EDISON ELECTRIC 

INSTITUTE 

David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, N.W. 

Washington, D.C. 20581 

Received CFTC 

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COMMENT 

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November 10, 2009 .-

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Re: Notice oflntent To Undertake a Determination Whether Certain PJM Contracts,~ 

Offered for Trading on the IntercontinentalExchange, 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 oflntent, Pursuant to the Authority in Section 2(h)(7) 

ofthe Commodity Exchange Act and Commission Rule 36.3(c)(3), to Undertake a 

Determination Whether the PJM Interconnection, LLC ("PJM") WH Real Time Peak 

Daily Contract ("PDP contract"); PJM WH Real Time Peak Contract ("PJM contract"); 

PJM WH Real Time Off-Peak Contract ("OPJ contract"); PJM WH Day Ahead LMP 

Peak Daily Contract ("PDA contract"); and PJM WH Real Time Off-Peak Daily Contract 

("ODP contract") Offered For Trading on the IntercontinentalExchange, Inc. ("ICE"), 

Perform Significant Price Discovery Functions. 1 

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 ofthe U.S. electric power industry. Many of EEl's electric 

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

the Commission in the PJM Notice oflntent, to hedge the price risks associated with 

buying and selling wholesale power supplies. 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 that could, without adequate hedging 

mechanisms, become more volatile because of volatile wholesale electricity prices. As a 

result, EEl and its member companies have a direct interest in the outcome of these 

proceedings. 

1 74 Fed. Reg. 54,966 (Oct. 26, 2009) (the "PJM Notice oflntent"). 

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II. OVERVIEW OF EEl'S COMMENTS 

EEl appreciates the opportunity to comment upon whether the contracts 

referenced in the PJM Notice oflntent and traded on the ICE (collectively, the "ICE 

Contracts") perform significant price discovery functions. As EEl has apprised the 

Commission before, electric power markets are very complex, owing in large part to the 

unique physical characteristics of electricity and the delivery and timing issues that result. 

Customers require electricity around the clock, and our modem economy depends upon 

having a reliable and steady supply of electricity. Electricity cannot be stored in 

significant quantities. As a result, it must be generated and consumed almost 

instantaneously. Moreover, the supply and demand for electricity fluctuates, often 

dramatically, on a minute-by-minute, hourly, daily, weekly and seasonal basis, reflecting 

specific weather patterns, economic drivers and human behaviors. In addition, wholesale 

electricity transactions generally are limited to regional markets because of technical, 

reliability and efficiency factors. For these reasons, wholesale electricity prices are 

among the most volatile of any commodity. 

To manage this volatility, market participants such 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 PJM electricity 

markets. The ability ofEEI members to hedge their price risk by purchasing and selling 

the ICE Contracts helps reduce price volatility in the retail 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 PJM Notice of 

Intent: (1) the short amount of time provided by the Commission to respond to the PJM 

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

information about whether the ICE Contracts meet the criteria of a significant price 

discovery contract ("SPDC"); (2) the ICE Contracts do not satisfy the SPDC 

determination criteria set forth in the Commission's SPDC Order;3 and (3) the costs and 

risks associated with designating the ICE Contracts as SPDCs significantly outweigh any 

potential benefit. 4 

2 Under the Federal Power Act, all sales of electric energy at wholesale must be made at prices that are 

"just and reasonable." See 16 U.S.C. § 824d. In addition, all persons who sell physical power in the 

interstate wholesale markets are subject to the regulation of the Federal Energy Regulatory Commission. 

16 U.S.C. § 824. 3 Significant Price Discovery Contracts on Exempt Commercial Markets, 74 Fed. Reg. 12,178 (Mar. 23, 

2009) (the "SPDC Order"). 4 17CFRParts 15, 16and 17(2009). 

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III. THE COMMISSION HAS NOT PROVIDED A SUFFICIENT 

OPPORTUNITY FOR COMMENT 

The PJM Notice oflntent provides only a 15-day window for filing 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 swap 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 over the last several weeks. 5 

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

to multiple Notices oflntent, all within a compressed time period. 

Given the unique characteristics of the evolving electricity trading markets, and 

the fact that the process for designating SPDCs is still new for both the Commission and 

the affected public (with still only one contract designated 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 PJM Notice oflntent, 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 AVAILABLE EVIDENCE DOES NOT SUPPORT A 

DETERMINATION THAT THE ICE CONTRACTS ARE SPDCS 

EEl respectfully submits that none of the ICE Contracts satisfy 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 

5 See, e.g., 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 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. 

