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. Total net FTR auction revenue for the 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 2017/2018 planning period, total net FTR auction revenue was $558.4 million. Table 13-7 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 2016/2017 planning period and the first four months of the 2017/2018 planning periods. Table 13-7 Projected ARR revenue adequacy (Dollars (Millions)): Planning periods 2016/2017 and 2017/2018 2016/2017* 2017/2018** Total FTR auction net revenue $941.5 $558.4 Annual FTR Auction net revenue $909.0 $542.2 Monthly Balance of Planning Period FTR Auction net revenue* $32.5 $16.2 ARR target allocations $914.2 $550.4 ARR credits $914.2 $550.4 Surplus auction revenue $27.4 $8.0 ARR payout ratio 100% 100% FTR payout ratio* 100% 100% * Shows twelve months for 2016/2017 ** Shows four months for 2017/2018. Figure 13-2 shows the dollars per ARR MW held for each month of the 2010/2011 planning period through the first four months of the 2017/2018 planning periods. The ARR MW held do not include self scheduled FTRs but do include Residual ARRs starting in August 2012. FTR prices increased in the 2014/2015 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

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. Total net ARR holders received $968.1 million in credits from the FTR auction revenue for auctions during the 2016/2017 15/16 planning period, 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 2017/2018 the first 10 months of the 16/17 planning period, total net FTR auction revenue was ARR holders received $558.4 million940.3 million in ARR credits. Table 13-7 6 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 2016/2017 15/16 planning period and the first four 10 months of the 2017/2018 16/17 planning periods. Table 13-7 6 Projected ARR revenue adequacy (Dollars (Millions)): Planning periods 15/16 and 16/17 2015/2016 2016/2017 and 2017/2018 2016/2017* 2017/2018** Total FTR auction net revenue $941.5 968.1 $558.4 940.3 Annual FTR Auction net revenue $936.3 $909.0 $542.2 Monthly Balance of Planning Period FTR Auction net revenue* $32.5 31.8 $16.2 31.3 ARR target allocations $914.2 931.6 $550.4 913.8 ARR credits $914.2 931.6 $550.4 913.8 Surplus auction revenue $27.4 36.5 $8.0 26.5 ARR payout ratio 100% 100% 100 100 FTR payout ratio* 100% 100% 100 100 * Shows twelve months for 2016/2017 ** Shows four 2015/2016 and ten months for 2017/20182016/2017. Figure 13-2 shows the dollars per ARR MW held for each month of the 2010/2011 10/11 planning period through the first four 10 months of the 2017/2018 16/17 planning periods. The ARR MW held do not include self self-scheduled FTRs but and do include Residual ARRs starting in August 2012. FTR prices increased in the 2014/2015 14/15 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 andand Stage 2 ARRs. The increased FTR prices resulted in an increase in dollars paid per ARR MW. For the 14/15 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 15/16 planning period, the dollars per MW of ARR allocation was $10,641.54. For the first 10 months of the 16/17 planning period, the dollars per MW of ARR allocation were $9,337.48 down from $9,608.25 in the first 10 months of the 15/16 planning period. Total dollars per MW were down slightly in the 16/17 planning period due to increased Stage 1B and Stage 2 ARR volume. Figure 13-2 Dollars per ARR MW paid to ARR holders: Planning periods 10/11 through 16/17 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 $2,000 $1,800 $1,600 $1,400 $/ARR MW $1,200 $1,000 $800 $600 $400 $200 $0 Excess Auction Revenue Figure 13-3 shows the monthly excess auction revenue from the 11/12 through 15/16 planning periods. Excess auction revenue is the revenue collected each month from FTR auctions in excess of ARR target allocations. Beginning with the 14/15 planning period, market rules allow PJM to 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.19 This 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

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. Total net ARR holders received $968.1 million in credits from the FTR auction revenue for auctions during the 2016/2017 15/16 planning period, 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 2017/2018 the first 10 months of the 16/17 planning period, total net FTR auction revenue was ARR holders received $558.4 million940.3 million in ARR credits. Table 13-7 6 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 2016/2017 15/16 planning period and the first four 10 months of the 2017/2018 16/17 planning periods. Table 13-7 6 Projected ARR revenue adequacy (Dollars (Millions)): Planning periods 15/16 and 16/17 2015/2016 2016/2017 and 2017/2018 2016/2017* 2017/2018** Total FTR auction net revenue $941.5 968.1 $558.4 940.3 Annual FTR Auction net revenue $936.3 $909.0 $542.2 Monthly Balance of Planning Period FTR Auction net revenue* $32.5 31.8 $16.2 31.3 ARR target allocations $914.2 931.6 $550.4 913.8 ARR credits $914.2 931.6 $550.4 913.8 Surplus auction revenue $27.4 36.5 $8.0 26.5 ARR payout ratio 100% 100% FTR payout ratio* 100% 100% * Shows twelve months for 2016/2017 ** Shows four 2015/2016 and ten months for 2017/20182016/2017. Figure 13-2 shows the dollars per ARR MW held for each month of the 2010/2011 10/11 planning period through the first four 10 months of the 2017/2018 16/17 planning periods. The ARR MW held do not include self self-scheduled FTRs but and do include Residual ARRs starting in August 2012. FTR prices increased in the 2014/2015 14/15 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 andand Stage 2 ARRs. The increased FTR prices resulted in an increase in dollars paid per ARR MW. For the 14/15 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 15/16 planning period, the dollars per MW of ARR allocation was $10,641.54. For the first 10 months of the 16/17 planning period, the dollars per MW of ARR allocation were $9,337.48 down from $9,608.25 in the first 10 months of the 15/16 planning period. Total dollars per MW were down slightly in the 16/17 planning period due to increased Stage 1B and Stage 2 ARR volume. Figure 13-2 Dollars per ARR MW paid to ARR holders: Planning periods 10/11 through 16/17 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 $2,000 $1,800 $1,600 $1,400 $/ARR MW $1,200 $1,000 $800 $600 $400 $200 $0 Excess Auction Revenue Figure 13-3 shows the monthly excess auction revenue from the 11/12 through 15/16 planning periods. Excess auction revenue is the revenue collected each month from FTR auctions in excess of ARR target allocations. Beginning with the 14/15 planning period, market rules allow PJM to 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.19 This 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

