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AMERICAN PUBLIC GAS ASSOCIATION 

July 13, 2009 

VIA E-MAIL: secretary@cftc.gov 

David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, N.W. 

Washington, D.C. 20581 

,, 

COMMENT 

Re: "Notice of Intent to Undertake a Determination Whether the Henry 

Financial LDI Fixed Price Contract Traded on the Intercontinental 

Exchange, Inc., Performs a Significant Price Discovery Function," 

74 Fed. Reg. 28028 (June 12, 2009). 

Dear Mr. Stawick: 

The American Public Gas Association ("APGA'') appreciates the opportunity to comment 

on the Commodity Futures Trading Commission's ("Commission") "Notice of Intent to 

Undertake a Determination Whether the Henry Financial LDI Fixed Price Contract Traded on 

the Intercontinental Exchange, Inc., Performs a Significant Price Discovery Function," 74 Fed. 

Reg. 28028 (June 12, 2009) ("Notice of SPDC Determination"). The Notice of SPDC 

Determination is the first review by the Commission of whether a particular contract performs a 

significant price discovery function under the new authority granted by the CFTC 

Reauthorization Act of 2008 ("Reauthorization Act"). 

APGA 

APGA is the national association for publicly-owned natural gas distribution systems. 

There are approximately 1,000 public gas systems in 36 states and over 700 ofthese systems are 

APGA members. Publicly-owned gas systems are not-for-profit, retail distribution entities 

owned by, and accountable to, the citizens they serve. They include municipal gas distribution 

systems, public utility districts, county districts, and other public agencies that have natural gas 

distribution facilities. 

The Reauthorization Act 

Over the past several years, and leading up to the passage of the Reauthorization Act, 

APGA has sounded the alarm with respect to the need for greater oversight and transparency of 

the over-the-counter ("OTC") markets in financial contracts in natural gas. APGA noted in 

testimony both before Congress and the Commission, that APGA's members have lost 

confidence that the prices for natural gas in the futures and the economically linked OTC 

201 Massachusetts Avenue, NE, Suite C-4 • Washington, DC 20002 • 202.464.2742 • 202.464.0246 (fax) 
David A. Stawick 

Page 2 

July 13, 2009 

markets are an accurate reflection of supply and demand conditions for natural gas. APGA 

further testified that restoring trust in the validity of the pricing in these markets requires a level 

of transparency in natural gas markets which assures consumers that market prices are a result of 

fundamental supply and demand forces and not the result of manipulation or other abusive 

market conduct. APGA therefore strongly supported an increase in the level of transparency 

with respect to trading activity in these markets. For this reason, APGA supported enactment of 

the Reauthorization Act and, in particular, the provisions of the Reauthorization Act which 

significantly expanded the Commission's oversight authority with respect to exempt commercial 

markets having Significant Price Discovery Contracts ("SPDC"). 

APGA applauds the Commission's quick promulgation of rules implementing its 

enhanced authority with respect to SPDCs traded on exempt commercial markets.! APGA 

further applauds the Commission for bringing this first proceeding to determine whether a 

contract performs a significant price discovery function. APGA believes that it is critically 

important for the Commission to remain committed to vigorous enforcement of this new 

authority. 

The Proceeding 

As an initial matter, APGA believes that it is appropriate to comment on the procedure of 

this first ever Notice of SPDC Determination. APGA recognizes that the determination of 

whether a particular contract serves a significant price discovery function must be made on the 

individual facts and circumstances of each such inquiry. The Commission, in part, relies upon an 

October 2007 report to demonstrate that "traders and voice brokers view the subject ICE contract 

as economically equivalent to the NYMEX ... futures contract."2 Although APGA agrees that 

such evidence is useful with respect to this particular case, it also cautions that such a focused 

and specific study should not be expected to be part of the evidentiary foundation with respect to 

each contract subject to a SPDC determination. Were the Commission to require such a study in 

relation to each individual notice of determination, it might make the process more resource 

intensive than Congress intended it to be. With that in mind, APGA urges the Commission to 

keep the process as efficient as possible so that it can enforce these provisions aggressively 

within its resource constraints. 

