01--1) 

HUNTON& 

WILLIAMS 

Received CFTC 

Records Section 

Jo/;lt/D1 

HUNTON & WILLIAMS LLP 

1900 K STREET, N.W. 

WASHINGTON, D.C. 20006-1109 

G) 

October 21, 2009 

COMMENT 

TEL 202 • 955 • 1500 

FAX 202 • 778 • 2201 

MARK W. MENEZES 

DAVID T. MCINDOE 

R. MICHAEL SWEENEY, JR. 

EMAIL: mmenezes@hunton.com 

dmcindoe@hunton.com 

rsweeney@hunton.com 

FILENO: 76142.2 ~ 0 c:::> ...., $ 

David A. Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Center 

1155 21st Street, NW 

Washington, DC 20581 

VIA ELECTRONIC MAIL 

Re: Significant Price Discovery Contract Proceeding, Mid-C Financial Contracts 

Dear Secretary Stawick: 

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On behalfofthe Working Group ofCommercial Energy Firms (the "Working 

Group"), Hunton & Williams LLP submits the following comments in response to the request 

for public comment set forth in the Notice oflntent ("NOI") issued by the Commodity 

Futures Trading Commission ("CFTC" or "Commission") and published in the Federal 

Register on October 6, 2009, 1 addressing whether the following contracts offered for trading 

on the IntercontinentalExchange, Inc. ("ICE") perform a significant price discovery function: 

• Mid-C Financial Peak ("MDC") contract; 

• Mid-C Financial Peak Daily ("MPD") contract; 

• Mid-C Financial Off-Peak ("OMC") contract; and 

• Mid-C Financial Off-Peak Daily ("MXO") contract.2 

The Working Group is a diverse group of commercial firms in the domestic energy 

industry whose primary business activity is the physical delivery of one or more energy 

Notice of Intent, Pursuant to the Authority in Section 2(h)(7) of the Commodity Exchange Act and 

Commission Rule 36.3(c)(3), to Undertake a Determination Whether the Mid-C Financial Peak Contract; Mid-C 

Financial Peak Daily Contract; Mid-C Financial Off-Peak Contract; and Mid-C Financial Off-Peak Daily 

Contract, Offered for Trading on the IntercontinentalExchange, Inc., Perform Significant Price Discovery 

Functions, 74 Fed. Reg. 51261 (Oct. 6, 2009). 

Collectively, these contracts are referred to hereinafter as the "Mid-C Contracts." 

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David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page2 

commodities to customers, including industrial, commercial and residential consumers. 

Members of the Working Group consist of energy producers, marketers and utilities. The 

Working Group considers and responds to requests for public comment regarding legislative 

and regulatory developments with respect to the trading of energy commodities, including 

derivatives and other contracts that reference energy commodities. 

As discussed further in these comments, the Working Group believes that none of the 

Mid-C Contracts serve a significant price discovery function and that the Commission might 

exceed its authority set forth in Section 2(h)(7) of the Commodity Exchange Act ("CEA"), 7 

U.S.C. § 2(h)(7) (2008), if it determines that any of these contracts meet the criteria for 

designation as a significant price discovery contract ("SPDC"). 

I. COMMISSION AUTHORITY AND DISCRETION TO DESIGNATE CONTRACTS AS SPDCs. 

In 2000, Congress enacted the Commodity Futures Modernization Act ("CFMA"), 3 

which amended the CEA to create a tiered approach to the regulation of futures and 

derivatives markets to replace the CEA's then-existing "one size fits all" regulatory 

framework. As part of this tiered approach, the CFMA created exempt commercial markets 

("ECMs"). ECMs are principal-to-principal electronic trading platforms designed to 

encourage electronic trading of derivatives by sophisticated market participants. ECMs were 

subject to limited Commission regulation and oversight under the CFMA amendments to the 

CEA. 

In June 2008, Title XIII of the Food, Conservation and Energy Act of20084 was 

enacted and, in relevant part, amended the CEA to include new Section 2(h)(7). CEA Section 

2(h)(7) expanded the Commission's limited authority over ECMs to identify and list contracts 

that serve a significant price discovery function. 5 Specifically, this provision sets forth 

enumerated factors that the Commission must consider when determining whether a contract 

performs a significant price discovery function: (1) Price Linkage; (2) Arbitrage; (3) Material 

Price Reference; (4) Material Liquidity; and (5) Other Factors. 

