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 $761.1 million in credits from the FTR auctions during the first seven months of the 2014 to 2015 planning period. During the first seven months of the 2014 to 2015 planning period, ARR holders received $733.7 million in ARR credits. Table 13-40 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 2013 to 2014 planning period and the 2014 to 2015 planning periods. Total FTR auction net revenue $568.8 $761.1 Annual FTR Auction net revenue $558.4 $748.6 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 $12.5 ARR target allocations $506.2 $733.7 ARR credits $506.2 $733.7 Surplus auction revenue $62.6 $27.4 ARR payout ratio 100 100 FTR payout ratio* 72.8 100.0 * Shows twelve months for 2013/2014 and 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 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 Total net FTR auction revenue for 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 $761.1 million in credits from the FTR auctions during the first seven months of the 2014 to 2015 2016/2017 planning period, before accounting for self scheduling, load shifts or residual ARRs, was $941.5 million. The FTR auction revenue collected pays ARR holders’ credits. During the first seven months of the 2014 to 2015 2017/2018 planning period, ARR holders received total net FTR auction revenue was $733.7 million in ARR credits598.3 million. Table 13-40 7 lists projected ARR target allocations from the Annual ARR Allocation, Allocation and net revenue sources from the Long Term, Annual and Monthly Balance of Planning Period FTR Auctions for the 2013 to 2014 2016/2017 planning period and the 2014 to 2015 first ten months of the 2017/2018 planning periods. 2016/2017* 2017/2018** Total FTR auction net revenue $568.8 961.1 $761.1 598.3 Annual FTR Auction net revenue $558.4 909.0 $748.6 542.2 Long Term FTR Auction net revenue $20.8 $18.6 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 31.3 $12.5 37.4 Figure 13-2 shows the monthly auction revenue collected each month from FTR auctions above ARR target allocations $506.2 $733.7 ARR credits $506.2 $733.7 Surplus auction revenue $62.6 $27.4 ARR payout ratio 100 100 FTR payout ratio* 72.8 100.0 * Shows twelve months for 2013/2014 and seven months for 2014/2015. Figure 13-16 shows from the dollars per ARR MW held for each month of the 2010 to 2011 2011/2012 through 2014 to 2015 2017/2018 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 Beginning with 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 decrease prevailing flow target allocations by clearing counter flow FTRs, without making the opposite prevailing flow FTR available, as long as ARRs remain revenue adequate. adequate.22 This allows PJM to use the excess ARR auction revenue to pay prevailing flow FTRs without increasing prevailing flow obligations. The result is to increase FTR funding. This action removes money from the excess ARR revenue stream and caused the large decrease in excess ARR revenue over ARR target allocations beginning in June 2014. Currently excess ARR The extra auction revenue is allocated pro rata to FTR Holders at the end of the planning period. All FTR auction revenue should be distributed to ARR holders. 11/12 12/13 13/14 14/15 Excess Revenue 15/16 16/17 17/18 $12,000,000 $10,000,000 Re e $8,000,000 ARR target allocations $914.2 $561.1 venu ARR credits $914.2 $561.1 $6,000,000 Surplus auction revenue $46.9 $37.2 xcess ARR payout ratio 100 100 E FTR payout ratio* 100 100 $4,000,000 * Shows twelve months for 2016/2017 ** Shows ten months for 2017/2018. $2,000,000 $- June Jul Aug Sep Oct Nov Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct 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 $761.1 568.8 million in credits from the FTR auctions during the first seven months of the 2013 to 2014 to 2015 planning period. During the first seven months of the 2013 to 2014 to 2015 planning period, ARR holders received $733.7 506.2 million in ARR credits. Table 13-40 31 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 period and the 2014 to 2015 planning periods. $50 14/15 Total FTR auction net revenue $626.7 $568.8 $761.1 Annual FTR Auction net revenue $602.9 $558.4 $748.6 Monthly Balance of Planning Period FTR Auction net revenue* revenue $23.9 $10.4 $12.5 ARR target allocations $570.5 $506.2 $733.7 ARR credits $570.5 $506.2 $733.7 Surplus auction revenue $56.2 $62.6 $27.4 ARR payout ratio 100 100 FTR payout ratio* ratio 67.8 72.8 100.0 * Shows twelve months for 2013/2014 As an illustration of the relationship between FTRs and seven months for 2014/2015. congestion, Figure 13-16 18 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 prices and an approximate measure of reduced supply caused by a more conservative model used day- ahead and real-time congestion for each PJM control zone for the 2013 to allocate Stage 1B and Stage 2 ARRs2014 planning period. The increased FTR day-ahead and real-time congestion are based on the difference between zonal congestion 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 DecWestern Hub congestion prices.

