.• 

October 21, 2009 

Received CFTC 

Records Section 

, D/e:AI/ or 

VIA Email: secretarv@cftc.gov 

David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21 st Street, NW 

Washington, DC 20581 

C.f.T.C. 

OFFICE OF HIE SECRETARIAT 

2009 OCT 21 Prl Lt 38 

COMMENT 

Re: "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; 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 lntercontinentaiExchange, Inc., Perform 

Significant Price Discovery Functions," 74 Fed. Reg. 51264 (October 6, 2009). 

Dear Mr. Stawick: 

The Electric Power Supply Association ("EPSA") 1 respectfully files comments on the 

Commodity Futures Trading Commission's ("CFTC" or "Commission") notice of intent 

("notice" or "NOI") to determine whether the SP-15 Financial Day-Ahead LMP Peak 

("SPM") contract, SP-15 Financial Day-Ahead LMP Peak Daily ("SOP") contract, the 

SP-15 Financial Day-Ahead LMP Off-Peak Daily ("SQP") contract, the SP-15 Financial 

Swap Real Time LMP- Peak Daily ("SRP") contract, the SP-15 Financial Day-Ahead 

LMP Off-Peak ("OFP") contract, the NP-15 Financial Day-Ahead LMP Peak Daily 

("DPN") contract, and the NP-15 Financial Day-Ahead LMP Off-Peak Daily ("UPN") 

contract, all offered for trading on the Intercontinental Exchange, Inc. ("ICE"), perform 

significant price discovery functions. 

The notice, published in the Federal Register on October 6, 2009, and establishing a 15 

day comment period, is the first review by the Commission of whether particular power 

contracts perform a significant price discovery function pursuant to the authority granted 

by the CFTC Reauthorization Act of 2008 ("Reauthorization Act"). EPSA believes that 

these contracts do not serve a significant price discovery function for two reasons: (1) 

based on how the California Independent System Operator ("CAISO") operates and 

utilizes Locational Marginal Prices ("LMPs"), the contracts do not serve as a material 

price reference, and (2) the contracts are not materially liquid. In light of these facts 

1 The comments contained in this filing represent the position of EPSA as an organization, but not 

necessarily the views of any particular member with respect to any issue. 

1 
discussed below, the SPM, SOP, SQP, SRP, OFP, DPN and UPN contracts do not 

meet either of the tests necessary to function as Significant Price Discovery Contracts 

("SPDCs"). 

THE ELECTRIC POWER SUPPLY ASSOCIATION 

EPSA is the national trade association representing competitive power suppliers, 

including generators and marketers. These suppliers, who account for 40 percent of the 

installed generating capacity in the United States, provide reliable and competitively 

priced electricity from environmentally responsible facilities serving global power 

markets. EPSA seeks to bring the benefits of competition to all power customers. 

Many of EPSA's member companies are active market participants in and members of 

the CAISO market and participate in western power markets. Accordingly, EPSA has a 

direct and substantial interest in the outcome of this proceeding. Therefore, allowing . 

EPSA to actively participate based on the input from its members in this proceeding 

would be in the public interest, particularly as this proceeding represents the first 

instance in which the Commission will determine whether particular contracts which 

settle against prices within an organized wholesale electricity market serve a significant 

price discovery function. 

BACKGROUND 

In 2000, the Commodity Futures Modernization Act ("CFMA") created a system of tiered 

regulation to replace a "one size fits all" regulatory scheme. As part of the tiered 

regulatory scheme, Congress created exempt commercial markets ("ECMs"), which are 

principal to principal electronic trading platforms that serve sophisticated market 

participants. ECMs were designed to encourage electronic trading of derivatives by 

sophisticated market participants, and were subject to limited CFTC oversight. The 

CFTC Reauthorization Act of 20082 expanded the CFTC's authority over ECMs that list 

contracts that serve a significant price discovery function. Congress directed the 

Commission to consider five criteria when making the significantprice discovery 

determination: (1) Price Linkage; (2) Arbitrage; (3) Material Price Reference; (4) Material 

Liquidity; and (5) Other Factors. 