See also NP-15 Financial Day-Ahead LMP Off-Peak Daily Contract, Offered for Trading on the 

lntercontinenta!Exchange, Inc., Perform Significant Price Discovery Functions, 74 Fed. Reg. 51,264 (Oct. 

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 IntercontinentalExchange, Inc., Perform Significant Price Discovery Functions, 74 Fed. 

Reg. 53,720 (Oct. 20, 2009). 6 See PJM Notice oflntent at n. 6 (stating: "[w]here appropriate, the Commission may choose to interview 

market participants regarding their impressions of a particular contract."). 

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and material liquidity in making its determination. 7 For each contract, the Commission 

relies on only two of the four factors that it is required to consider: material price 

reference and material liquidity. The evidence of material price reference and material 

liquidity cited by the Commission appears to be insufficient to support a determination 

that any ofthe ICE Contracts are SPDCs. 8 

A. No Material Price Reference 

As evidence to substantiate that the ICE Contracts serve as a material price 

reference for other transactions, the Commission cites only to its study of exempt 

commercial markets ("ECM Study"), which found generally that "market farticipants 

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

Commission also acknowledges in the PJM Notice oflntent that the ECM Study "did not 

specifically address the power contracts under review." 10 A more in depth analysis of the 

specific contracts demonstrates that there is no material price reference as defined by the 

Commission. 11 

The bids, offers, and transactions in physical electric power markets are not 

primarily "based on," or "determined by referencing, the prices generated by" any of the 

ICE Contracts, as the Commission's regulations require. 12 In fact, the opposite is true: 

the ICE Contracts are priced based on the results of physical commodity trading in PJM' s 

markets. As the Commission correctly notes in the PJM Notice oflntent, the ICE 

Contracts settle at Locational Marginal Prices ("LMPs") that reflect actual physical 

electric power trading and the forces of local supply and demand in the P 1M market. 13 

These LMPs are determined by fundamental factors such as consumer demand, economic 

conditions, weather, generation fuel prices, generation outages, and congestion on the 

electric transmission system. 

Furthermore, LMPs are pervasively regulated by the Federal Energy Regulatory 

Commission ("FERC") under its Federal Power Act jurisdiction to ensure that they are 

just and reasonable. FERC approves filed tariffs that set forth the process for 

determining LMPs. These tariffs include rules to mitigate prices to ensure that they 

7 SPDC Order at 12,181. 8 The Commission does not discuss the remaining two factors- price linkage and arbitrage- in the PJM 

Notice of Intent. EEl assumes that the Commission has not found any evidence of price linkage or 

arbitrage. In fact, the ICE Contracts also fail to satisfy these factors. If the Commission decides that it will 

look to these factors in making any final SPDC determination, it should issue a supplemental notice 

explaining the evidence it believes relates to these factors, and provide EEl and other market participants 

with an opportunity to provide specific comments relative to those factors. 9 See Report on the Oversight of Trading on Regulated Futures Exchanges and Exempt Commercial 

Markets, Oct. 2007 available at 

http://www. cftc.gov /ucrn/ groups/public/ @newsroom/ documents/file/pr5403-07 _ ecrnreport. pdf,- See also 

PJM Notice oflntent at 54,967, 54,968, 54,969. 10 PJM Notice oflntent at 54,967, 54,968, 54,969. 11 ICE Henry Financial SPDC Order at 37,989. 12 See 17 CFR § 36.3(c)(1)(iii). 13 An LMP at a particular point on the transmission has three components: the marginal cost of energy, 

marginal losses, and marginal congestion costs. PJM Open Access Transmission Tariff, Attach. KAppendix § 2.6. 

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remain just and reasonable, as well as rules establishing independent market monitors to 

consistently review market prices and market participant behaviors. FERC also acts on 

its own to oversee the markets to ensure that they are operating properly and are free 

from manipulation, and has strong authority to punish actual or attempted market 

manipulation. 

In short, the ICE Contracts settle based on PERC-regulated LMPs that are 

themselves determined by physical supply and demand factors that exist independent of 

any related financial contracts. In addition, the ICE contracts only settle on a daily or 

monthly basis, whereas the physical PJM market provides both day-ahead and real-time 

pricing, with real-time LMPs calculated every five minutes. For these reasons, the ICE 

Contracts cannot serve as a material price reference in physical electric power markets. 

The fact that the ICE Contracts do not serve as a price reference for physical transactions 

should weigh heavily against a final determination by the Commission that they are 

SPDCs. 14 

B. No Material Liquidity 

The PJM Notice oflntent concludes, based solely on the average number of daily 

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

Contracts, that the ICE Contracts may satisfy the material liquidity provision outlined in 

the SPDC Order .

