November 10, 2009 

Received CFTC 

~~ords Section 

VIA Email: secretary@cftc.gov 'f'la/or 

David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21 st Street, NW COMMENT 

Washington, DC 20581 

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 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 All Offered for Trading on the 

Intercontinental Exchange, Inc. Perform Significant Price Discovery 

Functions," 74 Fed. Reg. 54966 (October 26, 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 "NO I") to determine 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 ("PJM Western Hub Contracts") - all offered for trading · 

on the Intercontinental Exchange, Inc. ("ICE") - perform significant price 

discovery functions 

The Notice, published in the Federal Register on October 26, 2009, and 

establishing a 15 day comment period, is a further consideration by the 

Commission of whether certain power contracts perform a significant price 

discovery function pursuant to the authority granted to the Commission 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) due to the manner in which the PJM Interconnection, Inc ("PJM") 

produces and disseminates Locational Marginal Prices ("LMP"), the contracts do 

not serve as a material price reference, and (2) the contracts do not meet the 

material liquidity standard. 

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 
In light of these facts, as discussed below, none of the PJM Western Hub· 

Contracts meet the tests necessary to be designated as a Significant Price 

Discovery Contract ("SPDC"). 

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 PJM market and participate in eastern 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 the PJM 

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 the category of 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 significant price discovery determination: 

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

Liquidity; and (5) Other Factors. 

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

1623 (June 18, 2008). 

2 
The CFTC NOI indicates that the PJM Western Hub Contracts meet Material 

Price Reference and Material Liquidity elements. 3 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. 4 The purpose of an SPDC designation is to create 

oversight for contracts the trading of which impacts other contracts or markets 

(such as the natural gas "Henry Hub look alike c;:;r.tract"). SPD~ designation is to 

be a selectively used tool only for contracts that meet the requisite criteria. It is 

not a general grant of jurisdiction to the Commission to designate as SPDCs 

those contracts that do not serve a price discovery function or have no 

meaningful price linkage. 

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 SPDC, the PJM Western Hub Contracts 

do not serve a significant price discovery function. 

THE CONTRACTS 

As the Commission correctly notes, the PJM Western Hub Contracts are 

financially settled contracts based upon the volumetric weighted average of 

LMPs occurring in the PJM Western Hub. 5 The LMPs are derived from the PJM 

electricity market and result from the PJM tariff structure afproved and regulated 

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

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 all times. 

The procurement of power on the PJM grid for each 5-minute settlement interval 

of the day is accomplished through a complex process overseen by federal 

3 As the Commission has focused on these factors, EPSA will do so as well. As can be seen from 

these comments, however, EPSA has demonstrated that the contracts do not meet other criteria 

such as price linkage and arbitrage. 

4 The Joint Explanatory Statement of the Committee of Agriculture Conference, H.R. Rep. No. 

111 0 627, 110 Con g., 2nd Sess. at 978-86 (2008). 

5 For example, for the PJM WH Real Time Peak Daily contract, "tha Fl,..eting Price will be a price 

in USD and cents per MWh equal to the arithmetic average of the hourly real-time Locational 

Marginal Price (LMPs) during the settlement (nominal) date for PJM West published by PJM 

Interconnect for all peak hours in the day of production as per ISDA commodity definitions." 

6 The PJM electricity market is also subject to FERC regulated price mitigation to prevent the 

exercise of locational market power by any supplier. 

3 
regulators which takes into account reliability and competitive market forces. 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 pricing point on the 

grid. As a result, the price of electricity in PJM for each 5-minute settlement 

interval, the LMP, reflects forces of supply and demand for the physical 

commodity at each pricing point. The hub price is a weighted average of 

particular pricing points in a geographic area. 7 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. PJM is the longest standing of such markets and has been in 

existence over a decade. 

For the Day Ahead LMP, the PJM market receives offers from suppliers to 

provide generation ("supply") the day before expected delivery, and bids to buy 

power are received, establishing the demand for delivery of electricity ("load"). 