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. Total net 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 $767.9 million in credits from the FTR auction revenue for auctions during the 2016/2017 2014 to 2015 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 2017/2018 the 2014 to 2015 planning period, total net FTR auction revenue was ARR holders received $558.4 million735.3 million in ARR credits. Table 13-7 10 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 2016/2017 2014 to 2015 planning period and the first four months of the 2017/2018 2015 to 2016 planning periods. As seen here, due to decreased FTR volume leading to increased FTR nodal prices, total auction revenue increased 26.1 percent while projected ARR target allocations increased 26.7 percent from the previous planning period. Table 13-7 13‑10 Projected ARR revenue adequacy (Dollars (Millions)): Planning periods 2014 to 2015 and 2015 to 2016 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. Total dollars per MW was down slightly in the 2016 to 2017 planning period due to increased Stage 1B and Stage 2 ARR volume. Figure 13‑4 Dollars per ARR MW paid to ARR holders: Planning periods 2010 to 2011 through 2016 to 2017 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 and 2017/2018 2016/2017* 2017/2018** $2,000 $1,800 $1,600 R M $1,400 2014/2015 2015/2016 Total FTR auction net revenue $941.5 767.9 $558.4 968.1 $1,200 Annual FTR Auction net revenue $909.0 748.6 $542.2 936.3 W Monthly Balance of Planning Period FTR Auction net revenue* $32.5 19.3 $16.2 31.8 $1,000 ARR target allocations $914.2 735.3 $550.4 931.6 $/AR ARR credits $914.2 735.3 $550.4 931.6 $800 Surplus auction revenue $27.4 32.6 $8.0 36.5 ARR payout ratio 100% 100% 100 100 $600 FTR payout ratio* 100% 100% 100 100 * Shows twelve months for 2016/2017 ** Shows four months for 2017/20182014/2015 and 2015/2016. $400 Figure 13-2 4 shows the dollars per ARR MW held for each month of the 2010/2011 planning period 2010 to 2011 through the first four months of the 2017/2018 2015 to 2016 planning periods. The ARR MW held do not include self self-scheduled FTRs but and do include Residual ARRs starting in August 2012. FTR prices increased in the 2014/2015 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 andand Stage 2 ARRs. The increased FTR prices resulted in an increase in dollars paid per ARR MW. For the 2014 to 2015 $200 $0 Excess ARR Revenue 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 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, excess FTR auction revenue is allocated pro rata to FTR holders at the end of the planning period, instead of being distributed to ARR holders. Figure 13‑5 Monthly excess ARR revenue: Planning periods 2011 to 2012 through 2016 to 2017 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 $- Financial Transmission Rights 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 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. Total net FTR auction revenue for the 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 2017/2018 planning period, total net FTR auction revenue was $558.4 598.3 million. Table 13-7 lists projected ARR target allocations from the Annual ARR Allocation and net revenue sources from the Long Term, Annual and Monthly Balance of Planning Period FTR Auctions for the 2016/2017 planning period and the first four ten months of the 2017/2018 planning periods. 2016/2017* 2017/2018** Total FTR auction net revenue $961.1 $598.3 Annual FTR Auction net revenue $909.0 $542.2 Long Term FTR Auction net revenue $20.8 $18.6 Monthly Balance of Planning Period FTR Auction net revenue* $31.3 $37.4 Table 13-7 Projected ARR revenue adequacy (Dollars (Millions)): Planning periods 2016/2017 and 2017/2018 2016/2017* 2017/2018** Total Auction Revenue Figure 13-2 shows the monthly auction revenue collected each month from FTR auctions above ARR target allocations from the 2011/2012 through 2017/2018 planning periods. Beginning with the 2014/2015 planning period, market rules allow PJM to 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.22 This allows PJM to use 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 ARR revenue over ARR target allocations beginning in June 2014. The extra auction revenue is allocated pro rata to FTR Holders at the end of the planning period. All FTR auction net revenue should be distributed to ARR holders. Figure 13-2 Monthly additional ARR revenue: Planning periods 2011/2012 through 2017/2018 11/12 12/13 13/14 14/15 15/16 16/17 17/18 $941.5 12,000,000 $558.4 Annual FTR Auction net revenue 10,000,000 Re e $909.0 $542.2 Monthly Balance of Planning Period FTR Auction net revenue* $32.5 $16.2 8,000,000 ARR target allocations $914.2 $550.4 561.1 venu ARR credits $914.2 $550.4 561.1 $6,000,000 Surplus auction revenue $27.4 46.9 $8.0 37.2 xcess ARR payout ratio 100% 100% 100 100 E FTR payout ratio* 100% 100% 100 100 $4,000,000 * Shows twelve months for 2016/2017 ** Shows four ten months for 2017/2018. Figure 13-2 shows the dollars per ARR MW held for each month of the 2010/2011 planning period through the first four months of the 2017/2018 planning periods. The ARR MW held do not include self scheduled FTRs but do include Residual ARRs starting in August 2012. FTR prices increased in the 2014/2015 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$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 Feb Apr June Aug Oct Dec