June 10, Re: PJM Interconnection, L.L.C., Docket No. ER Pursuant to Section 205 of the Federal Power Act, 16 U.S.C.

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1 955 Jefferson Avenue Valley Forge Corporate Center Norristown, PA Jacqulynn Hugee Assistant General Counsel - Markets Telephone Facsimile hugeej@pjm.com Honorable Kimberly D. Bose, Secretary Federal Energy Regulatory Commission 888 First Street, N.E. Washington, D.C June 10, 2013 Re: PJM Interconnection, L.L.C., Docket No. ER Dear Secretary Bose: Pursuant to Section 205 of the Federal Power Act, 16 U.S.C. 824d, and the Commission s Regulations, 18 C.F.R. Part 35, PJM Interconnection, L.L.C. ( PJM ) hereby submits for filing revisions to Schedules 9-3, 9-6, 9-MMU, 9-PJMSettlement, the Preface to Attachment K, Article VI of Attachment M-Appendix, and Attachment Q of the PJM Open Access Transmission Tariff ( Tariff ), and to Sections 1.3.9A, , B, , A, 2.6, 2.6A, and of Attachment K-Appendix of the Tariff and the parallel provisions of Schedule 1 of the Amended and Restated Operating Agreement of PJM Interconnection, LLC ( Operating Agreement ), 1 to: define Up-to Congestion Transactions and Virtual Transactions; clarify the rules concerning the use of such transactions; incorporate a bid/offer volume limit for Up-to Congestion Transactions; extend the Financial Transmission Right ( FTR ) forfeiture rule ( FTR Forfeiture Rule ) to Up-to Congestion Transactions to ensure that FTR holders do not use Up-to Congestion Transactions to inappropriately manipulate the values of their FTR positions; and 1 All further references in this transmittal letter to the parallel provisions of Attachment K-Appendix and Schedule 1 of the Operating Agreement shall only be made to Schedule 1 of the Operating Agreement provisions, without reference to the parallel Tariff provisions. All capitalized terms that are not otherwise defined herein shall have the same meaning as they are defined in the Operating Agreement, Tariff or the Reliability Assurance Agreement Among Load Serving Entities in the PJM Region.

2 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 2 correct references to certain defined and currently undefined terms. This filing and the related companion filing also being filed today addressing Upto Congestion Credit requirements are intending to establish appropriate controls and reforms given the evolution of the up-to congestion product from a financial hedge associated with an underlying physical transaction associated with moving power through PJM to its present primary use as a purely virtual product. 2 PJM asks the Commission to issue an order accepting the enclosed revisions by no later than August 9, 2013, sixty (60) days after the date of this filing, with an effective date of August 9, 2013 for all of the proposed revisions except the revisions to Section concerning the application of the FTR Forfeiture Rule to Up-to Congestion Transactions for which a September 1, 2013 effective date is requested, as explained in detail below. I. Procedural Background and Stakeholder Process A. History of Up-To Congestion Transactions, Increment Bids and Decrement Bids in the PJM Energy Markets In 1999, the Commission issued an order requiring PJM to file new, multisettlement system procedures to be incorporated into the Operating Agreement. 3 One of the options the Commission specifically directed PJM to consider was giving transmission customers the ability to indicate in advance the maximum amount of 2 Although PJM continues to explore in the stakeholder process the larger issue as to the future relationship of Up-to Congestion Transactions to Virtual Transactions, these reforms represent a significant step to better align the PJM market rules with the use of Up-to Congestion Transactions today. These changes were approved by acclamation by PJM s Markets and Reliability Committee and Members Committee. 3 Atlantic City Electric Company, et al., 86 FERC 61,147 at 61,523 and 61,530 (1999).

3 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 3 congestion charges they are willing to pay for day-ahead transactions. 4 In response to this directive, PJM and its stakeholders developed a two-settlement system that provided (1) an option for market participants to lock in day-ahead scheduled quantities at day-ahead prices; (2) a means for market participants to obtain increased price certainty; (3) financial incentive for resources and demand to submit day-ahead schedules that match their actual schedules; and (4) financial incentive for generation to follow real-time dispatch. 5 In its Two-Settlement System Filing, PJM submitted that it s proposed two-settlement system will assist market participants in hedging financial risk between day ahead conditions and real time dispatch. 6 PJM s proposal allowed for several bidding mechanisms in the Day-ahead Energy Market for the purpose of ensuring price certainty price-sensitive bids, decrement and increment bids, and upto congestion bids. 7 There were no limits on the number of Up-to Congestion Transactions a given market participant could submit in to the Day-ahead Energy Market. PJM s Two-Settlement System Filing was accepted by the Commission by letter order issued on May 18, 2000, effective June 1, Thus, Up-To Congestion Transactions were originally created as a mechanism to hedge in the Day-ahead Energy Market the exposure to price differentials from the source to the sink of their physical energy deliveries into, out of or through PJM in the Real-time Energy Market, and to allow market participants who want to wheel power through PJM 4 Id. at 61, See PJM Interconnection, L.L.C., PJM Compliance Filing, Docket No. ER , at 4 (March 10, 2000) ( Two-Settlement System Filing ). 6 Id. citing New England Power Pool, 88 FERC 61,147 at 61,491 & n. 10 (1999). 7 Id. at 6. 8 PJM Interconnection, L.L.C., 91 FERC 61,148 (2000).

