HUNTON& 

WILLIAMS 

October 21, 2009 

David A. Stawick, Secretary 

Received CFTC 

Records Section 

Jo/~(/;1 

COMMENT 

HUNTON & WILLIAMS LLP 

1900 K STREET, N.W. 

WASHINGTON, D.C. 20006-1109 

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 

FILE NO: 76142.2 

Commodity Futures Trading Commission 

Three Lafayette Center 

VIA ELECTRONIC MAIL 

115 5 21st Street, NW 

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Significant Price Discovery Contract Proceeding, SP-15 & NP-15 Financial Contracts~ ~ ~ 

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Dear Secretary Stawick: ...t: ::0 

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On behalfofthe Working Group of Commercial 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: 

• SP-15 Financial Day-Ahead LMP Peak ("SPM") contract; 

• SP-15 Financial Day-Ahead LMP Peak Daily ("SDP") contract; 

• SP-15 Financial Day-Ahead LMP Off-Peak Daily ("SQP") contract; 

• SP-15 Financial Swap Real Time LMP - Peak Daily ("SRP") contract; 

• SP-15 Financial Day-Ahead LMP Off-Peak ("OFP") contract; 

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 SP-15 Financial Day-Ahead LMP Peak 

Contract; SP-15 Financial Day-Ahead LMP Peak Daily Contract; SP-15 Financial Day-Ahead LMP Off-Peak 

Daily Contract; SP-15 Financial Swap Real Time LMP-Peak Daily Contract; SP-15 Financial Day-Ahead LMP 

Off-Peak Contract; NP-15 Financial Day-Ahead LMP Peak Daily Contract; and NP-15 Financial Day-Ahead 

LMP Off-Peak Daily Contract, Offered for Trading on the IntercontinentalExchange, Inc., Perform Significant 

Price Discovery Functions, 74 Fed. Reg. 51264 (Oct. 6, 2009). 

~ 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page2 

• NP-15 Financial Day-Ahead LMP Peak Daily ("DPN") contract; and 

• NP-15 Financial Day-Ahead LMP Off-Peak Daily ("UPN"). 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 

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. 

For the reasons discussed herein, the Working Group believes that none of the 

contracts designated above serve a significant price discovery function and the designation of 

such contracts as significant price discovery contracts ("SPDCs") might exceed the 

Commission's authority as set forth in Section 2(h)(7) ofthe Commodity Exchange Act 

("CEA"), 7 U.S.C. § 2(h)(7) (2008), and Section 36.3(c) of its regulations, 17 C.F.R. § 

36.3(c) (2009). 

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 ofthe 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 

Collectively, these contracts are referred to hereinafter as the "CAISO Contracts." 

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

Stat. 2763 (Dec. 21, 2000). 

4 Title XIII ofthe 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 

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"). The rationale for this statutory change is based on 

parity. 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. 

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 contracts traded on an ECM as SPDCs. It is first time, however, that the 

Commission has addressed the status of an electricity contract as an SPDC. 

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 CAISO CONTRACTS AND THE UNDERLYING PHYSICAL WHOLESALE 

ELECTRICITY MARKET. 

The CAISO Contracts are financially-settled contracts traded on ICE that are based 

upon the volumetric weighted average of locational marginal prices ("LMPs") of physical 

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 

electricity in the regional wholesale electricity market operated by the California Independent 

System Operator, Inc. ("CAISO"). 8 The LMPs are derived from costs associated with 

energy, congestion and losses at different pricing points (or nodes) within the CAISO 

footprint. 9 The LMPs are posted by the CAISO on a Day-Ahead and Real-Time (i.e., hourby-hour) basis. 

The CAISO Day-Ahead market is an essential part of the planning, modeling and 

scheduling required to ensure the reliable and secure operation of the CAISO electric grid. A 

critical element of the Day-Ahead market is the requirement that all scheduled flows of 

electricity must be balanced. Specifically, the day before expected delivery of physical 

electricity, the planned schedule for delivering electricity to load (i.e., customers) in the 

CAISO footprint must be equal to the offers to supply electricity to the market. 

The CAISO Real-Time market functions as a dynamic balancing market. Depending 

on the conditions affecting the real-time operation of the CAISO electric grid, generation 

scheduled for delivery to load is subject to curtailment to address, among other things, 

unanticipated drops in demand, conditions affecting the secure operation of the transmission 

system, or the loss of scheduled supply resources. Conversely, additional generation may 

have to be dispatched to meet unanticipated increases in demand. As a consequence, the 

cleared LMP for CAISO's Real-Time market reflects natural market forces of supply and 

demand for physical electricity at each pricing point for each hour of a given day. 

The ICE swaps market does not, and cannot, influence the LMPs for physical 

electricity posted by the CAISO on a Real-Time and Day-Ahead basis. As noted above, the 

only factors that the CAISO takes into consideration when setting the LMP for these markets 

The CAISO is a non-profit public benefit corporation that is responsible for the administration and 

operation of the majority of the State of California's high-voltage wholesale electric grid. The CAISO's operation 

of wholesale electricity markets within its footprint are subject to the exclusive jurisdiction of the Federal Energy 

Regulatory Commission ("FERC") under ~art II of the Federal Power Act ("FPA"), 16 U.S.C. § 824 et seq. 

