C. F. T. C. 

November 27,2009 

Received CFTC Rec~rds Section 

\\ f3o( Oj 

OFFICE OF THE SECRETARIAT 

Via Electronic Mail: Secretary@CFTC.gov 2009 NOU 30 Arl 9 02 

Mr. David Stawick, Secretary 

U.S. Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 COMMENT 

Re: ICE SP-15 Financial Day-Ahead LMP Peak (SPM) Contract; 

Mr. Stawick, 

ICE SP-15 Financial Day-Ahead LMP Peak Daily (SDP) Contract; 

ICE SP-15 Financial Day-Ahead LMPOff-Peak Daily (SQP) Contract; 

ICE SP-15 Financial Swap Real Time LMP-Peak Daily (SRP) Contract; 

ICE SP-15 Financial Day-Ahead LMP Off-Peak (OFP) Contract; 

ICE NP-15 Financial Day-Ahead LMP Peak Daily (DPN) Contract; 

ICE NP-15 Financial Day-Ahead LMP Off-Peak Daily (UNP) Contract; 

ICE Mid-C Financial Peak (MDC) Contract; 

ICE Mid-C Financial Peak Daily (MPD) Contract; 

ICE Mid-C Financial Off-Peak (OMC) Contract; and 

ICE Mid-C Financial Off-Peak Daily (MXO) Contract 

On October 21, 2009, the Financial Institutions Energy Group ("FIEG") filed comments 

in the Commission's rulemakings to determine whether any of the above-referenced 

contracts perform a significant price discovery function. In addition to its substantive 

comments, FIEG (and other interested persons) proposed that the Commission allow at 

least 30 days for public comment, as the Commission's rules allow comments to be filed 

"within 30 calendar days of publication of notice in the Federal Register or within such 

other time specified by the Commission." 1 On November 12, 2009, the Commission 

reopened and extended the comment period in each rulemaking. FIEG appreciates the 

extended comment period provided by the Commission and herein submits its expanded 

comments on the Commission's significant price discovery contract ("SPDC") proposals. 

Background 

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 

1 Procedure for Significant Price Discovery Determination, 17 CFR § 36.3( c )(3) (2009). 

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services at market-based rates. 2 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. 

Electricity prices are among the most volatile of any commodity. This makes it critically 

important for market participants, including public power companies, investor-owned 

utilities and power marketers, to be able to adequately hedge their price risks. These 

market participants often use the above-referenced ICE SP-15, NP-15 and Mid-C 

contracts (the "ICE Contracts") to hedge their long and short physical positions in the 

California and Pacific Northwest electric power markets. These underlying physical 

positions can be substantial and not only involve delivery in the spot month, but also 

often extend forward for months or even years as a result of the manner in which market 

participants procure and sell physical power. As a result, these companies' long-term 

price exposures often require hedging beyond the spot month, for several months or 

years. FIEG is concerned that unwarranted constraints on market participants' access to 

the ICE Contracts for legitimate short-term and long-term hedging purposes could harm 

the related California and Pacific Northwest electric power markets by diminishing the 

ability of market participants to hedge their physical positions. 

The ICE Contracts Are Not SPDCs 

The ICE Contracts do not meet any of the four SPDC determination criteria described in 

the Commission's March 23, 2009, SPDC Order. 3 Additionally, under the CEA it is the 

Commission's burden to demonstrate through application ofthe four SPDC 

determination criteria that a contract performs a significant price discovery function. 

Section 2(h)(7) of the CEA specifies four factors that the Commission 

must consider, as appropriate, in making a determination that a contract is 

performing a significant price discovery function. The four factors 

prescribed by the statute are: Price Linkage; Arbitrage; Material Price 

Reference; and Material Liquidity. 4 

FIEG respectfully submits that thus far the Commission has not met its burden with 

regard to any of the four designation criteria for any of the ICE Contracts; in the 

Commission's original Federal Register notices (and in the comments submitted during 

2 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 the regulation by the FERC. 

3 See, Significant Price Discovery Contracts on Exempt Commercial Markets, 74 Fed. Reg. 12178 (to be 

codified at 17CFR.parts 15, 16, 17, 18, 19,21,36,40.). 