Support for finding ICE Henry Financial LDJ Fixed Price Contract a SPDC 

The Commission in its release asks commenters to provide written views, data and 

analysis that would address whether the ICE Henry Financial LD I Fixed Price Contract for 

natural gas ("ICE Henry Hub Contract") is a SPDC. As noted above, APGA's members are 

publicly-owned natural gas distribution systems. APGA' s membership includes both local gas 

distribution systems that hedge their individual gas purchases as well as state-level service units 

that hedge the gas purchases of local distribution systems. These members have direct experience 

as end-user buy side participants in exchange-traded and/or OTC derivatives markets. APGA's 

1 See, "Significant Price Discovery Contracts on Exempt Commercial Markets," 74 Fed Reg. (Mar. 23, 2009). 

2 Id at 2830. 
David A. Stawick 

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July 13, 2009 

comments rely upon the common experience of those of its members that are active users of the 

derivatives markets. These members are knowledgeable with respect to the operation of the cash 

markets in natural gas, NYMEX and the Intercontinental Exchange ("ICE"). 

The Commission asks commenters to address the four specific criteria that the 

Commission must consider: 1) price linkage; 2) arbitrage; 3) material price reference; and 4) 

material liquidity. Our analysis of each ofthese is as follows. 

Price linkage 

Our members recognize that the prices on the ICE Henry Hub contract and the NYMEX 

contract have an on-going, linked relationship. Our members report that this relationship extends 

not only to the linked settlement price, but to prices between the two contracts throughout the 

trading day. Members report that the prices of both markets are substantially the same and move 

in tandem. Counterparties will use either market interchangeably as a basis for quoting prices. 

This market practice and usage clearly support a finding of pricing linkage between the ICE 

Henry Hub contract and the NYMEX contract. 

Arbitrage 

As noted above .. members uniformly report that the prices oftheiCE Henry Hub contract 

and the NYMEX Henry Hub contract are closely linked, making arbitrage trading between the 

two markets possible. 

Material Price Reference 

APGA's members note that in general the written cash market contracts that they enter 

into reference the NYMEX settlement price, as does the ICE Henry Hub contract itself. 

Accordingly, the cash contracts that they enter into do not commonly explicitly reference the 

ICE Henry Hub contract as the settlement price. However, as noted above, it is common market 

practice for dealers to provide cash market price quotes based upon the ICE Henry Hub contract. 

Thus, the ICE Henry Hub contract is routinely used as a means by which cash market prices are 

referenced. 

Material liquidity 

APGA believes that the ICE Henry Hub contract is materially liquid. Whether or not our 

members trade the Henry Hub contract on ICE, they are of the opinion that they would be able to 

execute substantial sized orders without having an impact on the market price through the 

transaction. Our members note that there is a continuous stream of prices observed prices from 

the ICE Henry Hub contract and that there is little trading evidence that price concessions are 

necessary in order to execute a trade. Finally, APGA notes that the prices on the ICE Henry Hub 

contract are correlated with other contemporaneous prices 
David A. Stawick 

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July 13, 2009 

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As APGA has noted in the past, natural gas is a lifeblood of our economy and millions of 

consumers depend on natural gas every day to meet their daily needs. It is critical that the price 

those consumers pay for natural gas comes about through the operation of fair and orderly 

markets and through appropriate market mechanisms that establish a fair and transparent 

marketplace. For this reason, APGA supported enactment of the Reauthorization Act. 

APGA commends the Commission's decision to initiate this first ever Notice of SPDC 

Determination. Based upon the analysis outlined above, APGA's members believe that the ICE 

Henry Hub contract is a significant price discovery contract and that the evidence and analysis 

provided to the Commission support such a determination. 

APGA supported enactment of the Reauthorization Act in order to help restore trust in 

the validity of the pricing in these markets. As APGA noted previously, whether the 

Reauthorization Act achieves these goals largely depends in the first instance upon whether the 

Commission finds contracts to be SPDCs under the Act's provisions. Accordingly, in exercising 

this authority, the Commission must bear in mind that these provisions of the Reauthorization 

Act are remedial in purpose and intent and that the Commission as a consequence should carry 

out its mandate under the Reauthorization Act thoroughly and energetically. 

We would be happy to discuss our comments or the evidence and analysis of our 

members discussed above at greater length with the staff. Please feel free to contact Bert 

Kalisch, President and CEO of APGA, David Schryver, Executive Vice President at 202 464-

2742, or Paul M. Architzel of Alston & Bird, LLP, outside counsel to APGA at 202 756-3492. 

c: Chairman Gensler 

Commissioner Dunn 

Commissioner Chilton 

Commissioner Sommers 

Respectfully submitted, 

Daniel Berkovitz, General Counsel 

Richard A. Shilts, Director DMO 

Susan Nathan, Senior ·Special Counsel 

Gregory Price, Industry Economist 

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