The purpose of new CEA Section 2(h)(7) is to make the regulation of certain contracts 

traded on ECMs similar to the Commission's regulation of those contracts traded on 

designated contract markets ("DCMs"). Accordingly, in situations where the Commission 

determines that ECM contracts serve a significant price discovery function similar to 

contracts traded on a DCM, those contracts are subject to comparable regulation. 

Incorporated as Appendix E of the Consolidated Appropriations Act of2001, Pub. L. No. 106-554, 114 

Stat. 2763 (Dec. 21, 2000). 

4 Title XIII of the Food, Conservation and Energy Act of2008, Pub. L. No. 110-246, 122 Stat. 1623 (June 

18, 2008) (the "Reauthorization Act"). 

Section 13204(c) of the Reauthorization Act requires the Commission to identifY contracts that it deems 

appropriate for designation as SPDCs within 180 days after issuing rules implementing new CEA Section 2(h)(7). 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page 3 

On March 23, 2009, the Commission issued a final rule implementing the provisions 

of new CEA Section 2(h)(7) subjecting ECMs with SPDCs to self-regulatory and reporting 

requirements, as well as certain Commission oversight authorities, with respect to those 

contracts. 6 The SPDC Final Rule became effective on April22, 2009. Among other things, 

the Commission adopted regulations establishing the procedures and the standards by which 

it will determine whether an ECM contract performs a significant price discovery function 

and provided guidance with respect to compliance with nine statutory core principles 

applicable to ECMs. 7 

The Commission has broad discretion when determining whether to designate a 

contract as a SPDC. Importantly, not all of the various statutory factors must be present to 

support a determination that a contract performs a significant price discovery function. In 

this regard, CEA Section 2(h)(7) neither prioritizes nor specifies the degree to which a 

contract must conform to the various factors. 

The NOI represents the second instance in which the Commission has exercised its 

authority under CEA Section 2(h)(7) and Rule 36.3(c) to designate electricity contracts traded 

on an ECM as SPDCs. However, as noted further in Section II, below, it is the first time that 

the Commission has addressed the status of electricity contracts as SPDCs for a region where 

the underlying physical market is not an independently-administered, organized wholesale 

electricity market. 

As discussed herein, despite the broad discretion provided the Commission to 

designate contracts traded on ECMs as SPDCs, the Working Group respectfully submits that 

such discretion should be used in a deliberate and limited manner so as not to impose overly 

broad and unnecessary restrictions and increased costs on legitimate market activity. 

II. THE MID-C CONTRACTS AND THE UNDERLYING PHYSICAL WHOLESALE 

ELECTRICITY MARKETS. 

The Mid-C Contracts are financially-settled contracts based on the day-ahead index 

price published in the settlement month by ICE in the "ICE Day-Ahead Power Price Report." 

Specifically, as described in the NOI: 

• MDC Contract. The MDC contract is based on the arithmetic calendar-month average 

of peak-hour day-ahead electricity prices published daily in the "ICE Day-Ahead Power 

Price Report" for the Mid-Columbia Hub during all peak hours in the month of the 

electricity production. The peak-hour electricity price reported each day by the ICE is a 

6 See Significant Price Discovery Contracts on Exempt Commercial Markets, 74 Fed. Reg. 12,178 (Mar. 

23, 2009) ("SPDC Final Rule"); 17 C.F.R. § 36.3 (2009). 

Jd at§ 36.3(c)(3). 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page4 

volume-weighted index that includes qualifying, 5 day-ahead, peak hour power 

contracts based on the Mid-Columbia Hub that are traded on the ICE platform from 6 

a.m. to 11 a.m. CST on the publication date. 

• MDP Contract. The MPD contract is based on the day-ahead index price published in 

the settlement month by ICE for the specified day. The peak day-ahead electricity 

prices are published in the "ICE Day-Ahead Power Price Report." For each peak day 

of the month, ICE reports a next-day peak electricity price for each hub. 

• OMC Contract. The OMC contract is based on the arithmetic calendar month average 

of off-peak day-ahead electricity prices published in the "ICE Day-Ahead Power Price 

Report" for the Mid-Columbia hub during all off-peak hours in the month of the 

electricity production. The electricity price reported each day by the ICE is a volumeweighted index that includes qualifying day-ahead off-peak power contracts based on 

the Mid-Columbia Hub that are traded on the ICE platform from 6 a.m. to 11 a.m. CST 

on the date of publication. The ICE contracts on which the price index is based specify 

physical delivery of power. 

• MXO Contract. The MXO contract is based on the day-ahead index price published in 

the settlement month by ICE for the specified day. The off-peak day-ahead electricity 

prices are published in the "ICE Day-Ahead Power Price Report." For each off-peak 

day of the month, the ICE reports a next-day off-peak electricity price for each hub 

using the methodology noted above. 