PJM matches the offers to sell or deliver electricity to the amount of load that is 

bid. The Day Ahead market is an essential part of the planning and modeling 

required to ensure the reliability of the electrical grid. 

The 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 ever-changing 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 on a moment-by-moment basis. 

As a result, the LMP reflects the forces of supply and demand for the physical 

commodity at each pricing point as provided for under the PJM open access 

transmission tariff. This system is the product of a well developed and 

longstanding market design. The market functions are embodied in a FERCapproved 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 the level of load-side demand and available supply. In fact, the market is 

closely monitored by an independent market monitor which has the ability to 

make referrals to FERC and has the responsibility for calculating offer caps (the 

"three pivotal suppliers test" caps supply offers at cost plus ten percent if a 

supplier is determined to have locational market power). Further, sellers in the 

PJM market may not make market-based offers unless they have made a 

threshold showing to FERC of a lack of generation market power. EPSA 

7 The PJM Western Hub is comprised of 109 electrical busses (generators and substations) 

defined by PJM, primarily physically located in western and central Pennsylvania, and chosen for 

their "electrical proximity." The price for the PJM Western Hub is a simple average of the LMP for 

such buses calculated every 5 minutes. 

4 
contends that FERC-regulated RTO/ISO markets may be the most significantly 

regulated and transparent physical cash markets in existence 

External financial transactions such as the ICE swaps market do not and cannot 

impact the LMP in PJM. Under the PJM tariff, the algorithm for setting LMP 

prices at a specific location on the grid for each settlement interval is driven 

solely by the available supply and demand for physical electricity, subject to 

operating conditions on the PJM grid. 

THE CFTC'S ANALYSIS OF THE CONTRACTS AS POTENTIAL SPDCS 

The CFTC's NOI indicates that the PJM Western Hub Contracts may 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 SPDC rules, in light of the facts of 

how PJM operates and how these contracts are traded, demonstrates that the 

PJM Western Hub Contracts meet neither of these tests. 

1 . Material Price Reference 

The first basis for the Commission's preliminary determination is that the PJM 

Western Hub 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 if the cash market quotes the ECM contract. An indirect reference 

would be whether an industry publication quotes the ECM's contract's price. The 

PJM Western Hub contracts meet neither of these standards. 

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

. reference, the ICE PJM Western Hub contracts. This is not surprising, because 

the cash market risk that these contracts hedge is the volatility in the PJM 

markets. This pricing point does not need a proxy pricing vehicle (such as the 

PJM Western Hub Contracts) as the actual cash price is constantly and 

transparently produced by the FERC-regulated PJM market. That is, the source 

of price discovery for the Day Ahead and Real Time LMPs in the PJM market is 

the PJM market itself. The LMPs for the PJM Day Ahead and Real Time markets 

are the direct reflection of supply and demand in PJM, and are readily and 

transparently available. 8 

8 Beyond these LMPs, a relevant indication of longer-dated pricing trends in the PJM market may 

be the price of natural gas (which is often the marginal fuel in PJM). 

5 
Logically, parties desiring to reference the PJM Western Hub LMPs in a contract, 

whether peer-to peer, voice-brokered, or traded on a designated contract market 

or otherwise, do so directly by referencing the actual, published LMPs, rather 

than indirectly by referencing the Western Hub Contracts. EPSA is not aware of 

any circumstances in which commercial parties reference the Western Hub 

Contracts rather than the PJM LMPs themselves for settlement or other purposes 

(nor can EPSA indentify any reason why commercial parties would do so). 

Simply put, the transparent, FERC-regulated readily available PJM LMP pricing 

provides the price discovery for parties. 

As to the indirect reference regarding whether an industry publication quotes the 

ECM's contract's price, the only publication that the NOI refers to is the "PJM 

Power End of Day" and "OTC Power End of Day" data packages. These are ICE 

data sets and it is logical that ICE would publish historic prices of its own 

contracts, as do other contract markets. However, the fact that ICE offers this 

data package does not provide a basis for a finding of a material price reference. 

