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November 10, 2009 ® 0 

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Via Electronic Mail: Secretary@cftc.gov 

Received CFTC 

ReyorcJs Section 

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Mr. David Stawick, Secretary 

U.S. Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

COMMENT 

Re: PJM WH Real Time Peak Daily (PDP) Contract 

P JM WH Real Time Peak (P JM) Contract 

Mr. Stawick, 

PJM WH Real Time Off-Peak (OP) Contract 

PJM WH Day Ahead LMP Peak Daily (PDA) Contract and 

PJM WH Real Time Off-Peak Daily (ODP) Contract 

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The Financial Institutions Energy Group ("FIEG") is comprised of investment and commercial 

banks that provide a broad range of financial services to all segments of the U.S. and global 

economy. Its Members and their affiliates play a number of roles in the wholesale power and 

natural gas markets, including acting as marketers, lenders, underwriters of debt and equity 

securities, and proprietary investors. The Federal Energy Regulatory Commission ("FERC") has 

authorized FIEG's power-marketer Members to sell energy, capacity and ancillary services at 

market-based rates. FIEG Members are active participants in the various organized electricity 

markets administered by independent system operators ("ISOs") and regional transmission 

organizations ("RTOs") in North America. · 

* * * 

These comments echo those that FIEG and others filed in response to the Commission's proposal 

to treat certain ICE contracts in the West as significant price discovery contracts. 1 Because 

electricity prices are volatile, it is critical that market participants, including public power 

companies, investor-owned utilities and power marketers, be able to adequately hedge their price 

risks.2 Such market participants use the above-referenced ICE PJM contracts (the "ICE 

Contracts") to hedge their long and short physical positions in the Mid-Atlantic and Northeast 

electric power markets. These underlying physical positions can be substantial and require 

delivery not only in the spot month, but often extend forward for months or even years as a result 

of the manner in which market participants procure and sell physical power.3 

1 See comments in Comments File 09-011 and 09-012. 

2 ln addition, trading and managing risk related to power is inherently different from natural gas and oil because 

power cannot be stored. 

3 Under the Federal Power Act ("FP A"), all sales of electric energy at wholesale must be made at prices that are 

"just and reasonable." In addition, all persons who sell physical power in the wholesale markets are subject to 

regulation by the FERC. 
Mr. David Stawick, Secretary 

November 10, 2009 

Page2 

Comments 

The factors the Commission must consider when evaluating whether a contract is an SPDC are: 

(1) price linkage; (2) arbitrage; (3) material price reference; and (4) material liquidity. Three of 

the four criteria (all but material price reference) require the Commission to compare the ICE 

Contracts to contracts listed for trading on or subject to the rules of a designated contract market 

or derivatives transaction execution facility, or to other SPDCs. 4 

FIEG respectfully submits that the ICE Contracts do not appear to meet the SPDC determination 

criteria set forth in the Commission's SPDC Order. 5 For each contract, the Commission has 

identified alleged evidence for only two of the four factors it is required to consider pursuant to 

its regulations and Section 2(h)(7) of the Commodity Exchange Act: material price reference 

and material liquidity. 6 With regard to the remaining two factors, the Commission apparently 

has not found any evidence of price linkage or arbitrage with other contracts. Although not all 

factors are required to be present to support a determination that a particular contract performs a 

significant price discovery function, the absence of price linkage and arbitrage significantly 

reduces the likelihood that a contract performs a significant price discovery function. 7 

Moreover, the alleged evidence of material price reference and material liquidity proposed by the 

Commission appear to be insufficient for an SPDC determination. 

• No price linkage with NYMEX contracts. The ICE Contracts reference the day-ahead or realtime Locational Marginal Prices ("LMPs") set by physical demand and supply in the PJM 

Interconnection ("PJM"). Such prices in physical power markets are regulated by the FERC, 

which is charged with ensuring that prices are just and reasonable. 8 None ofthe ICE 

4 See 17 CFR § 36.3(c)(l)(i, ii, & iv). The following four NYMEX contracts appear to be the most similar to the 

ICE Contracts: 

• PJM Western Hub Peak Calendar-Month Day-Ahead LMP Swap Futures (J4) 

• PJM Western Hub Off-Peak Calendar-Month Day-Ahead LMP Swap Futures (E4) 

• PJM Western Hub Peak Calendar-Month Real-Time LMP Swap Futures (Ll) 

• PJM Western Hub Off-Peak Calendar-Month Real-Time LMP Swap Futures (N9). 