4 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 4 to set the maximum dollar value of congestion they would be willing to pay to wheel that power. With respect thereto, PJM stated in its Two-Settlement System Filing as follows: Up-to congestion bids permit transmission customers to specify how much they are willing to pay for congestion by bidding a certain maximum amount for congestion between the transaction source and sink. If the congestion charges are less than the amount specified in the bid, then the transaction will be scheduled in the day-ahead schedule. These up-to bids protect transmission customers from paying uncertain congestion charges by guarantying that they will pay no more than the amount reflected in their bids. Transmission customers also may use an increment and decrement bid pair to accomplish the same type of hedging strategy, which further enhances their price certainty options. In the Commission s words, these types of bids allow transmission customers to specify the maximum price they are willing to pay for congestion in much the same way that energy market participants place bids for energy. 9 Based on the foregoing, in the Two-Settlement System Filing PJM proposed to revise its Operating Agreement to permit up-to congestion bids in the Day-ahead Energy Market. 10 Additionally, in the Two-Settlement System Filing PJM first introduced the concept of purely financial transactions into its energy markets. PJM explained that decrement bids allow a marketer or other similar entity (transmission customer) without physical demand to place a bid to purchase a certain quantity of energy at a certain location if the day-ahead price is at or below a certain price. 11 It further stated that increment offers allow a market participant to offer to sell a certain quantity of energy at a certain location if the day-ahead price is at or above a certain price. 12 Finally, PJM explained that [t]ransmission customers also may use an increment and decrement bid pair to accomplish the same type of hedging strategy as using up-to congestion bids 9 Two-Settlement System Filing at 7, citing Atlantic City Electric Company, et al., 86 FERC at 61, Id. at Id. at Id. at 7.

5 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 5 which further enhances their price certainty options. 13 Since their incorporation into the PJM energy markets in 2000, increment and decrement bids, also known as virtual transactions, virtual bids, and virtual offers have represented the vast majority of the bids and offers in the PJM energy markets. In July 2003 such purely financial transactions comprised 83% of all bids received by PJM. 14 More recently, Up-to Congestion Transactions have increasingly been used by financial market participants as virtual transactions and less by physical market participants to lock in congestion for the purposes of physical transactions. In its 2012 State of the Market Report for PJM, the PJM Independent Market Monitor ( IMM ) indicated that only 0.2% of Up-to Congestion Transactions in the Day-ahead Energy Market had matching, physical schedules in real-time. 15 Effective September 2009, PJM revised its Operating Agreement to allow for the allocation of surplus marginal line loss charges to customers engaging in Up-to Congestion Transactions in proportion to the total megawatt-hours of those cleared transactions (that paid for transmission service during such hour). 16 Over the several months after these changes were implemented, a number of Market Participants began submitting what appeared to PJM to be uneconomic Up-to Congestion Transactions simply for the purpose of arbitraging the differential between the price of non-firm transmission service and the resulting marginal line loss payment surplus allocation. 13 Id. 14 PJM Interconnection, L.L.C., Comments of PJM Interconnection, L.L.C. on Technical Conference, August 6, 2003, Docket Nos. ER and -001, at Monitoring Analytics, LLC, 2012 State of the Market Report for PJM, Volume II: Detailed Analysis (March 14, 2013), Section 8 at p. 262, available at PJM_State_of_the_Market/2012/2012-som-pjm-volume2-sec8.pdf. 16 See Black Oak Energy v. PJM Interconnection, L.L.C., 128 FERC 61,262 (2009) ( Compliance Order ).

6 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 6 To address this behavior PJM proposed to revise Sections (b) and 5.5 of Schedule 1 of its Operating Agreement to eliminate the requirement to obtain transmission service for day-ahead scheduling of Up-to Congestion Transactions to eliminate a possibility for Market Participants to game the allocation of marginal loss surplus revenues in a filing submitted to the Commission on August 18, PJM believed making these market rule changes best addressed the market behavior PJM and its stakeholders sought to eradicate from its markets since it eliminated the fictitious OASIS reservation for the purely financial Up-To Congestion Transactions because there is no need for such reservations unless there is a physical transaction in the Realtime Energy Market. The Commission accepted these revisions on September 17, B. Current Market Rules for Up-to Congestion Transactions PJM s current market rules for Up-to Congestion Transactions still allow Market Participants to specify the amount of explicit congestion they are willing to pay and there is still no bid volume limit for Up-to Congestion Transactions. However, there are certain limitations on the parameters according to which Market Participants may submit Up-to Congestion Transactions that stem from their initial implementation in PJM s markets. First, participants are limited as to the price spread that may be associated with an Up-to Congestion Transaction. The maximum spread for Up-to Congestion Transactions is +/- $50/MWh. Second, Up-to Congestion Transactions may be submitted at only a subset of the pricing nodes available for other types of virtual 17 PJM Interconnection, L.L.C.,132 FERC 61,244 (2010).