Market participants transacting into, within, or through the CAISO are subject to market rules designed by the 

CAISO that have been approved by, and are on file with, FERC. 

9 It is important to note that the physical electricity market reflects the unique nature of electricity as a nonstorable commodity. Specifically, to ensure the reliable and secure operation of the electrical grid, generation 

supply must equal demand at all times. Significant technological expertise and complex modeling, planning and 

scheduling is required for each and every second of the day. The LMP, regardless of whether it is generated for 

the CAISO's Day-Ahead or Real-Time markets, is reflective of this vital balance of generation supply and 

demand. 

In addition, the physical electricity markets administered by the CAISO recently underwent significant 

changes as part of the CAISO's Market Redesign and Technology Upgrade ("MRTU") efforts. Cal. Indep. Sys. 

Operator Corp., 116 FERC ~ 61,274 (2006), order on reh 'g, 119 FERC ~ 61,076 (2007), order on reh 'g and 

denying motion to reopen record, 120 FERC ~ 61,271 (2007) (approving the MRTU market design). As such, the 

data from the MRTU market in CAISO is evolving and maturing. Accordingly, based on this fact alone, the 

Working Group believes that it is premature for the Commission to consider making an SPDC determination for 

the CAISO Contracts. 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page 5 

is the available supply of physical electricity and the available demand for physical 

electricity. Any product traded outside ofthe CAISO's Day-Ahead and Real-Time physical 

markets does not have any impact whatsoever on the posted LMPs. 

Ill. PROPOSED DESIGNATION OF CAISO CONTRACTS AS SPDCs. 

The NOI asserts that each of the CAISO 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: (1) impact trading on a designated contract market, or (2) be quoted as an 

independent price reference by the public. 10 However, a closer examination of the 

Reauthorization Act and Section 36.3(c) of the Commission's regulations shows that the 

CAISO 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 CAISO 

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. 11 In guidance set forth in Appendix A to Section 36 of the Commission's 

regulations, the Commission states that it will rely on one of two sources of evidence, direct 

or indirect, that the contract is a Material Price Reference. 12 A direct reference would be 

whether the cash market quotes the ECM contract. 13 An indirect reference would be whether 

an industry publication quotes the ECM contract's price. The CAISO Contracts meet neither 

of these standards. 14 

1. Direct Reference. 

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

the CAISO Contracts. The Material Price Reference in the market is the actual CAISO LMPs 

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

10 The Joint Explanatory Statement of the Committee of Agriculture Conference, H.R. Rep. No. 1110 627, 

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

II 

12 

13 

14 

7 U.S.C. § 2(h)(7)(B)(iii). 

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

Jd 

Jd 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page 6 

market. The CAISO Contracts, and any other contract in the market, whether bilateral, voicebrokered, or traded on a designated contract market, would reference the CAISO Day-Ahead 

and Real-Time LMP settlement prices. The CAISO Contracts cannot and do not affect prices 

in CAISO. 

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 Commission refers is the "West Power End 

of Day Package," which is published by ICE. 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 to satisfy the requirements of CEA Section 2(h)(7)(B)(iii). The 

only price references that market participants use for trading in or around CAISO are the 

most reliable price references, which are the physical CAISO market Day-Ahead and RealTime LMPs. The Commission does not provide any example of how even the forward price 

quotes for the CAISO Contracts are used to price other transactions. No contract in any 

market, whether physical or financial, is tied directly or indirectly to the settlement price of 

the CAISO 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. 15 The Commission also states "[l]iquidity is a broad concept that captures 

the ability to transact immediately with little or no price concession." 16 As demonstrated 

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

sufficient liquidity. 

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

Trading in the CAISO 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 CAISOrelated contracts (i.e., listed on DCMs or traded in the OTC market) settle directly to physical 

CAISO Day-Ahead and Real-Time LMPs -not to CAISO Contracts. Additionally, trading in 

the CAISO Contracts has no affect whatsoever on the actual CAISO Day-Ahead and RealTime LMPs and, therefore, there is no indirect affect on any other contracts listed for trading. 

IS 7 U.S.C. § 2(h)(7)(B)(iv). 

16 17 C.F.R. Part 36, Appendix A (2009). 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page 7 

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 ofthe CAISO 

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 CAISO 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 CAISO Contracts do not perform a significant price discovery function and 

should not be designated as SPDCs by the Commission. 

2. The CAISO Contracts do not meet the Material Price Reference or Material Liquidity 

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

3. CAISO Day-Ahead and Real-Time LMPs 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 CAISO Contracts 

and trading in the CAISO Contracts has no affect whatsoever on physical CAISO 

Day-Ahead and Real-Time LMPs. 

5. Because all other CAISO-related contracts, regardless of whether they are traded on 

DCMs or in the OTC market, settle directly to the physical CAISO LMPs, trading in 

the CAISO Contracts has no affect on the prices of contracts in other markets. 
David A. Stawick, Secretary 

Commodity Futures Trading Commission 

October 21, 2009 

Page 8 

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