C.f.T~C. 

OFFICE Of THE SECRETARIAT 

2009 NOU 10 Prl 5 07 

November 10, 2009 

David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, N.W. 

Washington, D.C. 20581 

COMMENT 

955 Jefferson Avenue 

Valley Forge Corporate Center 

Norristown, PA 19403-2497 

Vincent P. Duane 

IJ1-3~ 

(f) 

Vice President and General Counsel 

610.666.4367 

610.666.4281 FAX 

duanev@pjm.com 

Received CFTC 

Records Section 

ltj/o/tff 

Re: Notice of Intent To Undertake a Determination Whether Certain PJM Contracts Offered for 

Trading on the lntercontinentaiExchange. Inc .. Perform Significant Price Discovery Functions 

Dear Mr. Stawick: 

PJM Interconnection, L.L.C. {"PJM") respectfully submits the following comments in response to 

the U.S. Commodity Futures Trading Commission's (the "Commission") Notice of Intent, Pursuant to the 

Authority in Section 2(h)(7) of the Commodity Exchange Act ("CEA"} 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 lntercontinentaiExchange, Inc. 

(collectively, the "ICE Contracts"), Perform Significant Price Discovery Functions.1 PJM's comments apply 

to each of the five contracts included in Commission's Notice of Intent. 

I. PJM'S PRODUCTS AND MEMBERS 

PJM is a Regional Transmission Organization ("RTO") approved by the Federal Energy Regulatory 

Commission ("FERC") to coordinate the transmission of wholesale electricity in all or parts of 13 states and 

the District of Columbia.2 PJM currently has approximately 550 members, including transmission owners, 

load serving entities, generation owners, electric distributors, end-use commercial and industrial customers, 

and other suppliers (e.g., power marketers), among others. 

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 PJM WH Real Time Peak Daily Contract, PJM WH Real Time Peak Contract, PJM WH Real Time OffPeak Contract, PJM WH Day Ahead LMP Peak Daily Contract, and PJM WH Real Time Off-Peak Daily Contract, Offered for Trading on the 

lntercontinentaiExchange, Inc., Perform Significant Price Discovery Functions, 74 Fed. Reg. 54,966, 54,969 (Oct. 26, 2009) (the "Notice of 

Intent"). 

Pennsylvania-New Jersey-Maryland Interconnection, 81 FERC 1J61,252 (1997), reh'g_denied, 92 FERC 1J61 ,282 (2000); PJM 

Interconnection, L.L.C., 101 FERC 1J61,345 (2002); PJM Interconnection, L.L.C., 81 FERC 1!61,257 (1997), and PJM Interconnection L.L.C., 

96 FERC 1J61 ,061 (2001 ), order on compliance filing, 98 FERC 1J61 ,072 (2002). See also Regional Transmission Organizations, Order No. 

2000, FERC Slats. & Regs.1J31 ,089 (1999), order on reh'g. Order No. 2000-A, FERC Slats. & Regs.1J31 ,092 (2000), affd sub nom, Pub. Uti/. 

Dist. No. 1 v. FERC, 272 F.3d 607 (D.C. Cir. 2001). 

610.666.8980 1 wvM.pjm.com 
David A. Stawick 

November 10, 2009 

Page 2 

P JM began operating a wholesale electricity spot market in 1997, pursuant to FERC's Order No. 

888, which introduced independent operation of the grid as a policy initiative to "meet the demands of the 

competitive marketplace."3 PJM administers auctions and markets that provide for the purchase and sale 

··of energy and energy-related products and services, including short- and long-term transmission rights 

products, a day-ahead (spot) energy market, a real-time (day of/spot) energy market, a capacity market, 

and several ancillary services markets. 

PJM's electricity markets establish wholesale prices for electricity through the use of Locational 

Marginal Pricing ("LMP"). The LMP construct allows prices to reflect the actual, real-time cost of providing 

electricity to specific locations or "nodes" throughout the PJM system. Location-specific, real-time price 

signals improve the efficiency of the PJM wholesale electricity markets by allocating resources 

economically and encouraging an appropriate level of conservation and new development of electricity 

generation and transmission resources.4 The LMP construct additionally sends price signals to both supply 

and demand side participants to encourage response in a manner that most efficiently ensures the 

continued reliable operation of the power grid. LMPs also are essential components of the five contracts 

included in Commission's Notice of Intent. 

