COMMENT 

--.::'E-.- u • 

EDISON ELBCftiiC 

INSTIT(ti'.B 

David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, N.W. 

Washington, D.C. 20581 

.C.F.T.C. 

OfHC.£ .OF THE SECRETARIAT 

2009 NOU .~ Af'l 8 28 

Re: Notice of Intent To Undertake A Determination Of Whether Certain SP-15 and NP15 Contracts, Offered For Trading On The Intercontinenta!Exchange, Inc. Perform 

Significant Price Discovery Functions 

Dear Mr. Stawick: 

The Edison Electric Institute ("EEl") respectfully submits the following 

comments in response to the Commodity Futures Trading Commission's (the 

"Commission" or "CFTC") 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 OffPeak Daily Contract; SP-15 Financial Swap Real Time LMP-Peak Daily Contract; SP15 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 ("Notice of Intent"). 1 

1 See "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 Intercontinenta!Exchange, 

Inc., Perform Significant Price Discovery Functions, Notice of action and request for comment," 74 

Federal Register 192 . Reg. 51 ,264, 51 ,268 (October 6, 2009) (the "SP-1 ~ and NP-15 Notice of Intent"). 
I. INTEREST OF EEl IN THE PROPOSED RULEMAKING 

EEl is the association of shareholder-owned electric companies, international 

affiliates and industry associates worldwide. Our U.S. members serve 95 percent of the 

ultimate customers in the shareholder-owned segment of the industry, and represent 

approximately 70 percent of the U.S. electric power industry. Many of EEl's electric 

utility company members utilize financial instruments, like the contracts referenced by 

the Commission in its Notices of Intent, to hedge the price risks associated with buying 

and selling wholesale power supply. These tools are a key method used by utilities to 

provide reliable electric service to consumers at stable prices, and to protect electric 

customers from higher retail prices caused from time-to-time by volatile wholesale 

electricity prices. As a result, EEl and its member companies ha\e a direct interest in the 

outcome ofthese proceedings. 

II. OVERVIEW OF EEl'S COMMENTS 

EEl appreciates the opportunity to comment upon whether the ICE SP-15 and NP15 contracts referenced in the Notice oflntent and traded on the 

IntercontinentaiExchange, Irx.:. ("ICE") (collectively, the "ICE Contracts") perform 

significant price discovery functions. 

At the outset, it is important to recognize that electric power markets are very 

complex, owing in part to the unique physical characteristics of electricity and the 

delivery and timing issues that result. Customers require electricity around the clock, and 

our modern economy depends upon having a reliable and steady supply of electricity. 

Electricity cannot be stored in significant quantities, however, which requires that it be 

generated and consumed almost instantaneously. Moreover, the supply and demand for 

electricity changes dramatically on a daily, weekly and seasonal basis as well as in 

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response to specific weather patterns. In addition, wholesale electricity transactions 

generally are limited to regional markets because oftechnical, reliability and efficiency 

factors. For these reasons, electricity prices are among the most volatile of any 

commodity. To manage this volatility, market participants su.:h as investor-owned 

utilities and power generators use a variety of financial instruments and tools to address 

the specific physical characteristics of electricity, and the specific timing and delivery 

issues they face in providing service to retail customers. The ICE Contracts are an 

example of these very important price hedging and risk management tools. 

In order to serve retail load, EEl members procure and sell substantial quantities 

of wholesale physical power. The contracts through which they procure and sell this 

power often provide for delivery not only in the spot month, but often for months or even 

years into the future. 2 EEl members use the ICE Contracts to hedge the price risk 

associated with their long and short physical power positions in the California electricity 

markets. The ability of EEl members to hedge against price volatility by purchasing and 

selling the ICE Contracts helps reduce price volatility in the wholesale markets and, 

thereby, promotes a reliable flow of electricity to retail customers at more stable prices. 

EEl submits the following general comments in response to the Commission's 

Notice oflntent: (1) the short amount oftime provided by the Commission to respond to 

the Notice of Intent is insufficient to allow affected market participants to provide 

detailed information about whether the ICE Contracts meet the SPDC criteria; (2) the 

ICE Contracts do not meet any of the criteria that the Commission is directed to consider 

2 Under the Federal Power Act, 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 interstate wholesale markets 

are subject to the regulation of the Federal Energy Regulatory Commission. 