The CFTC NOI asserts that the SPM, SOP, SQP, SRP, OFP, DPN and UPN contracts 

meet Material Price Reference and Material Liquidity elements. In this context, it is 

important to note that Congress gave the CFTC this authority to capture: (1) contracts 

that trade with enough volume to impact trading on a designated contract market, or (2) 

contracts that trade with enough volume to be quoted as an independent price 

reference by the public. 3 

2 Title XIII of the Food, Conservation and Energy Act of 2008, Pub. L. No. 110-246, 122 Stat. 1623 (June 

18, 2008). 

3 The Joint Explanatory Statement of the Committee of Agriculture Conference, H. R. Rep. No. 111 0 627, 

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

2 
EPSA supports efforts to improve the transparency of markets. In doing so, there 

should be a balance between providing market oversight rules that allow for a broad use 

of market-based risk management tools to conduct business while providing regulators 

with the needed information and transparency to protect against market manipulation 

and control excessive speculation. Based on these goals and the criteria set out to 

define a significant price discovery function, the SPM, SOP, SQP, SRP, OFP, DPN and 

UPN contracts do not serve a significant price discovery function. 

THE CONTRACTS 

As the Commission correctly notes, the SPM, SOP, SQP, SRP, OFP, DPN and UPN 

contracts are financially settled contracts based upon the volumetric weighted average 

of LMPs occurring in various CAISO market locations. 4 The LMPs are derived from the 

CAl SO electricity market and result from the CAISO tariff structure approved and 

regulated by the Federal Energy Regulatory Commission ("FERC"). 5 

It is important to note that the physical electricity market reflects the unique nature of 

electricity as a commodity with prohibitive storage costs. In order to ensure the 

reliability of the electrical grid, supply must equal demand at numerous locations at all 

times. As one would imagine, a complex process overseen by federal regulators, taking 

into account reliability and competitive market forces, is required to procure power 

across all locations on the CAISO grid for each settlement interval of the day. An LMP, 

regardless of whether it is a day ahead LMP or a real-time LMP, is a product of the 

intersection of supply and demand at a specific location on the grid. As a result, the 

price of electricity in CAl SO for each settlement interval, the LMP, reflects forces of 

supply and demand for the physical commodity at each pricing point. Further, the 

process is overseen by FERC based upon its successful implementation of Regional 

Transmission Organization/Independent System Operator ("RTO" or "ISO") markets 

across the United States. 

For the Day Ahead ("DA") LMP, the CAISO market receives offers from Scheduling 

Coordinators that schedule generation the day before expected delivery ("supply"), and 

the CAISO forecasts demand in the CAISO market for delivery of DA electricity ("load"). 

The CAISO matches the offers to sell or deliver electricity to the forecast load. The Day 

4 As explained by ICE in an advisory dated March 27, 2009: "On April 1, 2009, the California ISO (CAl SO) 

will launch the new Market Redesign and Technology Upgrade (MRTU) for the California electricity 

markets. This is only a reminder as in January 2008, ICE added language to the financial swap confirms 

for NP 15 and SP 15 to reflect the changes in the California markets post MRTU. This change will only 

affect the Floating Price portion of confirms for Fin Swap Peak, FP for ICE and Fin Swap Off Peak, FP for 

ICE as follows: Floating Price: ... April 1, the "Floating Price" will be the average of the hourly Day Ahead 

LMP prices posted by CAl SO for the [NP-15 or SP 15] EZ Gen Hub. In addition, to comply with the 

CAl SO tariff, ICE will hold open all CAISO cleared swaps for 8 days to allow for any price adjustments by 

CAISO. All additional language will be retroactive to previous confirmations in these products." 