7 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 # of Transactions Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 7 bidding. The valid sources and sinks that may be submitted as part of Up-to Congestion Transactions are posted on the PJM OASIS. 18 With Up-to Congestion Transactions having become primarily a virtual or financial product, the total number of submitted Up-to Congestion Transactions has increased substantially in recent years. As illustrated in the chart below, the number of Up-to Congestion Transactions submitted in the Day-ahead Energy Market totaled only about 49,000 in January 2007, about 33,000 of which cleared, increasing to about 141,000 Up-to Congestion Transactions submitted and 85,000 cleared in January 2010, and finally as of September 2012 there were approximately 2.25 million Up-to Congestion Transactions submitted into the Day-ahead Energy Market, of which approximately 680,000 cleared. Millions 2.5 PJM Up-To-Congestion Transactions - Total Number Submitted Transactions Cleared Transactions 18 OASIS sources and sinks are available on PJM s website at oasis/references/oasis-source-sink-link.ashx.

8 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 8 The most significant increase in the number of submitted and cleared Up-to Congestion Transactions began around September 2010, about the time PJM revised its Operating Agreement to eliminate the requirement for transmission service for dayahead scheduling of Up-to Congestion Transactions. Some Market Participants have indicated that the volume of such transactions significantly increased because they were unaware of the existence of such transactions until PJM submitted its September 2010 filing. PJM also believes that, because an Up-to Congestion Transaction is a paired injection and withdrawal of the same megawatt quantity of energy and therefore does not create deviations and is not assigned Balancing Operating Reserve Charges, unlike Increment Offers and Decrement Bids, financial Market Participants have shifted from using Increment Offers and Decrement Bids to Up-to Congestion Transactions. The chart below illustrates the reduction in submitted and cleared Increment Offers and Decrement Bids over the same time period as the increase in Up-to Congestion Transaction volume.

9 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 # of Bids Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 9 Millions 2.5 Total Number of Increment Offers and Decrement Bids Submitted Bids Cleared Bids The potential for continued increase in the volume of Up-to Congestion Transactions submitted and cleared in the Day-ahead Energy Market has raised concerns with PJM s Market Operations staff as to the continued ability for PJM s market clearing software to consistently solve in the Operating Agreement-required timeframe. C. FTR Forfeiture Rule The FTR Forfeiture Rule is found in Section 5.2.1(b) of Schedule 1 of the Operating Agreement and provides that if a company or one of its affiliate companies submits an Increment Offer or Decrement Bid at or near the source or sink location of one of their FTRs which results in a higher Locational Marginal Price ( LMP ) spread in

10 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 10 the Day-ahead Energy Market than in the Real-time Energy Market, then the FTR profit for that particular FTR will be forfeited. 19 Specifically, Section 5.2.1(b) states as follows: (b) If a holder of a Financial Transmission Right between specified delivery and receipt buses acquired the Financial Transmission Right in a Financial Transmission Rights auction (the procedures for which are set forth in Part 7 of this Schedule 1) and (i) had an Increment Bid and/or Decrement Bid that was accepted by the Office of the Interconnection for an applicable hour in the Day-ahead Energy Market for delivery or receipt at or near delivery or receipt buses of the Financial Transmission Right; and (ii) the result of the acceptance of such Increment Bid or Decrement Bid is that the difference in Locational Marginal Prices in the Day-ahead Energy Market between such delivery and receipt buses is greater than the difference in Locational Marginal Prices between such delivery and receipt buses in the Real-time Energy Market, then the Market Participant shall not receive any Transmission Congestion Credit, associated with such Financial Transmission Right in such hour, in excess of one divided by the number of hours in the applicable month multiplied by the amount that the Market Participant paid for the Financial Transmission Right in the Financial Transmission Rights auction. Section 5.2.1(c) of the Operating Agreement clarifies that, for purposes of subsection 5.2.1(b), at or near delivery or receipt buses of the Financial Transmission Right refers to a bus where seventy-five percent or more of the energy injected or withdrawn at that bus and which is withdrawn or injected at any other bus is reflected in the constrained path between the subject FTR delivery and receipt buses that were acquired in the FTR auction. Noting the recent, significant increase in Up-to Congestion Transaction bid volumes, 20 the IMM recommended the application of the FTR Forfeiture Rule to Up-to 19 The FTR forfeiture rules were implemented in See PJM Interconnection, L.L.C., PJM Transmittal Letter, Docket No. ER (December 22, 2000) ( PJM FTR Forfeiture Filing ).

11 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 11 Congestion Transactions because they are analogous to other virtual bids and offers, i.e. Increment Offers and Decrement Bids, to which the FTR Forfeiture Rule is applied. PJM agreed with the IMM that the FTR Forfeiture Rule should be applied to Up-to Congestion Transactions and in the Fall of 2012 commenced a stakeholder process to address the issue. II. Proposed Revisions To address purported confusion regarding Up-to Congestion Transactions and to avoid performance issues in PJM s Day-ahead Energy Market software related to the increased volume of such transactions, PJM proposes to incorporate definitions of Up-to Congestion Transactions and Virtual Transactions into the Tariff and Operating Agreement, correct certain terminology, add a bid/offer segment volume limit for Up-to Congestion Transactions, and apply the FTR Forfeiture Rule to Up-to Congestion Transactions. A. Definitions of Up-to Congestion Transactions and Virtual Transaction Up-to Congestion Transactions, Increment Offers and Decrement Bids have been in use in PJM since Despite the long-standing historical use of these products, neither has been clearly defined in the Tariff or Operating Agreement. For this reason, PJM proposes to incorporate a definition of an Up-to Congestion Transaction, further define a Virtual Transaction as inclusive of an Up-to Congestion Transaction, and distinguish an Up-to Congestion Transaction from a Decrement Bid 20 See Executive Report (October 25, 2012) presented to the PJM Members Committee, at 30, available at webinar/ reports-item-03a-markets-report.ashx.