4 Appendix A to Part 36, Guidance on Significant Price Discovery Contracts, 17 CFR part 36, Appendix A 

(2009) (emphasis added; hereinafter the "SPDC Appendix"). The inclusion of the four SPDC designation 

criteria in the CEA and Congress' requirement that "in its discretion" the Commission "shall consider" 

them in making its determination, 7 USC§ 2(h)(7)(A & B), strongly suggest that the Commission must 

reasonably find that at least some of the criteria are satisfied to make a valid determination that a contract 

performs a significant price discovery function. 

2 
the initial 15-day comment period) no information has been submitted that would 

substantively support a finding that any of the four SPDC factors are satisfied for any of 

the ICE Contracts. Barring the submission of new facts supporting a finding that any of 

the ICE Contracts is a SPDC, FIEG believes that the Commission is compelled under the 

procedure it promulgated for significant price discovery determination to find that none 

ofthe ICE Contracts are SPDCs. 5 FIEG's specific comments on each ofthe four SPDC 

factors are set forth below. 

Three of the four SPDC factors require a nexus between the contract being considered for 

SPDC designation and a contract listed for trading on or subject to the rules of a 

designated contract market or derivatives transaction execution facility, or to another 

SPDC traded on an electronic trading facility ("ETF"). 6 Although the Commission does 

not specify the exchange-traded contracts to which it will refer in making its SPDC 

determinations relating to the ICE Contracts, FIEG's comments below assume that the 

Commission's analyses will focus on one or more of the various NYMEX power 

contracts that reference prices at SP-15, NP-15 and Mid-C. 7 

5 "Before making a final price discovery determination under this paragraph, the Commission shall publish 

notice in the Federal Register that it intends to undertake a determination with respect to whether a 

particular agreement, contract or transaction performs a significant price discovery function and to receive 

written data, views and arguments relevant to its determination from the electronic trading facility and 

other interested persons. . . . After prompt consideration of all relevant information, the Commission shall, 

within a reasonable period of time after the close of the comment period, issue an order explaining its 

determination whether the agreement, contract or transaction executed or traded by the electronic trading 

facility performs a significant price discovery function under the criteria specified in paragraph (c)(l)(i) 

through (v) of this section." 17 CFR § 36.3( c )(3) (2009). Based on this language, FIEG believes that "all 

relevant information" includes only "written data, views, and arguments," of the Commission, the ETF and 

other interested persons submitted in the course of the ICE Contracts' SPDC determinations. Further, 

FIEG believes procedural due process requires that the ETF and other interested persons have a reasonable 

opportunity to comment on any new data, views or arguments material to the Commission's determination 

introduced into the record by the Commission after the close of the extended comment period on November 

27,2009. 

6 See 17 CFR § 36.3(c)(l)(i, ii, & iv) (describing Price Linkage, Arbitrage, and Material Liquidity). 

7 Specifically, the NYMEX contracts for the SP-15, NP-15, and Mid-C delivery points are the: CAISO 

SP15 EZ Gen Hub 5 MW Peak Calendar-Month Real-Time LMP Swap Futures; CAISO SP15 EZ Gen Hub 

5 MW Off-Peak Calendar-Month Real-Time LMP Swap Futures; CAISO SP15 EZ Gen Hub 5 MW Peak 

Calendar-Day Real-Time LMP Swap Futures; CAISO SP15 EZ Gen Hub 5 MW Off-Peak Calendar-Day 

Real-Time LMP Swap Futures; CAISO SP15 EZ Gen Hub 5 MW Peak Calendar-Month Day-Ahead LMP 

Swap Futures; CAISO SP15 EZ Gen Hub 5 MW Off-Peak Calendar-Month Day-Ahead LMP Swap 

Futures; CAISO SP15 EZ Gen Hub 5 MW Peak Calendar-Day Day-Ahead LMP Swap Futures; CAISO 

SP15 EZ Gen Hub 5 MW Off-Peak Calendar-Day Day-Ahead LMP Swap Futures; Dow Jones SP15 

Electricity Price Index Swap Contract; CAISO NP15 EZ Gen Hub 5 MW Peak Calendar-Month Real-Time 

LMP Swap Futures; CAISO NP15 EZ Gen Hub 5 MW Off-Peak Calendar-Month Real-Time LMP Swap 

Futures; CAISO NP15 EZ Gen Hub 5 MW Peak Calendar-Day Real-Time LMP Swap Futures; CAISO 

NP15 EZ Gen Hub 5 MW Off-Peak Calendar-Day Real-Time LMP Swap Futures; CAISO NP15 EZ Gen 

Hub 5 MW Peak Calendar-Month Day-Ahead LMP Swap Futures; CAISO NP15 EZ Gen Hub 5 MW OffPeak Calendar-Month Day-Ahead LMP Swap Futures; CAISO NP15 EZ Gen Hub 5 MW Peak CalendarDay Day-Ahead LMP Swap Futures; CAISO NP15 EZ Gen Hub 5 MW Off-Peak Calendar-Day DayAhead LMP Swap Futures; Dow Jones NP15 Electricity Price Index Swap Contract; and Dow Jones MidColumbia Electricity Price Index Swap Contract. 