The Mid-Columbia region is a power trading hub for the Pacific Northwest comprising 

the control areas of three public utility districts ("PUDs") in Washington that run hydroelectric 

projects on the Columbia River. The three PUDs are Grant, Douglas and Chelan. Hydro 

projects include Wells, Rocky Reach, Rock Island, Wanapum and Priest Rapids dams. In 

contrast to organized wholesale electric markets in California, New York, the Midwest, MidAtlantic and New England regions that are independently operated by regional transmission 

organizations/independent system operators approved by the Federal Energy Regulatory 

Commission ("FERC"), there is no formal market structure for the Mid-Columbia Hub or in 

the Pacific Northwest more generally. The electric grid comprising the Mid-Columbia Hub is 

operated by individual electric utilities and the wholesale physical energy market is primarily 

of a bilateral nature. All wholesale electricity transactions taking place in the Mid-Columbia 

Hub are subject to direct or indirect regulation and oversight by FERC. 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page 5 

Ill. THE CFTC'S ANALYSIS OF THE CONTRACTS AS POTENTIAL SPDCS. 

The NOI asserts that each of the Mid-C Contracts serves a significant price discovery 

function because each contract appears: (1) to serve as a Material Price Reference; and (2) to 

be Materially Liquid. In this context, it is important 'to note that Congress gave the 

Commission authority under CEA Section 2(h)(7) to capture contracts that trade with enough 

volume to (a) impact trading on a designated contract market, or (b) be quoted as an 

independent price reference by the public. 8 However, a closer examination of the 

Reauthorization Act and Section 36.3(c) of the Commission's regulations shows that the MidC Contracts do not satisfy either of these criteria and, therefore, do not serve a significant 

price discovery function. 

A. Material Price Reference. 

The first basis for the Commission's proposed determination that the Mid-C Contracts 

perform a significant price discovery function is that each contract serves as a Material Price 

Reference. CEA Section 2(h)(7)(B)(iii) requires the Commission to consider "the extent to 

which, on a frequent and recurring basis, bids, offers, or transactions in a commodity are 

directly based on, or are determined by referencing, the prices generated" by the ECM. 9 

Guidance set forth in Appendix A to Section 36 of the Commission's regulations states that 

the Commission will rely on one of two sources of evidence, direct or indirect, that the 

contract is a Material Price Reference. 10 A direct reference would be whether the cash 

market quotes the ECM contract. 11 An indirect reference would be whether an industry 

publication quotes the ECM contract's price. The Mid-C Contracts meet neither of these 

standards. 12 

1. Direct Reference. 

There are no other related contracts traded in any market that settle to, or reference, 

the Mid-C Contracts. The only contract listed on a DCM or ECM other than ICE that 

references the Mid-Columbia Hub is the Dow Jones Mid-Columbia Electricity Index Futures 

("NYMEX Mid-C Futures Contract") traded on the New York Mercantile Exchange. The 

NYMEX Mid-C Futures Contract settles on the "arithmetic average of all day-ahead MidThe Joint Explanatory Statement of the Committee of Agriculture Conference, H.R. Rep. No. 1110 627, 

110 Cong., 2nd Sess. at 978-86 (2008). 

9 

10 

11 

12 

7 u.s.c. § 2(h)(7)(B)(iii). 

17 U.S.C. Part 36, Appendix A (2009) (Guidance on Significant Price Discovery Contracts). 

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David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page 6 

Columbia electricity prices published by Dow Jones and Co. for peak hours in a contract 

month." 13 

Based on the foregoing, the Material Price Reference in the Mid-Columbia Hub is the 

actual price for physical electricity, which is the purest reflection of supply and demand in 

that regional electricity market. The Mid-C Contracts, and any other contract in the market, 

whether bilateral, voice-brokered, or traded on a DCM, reference the prices for physical 

electricity for settlement purposes -- not the Mid-C Contracts. Accordingly, the Mid-C 

Contracts cannot and do not affect prices in the Mid-Columbia Hub. 