12 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 12 and Increment Offer. In that regard, PJM proposes to incorporate new Section as follows: Up-to Congestion Transaction. Up-to Congestion Transaction shall have the meaning specified in Section A of this Schedule. 21 In Section A of Schedule 1 of the Operating Agreement PJM proposes to clarify in subsection (c) that Market Participants are required to submit schedules for their energy imports, energy exports and wheel through transactions that involve the use of generation or Transmission Facilities as indicated in that section, and to make more specific the rules concerning such transactions to the extent the Market Participant has chosen to specify the price at which the transaction will be wholly or partially curtailed. 22 Further, PJM proposes to incorporate a new subsection (c-1) in Section A to specify the characteristics of an Up-to Congestion Transaction such as the limit on the maximum spread for Up-to Congestion Transactions and the points at which a Market Participant can submit an Up-to Congestion Transaction, as recognized by the Commission, 23 as follows: (c-1) A Market Participant may elect to submit in the Dayahead Energy Market a form of Virtual Transaction that combines an offer to sell energy at a source, with a bid to buy the same megawatt quantity of energy at a sink where such transaction specifies the maximum difference between the Locational Marginal Prices at the source and sink. The Office of Interconnection will schedule these transactions only to the extent this difference in Locational Marginal 21 etariff records OATT ATT K APPX Sec 1.3 and OA Schedule 1 Sec etariff records OATT ATT K APPX Sec 1.10 and OA Schedule 1 Sec Pennsylvania-New Jersey-Maryland Interconnection, 81 FERC 61,257, at 62,257 (1997) ( To address the issue of uncertain congestion charges, a multi-settlement system proposal could be developed to permit each transmission customer to inform the ISO of the maximum congestion charge it is willing to pay for various amounts of transmission between identified points. )

13 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 13 Prices is within the maximum amount specified by the Market Participant. A Virtual Transaction of this type is referred to as an Up-to Congestion Transaction. Such Upto Congestion Transactions may be wholly or partially scheduled depending on the price difference between the source and sink locations in the Day-ahead Energy Market. The foregoing price specification shall apply to the price difference between the specified source and sink in the dayahead scheduling process only. An accepted Up-to Congestion Transaction results in scheduled injection at a specified source and scheduled withdrawal of the same megawatt quantity at a specified sink in the Day-ahead Energy Market. The source-sink paths on which an Up-to Congestion Transaction may be submitted are limited to those posted on the PJM internet site. Additionally, the maximum difference between the source and sink prices that a participant may specify shall be limited as specified in the PJM Manuals. 24 Virtual Transaction will be defined in new Section B of Schedule 1 of the Operating Agreement as a Decrement Bid, Increment Offer and/or Up-to Congestion Transaction. 25 This definition is needed to distinguish and clarify that each type of transaction is a separate and distinct type of purely financial transaction. In Section A(i) the proposed revisions also make clear that bid/offer segments for purposes of Up-to Congestion Transactions are different than for Increment Offers and Decrement Bids because Up-to Congestion Transactions have both a source and sink while Increment Offers and Decrement Bids only have one location. Therefore, PJM proposes to add a sentence which clarifies that bid/offer segments for Up-to Congestion Transactions refer to the pairing of a source and sink designation, as well as price and megawatt quantity, that compromise each Up-to Congestion Transaction. For Increment Offers and Decrement Bids the bid/offer 24 etariff records OATT ATT K APPX Sec 1.10 and OA Schedule 1 Sec etariff records OATT ATT K APPX Sec 1.3 and OA Schedule 1 Sec

14 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 14 segments only refer to each pairing of price and megawatt quantity submitted as part of an Increment Offer or Decrement Bid. 26 B. Revisions for Internal Consistency Additional changes required elsewhere in the Tariff and Operating Agreement for internal consistency necessitated by the incorporation of the definitions of Up-to Congestion Transaction and Virtual Transaction are reflected as proposed revisions to the Tariff and Operating Agreement as follows: a. Schedules 9-3, 9-6, 9-MMU, 9-PJMSettlement of the Tariff changing up-to congestion bid(s) to the new defined term Up-to Congestion Transaction; 27 b. Section of Schedule 1 of the Operating Agreement changing Up-to Congestion transactions to the new defined term Up-to Congestion Transactions; 28 c. Preface to Attachment K of the Tariff changing virtual bids and offers to Virtual Transactions; 29 d. Section A of Schedule 1 of the Operating Agreement changing Increment Offers and/or Decrement Bids and bids to Virtual Transactions; 30 e. Section 2.6A of Schedule 1 of the Operating Agreement changing virtual trading to the submission of Virtual Transactions; 31 f. Section 6.4.1(f)(iv) of Schedule 1 of the Operating Agreement changing virtual bids and offers to Increment Offers and Decrement Bids; 32 g. Attachment M-Appendix, Article VI changing virtual trading to Virtual Transactions; etariff records OATT ATT K APPX Sec 1.10 and OA Schedule 1 Sec etariff records OATT SCHEDULE 9-3, 9-6, 9-MMU and 9 PJMSettlement. 28 etariff records OATT ATT K APPX Sec 1.10 and OA Schedule 1 Sec etariff records OATT ATT K APPX Preface. 30 etariff records OATT ATT K APPX Sec 1.10 and OA Schedule 1 Sec etariff records OATT ATT K APPX Sec 2.6A and OA Schedule 1 Sec 2.6A. 32 etariff records OATT ATT K APPX Sec 6.4 and OA Schedule 1 Sec

