As explained in our alert "Internal Bilateral Transactions: Regulatory Risk & Confusion Reign" dated June 6, 2012, significant regulatory ambiguity exists concerning the regulatory status and compliance criteria for Internal Bilateral Transactions (IBTs), particularly in the PJM Interconnection (PJM). We noted that a clarification of PJM’s view as to the scope of tariff-compliant IBTs would be of value to market participants. On June 13, PJM provided such a clarification (PJM Clarification).1 According to PJM, an IBT can only meet the “physicality” requirement of the tariff in the following ways:

• either (a) physical generation (not the market) is contemplated as the ultimate contractual source of the energy that is the subject of the IBT, or (b) that a load-serving entity recognized as such under the RAA (not the market) is contemplated as buying the energy that is the subject of the IBT in order to meet that LSE’s load serving obligations.

• The ultimate source and sink cannot both be the spot market. In other words,

o The ultimate contractual source CANNOT be the market IF the ultimate sink is not a load serving entity with actual physical load (that is, not the spot market)...