5 The CAl SO electricity market is also subject to FERC directed price mitigation to prevent the exercise of 

locational market power by any supplier. 

3 
Ahead market is an essential part of the planning and modeling required to ensure the 

reliability of the electrical grid. The day-of (or Real-Time) market is a market where 

power deliveries to the market reflect the actual real-time load and supply offers 

occurring in the delivery day. As electricity supply and demand are a product of everchanging factors such as weather and equipment availability (generators, transmission, 

etc), real-time supply and load will often diverge from day-ahead expectations. The 

Real-Time LMP reflects this unpredictable and volatile matching of supply and demand 

across numerous locations on the grid at each moment. 

Therefore, the price of electricity in CAISO for each settlement interval, the LMP, 

reflects the forces of supply and demand for the physical commodity at each pricing 

point. That market is the product of an extensive multiyear effort closely overseen and 

regulated by FERC ("Market Redesign and Technology Update" or "MRTU"). The 

market functions are embodied in a FERC-approved tariff on file with FERC. The LMP 

prices created by this process are the outcome of the highly mitigated and transparent 

physical cash market driven by load needs and supply availability. External financial 

transactions such as the ICE swaps market do not impact the LMP in CAISO. Under 

the CAISO's tariff, the algorithm for setting LMP prices at a specific location on the grid 

for each settlement interval is driven by the available supply and demand for physical 

electricity, subject to operating conditions on the CAISO grid. 

THE CFTC'S ANALYSIS OF THE CONTRACTS AS POTENTIAL SPDCS 

The CFTC's NOI asserts that the SPM, SOP, SQP, SRP, OFP, OPN and UPN contracts 

serve a significant price discovery function for two reasons: (1) they each serve as a 

material price reference, and (2) each contract is materially liquid. A reading of the 

Reauthorization Act and the Commission's SPOC rules, in light of the facts of how the 

CAISO operates, demonstrates that the SPM, SOP, SQP, SRP, OFP, OPN and UPN 

contracts meet neither of these tests. 

1. Material Price Reference 

The first basis for the Commission's determination is that the SPM, SOP, SQP, SRP, 

OFP, OPN and UPN contracts serve as a material price reference. Congress instructed 

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. The Commission elaborates on this by 

saying that it will rely on one of two sources of evidence, direct or indirect, that the 

contract is a material price reference. A direct reference would be whether the cash 

market quotes the ECM contract. An indirect reference would be whether an industry 

publication quotes the ECM's contract's price. The SPM, SOP, SQP, SRP, OFP, OPN 

and UPN contracts meet neither of these standards. 

The CFTC has not identified any contracts in any market that settle to, or reference, the 

SPM, SOP, SQP, SRP, OFP, OPN or UPN contract. This is not surprising, because the 

cash market risk that these contracts hedge is the volatility in the CAISO markets. This 

4 
pricing point does not need a proxy pricing vehicle as the actual cash price is constantly 

and transparently produced by the FERC-regulated CAISO which is directly involved in 

assuring reliable power at competitive prices. That is, the price discovery for the day 

ahead and hourly LMPs in the CAISO market is the CAISO market itself. The LMPs for 

the CAl SO's Day Ahead and Real Time markets are the direct reflection of supply and 

demand in CAISO, and are readily and transparently available. 

Logically, parties desiring to reference the CAISO LMPs in a contract, whether peer-to 

peer, voice-brokered, or traded on a designated contract market or otherwise, would do 

so directly by referencing the actual, published LMPs, rather than indirectly by 

referencing the SPM, SOP, SOP, SRP, OFP, DPN or UPN contracts. EPSA is not 

aware of any circumstances in which it would make sense to reference those contracts 

rather than the ·cAl SO LMPs themselves. 