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in its SPDC Order; 3 and (3) the costs and risks associated with designating the ICE 

Contracts as SPDCs significantly outweigh any potential benefit. 4 

III. THE COMMISSION HAS NOT PROVIDED A SUFFICIENT 

OPPORTUNITY FOR COMMENT 

The Notices oflntent provide only a 15-day window for providing comments on 

the Commission's proposals to designate the ICE Contracts as SPDCs. EEl respectfully 

submits that this limited time period for providing comments is insufficient to give the 

numerous entities that could be impacted an opportunity to provide detailed information 

that will assist the Commission in reaching a sound and well-reasoned determination. 

As noted above, the markets for electricity-related products are exceedingly 

complex. A full understanding of the particular facts surrounding each power contract is 

needed in order to fully analyze what effect a change in regulation may have on the 

underlying wholesale power markets. In addition, the Commission has simultaneously 

announced its intent to designate several energy-related contacts as SPDCs. 5 This 

requires users of these contracts to provide details on multiple contracts, in response to 

multiple Notices of Intent, all within a compressed time period. 

3 "Significant Price Discovery Contracts on Exempt Commercial Markets; Final Rules," 74 Fed. 

Reg. 12,178, 12,203 (March 23, 2009) (the "SPDC Order"). 4 17 CFR Parts 15, 16, 17 et all (March 23, 2009). 5 See, e.g., "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 IntercontinentaiExchange, Inc., Perform Significant 

Price Discovery Functions, Notice of action and request for comment", 74 Fed. Reg. 51,261-51,264 

(October 6, 2009). See also "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 

Henry Financial Swing Contract; Henry Financial Basis Contract; and Henry Financial Index Contract, 

Offered for Trading on the IntercontinentaiExchange, Inc., Perform Significant Price Discovery Functions, 

Notice of action and request for comment," 74 Federal Register 201, 53,720, 53722 (October 20, 2009). 

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Given the unique characteristics of the evolving electricity trading markets, 

coupled with the fact that the process for designating SPDCs is still new for both the 

Commission and the affected public (with only one contract designated as an SPDC to 

date), the Commission should provide an adequate process that allows for a thorough 

analysis of whether the ICE Contracts meet the SPDC criteria, and the potential 

consequences of designating them as SPDCs. In order to give affected entities a 

sufficient opportunity to provide detailed comments on the Notices of Intent, the 

Commission should either extend the comment period for 30 days or .establish public 

hearing procedures to provide further opportunity for comment. 6 

IV. THE ICE CONTRACTS DO NOT MEET ANY OF THE SPDC 

DETERMINATION CRITERIA 

EEl respectfully submits that none of the ICE Contracts meets any of the SPDC 

determination criteria set forth in the Commission's regulations, which require the 

Commission to consider factors such as price linkage, arbitrage, material price reference 

and material liquidity in making its determination. 7 

A. There Is No Price Linkage Between The ICE Contracts And The 

Corresponding NYMEX Contracts 

Although the Commission does not specify the exchange-traded contracts to 

which it is comparing the ICE Contracts, the Commission's analysis should focus on the 

power contracts listed on the New York Mercantile Exchange ("NYMEX") (a designated 

contract market) that correspond to the ICE Contracts. 8 The remaining comments 

6 SP-15 and NP-15 Notice of Intent, at n. 4 (stating: "[w ]here appropriate, the Commission may choose to 

interview market participants regarding their impressions of a particular contract.") 7 SPDC Order at 12,181. 8 References to the "corresponding NYMEX power Contracts" include the following: CAISO SP15 EZ 

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

(continued ... ) 

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provided herein assume that the Commission intends to focus on these corresponding 

NYMEX power contracts. None ofthe ICE Contracts has the requisite price linkage to 

the NYMEX contracts that the Commission must find in order to determine that they are 

SPDCs.9 

To the extent that both the ICE SP~ 15 and NP-15 contracts and the NYMEX SP15 and NP-15 contracts settle at the same prices, it is solely because both sets of contracts 

reference the day-ahead or real-time hourly Locational Marginal Prices ("LMPs") set by 

physical power trading in the California Independent System Operator ("CAISO") 

markets. In the CAISO, LMPs settle based on physical factors such as weather, snowpack, generation and transmission outages, factors which affect all markets regardless of 

the existence of the corresponding NYMEX contracts. Moreover, LMPs are regulated by 

the Federal Energy Regulatory Commission ("FERC"), which is charged with ensuring 

that LMP prices are just and reasonable. Thus, none of the ICE Contracts "uses or 

otherwise relies on a daily or final settlement price, or other major price parameter" of a 