15 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 15 h. Attachment Q of the Tariff changing virtual bidding to Virtual Transactions in Section Ia.B(2)(iii) and Section II.D where applicable; 34 and, i. Attachment Q of the Tariff changing virtual bid(s), virtual bidding, and virtual bids and offers to Increment Offers and Decrement Bids where not appropriate to change the terms to Virtual Transaction where appropriate. 35 On or about June 10, 2013, PJM expects to submit further related revisions to Attachment Q of the Tariff, consistent with this filing, to modify PJM s credit standards related to Virtual Transactions in PJM s Day-Ahead Energy Market so as to include mandatory bid credit screening for Up-to Congestion Transactions. 36 C. Correction of Term Increment Bid to Increment Offer For further clarification in its market rules, PJM proposes to revise Section 1.3.9A of Schedule 1 of the Operating Agreement to change the defined term Increment Bid to Increment Offer, consistent with the remainder of the Operating Agreement wherein the word offer is used to reflect a proposed sale of energy and the word bid is used to reflect a proposed purchase of energy. For further consistency, PJM proposes to change all references elsewhere in the Tariff and Operating Agreement in Schedules 9-3, 9-6, 9-MMU, 9-PJMSettlement of the Tariff and Sections A, 2.6, and 5.2.1(b) of Schedule 1 of the Operating Agreement from Increment Bid to Increment Offer etariff records OATT ATT M - APPENDIX. 34 etariff records OATT ATT Q. 35 etariff records OATT ATT Q. 36 See Presentation and Proposed Tariff Revision Discussed at MC Meeting on May 30, 2013 available on PJM s website at item-03-utc-credit-requirements-presentation.ashx and committees-groups/committees/mc/ / item-03-utc-credit-requirements-attachment-qrevisions.ashx. 37 etariff records OATT SCHEDULE 9-3, 9-6, 9-MMU, 9 PJMSettlement and OA Schedule 1 Sec 1.10, 2.6 and

16 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 16 D. Application of Bid/Offer Limit to Up-to Congestion Transactions PJM s market rules in Section A(i) specify a limit of 3,000 that PJM may apply on the number of bid/offer segments for Increment Offers and Decrement Bids that a Market Participant can submit per day in the Day-ahead Energy Market. This bid/offer limit was established in 2003 in response to the harmful affect that one Market Participant s excessive bidding in PJM s energy markets was having on PJM s market systems, causing the systems to become slowed and degrading their performance. 38 When this 3,000 bid/offer segment limit was originally incorporated into Section A it specified that PJM would only invoke such limitation when PJM determines that such limit is required to avoid or mitigate significant system performance problems related to bid/offer volume and required that PJM notify market participants of the need to impose such limit by no later than 10:00 a.m. The same parameters remain in place today. To date, PJM has never invoked the 3,000 bid/offer segment limit because PJM s market systems have been able to handle the volume of Decrement Bids and Increment Offers submitted by Market Participants with no deleterious effect on system performance. However, given that there is currently no bid/offer segment limit for Up-to Congestion Transactions, and with the significant increase in the number of Up-to Congestion Transactions submitted to PJM since the summer of 2010, PJM has become concerned that if no limit is imposed on the submission of Up-to Congestion Transaction bid/offer segments in the Day-ahead Energy Market, this could negatively affect the performance of PJM s Day-ahead Energy Market software that would cause PJM to be unable to solve the Day-ahead Energy Market case by 4:00 p.m., as required 38 See PJM s April 1, 2003, April 18, 2003, May 7, 2003 and August 6, 2003 filings in Docket No. ER and its September 22, 2003 filings in Docket Nos. ER and ER

17 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 17 by Section (b) of the Operating Agreement, on any given day. For that reason, PJM proposes to apply the bid/offer segment limit to Up-to Congestion Transactions in the same way the limit is applied to the other two types of Virtual Transactions Increment Offers and Decrement Bids to avoid any performance issues in PJM s Dayahead Energy Market software. Further, at stakeholder request, PJM proposes to move the specific bid/offer segment limit of 3,000 for Virtual Transactions from Section A(i) of Schedule 1 of the Operating Agreement into Section 2.3 of PJM Manual 11 to give PJM and its stakeholders the flexibility to revisit the issue of the appropriate limit on the number of bid/offer segments that a Market Participant can submit in the Day-ahead Energy Market on a daily basis if significant system performance issues arise and PJM needs to implement a lower limitation expeditiously. That is because if system performance issues arise, PJM and its Members will have no ability to make a determination that a lower limit is needed on a temporary or permanent basis to resolve the impact on system performance of excessive bid/offer segments. In such case, PJM s only option would be to submit an emergency filing with the Commission if PJM experienced a system performance problem due to a high volume of Up-to Congestion Transactions, then wait out the mandatory comment period and the issuance of a Commission order approving the lower limit. Meanwhile, PJM s may be unable to clear its Day-ahead Energy Market by 4:00 p.m. for every day until the Commission is able to issue its order. By giving PJM and its Members the flexibility to change the limitation to deal with such an exigent circumstance PJM can avoid the need to request Commission action on an emergency basis.