As stated above, EPSA is not aware of, and the NOI has provided no evidence 

of, any contracts settling on this reference. Nor does the NOI identify any 

circumstance where the forward price quotes for the PJM contracts would be 

used as a reference. The PJM LMP is the most reliable and transparent price 

reference for the PJM market. 

2. Material Liquidity 

To find material liquidity, the Commission needs to determine not only that the 

contract traded on the ECM must trade with sufficient volume, but that the trading 

of the contract must "have a material effect on other agreements, contracts, or 

transactions listed for trading ... on a designated contract market"9 or ECM. The 

PJM Western Hub Contracts do not meet the required measure of material 

liquidity. 

EPSA is not aware that trading in the PJM Western Hub 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 PJM-related contracts, either listed on 

DCMs or traded in the OTC market, would settle on or reference the PJM market 

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

referencing the PJM Western Hub Contracts. Additionally, trading in the PJM 

Western Hub Contracts has no effect and can have no effect on the FERCregulated PJM market Day Ahead and Real Time LMPs. 

9 17 C.F.R. § 36.3 (c) (2) (2009) 

6 
While the NYMEX does list PJM Western Hub contracts, those contracts, like the 

ICE contracts, settle on the LMP prices thereby removing any price linkage as 

neither exchange's contracts settle based upon the other. In addition, the 

NYMEX contracts have little liquidity thereby removing any meaningful arbitrage 

possibility. 

Further, 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."10 While the PJM Western Hub contracts trade in excess of five trades 

per day, they do not meet a "continuous ... multiple times per minute" test. 

Indeed, EPSA believes that the contracts generally do not trade continuously, 

rather there may be trading in the morning of a day, but very little in the 

afternoon. Thus, there are times of the trading day when there is little ability to 

execute a transaction. There rarely is "continuous" trading. 

In addition, EPSA is concerned the Commission used inadequate measures of 

material liquidity. The various contracts identified by the Commission include 

contracts with varying sizes that may not perfectly match the physical market 

standards and which trade in ways that may lead to a misleading conclusion 

regarding their liquidity (e.g. EPSA understands that the overwhelming majority 

of contract "PDP" trades in the balance-of-day market, meaning the contract only 

exists for a few hours). Further, according to the NO I, several of the contracts 

trade low volumes -some with a daily average of under 15 trades per day- which 

are not reflective of liquidity. In addition, the contract specification sheets discuss 

various contract sizes and the recording of lots in various number for certain of 

the contracts (e.g. for contract "PJM", a separate lot is recorded for each on-peak 

day of the traded month) which may overstate liquidity. Finally, these contracts 

trade over extended contract series (e.g. for contract "OPJ" up to 86 months of 

trading), which could indicate the stated volumes being spread thinly over the 

entire series. The foregoing indicates that, for the contracts that appear to trade 

more frequently, simple volume numbers are insufficient and additional analysis 

is needed before the Commission can conclude that there is sufficient liquidity in 

each of the noticed contracts. 

Thus, the material liquidity measure requiring trading to not only exceed a 

volumetric threshold but have a "material effect" on other exchange traded 

contracts simply is not met with regard to the PJM Western Hub contracts. 

CONCLUSION 

The PJM Western Hub Contracts meet neither the material price reference nor 

material liquidity standard. The Commission has identified no other contract in 

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

7 
any market that is tied to the settlement price of these ICE contracts. Trading in 

the PJM Western Hub Contracts cannot reasonably be expected to have any 

effect whatsoever on PJM market Day Ahead and Real Time LMPs. As other 

PJM-related contracts, either on DCMs or in the OTC market, will sirr.i'- -' 

reference, or se!tle to, PJM UVIPs directly, trading in the PJM Western Hub 

Contracts will have no effect on the prices of contracts in other markets. As 

explained above, PJM market Day Ahead and Real Time LMPs themselves 

provide the only material price reference for the market. The PJM Western Hub 

contracts do not perform a significant price discovery function. 

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

intrinsically reflective of competitive prices. Unlike certain other commodities 

markets, EPSA is not aware of concerns regarding speculation driving power 

market prices as they are closely overseen by FERC. Thus, 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 of an SPDC designation as 

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 

8