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 $761.1 767.9 million in credits from the FTR auctions during the first seven months of the 2014 to 2015 planning period. The FTR auction revenue collected pays ARR holders’ credits. During the first seven months of the 2014 to 2015 planning period, ARR holders received $733.7 735.3 million in ARR credits. Table 13-40 10 lists projected ARR target allocations from the Annual ARR Allocation, Allocation and net revenue sources from the Annual and Monthly Balance of Planning Period FTR Auctions for the 2013 2014 to 2014 2015 planning period and the 2014 2015 to 2015 2016 planning periods. As seen here, due to decreased FTR volume leading to increased FTR nodal prices, auction revenue increased 24.5 percent while projected ARR target allocations increased 26.1 percent from the previous planning period. Total FTR auction net revenue $568.8 767.9 $761.1 962.0 Annual FTR Auction net revenue $558.4 748.6 $748.6 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 $12.5 936.3 ARR target allocations $506.2 735.3 $733.7 928.8 ARR credits $506.2 735.3 $733.7 928.8 Surplus auction revenue $62.6 32.6 $27.4 33.2 ARR payout ratio 100 100 FTR payout ratio* 72.8 100.0 100 100 * Shows twelve months for 2013/2014 2014/2015 and seven months for 2014/20152015/2016. Figure 13-16 4 shows the dollars per ARR MW held for each month of the 2010 to 2011 through 2014 2015 to 2015 2016 planning periods. The ARR MW held do not include self 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 PJM’s assumption of more conservative outages in the model used to allocate Stage 1B and Stage 2 ARRs. The increased FTR prices result resulted in an increase in dollars paid per ARR MW. For the 2014 to 2015 planning period, the total dollars per MW of ARR allocation was $11,279, while the previous planning period resulted in a dollars per MW of $6,692, a 68.5 percent increase in payment per allocated 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. For the first seven months of the 2015 to 2016 planning period, the dollars per MW of ARR allocation was $7,739.36. 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 $/ARR MW 2,000 These increased facility limits must be carried over into the FTR auctions, which results in an over selling of FTR MW. Beginning with the 2014 to 2015 planning period, market rules allow PJM to lower facility limits decrease prevailing flow target allocations 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 Currently, excess ARR FTR auction revenue is allocated pro rata to FTR holders at the end of the planning period, instead of being distributed to ARR holders. 11/12 12/13 13/14 14/15 15/16 $12,000,000 $10,000,000 Excess Revenue $8,000,000 $6,000,000 $1,800 $4,000,000 $1,600 $1,400 $2,000,000 $1,200 $/ARR MW June Jul Aug Sep Oct Nov DecDec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec $1,000 $800 $600 $400 $200 $0 Figure 13-5 shows the monthly excess ARR revenue from the 2011 to 2012 through 2015 to 2016 planning periods. Excess ARR revenue is the revenue collected each month from FTR auctions in excess of ARR target allocations after PJM’s implemented counter flow FTR clearing process. Stage 1A ARRs may be over allocated in the initial Stage 1A process, which requires that facility limits are increased above their actual capability. FTRs are financial instruments that entitle their holders to receive revenue or require them to pay charges based on locational congestion price differences in the Day- Ahead Energy Market across specific FTR transmission paths, subject to revenue availability. This value, termed the FTR target allocation, defines the maximum, but not guaranteed, payout for FTRs. The target allocation of an FTR reflects the difference in congestion prices rather than the difference in LMPs, which includes both congestion and marginal losses. Auction market participants are free to request FTRs between any eligible pricing nodes on the system. For the Long Term FTR Auction a list of available hubs,