18 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 18 Moving the specific 3,000 bid/offer segment limit to the PJM Manuals does not change the substantive requirements and limitations affecting PJM s ability to modify the bid/offer cap. The Operating Agreement limitation remains that PJM would still only be able to invoke the specified bid/offer segment limit in the limited circumstance when it determines that such limit is required to avoid or mitigate significant system performance problems related to bid/offer volume. 39 Moreover, PJM would still have to give notice of the need to impose such limit by 10:00 a.m. on the day that the Dayahead Energy Market will clear. 40 In short, the standards governing PJM s actions remain as they exist in the Tariff and Operating Agreement today. As noted above, the shift of the specific 3,000 bid/offer segment limit to the PJM Manuals provides for flexibility in those circumstances where PJM needs to respond to emergency circumstances in order to ensure that the market can be cleared. Based on the foregoing, PJM proposes the following revisions to Section A: (i) Except for Economic Load Response Participants, all Market Participants may submit Increment Bids and/or Decrement Bids Virtual Transactions that apply to the Dayahead Energy Market only. Such bids Virtual Transactions must comply with the requirements set forth in the PJM Manuals and must specify amount, location and price, if any, at which the Market Participant desires to purchase or sell energy in the Day-ahead Energy Market. The Office of the Interconnection may require that a market participant shall not submit in excess of 3000 a defined number of bid/offer segments in the Day-ahead Energy Market, as specified in the PJM Manuals, when the Office of the Interconnection determines that such limit is required to avoid or mitigate significant system performance problems related to bid/offer volume. Notice of the need to impose such limit shall be provided prior to 10:00 a.m. EPT on the day that the Dayahead Energy Market will clear. For purposes of this 39 Section A(i) of Schedule 1 of the Operating Agreement and Attachment K-Appendix of the Tariff. 40 Id.

19 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 19 provision, a bid/offer segment is each pairing of price and megawatt quantity submitted as part of an Increment Bid Offer or Decrement Bid. For purposes of applying this provision to an Up-to Congestion Transaction, a bid/offer segment shall refer to the pairing of a source and sink designation, as well as price and megawatt quantity, that comprise each Up-to Congestion Transaction. 41 E. Revisions to Apply FTR Forfeiture Rule to Up-to Congestion Transactions PJM proposes to apply the FTR Forfeiture Rule to Up-to Congestion Transactions and to evaluate Up-to Congestion Transactions based on the distribution factor of the flow from the transaction source to the transaction sink on a given constraint impacting an FTR path. This market rule change will make consistent the application of the FTR Forfeiture Rule to all Virtual Transactions. Therefore, PJM proposed that stakeholders approve the following revisions to Section 5.2.1(b) to apply the FTR Forfeiture Rule to Up-to Congestion Transactions, which they overwhelmingly endorsed and approved: (b) If a holder of a Financial Transmission Right between specified delivery and receipt buses acquired the Financial Transmission Right in a Financial Transmission Rights auction (the procedures for which are set forth in Part 7 of this Schedule 1) and (i) had an Increment Bid and/or Decrement Bid that was accepted by the Office of the Interconnection for an applicable hour in the Day-ahead Energy Market for delivery or receipt at or near delivery or receipt buses of the Financial Transmission Right or had an Up-to Congestion Bid that was accepted by the Office of the Interconnection for an applicable hour in the Day-ahead Energy Market for a path at or near the path of the Financial Transmission Right; and (ii) the result of the acceptance of such Increment Bid, or Decrement Bid or Upto Congestion Bid is that the difference in Locational Marginal Prices in the Day-ahead Energy Market etariff records OATT ATT K APPX Sec 1.10 and OA Schedule 1 Sec

20 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 20 However, upon preparing the etariff Section for this filing, PJM realized that it neglected to carry through the corrections to change Up-to Congestion Bid to Up-to Congestion Transaction in this proposal. Therefore, the revisions that PJM is submitting in this filing are slightly different what was approved by stakeholders, though not substantively different. Nevertheless, making the referenced changes is necessary to avoid confusion and to be consistent with the other referenced revisions PJM is making in this filing as discussed above. Therefore, the revisions that PJM proposes to make for the application of the FTR Forfeiture Rule to Up-to Congestion Transactions are: (b) If a holder of a Financial Transmission Right between specified delivery and receipt buses acquired the Financial Transmission Right in a Financial Transmission Rights auction (the procedures for which are set forth in Part 7 of this Schedule 1)... or had an Up-to Congestion Transaction that was accepted by the Office of the Interconnection for an applicable hour in the Day-ahead Energy Market for a path at or near the path of the Financial Transmission Right; and (ii) the result of the acceptance of such..., or Decrement Bid or Up-to Congestion Transaction is that the difference in Locational Marginal Prices in the Day-ahead Energy Market III. Stakeholder Process All of the proposed revisions except those revisions to Section 5.2.1(b) of Schedule 1 of the Operating Agreement proposing to apply the FTR Forfeiture Rule to Up-to Congestion Transactions were endorsed by the PJM Markets and Reliability Committee ( MRC ) at its April 25, 2013 meeting, by acclamation with one objection and two abstentions. The PJM Members Committee, at its meeting held on May 16, 2013, 42 etariff records OATT ATT K APPX Sec 5.2 and OA Schedule 1 Sec

