PJM’s Annual FTR Auction

1. PJM’s Annual FTR Auction 1

2. Introduction 2

3. FTR Market Enhancements In order to create a more robust FTR Market, PJM is enhancing the FTR Market to include: Annual FTR Auction Current FTR allocation procedure will be converted into a long-term auction New FTR Product FTR Options are a financial instrument that provides a new hedging mechanism 3

4. Annual FTR Auction Annual FTR Auction 4

5. TODAY FUTURE FTRs are allocated to Firm Transmission Service Customers annually Monthly FTR Auctions allocate residual FTR capability to highest bidder All FTR capability is auctioned off to the highest bidders Auction revenues will be allocated to Firm Transmission Service Customers Annual FTR Auction 5

6. Annual FTR Auction BENEFITS Provides more flexible transmission congestion hedging alternatives Makes benefits of congestion hedges generally more available to customers who switch suppliers under Retail programs Continues to allocate property rights to Firm Transmission Customers through Auction Revenue Rights 6

7. What Are FTRs? Financial Transmission Rights are … financial instruments awarded to bidders in the FTR Auctions that entitle the holder to a stream of revenues (or charges) based on the hourly Day Ahead energy price differences across the path 7

8. What are ARRs? Auction Revenue Rights … are entitlements allocated annually to Firm Transmission Service Customers that entitle the holder to receive an allocation of the revenues from the Annual FTR Auction 8

9. Annual ARR Allocation Entire PJM System Capability ARRs Allocated (MWs) Annual FTR Auction Auction Revenue Rights Holders FTRsAwarded To Bidders (MWs & Price) Auction Revenue Auction Revenue Rights 9

10. New FTR Product FTR Options 10

11. TODAY FUTURE FTR Obligations only FTR Obligations can be a benefit or a liability FTR Obligations and FTR Options FTR Obligations can be a benefit or a liability FTR Options can be benefit, but never a liability New FTR Product 11

12. New FTR Product BENEFITS Provides additional Transmission congestion hedging alternatives to PJM customers Will make analysis of hedging alternatives less complex 12

13. FTR Market Timeline 13

14. Overview of Financial Transmission Rights (FTRs) 14

15. What Are FTRs? Financial Transmission Rights are … financial instruments awarded to bidders in the FTR Auctions that entitle the holder to a stream of revenues (or charges) based on the hourly Day Ahead energy price differences across the path 15

16. Why Do We Need FTRs? ? ? ? • Challenge: • LMP exposes PJM Market Participants to price uncertainty for congestion cost charges • During constrained conditions, PJM Market collects more from loads than it pays generators • Solution: • Provides ability to have price certainty • FTRs provide hedging mechanism that can be traded separately from transmission service 16

17. Characteristics of FTRs • Economic value based on Day Ahead LMPs • Defined from source to sink • can be in form of obligation or option • obligation can be benefit or liability • option can be benefit but never liability • Financial entitlement, not physical right • Independent of energy delivery • Must be simultaneously feasible 17

18. Economic Value of FTR FTR Target Allocation • FTR Target Allocation is equal to the FTR MW amount times the price difference from the FTR sink point to the FTR source point • LMPs based on the clearing prices from DayAhead Market • If LMP FTR Sink < LMP FTR Source , • the FTR is a liability if FTR defined as Obligation • the FTR has zero value if defined as Option = (FTR MW ) * (LMP FTR Sink - LMP FTR Source) 18

19. How are FTRs Acquired? FTRs are acquired in three market mechanisms … • Annual FTR Auction • multi - round • multi - period • multi - product • entire system capability • Monthly FTR Auction • single - round • purchase “left over” capability • FTR Secondary Market • bilateral trading 19

20. Types of FTR Products FTRs can be acquired in two forms … FTR Obligations FTR Options 20

21. What are FTR Obligations Worth? Benefit • the hourly economic value is positive • FTR same direction as congested flow Liability • the hourly economic value is negative • FTR opposite direction ascongested flow 21

