I got an invitation too, and have been meaning to run it by KK to make sure she wouldn't mind me submitting a Deryni fanfic in the contest, given that unlike submissions made here or on FFN, there is the potential for receiving compensation for the work there (I think prizes would count as a form of compensation, and the offer to help rewrite a story as an original work is only one of the potential prizes, IIRC), so I wanted to be sure she wouldn't have a problem with that first. Never mind that anything entered in the Fanfic category will clearly be fanfic, so I don't think there's a chance of anyone mistaking it for the entrant's original story world. I'd just prefer to steer on the side of caution and see what KK thinks of it first.
That said, if she has no objection to the idea, I'd been thinking of submitting a story or two myself, since even the smaller prizes (Amazon gift cards, IIRC) would make it worth taking a shot at one. And as you say, there's the exposure, not just for the fanfic authors but also for the authors inspiring their work, since I would think someone who really enjoys reading fanfic in an unfamiliar story world would be drawn to check out the original author also.