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 $761.1 968.1 million in credits from the FTR auctions during the first seven months of the 2014 2015 to 2015 2016 planning periodperiod before accounting for self scheduling, load shifts or residual ARRs. The FTR auction revenue collected pays ARR holders’ credits. During the first seven months of the 2014 2016 to 2015 2017 planning period, ARR holders received $733.7 935.7 million in ARR credits. Table 13-40 12 lists projected ARR target allocations from the Annual ARR Allocation, Allocation and net revenue sources from the Annual and Monthly Balance of Planning Period FTR Auctions for the 2013 2015 to 2014 2016 planning period and the 2014 first seven months of the 2016 to 2015 2017 planning periods. Total FTR auction net revenue $568.8 968.1 $761.1 935.7 Annual FTR Auction net revenue $558.4 936.3 $748.6 909.0 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 31.8 $12.5 26.7 ARR target allocations $506.2 931.6 $733.7 911.4 ARR credits $506.2 931.6 $733.7 911.4 Surplus auction revenue $62.6 36.5 $27.4 24.3 ARR payout ratio 100 100 100% 100% FTR payout ratio* 72.8 100.0 100% 100% * Shows twelve months for 2013/2014 2015/2016 and seven months for 2014/20152016/2017. Figure 13-16 4 shows the dollars per ARR MW held for each month of the 2010 to 2011 planning period through 2014 the first seven months of the 2016 to 2015 2017 planning periods. The ARR MW held do not include self 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 PJM’s assumption of more conservative outages in the model used to allocate Stage 1B and Stage 2 ARRs. The increased FTR prices result resulted in an increase in dollars paid per ARR MW. For the 2014 to 2015 planning period, the total dollars per MW of ARR allocation was $11,279, while the previous planning period resulted in a dollars per MW of $6,692, a 68.5 percent increase in payment per allocated 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. For the 2015 to 2016 planning period, the dollars per MW of ARR allocation was $10,641.54. For the first seven months of the 2016 to 2017 planning period, the dollars per MW of ARR allocation were $7,180.49 down from $7,739.36 in the first seven months of the 2015 to 2016 planning period. Total dollars per MW were down slightly in the 2016 to 2017 planning period due to increased Stage 1B and Stage 2 ARR volume. 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 allows PJM to use the excess auction revenue to pay prevailing flow FTRs without increasing prevailing flow obligations. The result is to increase FTR funding. This action removes money from the ARR revenue stream and caused the decrease in excess ARR revenue beginning in June 2014. Excess auction revenue is allocated pro rata to FTR holders at the end of the planning period, instead of being distributed to ARR holders. 11/12 12/13 13/14 14/15 15/16 16/17 $12,000,000 $10,000,000 Excess Revenue $8,000,000 $6,000,000 $4,000,000 $2,000,000 June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec $1,600 $- $1,400 $/ARR MW Figure 13-5 shows the monthly excess auction revenue from the 2011 to 2012 through 2015 to 2016 planning periods. Excess auction revenue is the revenue collected each month from FTR auctions in excess of ARR target allocations. Beginning with the 2014 to 2015 planning period, market rules allow PJM to lower facility limits decrease prevailing flow target allocations by clearing counter flow FTRs, without making the opposite prevailing flow FTR available, as long as ARRs remain revenue adequate. adequate.22 This allows PJM to use Table 13-13 shows the excess ARR auction revenue, by planning period, for planning periods 2010 to 2011 through 2016 to 2017. 2010/2011 $29,704,562 2011/2012 $80,083,695 2012/2013 $66,652,822 2013/2014 $71,687,937 2014/2015* $29,045,590 2015/2016 $29,612,591 2016/2017** $12,093,742 Total $318,880,939 *Start of counter flow “buy back” **Through December 31, 2016 22 See PJM. “Manual 6: Financial Transmission Rights” Revision 17 (June 1, 2016), p. 55. FTRs are financial instruments that entitle their holders to receive revenue or require them to pay prevailing flow FTRs without increasing prevailing flow obligationscharges based on locational congestion price differences in the Day- Ahead Energy Market across specific FTR transmission paths, subject to total congestion revenue including day-ahead and balancing congestion. This action removes money from The value of the excess ARR revenue stream day-ahead congestion price differences, termed the FTR target allocation, defines the maximum, but not guaranteed, payout for FTRs. The target allocation of an FTR reflects the difference in day-ahead congestion prices rather than the difference in LMPs, which includes both congestion 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 Decmarginal losses.