21 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 21 endorsed PJM s proposed revisions to the Tariff and approved the revisions to the Operating Agreement by acclamation, with no objections and one abstention. The MRC endorsed the proposed revisions to apply the FTR Forfeiture Rule to Up-to Congestion Transactions by acclamation with one objection and seventeen abstentions at its meeting on April 25, 2013; and on May 16, 2013, the PJM Members Committee endorsed the proposed revisions to the Tariff and approved the revisions to the Operating Agreement by acclamation, with no objections and one abstention. IV. Effective Date PJM requests that the Commission issue an order accepting the enclosed revisions by no later than August 9, 2013, with the following effective dates: a. August 9, 2013 for the proposed revisions to Schedules 9-3, 9-6, 9- MMU, 9-PJMSettlement, the Preface to Attachment K, Article VI Attachment M- Appendix, and Attachment Q of the Tariff, and for the revisions to Sections 1.3.9A, , B, , A, 2.6, 2.6A, of Schedule 1 of the Operating Agreement; b. August 9, 2013 for the proposed revisions to Section 5.2.1(b) of Schedule 1 of the Operating Agreement changing Increment Bid to Increment Offer; and, c. September 1, 2013 for the revisions to Section 5.2.1(b) of Schedule 1 of the Operating Agreement to apply the FTR Forfeiture Rule to Up-to Congestion Transactions. V. Description of Submittal PJM encloses with this transmittal letter electronic versions of the revisions to the Tariff and Operating Agreement in both marked (showing the changes) and clean forms.

22 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 22 VI. Correspondence The following individuals are designated for inclusion on the official service list in this proceeding and for receipt of any communications regarding this filing: Jacqulynn B. Hugee Assistant General Counsel PJM Interconnection, L.L.C. 955 Jefferson Avenue Norristown, PA (610) Craig Glazer Vice President, Federal Government Policy PJM Interconnection, L.L.C G Street, N.W, Suite 600 Washington, D.C (202) glazec@pjm.com Jeanine S. Watson Counsel PJM Interconnection, L.L.C. 955 Jefferson Avenue Norristown, PA (610) watsoj@pjm.com VII. Service PJM has served a copy of this filing on all PJM Members and on all state utility regulatory commissions in the PJM Region by posting this filing electronically. Electronic service is permitted as of November 3, 2008, under the Commission s regulations 43 pursuant to Order No and the Commission s Notice of Effectiveness of Regulations issued on October 28, 2008, in Docket No. RM In compliance with these regulations, PJM will post a copy of this filing to the FERC filings section of its internet site, located at the following link: with a specific link to the newly-filed document, and will send an on the same date as this filing to all PJM Members and all state utility 43 See 18 CFR 35.2, 154.2, and Federal Energy Regulatory Commission, Order No. 714, 124 FERC 61,270.

23 Honorable Kimberly D. Bose, Secretary June 10, 2013 Page 23 regulatory commissions in the PJM Region 45 alerting them that this filing has been made by PJM today and is available by following such link. PJM is also serving electronic copies of this filing on all persons listed on the Commission s official service list for these proceedings. VIII. Conclusion For the reasons discussed herein, PJM requests that the Commission accept the proposed revisions to the Tariff and Operating Agreement. Respectfully submitted, /s/ Jacqulynn B. Hugee Craig Glazer Vice President, Federal Government Policy PJM Interconnection, L.L.C G Street, N.W, Suite 600 Washington, D.C (202) glazec@pjm.com Jacqulynn B. Hugee Assistant General Counsel - Markets PJM Interconnection, L.L.C. 955 Jefferson Avenue Norristown, PA (610) hugeej@pjm.com Jeanine S. Watson Counsel PJM Interconnection, L.L.C. 955 Jefferson Avenue Norristown, PA (610) watsoj@pjm.com 45 PJM already maintains, updates and regularly uses lists for all PJM members and affected commissions.

24 Attachment A Revisions to the PJM Open Access Transmission Tariff and PJM Operating Agreement Additional coverpages identifying multiple versions of the Agreement(s) (Marked / Redline Format)