22. What are FTR Options Worth? A Benefit • the hourly economic value is positive • FTR same direction as the congested flow. Neither a Benefit or a Liability • the hourly economic value is zero • FTR opposite direction to the congested flow. FTR Option cannot have negative value 22

23. FTR Consistent withCongested Flow Thermal Limit FTR Obligation = 100 MW Bus B Bus A Energy Delivery = 100 MWh Sink (Receiving End) Source (Sending End) LMP = $15 LMP = $30 Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Obligation Credit = 100 MW * ($30-$15) = $1500 23

24. FTR Obligation is a Liability Thermal Limit FTR Obligation = 100 MW Bus B Bus A Energy Delivery = 100 MWh Source (Sending End) Sink (Receiving End) LMP = $30 LMP = $15 Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Obligation Credit = 100 MW * ($15-$30) = $-1500 24

25. FTR Option is a Benefit Energy Delivery = 100 MWh Thermal Limit FTR Option= 100 MW Bus B Bus A Source (Sending End) Sink (Receiving End) LMP = $15 LMP = $30 Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Option Credit = 100 MW * ($30-$15) = $1500 25

26. FTR Option is Neither a Benefit/Liability Thermal Limit FTR Option= 100 MW Bus B Bus A Energy Delivery = 100 MWh Source (Sending End) Sink (Receiving End) LMP = $30 LMP = $15 Congestion Charge = 100 MWh * ($30-$15) = $1500 FTR Option Credit = 100 MW * ($15-$30) = $-1500 = $0 ***When calculated, the FTR Option Credit is negative, therefore the economic value will equal zero.****** 26

27. Summary • FTRs are financial instruments used to hedge congestion costs • FTRs can be acquired in the Annual FTR Auction, Monthly FTR Auction or Secondary Market • FTRs can be Obligations or Options • obligation can be benefit or liability • option can be benefit but never liability • FTRs must be simultaneously feasible 27

28. Overview of Auction Revenue Rights(ARRs) 28

29. What are ARRs? Auction Revenue Rights … are entitlements allocated annually to Firm Transmission Service Customers that entitle the holder to receive an allocation of the revenues from the Annual FTR Auction 29

30. Characteristics of ARRs • Economic value based on LMPs from the Annual FTR Auction • Defined from source to sink • Only available as an obligation • obligation can be benefit or liability • Financial entitlement, not physical right • Must be simultaneously feasible 30

31. Economic Value of ARR (ARR MW ) * (LMP ARR Sink - LMP ARR Source) (# of rounds) ARR Target Allocation • ARR Target Allocation is equal to the ARR MW amount (divided by the number of rounds) times the price difference from the ARR sink point to the ARR source point • LMPs based on the nodal clearing prices for each round of the Annual FTR Auction • ARRs can be a benefit or a liability = 31

32. How are ARRs Acquired? ARRs are acquired in the following mechanisms … • Annual ARR Allocation Auction Revenue Rights (ARRs) requested by Firm Transmission Customers are allocated on an annual basis • Daily ARR Reassignment ARRs allocated for the planning period will be reassigned on a proportional basis within a zone as load switches between LSEs within the planning period 32

33. What can the holder do with the ARR? • Convert ARR into FTR by “self-scheduling” FTR into Annual Auction on exact same path as ARR • Reconfigure ARR by bidding into Annual Auction to acquire FTR on alternative path or for alternative product • May retain allocated ARR and receive associated allocation of revenues from the auction 33

34. Summary • ARRs entitle the holder to receive allocation of Annual FTR Auction revenues • ARRs are allocated to firm Transmission Service Customers • ARRs are reassigned on a proportional basis within a zone as load switches between LSEs within the planning period • ARRs are only available as an obligation • obligation can be benefit or liability • ARRs must be simultaneously feasible 34