5 Significant Price Discovery Contracts on Exempt Commercial Markets, 74 Fed. Reg. 12,178 (Mar. 23, 2009) 

("SPDC Order"). 

6 See Notice oflntent, 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 PJM WH Real Time Peak Daily Contract; 

PJM WH Real Time Peak Contract; PJM WH Real Time Off-Peak Contract; PJM WH Day Ahead LMP Peak Daily 

Contract; and PJM WH Real Time Off-Peak Daily Contract, Offered for Trading on the Intercontinenta!Exchange, 

Inc., Perform Significant Price Discovery Functions, 74 Fed. Reg. 54,966 (Oct. 26, 2009). 

7 SPDC Order at 12,197 ("The presence of any ofthese factors, however, would not necessarily be sufficient to 

establish the contract as a significant price discovery contract."). 

8 "All rates and charges made, demanded, or received by any public utility for or in connection with the transmission 

or sale of electric energy subject to the jurisdiction of the Commission, and all rules and regulations affecting or 

pertaining to such rates or charges shall be just and reasonable, and any such rate or charge that is not just and 

reasonable is hereby declared to be unlawful." 16 U.S.C. § 824d(a). 
Mr. David Stawick, Secretary 

November 10, 2009 

Page 3 

Contracts "uses or otherwise relies on a daily or final settlement price, or other major price 

parameter, of a contract or contracts listed for trading on or subject to the rules of a 

designated contract market or a derivatives transaction execution facility ... to value a 

position, transfer or convert a position, cash or financially settle a position, or close out a 

position." See 17 CFR § 36.3(c)(l)(i) (2009). Unlike the ICE Henry Financial LD1 Fixed 

Price contract, which uses the NYMEX physically-delivered Natural Gas (Henry Hub) 

Futures (NG) contract to determine its final settlement price, the ICE Contracts' settlement 

prices are determined by actual physical purchases and sales of electricity in P JM. 9 

• No arbitrage between ICE and NYMEX contracts. The Commission provides no evidence of 

arbitrage between the ICE Contracts and any NYMEX contracts. Therefore, notwithstanding 

any similarities in the referenced prices used to settle the contracts (likely due to the fact that 

both ICE and NYMEX contracts settle based on LMP prices), there is no support for a 

conclusion that market participants can "effectively arbitrage between the markets by 

simultaneously maintaining positions or executing trades in the contracts on a frequent and 

recurring basis." See 17 CFR § 36.3(c)(1)(ii) (2009). 

• No material price reference. As noted above, each of the ICE Contracts settle at LMPs set 

by physical demand and supply in PJM. Thus, the bids, offers, or transactions in physical 

power at PJM Western Hub are not "based on," or "determined by referencing, the prices 

generated by" any of the ICE Contracts. See 17 CFR § 36.3(c)(l)(iii) (2009). In fact, the 

opposite is true; the ICE Contracts are priced based on the results of physical demand and 

supply in PJM's markets. Therefore, although the ICE Contracts can be useful for hedging 

price risk, any reference to the ICE Contracts in the cash market is likely to be only a 

reference to the formula used by ICE to calculate the arithmetic average LMPs during the 

specified periods, not a reliance on the ICE Contracts as a price discovery contract. 

The Commission relies on two sources of evidence when determining whether a contract is 

being used as a material price reference: (1) evidence that cash market bids, offers or 

transactions frequently reference the price of the contract in question; or (2) evidence that the 

price of "the contract is being routinely disseminated in widely distributed industry 

publications- or offered by the ECM itself for some form of remuneration- and consulted 

on a frequent and recurring basis by industry participants in pricing cash market 

transactions." 10 The only evidence in the record of references to the price of the ICE 

Contracts in cash markets is a general conclusion in a 2007 study that found that market 

participants generally view the ICE as a price discovery market for certain electricity 

9 See Order Finding that the ICE Henry Financial LD 1 Fixed Price Contract Traded on the Intercontinental 

Exchange, Inc., Performs a Significant Price Discovery Function, 74 Fed. Reg. 37,988 (July 30, 2009) (designating 

the ICE Henry Financial LD1 Fixed Price contract an SPDC based on satisfaction of three of the four factors, 

including price linkage). 

10 See SPDC Order at 12,198. 
Mr. David Stawick, Secretary 

November 10, 2009 

Page4 

contracts; but as the Commission notes in its proposal, the ECM Study did not specifically 

address the use of the ICE Contracts. 11 With regard to routine dissemination and use of the 

price, although ICE sells its price data to market participants, there is no evidence in the 

record regarding how many participants purchase the information or whether the information 

is used to price cash market transactions. 