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 SPI5 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 SP 15 EZ Gen Hub 5 MW Peak Calendar-Day Day-Ahead LMP Swap Futures, CAISO 

SPI5 EZ Gen Hub 5 MW Off-Peak Calendar-Day Day-Ahead LMP Swap Futures, Dow Jones SP15 

Electricity Price Index Swap Contract, CAISO NP 15 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 NPI5 EZ Gen Hub 5 MW Peak Calendar-Day Real-Time LMP Swap Futures, CAISO 

NPI5 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 NP 15 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, and Dow Jones NP 15 Electricity Price Index Swap Contract. 9 SPDC Order at 12,181. 

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NYMEX contract "to value a position, transfer or convert a position, cash or financially 

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

B. There Is No Effective Arbitrage Between The ICE Contracts And The 

Corresponding NYMEX Contracts 

The Commission's Notice oflntent does not provide either real world or 

hypothetical examples illustrating how arbitrage would occur between the ICE and 

NYMEX markets. The corresponding NYMEX power contracts are considerably less 

liquid than the ICE Contracts. 11 Notwithstanding any similarities in the referenced prices 

used to settle the contracts, EEl members and other market participants cannot effectively 

arbitrage between these markets because they cannot execute simultaneous trades or 

liquidate positions in the contracts on a sufficiently frequent basis to protect themselves 

against exposure to unacceptably high price risk. As a result, the ICE Contracts do not 

"permit market participants to effectively arbitrage between the markets by 

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

and recurring basis."12 

C. No Material Price Reference 

The Commission's Notice oflntent references its study of exempt commercial 

markets ("ECM Study"), which found only generally that "market participants view the 

10 See 17 CFR § 36.3(c)(l)(i). 11 A brief review of available statistical information related to recent trading activity on the SP -15 and NP15 contracts shows either no open interest or activity, or the trading of only very small amounts of 

contracts. See, e.g., 

<<http://www .cmegroup.com/daily _ bulletin/Section02C _Summary_ Volume _And_ Open _Interest_(Exclud 

es%20TRAKRS)_ Energy _Futures_ And_ Options_ 2009202.pdf and http://www .cmegroup.com/marketdata/files/NYMEX _Monthly_ volumes-2009.pdf>>. 12 Order Finding That the ICE Henry Financial LDI Fixed Price Contract Traded on the 

Intercontinenta!Exchange, Inc., Performs a Significant Price Discovery Function, Final Order, 74 Federal 

Register 37,989 (July 30, 2009) (the "ICE Henry Financial SPDC Order"). 

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ICE as a price discovery market for certain electricity contracts". 13 However, the Notice 

of Intent also acknowledges that the ECM Study "did not specifically address the power 

contracts under review."14 A more in-depth analysis ofthe specific contracts reveals that 

there is no Imterial price reference as defined by the Commission. 15 As noted above, 

both the ICE SP-15 and NP-15 contracts settle at LMPs that are (1) determined by 

fundamental factors such as weather, snow-pack, generation and transmission outages, 

(2) regulated by FERC to insure that they are just and reasonable, and (3) set by physical 

power trading in the CAISO market. As such, the bids, offers, or transactions in physical 

electric power are not primarily "based on," or "determined by referencing, the prices 

generated by" any ofthe ICE Contracts, as the Commission's regulations require. 16 In 

fact, the opposite is true: the ICE SP-15 and NP-15 contracts are priced primarily based 

on the results of physical commodity trading in the CAISO's markets. 

D. No Material Liquidity 

The Notice of Intent concluded that the ICE Contracts may satisfY the material 

liquidity provision outlined in the SPDC Order apparently based solely on the average 

daily contracts and the average separate transactions for each of the relevant ICE 

Contracts. 17 However, the material liquidity criterion that the Commission is directed to 

consider in Rule 36.3(c)(l)(iv) requires the Commission to consider whether the trading 

volume ofthe ICE Contracts is "sufficient to have a material effect" on exchange-traded 

13 See CFTC Report on the Oversight a/Trading on Regulated Futures Exchanges and Exempt 

Commercial Markets (Oct. 2007} See also SP and NP Notice of Intent at 51 ,264, 51 ,268. 14 SP-15 and NP-15 Notice of Intent at 51,264, 51 ,268. . 15 ICE Henry Financial SPDC Order at 37,989. 16 See 17 CFR § 36.3(c)(l )(iii). 17 SP-15 and NP-15 Notice of Intent at 51,264, 51,268. 