II. PJM'S COMMENTS 

PJM appreciates the opportunity to comment in connection with the Commission's determination 

as to whether the ICE Contracts perform significant price discovery functions. Although PJM takes no 

position as to whether the ICE Contracts should be regulated as significant price discovery contracts, PJM 

believes that two fundamental attributes of its LMP-based products and markets will inform the Commission 

in making the threshold determination as to whether the ICE Contracts perform a significant price discovery 

function. 

A. LMPs Represent Prices in the Spot Market 

PJM operates day-ahead and real-time electricity markets. The day-ahead market is a forward 

market in which hourly LMPs are calculated for the next operating day based on generation offers, demand 

bids and scheduled bilateral transactions. The real-time market is a spot market in which current LMPs are 

calculated at five-minute intervals based on actual grid operating conditions. The day-ahead and real-time 

electricity markets are spot markets within the meaning of the CEA because all transactions clear and settle 

within two days of execution. 

B. LMPs Represent Actual Supply and Demand in the Physical Energy Market 

LMPs reflect the value of electricity at the specific location and time of delivery. As the 

Commission correctly describes in its Notice of Intent, each LMP has three components: the marginal cost 

Promoting Wholesale Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public 

Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888, 61 FR 21540 (May 10, 1996), FERC Slats. & 

Regs.~ 31,036 (1996), order on reh'g, Order No. 888-A. 62 FR 12274 (Mar. 14, 1997), FERC Slats. & Regs.~ 31,048 (1997), order on reh'g, 

Order No. 888-B, 81 FERC ~ 61,248 (1997), order on reh'g, Order No. 888-C, 82 FERC ~ 61,046 (1998), affd in relevant part sub nom. ' · 

Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000), affd sub nom. New York v. FERC, 535 U.S. 1 (2002). 

See generally Regional Transmission Organizations, Order No. 2000, FERC Slats. & Regs.~ 31,089 (1999), order on reh'g. Order 

No. 2000-A. FERC Slats. & Regs.~ 31,092 (2000) ("Order 2000"). 

610.666.8980 I www.pjm.com 
David A. Stawick 

November 10, 2009 

Page 3 

of energy, marginal losses, and marginal congestion costs.5 In practice, this means that if the lowest-priced 

electricity can reach all locations without impediment, the price of electricity will be the same across the 

entire grid, taking account for losses that are attendant to the physics of moving electrons over longer 

distances (marginal losses). If, however, a transmission constraint system outage, or other physical 

limitation of the PJM system prevents electricity from flowing freely to certain areas (i.e., congestion), moreexpensive electricity must be dispatched to meet demand located behind the constraint. As a result, LMPs 

will be higher in those physically constrained locations. 

Stated broadly, the price of electricity in the PJM LMP-based markets is determined by (i) actual 

physical conditions affecting supply (such as outages or deratings of generation and transmission facilities) 

and demand (driven significantly by weather) and (ii) market based offers made by sellers in PJM's 

markets. Bilateral trading activity, including financial transactions undertaken in over the counter 

environments would appear to have, at best attenuated and more likely, no impact on LMP outcomes. 

LMPs instead are driven by actual physical conditions affecting PJM's ability to dispatch generation to meet 

needed demand. 

In other words, the ICE Contracts do not determine LMPs in PJMs day-ahead and real-time 

electricity markets. Rather, the prices of the ICE Contracts are driven by prices in PJM's LMP-based 

markets. 

Finally, it should be noted that the processes (broadly described above) that contribute to the 

forming of LMPs are subject to exhaustive regulatory oversight by the FERC and are filed by PJM with that 

agency in the form of a tariff. Moreover, LMP outcomes are subject to a "just and reasonableness" 

standard under the Federal Power Act wherein prices must be free from the exercise of market power and 

market manipulation. PJM's markets are overseen by extensive and independent market monitoring and 

by the FERC's oversight, investigation and enforcement resources. 

Ill. CONCLUSION 

PJM respectfully requests that the Commission consider its comments in connection with the 

determination as to whether the ICE Contracts perform significant price discovery functions. If you have 

any questions regarding PJM's comments, please contact Vincent Duane, General Counsel, at (610) 666-

4367. 

Respectfully submitted, 

Vincent P. Duane 

567201 

74 Fed. Reg. 54,966; see also PJM Open Access Transmission Tariff ("OATT"), Attach. K-Appendix § 2.6. 

610.666.8980 I www.pjm.com