility limits by clearing counter flow FTRs, without making the opposite prevailing flow FTR available, as long as ARRs remain revenue adequate. This allows PJM to use the excess ARR revenue to pay prevailing flow FTRs without increasing prevailing flow obligations. This action removes money from the excess ARR revenue stream and caused the large decrease in excess ARR revenue beginning in June 2014. Currently excess ARR revenue is allocated pro rata to FTR holders. 11/12 12/13 13/14 14/15 Excess Revenue June Jul Aug Sep Oct Nov Dec

Revenue Adequacy. As with FTRs, revenue adequacy for ARRs must be distinguished from the adequacy of ARRs as an offset to total congestion. Revenue adequacy is a narrower concept that compares the revenues available to ARR holders to the value of ARRs as determined in the Annual FTR Auction. ARRs have been revenue adequate for every auction to date. Customers that self schedule ARRs as FTRs have the same revenue adequacy characteristics as all other FTRs. The adequacy of ARRs as an offset to total congestion compares ARR revenues to total congestion sinking in the participant’s load zone as a measure of the extent to which ARRs offset market participants’ actual, total congestion into their zone. Customers that self schedule ARRs as FTRs provide the same offset to congestion as all other FTRs. ARR holders received a projected $568.8 566.7 million in credits from the FTR auctions during the first ten months of the 2013 to 2014 planning period. During the first ten months of the 2013 to 2014 planning period, ARR holders received $506.2 505.5 million in ARR credits. Table 13-24 26 lists projected ARR target allocations from the Annual ARR Allocation, and net revenue sources from the Annual and Monthly Balance of Planning Period FTR Auctions for the 2012 to 2013 planning period and the first ten months of the 2013 to 2014 planning periods. Total FTR auction net revenue $568.8 626.7 $752.9 566.7 Annual FTR Auction net revenue $602.9 $558.4 $748.6 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 23.9 $4.2 8.3 ARR target allocations $506.2 570.5 $732.2 505.5 ARR credits $506.2 570.5 $732.2 505.5 Surplus auction revenue $62.6 56.2 $20.6 61.1 ARR payout ratio 100% 100% FTR payout ratio* 72.867.8% 100.075.1% * Shows twelve months for 2013/2014 2012/2013 and four ten months for 2014/20152013/2014.