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 $761.1 million in credits from the FTR auctions during For the first seven months of the 2014 to 2015 planning period. During the first seven months of the 2014 to 2015 2017/2018 planning period, ARR holders received $733.7 million in ARR credits. Table 13-40 lists projected the ARR target allocations allocations, which are based on the nodal price differences from the Annual ARR AllocationFTR Auction, and net revenue sources were $555.5 million, while PJM collected $568.6 million from the combined Annual and Monthly Balance of Planning Period FTR Auctions for Auctions, making ARRs revenue adequate. ARRs have historically been fully funded by the 2013 to 2014 planning period and revenue collected from the 2014 to 2015 planning periods. Total FTR auction net revenue $568.8 $761.1 Annual FTR Auction net Auction. As a result, ARRs do not receive revenue collected from the long term or monthly auctions. For the 2016/2017 planning period, the ARR target allocations were $558.4 914.2 million while PJM collected $748.6 941.5 million from the combined Annual and Monthly Balance of Planning Period FTR Auction net revenue* $10.4 $12.5 Auctions. The year over year decrease in ARR target allocations $506.2 $733.7 ARR credits $506.2 $733.7 Surplus and auction revenue $62.6 $27.4 ARR payout ratio 100 100 FTR payout ratio* 72.8 100.0 * Shows twelve months for 2013/2014 and 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 is a result of decreased prices from the previous planning period resulting from continued reduced supply caused by a more conservative model used to allocate allocation of Stage 1B and Stage 2 ARRs. The increased ARR revenue adequacy is also affected by PJM’s clearing of additional counter flow FTRs to alleviate infeasibilities from Stage 1A. • ARRs as an Offset to Congestion. ARRs did not serve as an effective way to return congestion revenues to load. Total ARR and self scheduled FTR prices result revenue offset only 74.5 percent of total congestion costs, which include congestion in an increase in dollars paid per ARR MWthe Day-Ahead Energy Market and the balancing energy market, for the 2011/2012 planning period through the 2017/2018 planning period. Some In the first seven months 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 2017/2018 planning period, in which balancing congestion and M2M payments were directly assigned to load, total ARR and self scheduled FTR revenues offset 79.4 percent of total congestion costs. Without the allocation of balancing congestion to load, the total offset offered by ARRs and FTRs would have been 90.5 percent. The goal of the FTR market rules allow PJM design should be to lower facility limits by clearing counter flow FTRs, without making ensure that load has the opposite prevailing flow FTR available, as long as ARRs remain revenue adequate. This allows PJM rights to use 100 percent of 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 Deccongestion revenues.

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 Figure 13-3 shows a map of over allocated ARR source points in Stage 1A, regardless of reason, for the 2013 to 2014 through 2016 to 2017 planning periods. The year indicated for each source point is the latest year that source was announced as over allocated in the Stage 1A process. Generators retired as of the 2016 to 2017 planning period are indicated by a square marker to 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 $761.1 767.9 million in credits from the FTR auctions during the first seven months of the 2014 to 2015 planning period. The FTR auction revenue collected pays ARR holders’ credits. During the first seven months of the 2014 to 2015 planning period, ARR holders received $733.7 735.3 million in ARR credits. Table 13-40 10 lists projected ARR target allocations from the Annual ARR Allocation, Allocation and net revenue sources from the Annual and Monthly Balance of Planning Period FTR Auctions for the 2013 2014 to 2014 2015 planning period and the 2014 2015 to 2015 2016 planning periods. Total As seen here, due to decreased FTR volume leading to increased FTR nodal prices, total auction net revenue $568.8 $761.1 Annual FTR Auction net revenue $558.4 $748.6 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 $12.5 increased 26.1 percent while projected ARR target allocations $506.2 $733.7 ARR credits $506.2 $733.7 Surplus auction revenue $62.6 $27.4 ARR payout ratio 100 100 FTR payout ratio* 72.8 100.0 * Shows twelve months for 2013/2014 and seven months for 2014/2015increased 26.7 percent from the previous planning period. Figure 13-16 shows planning period, the total dollars per MW of ARR allocation was $11,279, while the previous planning period resulted in a dollars per 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 $6,692, 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 68.5 percent increase in dollars paid payment per allocated 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. For the 2015 to 2016 planning period, the dollars per MW of ARR allocation was $10,641.54. Total dollars per MW was down slightly in the 2016 to 2017 planning period due to increased Stage 1B and Stage 2 ARR volume. 