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contracts such as the NYMEX contracts listed above. 18 As noted above, there is no direct 

price linkage between the ICE Contracts and the corresponding NYMEX contracts. 

Thus, they cannot have a material effect on the NYMEX contracts. Moreover, as also 

discussed above, potential arbitrage between the 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, the material liquidity criterion 

in the Commission's regulations is not satisfied. 19 

V. THE COSTS AND RISKS THAT WOULD RESULT FROM 

DESIGNATING THE ICE CONTRACTS AS SPDCS SIGNIFICANTLY 

OUTWEIGH ANY POTENTIAL BENEFIT 

EEl members and other market participants in U.S. physical power markets rely 

on the ability to hedge their price risks by purchasing and selling the ICE Contracts. 

Setting position limits for the ICE Contracts could adversely affect the underlying 

physical power markets by limiting the ability of market participants (including electric 

utilities with obligations to serve consumers) to adequately hedge against volatile 

physical power prices and deliver a reliable source of power to consumers at stable 

prices. The resulting reduced liquidity would also harm the ability of the market to 

generate accurate price signals, which are essential to maintaining efficient wholesale 

markets. 

18 See ICE Henry Financial SPDC Order at 37989. 19 See ICE Henry Financial SPDC Order at 37989 (in which the Commission explained that material 

liquidity means "the extent to which the volume of agreements, contracts or transactions in a commodity 

being traded on the electronic trading facility is sufficient to have a material effect on other agreements, 

contracts or transactions listed for trading on or subject to the rules of a DCM, DTEF or electronic trading 

facility operating in reliance on the exemption in section 2(h)(3).") 

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The critical role that these contracts play in ensuring a steady flow of power to 

retail consumers at reasonably stable prices, coupled with the fact that the SPDC 

determination criteria weigh against designating the contracts as SPDCs, should give the 

CFTC significant pause. In addition to the known risks discussed above, there is still the 

potential for unintended consequences that may result from the application ofthe 

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 deemed an 

SPDC, the ICE Henry Financial LDI Fixed Price Contract, was identified in July of2009 

and the ICE has not yet completed its implementation of the Commission's regulatory 

requirements. 

As discussed above, in the absence of providing additional time for public 

comment, the Commission should make a finding that the ICE Contracts are not SPDCs, 

based on the application of the specific facts associated with these contracts to the criteria 

for determining SPDCs set forth in the Commission's regulations. Ifthe Commission 

does not make such a finding, it should delay making a determination as to whether the 

ICE Contracts are SPDCs until further research can be done on the long-term and marketwide effects such designation may have. In the alternative, the Commission should limit 

the designation ofiCE Contracts as SPDCs to a finite number of contracts. If the 

Commission chooses to do this, it should then study the effect such designation has on 

those contracts and the underlying physical markets prior to taking any action with 

respect to the other ICE Contracts. 

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Finally, to the extent that the ICE Contracts are designated as SPDCs and position 

limits are imposed, the limits should be set high enough to allow for hedging of 

transactions in physical markets at current levels well forward on the price curve and 

allow automatic position increases as a result of load growth or new generation. 

Additionally, the Commission should provide for the opportunity to reassess any 

determination that the ICE Contracts are SPDCs, and to reassess any position limits 

imposed, based on actual experience. 

VI. CONCLUSION 

For the foregoing reasons, EEl respectfully recommends that the Commission not 

designate the ICE Contracts as SPDCs. If you have any questions regarding these 

comments, please do not hesitate to contact Richard F. McMahon, Jr., Executive 

Director, at (202) 508-5571, or Jeff Dennis, Director, Federal Regulatory Affairs, at (202) 

508-5098. 

Respectfully Submitted, 

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Richard F. McMahon, Jr. 

Executive Director 

Edison Electric Institute 

701 Pennsylvania Ave., NW 

Washington, DC 20004 

202-508-5571 (Phone) 

rmcmahon@eei .org 

Paul J. Pantano, Jr. 

Athena Y. Velie 

McDermott Will & Emery LLP 

600 13th Street, NW 

Washington, DC 20005 

Phone: (202) 756-8000 

Fax: (202) 756-8087