15 These aggregated figures do not provide an accurate view of actual 

liquidity. 

First, the ICE Contracts actually are comprised of hundreds of individually traded 

products. For example, the PJM contract referenced in the PJM Notice oflntent is 

actually 110 individual products, each designated by a particular month. Similarly, the 

OPJ contract is comprised of 86 individual monthly products. The PDP, PDA and ODP 

contracts are 38 individual products, each designated by a particular calendar day. These 

products are traded individually in the marketplace- for example, a January contract, 

regardless of its liquidity, is not helpful to a trader who needs to liquidate an October 

position. For this reason, the contracts should not be aggregated for purposes of 

determining liquidity. The more appropriate method for determinin~ liquidity is to 

examine the activity in a single traded month or day, as applicable. 1 

Further, the aggregated data relied on by the Commission in the Notice of Intent 

also includes a significant percentage of bilaterally negotiated, over-the-counter trades 

14 See The Joint Explanatory Statement of the Committee of Agriculture Conference, H.R. Rep. No. Ill 0 

627, 110 Cong., 2nd Sess. at 978-86 (2008) (explaining that Congress gave the Commission authority to 

designate as SPDCs contracts that may be quoted as an independent price reference by the public). 15 See PJM Notice oflntent at 54,967, 54,968, 54,969. The CFTC used trade data from a required 

quarterly notification that ICE filed on July 27, 2009. 16 For example, a high-level review of data available from ICE for September 2009 appears to show that at 

least two of the ICE Contracts, when broken into their individual contract month or day, had less than five 

trades per day. 

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that have been offered to the ICE for clearing. These transactions, which are not offered 

or bid on ICE, should not be included for purposes of determining material liquidity. 

In addition, 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 of the ICE Contracts is "sufficient to have a material effect" on corresponding 

exchange-traded contracts, e.g., contracts traded on the New York Mercantile Exchange 

("NYMEX"), a designated contract market ("DCM"). 17 The Commission does not 

specify the exchange-traded contracts to which it is comparing the ICE Contracts. While 

a review of the contracts traded on the NYMEX reveals some contracts that appear to 

correspond to the ICE Contracts, at least two of the ICE Contracts- the PDA and ODP 

contracts - do not appear to have any corresponding NYMEX contract. 18 As a result, 

these ICE Contracts, at a minimum, could not have a "material effect" on any exchangetraded contracts because no corresponding contracts appear to exist. 

More broadly, there is no direct price linkage between the ICE Contracts and the 

Corresponding NYMEX Contracts because both sets of contracts reference the day-ahead 

or real-time hourly LMPs set by physical power trading in the PJM markets (as discussed 

above). As a result, the ICE Contracts cannot have a direct material effect on the 

NYMEX contracts: both sets of contracts independently reference LMPs that are 

determined based on physical factors, entirely separate from ICE or NYMEX. Because 

trading in the ICE Contracts cannot have a direct "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 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 

17 See Order Finding That the ICE Henry Financial LDl Fixed Price Contract Traded on the 

IntercontinentalExchange, Inc., Performs a Significant Price Discovery Function, Final Order. 74 Fed. Reg. 

37,989 (July, 30 2009) (the "ICE Henry Financial SPDC Order"). 18 The following five NYMEX contracts ("Corresponding NYMEX Contracts") are most similar to the 

ICE Contracts: PJM Financially Settled Daily Futures -Peak (JD), which is similar to the ICE PDP 

contract; PJM Financially Settled Monthly Futures- Peak (JM) and PJM Western Hub Peak CalendarMonth Real-Time LMP Swap Futures (Ll), which are each similar to the ICE PJM contract, and; PJM 

Financially Settled Monthly Electricity Futures- Off-Peak (JP) and PJM Western Hub Off-Peak CalendarMonth Real-Time LMP Swap Futures (N9), which are each similar to the ICE OPJ contract. 19 See ICE Henry Financial SPDC Order at 37,989 (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 [derivatives 

transaction execution facility] or electronic trading facility operating in reliance on the exemption in section 

2(h)(3)."). 

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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 in the physical market could also harm the ability 

of the market to generate accurate price signals, which are essential to maintaining 

efficient wholesale markets. 

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, requires careful 

analysis by the Commission. In addition to the potential risks discussed above, there is 

the potential for other 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 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. If the 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 

any SPDC designation 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. 

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

limits are imposed, the limits should be crafted in such a way that they 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. 

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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, 

WDC99 1789735-4.064158.0013 

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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