3 
No Material Liquidity 

In the Commission's Federal Register notices, Material Liquidity is the only factor for 

which the Commission provided data allegedly supporting a finding that the factor is 

present. However, to establish the criterion of Material Liquidity it is insufficient for the 

Commission solely to note that the trading volume of the ICE Contracts exceeds the 

numerical thresholds for the reporting requirements in 17 CPR § 36.3( c )(2) (2009). In 

the SP DC Appendix, the Commission states that in markets where Material Liquidity 

exists, "a more or less continuous stream of prices can be observed" and traders have to 

make little in the way of price concessions to execute their trades. In its Federal Register 

announcements for the instant SPDC determinations, the Commission does not show how 

any of the ICE Contracts fit this description. The Commission's relative reticence here is 

in stark contrast to the levels of liquidity the Commission showed in its determination 

that the ICE Henry Financial LD1 contract performs a significant price discovery 

function. 

Instead of showing that trading volumes and open interest exceed a reporting requirement 

threshold, 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. 8 FIEG questions how even hypothetically high 

trading volumes in any of the ICE Contracts could have a material affect on any of the 

NYMEX contracts unless either Arbitrage or Price Linkage is also established. In the 

SPDC Appendix, the Commission states that Material Liquidity alone "would not be 

sufficient to make a determination that a contract is a significant price discovery contract, 

but combined with other factors it can serve as a guidepost indicating which contracts are 

functioning as significant price discovery contracts." The Commission then states that 

Material Liquidity "as reflected through the prices of linked or arbitraged contracts, will 

be a primary consideration in determining whether such contracts are significant price 

discovery contracts." As noted below, there is no price linkage between the ICE 

Contracts and the corresponding NYMEX contracts. Moreover, potential arbitrage 

between the ICE Contracts and any of the corresponding NYMEX contracts is hindered 

by the lack of liquidity in the NYMEX contracts. Because trading in the ICE Contracts 

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

Price Linkage or Arbitrage, the material liquidity criterion is not satisfied. 

No Price Linkage 

With respect to the ICE's Mid-C contracts, which settle based on the average of dayahead prices as published in the 'ICE Day Ahead Power Price Report' for all peak or offpeak hours in the contract month, the equivalent NYMEX contract settles based on the 

average of all firm, day-ahead Mid-Columbia prices published by Dow Jones & Co. for 

all peak hours in the contract month. To the extent that both the ICE and the NYMEX 

SP-15 and NP-15 contracts settle at similar prices, it is solely because both sets of 

8 See n.7, supra. 

4 
contracts reference the day-ahead or real-time hourly Locational Marginal Prices 

("LMPs") set by physical demand and supply in the California Independent System 

Operator ("CAISO"). In the CAISO, LMPs depend on physical factors such as weather, 

snow-pack, and generation and transmission outages. LMPs are regulated by the FERC, 

which is charged with ensuring that they are just and reasonable. 9 Thus, none of the ICE 

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

price parameter" of a NYMEX contract "to value a position, transfer or convert a 

position, cash or financially settle a position, or close out a position." 10 

No Arbitrage 

The NYMEX contracts listed above 11 

are considerably less liquid than the ICE Contracts. 

Compare the second quarter of 2009 open interest and trade volume information for the 

ICE Contracts cited by the Commission in its Federal Register announcements 12 to 

NYMEX open interest and trade volume information from the CME Group web site, 

which shows an open interest of only 120 contracts for the Dow Jones Mid-Columbia 

Electricity Price Index Swap Contract13 and zero open interest on the Dow Jones SP-15, 

NP-15 and Mid-C contracts from January 2009 to June 2009. 14 None ofthe NYMEX 

CAISO LMP-based contracts are even listed in these NYMEX reports. Therefore, 

notwithstanding any alleged correlation between the ICE Contracts and the NYMEX 

contracts listed above, 15 it would be unrealistic to conclude 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." 16 

9 "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 USC§ 824d(a). 