25 Section(s) of the PJM Open Access Transmission Tariff (Marked / Redline Format)

26 SCHEDULE 9-3 Market Support Service a) Market Support Service comprises all of the activities of PJM associated with supporting the operation of the PJM Interchange Energy Market and related functions, as described in Schedule 1 of the Operating Agreement and the Appendix to Attachment K to this Tariff, including, but not limited to, market modeling and scheduling functions, locational marginal pricing support, market settlements and billing, support of PJM s Internet-based customer interactive tool known as eschedules, and market monitoring. PJM provides this service to customers using Point-to-Point or Network Integration Transmission Service under this Tariff, to Generation Providers, as defined below, and to entities that submit offers to sell or bids to buy energy in the PJM Interchange Energy Market. b) PJM will charge each user of Market Support Service each month a charge equal to the sum of: (i) the MS Service Rate, Component 1, as stated below, times (1) the total quantity in MWhs of energy delivered to load (including losses and net of operating Behind The Meter Generation, but not to be less than zero) in the PJM Region or for export from such region during such month by such user as a customer under Point-to-Point Transmission Service (other than Wheeling-Through Service, as defined below) or Network Integration Transmission Service, plus (2) the total quantity in MWhs of energy input into the Transmission System during such month by such user as a Generation Provider, as defined below, plus (3) the total quantity in MWhs of all accepted Increment Bids Offers and accepted Decrement Bids, as defined in the Appendix to Attachment K of this Tariff, and all accepted Uup-to ccongestion bidstransactions submitted pursuant to section A(c) of such Appendix, submitted by such user during such month; plus (ii) the MS Service Rate Component 2, as stated below, times the number of Bid/Offer Segments, as defined below, submitted by such user during such month. For purposes of this Schedule 9-3, Wheeling-Through Service is Point-to-Point Transmission Service for which both the Point of Receipt and the Point of Delivery are at interconnections of the PJM Region with other Control Areas. c) For purposes of this Schedule 9-3, a Generation Provider shall be: (i) a Generation Owner, as such term is defined in the Operating Agreement; provided, however, that if a Generation Owner is not the entity credited on PJM s records for the energy input into the Transmission System from the generation facilities owned or leased (with rights equivalent to ownership) by such Generation Owner, as, for example, in the case of a qualifying facility selling energy to a public utility pursuant to section 210 of the Public Utility Regulatory Policies Act of 1978, then, with respect to such energy, the Generation Provider shall be the entity credited on PJM s records for the energy input into the Transmission System from such generation facilities; (ii) a Network Customer or Point-to-Point Transmission Service Customer, with respect to energy arranged by such customer to be delivered for import into the PJM Region; or (iii) a Market Seller (as such term is defined in the Operating Agreement) with respect to energy arranged by such Market Seller to be delivered for import to the boundaries of the PJM Region and for which there is no separately identifiable Transmission Customer. As the term is used in this Schedule 9-3, energy credited on PJM s records does not necessarily mean that a monetary credit resulted on any billing statement provided by PJM. Page 1

27 d) For purposes of this Schedule 9-3, a Bid/Offer Segment shall be each price/quantity pair submitted into the Day-ahead Energy Market, including those submitted in the generation rebidding period pursuant to section (a) of the Appendix to Attachment K of this Tariff. Segments shall be hourly for each bid to purchase energy, each Increment BidOffer, each Decrement Bid, and each Uup-to ccongestion bidtransaction. Segments shall be daily for each offer to sell other than an Increment BidOffer. Each uup-to ccongestion bidtransaction also shall be considered a Bid/Offer Segment. e) The MS Service Rate, Component 1 shall be as follows: Commencing June 1, 2006: Commencing January 1, 2007: Commencing January 1, 2008: Commencing January 1, 2011: Commencing October 1, 2011: $ per MWh $ per MWh $ per MWh $ per MWh $ per MWh Users charged the MS Service Rate, Component 1, shall receive a credit in the amount the user is charged the PJMSettlement Market Service Rate set forth in Schedule 9-PJMSettlement during the same billing period. f) The MS Service Rate, Component 2 shall be as follows: Commencing June 1, 2006: Commencing January 1, 2007: Commencing January 1, 2008: Commencing January 1, 2011: Commencing October 1, 2011: $ per Bid/Offer Segment $ per Bid/Offer Segment $ per Bid/Offer Segment $ per Bid/Offer Segment $ per Bid/Offer Segment Page 2

28 SCHEDULE 9-6 Formula Rate for Costs of Advanced Second Control Center a) In addition to the stated rates set forth in Schedules 9-1 through 9-5, PJM shall recover the costs of its planned advanced second control center ( AC2 ) in the manner set forth in this Schedule 9-6, commencing upon the date that the first asset relating to AC2 is declared by PJM to be in service under generally accepted accounting principles. The actual costs associated with each asset comprising the AC2 project shall commence to be collected pursuant to this Schedule 9-6 upon PJM s declaration of the in-service date of each such asset. PJM s recovery of AC2 related costs pursuant to this Schedule 9-6 shall be capped as follows: (i) actual costs associated with AC2 capital investment, not to exceed $135 million of investment; and (ii) actual AC2 operating and maintenance costs, not to exceed $11 million in 2008, $15 million in 2009, $15 million in 2010, $16 million in 2011, $18 million in 2012, $19 million in 2013, $19 million in 2014, $20 million in 2015 and $20 million multiplied by the percentage of the year remaining until seven years from the in-service date of the AC2 energy management system for any year thereafter. Any actual AC2 capital investment costs or AC2 operating and maintenance costs in excess of these caps shall be collected under the rates in Schedules 9-1 through 9-5, as they may be revised from time to time. b) The costs to be recovered under this Schedule 9-6 consist of the actual costs of owning, leasing, and operating AC2 and all of its related assets, unless specifically excluded in section (c) below. These costs include, but are not limited to: (i) depreciation, amortization, and interest expense related to the capitalized costs of the building and technology assets associated with AC2; (ii) (iii) (iv) (v) (vi) (vii) software license and maintenance costs associated with the technology assets installed for AC2; hardware maintenance and lease costs associated with the technology assets installed for AC2; telecommunications equipment maintenance and lease costs associated with the voice and data communications to and from AC2; telecommunications costs associated with voice communications and transmitting and receiving data to and from AC2; buildings and grounds maintenance, janitorial, and security costs of AC2; utilities costs associated with AC2; (viii) office equipment, office supplies, computer supplies, data processing, duplication, and shipping costs associated with AC2; (ix) insurance associated with AC2; and Page 3