• No materia/liquidity. To establish the criterion of"material liquidity" it is insufficient for 

the Commission to note that the trading volume of the ICE Contracts meets or exceeds 

numerical thresholds for the reporting requirements in 17 CFR § 36.3( c )(2) (2009). Instead, 

the material liquidity criterion in section 36.3(c)(l)(iv) ofthe Commission's regulations 

requires the Commission to consider whether the trading volume of the ICE Contracts is 

"sufficient to have a material effect" on exchange-traded contracts such as the NYMEX 

contracts listed above. 12 As noted, there is no evidence of direct price linkage or arbitrage 

between the ICE Contracts and any similar NYMEX contracts. Because trading in the ICE 

Contracts cannot have a "material effect" on the corresponding NYMEX contracts, the 

material liquidity criterion is not satisfied. 13 

The Commission also may want to consider fundamental differences between power markets and 

other energy markets such as oil and natural gas as it considers the question of any potential 

position limits. Prices in the underlying physical power markets at P JM Western Hub are 

generally not influenced by financial trading that occurs on platforms such as ICE and are 

calculated using physical supply and demand subject to market power mitigation rules under 

FERC's "just and reasonable" standard. Access to liquid financial contracts offers physical 

generators and load additional flexibility to hedge their physical positions. 14 The absence of 

adequate hedging is one of factors that in the past contributed to problems in physical power 

markets (e.g., in California in 2000-2001). Imposing position limits on financial trading in 

markets that do not currently face any known problems can run the risk of inadvertently harming 

the risk management and hedging opportunities available to physical market participants and 

should not be done,without careful deliberation. 

11 Report on the Oversight of Trading on Regulated Futures Exchanges and Exempt Commercial Markets at I 0 (Oct. 

2007) available at http://www.cftc.gov/stellent/groups/public/@newsroom/documentsifile/pr5403-

08 _ ecmreport.pdf. 

12 See n.4, supra. 

13 Moreover, based on the Commission's notice, in the second quarter of2009, the OPJ, PDA, and ODP contracts 

had very low daily average numbers of separate transactions (6.8, 16.6, and 11.3, respectively). It would seem, 

therefore, that at least these three contracts have very limited liquidity. 

14 The financial hedging in power includes spot, monthly, quarterly and calendar year terms and have grown as 

physical power markets have developed, see, e.g., Figure 29 in FERC's 2008 State of the Markets Report 

http://www.ferc.gov/market-oversight/st-mkt-ovr/2008-som-final.pdf. 
Mr. David Stawick, Secretary 

November 10, 2009 

Page 5 

Considering the balance of known factors weighing against the designation of the ICE Contracts 

as SPDCs, the Commission should exercise extreme care; particularly in light of the yet 

unknown ·potential for unintended consequences that may result from the application of the 

Commission's comprehensive regulatory program to these contracts. To date, the Commission 

has no experience with respect to what effect SPDC designation may have on the contracts or the 

related physical transactions. The first contract to be designated an SPDC, the ICE Henry 

Financial LD1 Fixed Price Contract, was designated in July of2009, and the ICE has just 

recently completed its implementation of the Commission's regulatory requirements. Therefore, 

FIEG respectfully recommends that the Commission not designate the ICE Contracts as SPDCs 

or in the alternative, that it consider delaying its determination as to whether the ICE Contracts 

are SPDCs until it has fully reviewed the effects of its regulation on the ICE Henry Financial 

LD 1 Fixed Price Contract. 

In addition to its comments, FIEG respectfully reiterates its concern that the short comment 

deadline may prevent some affected market participants from responding to the Commission's 

proposal. FIEG proposes that the Commission allow at least 30 days for public comment on 

SPDC proposals, consistent with its own regulations. 15 

FIEG appreciates the opportunity to provide these comments. 

15 17 CFR § 36.3(c)(3) (2009). 

Sincerely, 

Is/ Catherine M. Krupka 

Catherine M. Krupka 

Michael Brooks 

Sutherland Asbill & Brennan LLP 

1275 Pennsylvania Ave., NW 

Washington, DC 20004 

(202) 383-0248 

catherine.krupka@sutherland.com 

mich~el.brooks@sutherland.com 

Attorneys for The Financia! Institutions Energy Group