10 17 CFR § 36.3( c )(1 )(i) (2009). 

11 See n.7, supra. 

12 74 Fed. Reg. 51261 (Oct. 6, 2009); and 74 Fed. Reg. 51264 (Oct. 6, 2009). 

13 See NYMEXICOMEX Exchange Open Interest Report- Monthly, September 2009, 

http://www .cmegroup.com/market -data/volume-open-interest/index.html, p .2. 

14 See NYMEXICOMEX Monthly RTH I CME Globex & NYMEX Clear Port Volume, June 2009 Volumes, 

http://www .cmegroup.corn/wrappedpages/web _monthly _report/Web_ OI _Report_ NYMEX _ COMEX.pdf, 

p.10. 

15 In the SPDC Appendix, the Commission states that it would view correlated price movements between 

contracts as evidence that material liquidity exists and that SPDC designation is warranted, See SPDC 

Appendix, at section (C)(2). However, in examining any potential settlement price correlation between the 

SP-15/NP-15-related ICE Contracts and the corresponding NYMEX contracts, the Commission should also 

examine whether or not any such correlation is due solely to the contracts settling on the basis of the same 

CAISO LMP prices. Without this further examination, FIEG believes a correlation in price movements 

alone would not necessarily be evidence of material liquidity or that SPDC designation is warranted. 

16 17 CFR § 36.3(c)(1)(ii) (2009). 

5 
No Material Price Reference 

As noted above, both the ICE SP-15 and NP-15 contracts settle atLMPs set by physical 

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

power at SP-15 and NP-15 are not "based on," or "determined by referencing, the prices 

generated by" any ofthe ICE Contracts. 17 In fact, the opposite is true; the ICE SP-15 and 

NP-15 contracts are priced based on the results of physical demand and supply in the 

CAISO's markets. 18 

Other Material Factors 

In its March 23,2009, SPDC Order, 19 the Commission promulgated four substantive 

SPDC determination criteria and reserved§ 36.3(c)(l)(v) of its regulations, entitled 

"Other material factors [Reserved]," ostensibly as a place keeper for SPDC determination 

factors that it may develop at a later time. The Commission's Procedure for Significant 

Price Discovery Determination states that "the Commission shall ... issue an order 

explaining its determination whether the [contract] performs a significant price discovef6 

function under the criteria specified in paragraph (c)(l)(i) through (v) of this section."2 

FIEG believes this provision confines the Commission's consideration ofSPDC criteria 

in these rulemakings to those "specified in paragraph (c)(l)(i) through (v)" of the 

Commission's current SPDC determination regulations. 

Policy Considerations 

The Commission may also want to consider fundamental differences between power 

markets and other energy markets such as oil and natural gas as it debates the question of 

any potential position limits. Prices in the underlying physical power markets at SP-15 

and NP-15 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 PERC's "just and reasonable" standard. Access to liquid financial 

contracts offers physical generators and loads additional flexibility to hedge their 

17 17 CFR § 36.3(c)(l)(iii) (2009). 

18 In its Federal Register announcements for the ICE Contracts, the Commission refers to a general 

statement in the ECM Study that market participants view the ICE as a price discovery market for certain 

electricity contracts. This reference does not appear to fall within either the direct or indirect category of 

evidence of Material Price Reference described in the SPDC Appendix. Additionally, FIEG respectfully 

submits that publication and sale by the InterContinental Exchange of data packages that may include price 

data related to one or more of the LMP-based ICE Contracts should not be viewed as prima facie evidence 

of Material Price Reference as LMPs cannot be "directly based on" or "determined by referencing" prices 

in these ICE publications. 

19 74 Fed. Reg. 12178. 

20 17 CFR § 36.3(c)(3) (2009) (emphasis added). 

6 
physical positions. 21 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. 

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 an SPDC 

designation may have on the contracts or the related physical transactions. The first 

contract to be designated a SPDC, the ICE Henry Financial LD1 Fixed Price Contract, 

was designated in July of2009 and the ICE has only recently completed its 

implementation ofthe 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 LD1 Fixed Price Contract. 

FIEG appreciates the Commission's consideration of its comments. 

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 

michael.brooks@sutherland.com 

Attorneys for the Financial Institutions Energy Group 

21 The financial hedging in power includes spot, monthly, quarterly and calendar year terms and have 

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

Report http://www .ferc.gov /market -oversight/ st-mkt -ovr/2008-som-final. pdf. 

7