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 $/ARR 2,000 $1,800 $1,600 R M $1,400 2014/2015 2015/2016 Total FTR auction net revenue $767.9 $968.1 $1,200 Annual FTR Auction net revenue $748.6 $936.3 W Monthly Balance of Planning Period FTR Auction net revenue* $19.3 $31.8 $1,000 ARR target allocations $735.3 $931.6 $/AR ARR credits $735.3 $931.6 $800 Surplus auction revenue $32.6 $36.5 ARR payout ratio 100 100 $600 FTR payout ratio* 100 100 * Shows twelve months for 2014/2015 and 2015/2016. $400 Figure 13-4 shows the dollars per ARR MW held for each month of the 2010 to 2011 through 2015 to 2016 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 PJM’s assumption of more outages in the model used to allocate Stage 1B and Stage 2 ARRs. The increased FTR prices resulted in an increase in dollars paid per ARR MW. For the 2014 to 2015 Figure 13-5 shows the monthly excess ARR revenue from the 2011 to 2012 through 2015 to 2016 planning periods. Excess ARR revenue is the revenue collected each month from FTR auctions in excess of ARR target allocations after PJM’s implemented counter flow FTR clearing process. Stage 1A ARRs may be over allocated in the initial Stage 1A process, which requires that facility limits are increased above their actual capability. These increased facility limits must be carried over into the FTR auctions, which results in an over selling of FTR MW. Beginning with the 2014 to 2015 planning period, market rules allow PJM to lower facility limits decrease prevailing flow target allocations 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 Currently, excess ARR FTR auction revenue is allocated pro rata to FTR holders at the end of the planning period, instead of being distributed to ARR holders. 11/12 12/13 13/14 14/15 15/16 16/17 Excess Revenue June Jul Aug Sep Oct Nov DecDec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June Aug Oct Dec Feb Apr June FTRs are financial instruments that entitle their holders to receive revenue or require them to pay charges based on locational congestion price differences in the Day-Ahead Energy Market across specific FTR transmission paths, subject to revenue availability. This value, termed the FTR target allocation, defines the maximum, but not guaranteed, payout for FTRs. The target allocation of an FTR reflects the difference in congestion prices rather than the difference in LMPs, which includes both congestion and marginal losses. Auction market participants are free to request FTRs between any eligible pricing nodes on the system. For the Long Term FTR Auction a list of available hubs, control zones, aggregates, generator buses and interface pricing points is available. For the Annual FTR Auction and FTRs bought for a quarterly

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 Total net FTR auction revenue for 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 $761.1 million in credits from the FTR auctions during the first seven months of the 2014 to 2015 planning period. During the first seven months of the 2014 to 2015 2016/2017 planning period, before accounting for self scheduling, load shifts or residual ARRs, was $941.5 million. The FTR auction revenue collected pays ARR holders received holders’ credits. During 2017/2018 planning period, total net FTR auction revenue was $733.7 million in ARR credits558.4 million. Table 13-40 7 lists projected ARR target allocations from the Annual ARR Allocation, Allocation and net revenue sources from the Annual and Monthly Balance of Planning Period FTR Auctions for the 2013 to 2014 2016/2017 planning period and the 2014 to 2015 first four months of the 2017/2018 planning periods. Total FTR auction net revenue $568.8 941.5 $761.1 558.4 Annual FTR Auction net revenue $558.4 909.0 $748.6 542.2 Monthly Balance of Planning Period FTR Auction net revenue* $10.4 32.5 $12.5 16.2 ARR target allocations $506.2 914.2 $733.7 550.4 ARR credits $506.2 914.2 $733.7 550.4 Surplus auction revenue $62.6 27.4 $27.4 8.0 ARR payout ratio 100 100 100% 100% FTR payout ratio* 72.8 100.0 100% 100% * Shows twelve months for 2013/2014 and seven 2016/2017 ** Shows four months for 2014/20152017/2018. Figure 13-16 2 shows the dollars per ARR MW held for each month of the 2010 to 2011 2010/2011 planning period through 2014 to 2015 the first four months of the 2017/2018 planning periods. The ARR MW held do not include self scheduled FTRs and but do include Residual ARRs starting in August 2012. FTR prices increased in the 2014 to 2015 2014/2015 Annual FTR Auction as a result of reduced supply caused by a PJM’s assumption of more conservative outages in the 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 Decand