As to the indirect reference regarding whether an industry publication quotes the ECM's 

contract's price, the only publication that the CFTC refers to is the West Power End of 

Day Package. This is an ICE publication, and it is logical that ICE would publish the 

prices of its own contracts, as any other contract market does. However, the fact that 

ICE publishes the settlement prices of its own contracts holds no weight as evidence of 

a material price reference in this instance. As stated above, EPSA is not aware of and 

the NOI has provided no evidence of any contracts settling on this reference. The 

CFTC has not identified any circumstance where the forward price quote for the SPM, 

SOP, SOP, SRP, OFP, DPN or UPN contract would be used as a reference. The 

logical reference for trading in or around CAISO is the most reliable price reference, the 

CAISO market Day Ahead and Real Time LMPs, publicly available on the CAISO 

website. 

2. Material Liquidity 

To find material liquidity, the Commission needs to determine 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. The Commission also states "[l]iquidity is a broad concept that 

captures the ability to transact immediately with little or no price concession." 6 The 

SPM, SOP, SOP, SRP, OFP, DPN and UPN contracts lack both a material effect on 

other contracts, and sufficient liquidity. 

a. No Material Effect on other Contracts Listed for Trading 

EPSA is not aware that trading in the SPM, SOP, SOP, SRP, OFP, DPN and UPN 

contracts has any effect whatsoever on any contract listed for trading in a designated 

contract market ("DCM"), ECM or even in the OTC market. The NOI does not provide 

any indication otherwise. Logically, other CAISO-related contracts, either listed on 

DCMs or traded in the OTC market, would be expected to settle or reference the CAISO 

market Day Ahead and Real Time LMPs directly, rather than doing so indirectly by 

6 Appendix A to Part 36, 17 C.F.R. 36 (2009). 

5 
referencing the SPM,.SDP, SQP, SRP, OFP, DPN and UPN contracts. Additionally, 

trading in the SPM, SOP, SQP, SRP, OFP, DPN and UPN contracts has no effect and 

can have no effect on the FERC-regulated CAISO market Day Ahead and Real Time 

LMPs. Thus, neither EPSA nor the NOI can identify any indirect effect on any other 

contracts listed for trading. 

b. Liquidity in these Contracts is Insufficient 

The Commission states 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, "a market where trades occur multiple times per minute."7 Trading in the SPM, 

SOP, SQP, SRP, OFP, DPN and UPN contracts fails to meet this standard. The 

statement above reveals two elements that can show liquidity: 1) a narrow bid/ask 

spread, and 2) a trade frequency of multiple trades per minute, neither of which is 

present in any of the ICE contracts. For the second quarter 2009, the most active of the 

identified contracts is the SPD contract, which had an average of 111 trades per day 

during the quarter. The second highest average was in the SPM contract at 84 trades 

per day, and the lowest averages were in the MXO and OFP contracts at 10 and 9 

trades per day, respectively. Notably, these trade amounts are for all contract months 

combined, not just the prompt month. Even under a hypothetical scenario that assumes 

that all trading occurs in the same contract month, the highest daily average of 111 

trades per day still falls well short of a "multiple trades per minute" standard. As shown 

above, even if there is adequate liquidity, there is no material price reference leading to 

the question of why a contract with liquidity that did not serve as a price reference would 

be designated as a SPDC. 

CONCLUSION 

The SPM, SOP, SQP, SRP, OFP, DPN and UPN contracts meet neither the material 

price reference nor material liquidity standard. The Commission has identified no other 

contract in any market that is tied to the settlement price of these ICE contracts. Trading 

in the SPM, SOP, SQP, SRP, OFP, DPN and UPN contracts cannot reasonably be 

expected to have any effect whatsoever on CAISO market Day Ahead and Real Time 

LMPs. Logically, other CAl SO-related contracts, either on DCMs or in the OTC market, 

could also be expected to reference, or to settle to, the CAISO LMPs directly, so trading 

in the SPM, SOP, SQP, SRP, OFP, DPN and UPN contracts should have no effect on 

the prices of contracts in other markets. As explained above, CAISO market Day 

Ahead and Real Time LMPs themselves provide the only material price reference for 

the market. The SPM, SOP, SQP, SRP, OFP, DPN and UPN contracts do not perform 

a significant price discovery function. 