2. Indirect Reference. 

As to the indirect reference regarding whether an industry publication quotes the ECM 

contract's price, the only publication to which the CFTC refers is the "ICE Day-Ahead Power 

Price Report," an ICE publication. It is logical that ICE would publish the prices of its own 

contracts, as would any other contract market. However, the fact that ICE publishes the 

settlement prices of its own contracts does not constitute sufficient evidence of a Material 

Price Reference necessary to satisfy the requirements of CEA Section 2(h)(7)(B)(iii). As 

noted above, the only price reference that market participants use for trading in or around the 

Mid-Columbia Hub are the actual prices of physical electricity for that hub. The Commission 

does not provide any example of how even the forward price quotes for the Mid-C Contracts 

are used to price other transactions. No contract in any market is tied directly or indirectly to 

the settlement price of the Mid-C Contracts. 

B. Material Liquidity. 

To meet the Material Liquidity test, CEA Section 2(h)(7)(B)(iv) requires that the 

contract traded on the ECM must trade with sufficient volume "to. have a material effect on 

other agreements, contracts, or transactions listed for trading ... on a designated contract 

market" or ECM. 14 The Commission also states "[l]iquidity is a broad concept that captures 

the ability to transact immediately with little or no price concession." 15 As demonstrated 

below, the Mid-C Contracts lack both (a) a material effect on other contracts and (b) 

sufficient liquidity. 

13 See <<http://www.nymex.com/DO desc.aspx>>. The Dow Jones Mid-Columbia Electricity Price 

Indexes are volume-weighted averages of specifically defined bilateral, wholesale, physical transactions. 

Calculations for these indexes average power transactions from Columbia, Midway, Rocky Reach, Wells, and 

WanapurnNantage, delivery points along the Columbia River. Index participants provide Dow Jones with their 

itemized bilateral transactions and volume for eligible electricity products sold at the Mid-Columbia delivery 

points, as well as with any purchases made from entities not contributing to the indexes. See 

<<http://www.dj indexes.com/mdsidx/?event=energyUSDaily>>. 

14 7 U.S.C. § 2(h)(7)(B)(iv). 

15 17 C.F.R. Part 36, Appendix A (2009). 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page 7 

1. No Material Effect on Other Contracts Listed for Trading. 

Trading in the Mid-C Contracts has no affect whatsoever on any contract listed for 

trading on a DCM, ECM or even in the over-the-counter ("OTC") market. All other Mid-Crelated contracts (i.e., those listed on DCMs or traded in the OTC market) settle directly to 

the physical electricity prices transacted in the Mid -Columbia Hub. Additionally, trading in 

the Mid-C Contracts has no affect whatsoever on the actual prices of physical electricity in 

that region and, as a consequence, there is no indirect affect on any other contracts listed for 

trading. 

2. Liquidity in these Contracts is Insufficient. 

Guidance set forth in Appendix A to Section 36 of the Commission's regulations 

states, in relevant part, that "in markets where material liquidity exists, a more or less 

continuous stream of prices can be observed and the prices should be similar," for example, 

to "a market where trades occur multiple times per minute." The quoted language indicates 

two elements that can show liquidity: (a) a narrow bid/ask spread, and (b) a trade frequency 

of multiple trades per minute. Because neither factor is present in any of the Mid-C 

Contracts, trading in each of these contracts fails to meet this standard. At a minimum, prior 

to making any SPDC designations with regard to the Mid-C Contracts, the Working Group 

respectfully requests that the Commission undertake a quantitative analysis that considers 

whether such contracts are traded with the frequency required to meet the Commission's 

Material Liquidity indicia. 

IV. CONCLUSION. 

Despite the Commission's broad discretion to determine whether a contract performs 

a significant price discovery function, the Working Group respectfully submits that: 

1. The Mid-C Contracts do not perform a significant price discovery function and should 

not be designated as SPDCs by the Commission. 

2. The Mid-C Contracts do not meet the Material Price Reference or Material Liquidity 

standards set forth in CEA Section 2(h)(7). 

3. Physical electricity prices in the Mid-Columbia Hub themselves provide the only 

material price reference for that market. 

4. No other contract in any market is tied to the settlement price of the Mid-C Contracts 

and trading in the Mid-C Contracts has no affect whatsoever on physical electricity 

prices in the Mid-Columbia Hub. 
r • 

David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page 8 

5. Because all other related Mid-C Contracts, regardless of whether they are traded on 

DCMs or in the OTC market, settle directly to physical electricity prices in the MidColumbia Hub, trading in the Mid-C Contracts has no affect on the prices of contracts 

in other markets. 

The Working Group appreciates this opportunity to comment, and requests that the 

Commission consider these comments as it develops a final rule in this proceeding. 

Respectfully Submitted, 

Is/ Mark W Menezes 

Mark W. Menezes 

David T. Mcindoe 

R. Michael Sweeney, Jr. 

Counsel for the 

Working Group of Commercial Energy Firms