EPSA believes that the FERC-regulated, tariff-based CAISO power market is 

intrinsically reflective of competitive prices. Subjecting market participants to position 

limits or other regulatory elements relating to SPDC status can only negatively limit risk 

6 
management opportunities for market participants for a volatile commodity without 

serving the purpose that SPDC status was intended by Congress. 

Thank you for the opportunity to comment. 

Respectfully submitted, 

Nancy E. Bagot 

Vice President of Regulatory Affairs 

cc: Chairman Gensler 

Commissioner Dunn 

Commissioner Chilton 

Commissioner Sommers 

Commissioner O'Malia 

Daniel Berkovitz, General Counsel 

Richard A. Shilts, Director DMO 

Susan Nathan, Senior Special Counsel 

Gregory Price, Industry Economics 

7 
'NEWS RELEASE 

Electric Power Supply Association 

FOR IMMEDIATE RELEASE 

October 21, 2009 

CONTACT: Dan Dolan 

(202) 349-0153 

EPSA FILES COMMENTS WITH THE CFTC 

ON ELECTRICITY CONTRACTS 

WASHINGTON, D.C.- The Electric Power Supply Association (EPSA) today filed a letter with the 

Commodity Futures Trading Commission (CFTC) in response to a Notice oflnquiry (NOI) regarding the 

proposed designation of seven electricity contracts as significant price discovery contracts (SPDCs). All seven 

contracts are traded on the Intercontinental Exchange (ICE) and based on the California Independent System 

Operator's (CAISO) locational marginal pricing (LMP). SPDC designation would unnecessarily subject 

contracts to various requirements. This represents the first time that the CFTC has proposed electricity 

contracts as SPDCs. 

EPSA's letter requests that the Commission not designate the contracts as SPDCs and notes that the "External 

financial transactions such as the ICE swaps market do not impact the LMP in CAISO. Under the CAISO's 

tariff, the algorithm for setting LMP prices ... is driven by the available supply and demand for physical 

electricity, subject to operating conditions on the CAISO grid." Addressing the CFTC's criteria identified in the 

NOI for setting the contracts for SPDC status, EPSA's letter states that there is no reference outside ofiCE to 

the contracts in question, that the seven contracts have no material impact on other contracts listed for trading, 

and they do not have adequate liquidity for SPDC designation. 

EPSA President & CEO John E. Sheik said, "As a member of its Energy and Environmental Markets 

Advisory Committee, EPSA recognizes the important role the CFTC plays in regulating commodities 

markets. We also have been a strong supporter in Congress of increased CFTC authority over the 

derivatives markets and look forward to the Commission's future role under pending financial reform 

legislation. The unique physical nature of electricity and how organized power markets operate merits 

careful consideration. EPSA does not believe that the seven contracts identified in the NOI serve a 

significant price discovery function in the physical electricity market and so urge the CFTC to not 

designate them as such." Sheik went on to say, "Competitive suppliers are committed to working with the 

CFTC, FERC, Congress and the Administration to ensure appropriate transparency and oversight of the 

various markets impacting electricity." 

The letter concludes that "EPSA believes that the FERC-regulated, tariff-based CAISO power market is 

intrinsically reflective of competitive prices. Subjecting market participants to position limits or other 

regulatory elements relating to SPDC status can only negatively limit risk management opportunities for market 

participants for a volatile commodity without serving the purpose that SPDC status was intended by Congress." 

-EPSAEPSA is the national trade association representing competitive power suppliers, including generators and 

marketers. These suppliers, who account for nearly 40 percent of the installed generating capacity in the 

United States, provide reliable and competitively priced electricity from environmentally responsible facilities. 

EPSA seeks to bring the benefits of competition to all power customers. For more information about EPSA, 

please visit www.epsa.org.