-F'.lEI u • 

David A. Stawick 

Secretary 

Commodity Futures Trading Commission 

1155 21st Street, N.W. 

Washington, D.C. 20581 

Received CFTC 

Records Section 

!o/Clh/or 

coM MEN\ 

f'\) 

Re: Notice oflntent To Undertake a Determination Whether Certain Mid-C Contrac~ 

Offered for Trading on the IntercontinentalExchange, Inc., Perform Significant Pttie 

Discovery Functions :::3 

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 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 Mid-C Financial Peak Contract; Mid-C Financial Peak Daily 

Contract; Mid-C Financial Off-Peak Contract; and Mid-C Financial Off-Peak Daily 

Contract Offered For Trading on the IntercontinentalExchange, Inc, Perform Significant 

Price Discovery Functions ("Notice of Intent"). 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 of the U.S. electric power industry. Many ofEEI's electric 

1 See "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 Mid-C Financial Peak Contract; 

Mid-C Financial Peak Daily Contract; Mid-C Financial Off-Peak Contract; and Mid-C Financial Off-Peak 

Daily Contract, Offered for Trading on the IntercontinentalExchange, Inc., Perform Significant Price 

Discovery Functions, Notice of action and request for comment", 74 Fed. Reg. 51,261-51,264 (October 6, 

2009) (the "Mid-C Notice oflntent"). 

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

the Commission in its Notice of Intent, to hedge the price risks associated with buying 

and selling wholesale power supply. 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 caused from time-to-time by volatile wholesale 

electricity prices. As a result, EEl and its member companies have a direct interest in the 

outcome of these proceedings. 

II. OVERVIEW OF EEl'S COMMENTS 

EEl appreciates the opportunity to comment upon whether the ICE Mid-C 

contracts referenced in the Notice of Intent and traded on the IntercontinentalExchange, 

Inc. ("ICE") (collectively, the "ICE Contracts") perform significant price discovery 

functions. 

At the outset, it is important to recognize that electric power markets are very 

complex, owing in 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, however, which requires that it be 

generated and consumed almost instantaneously. Moreover, the supply and demand for 

electricity changes dramatically on a daily, weekly and seasonal basis as well as in 

response to specific weather patterns. In addition, wholesale electricity transactions 

generally are limited to regional markets because of technical, reliability and efficiency 

factors. For these reasons, 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 

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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? EEl members use the ICE Contracts to hedge the price risk 

associated with their long and short physical power positions in the Pacific Northwest 

electricity markets. The ability of EEl members to hedge against price volatility by 

purchasing and selling the ICE Contracts helps reduce price volatility in the wholesale 

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 Commission's 

Notice oflntent: (I) the short amount of time provided by the Commission to respond to 

the 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 meet any of the criteria 

that the Commission is directed to consider in its SPDC Order; 3 and (3) the costs and 

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

"just and reasonable." In addition, all persons who sell physical power in the interstate wholesale markets 

are subject to the regulation of the Federal Energy Regulatory Commission. 3 "Significant Price Discovery Contracts on Exempt Commercial Markets; Final Rules," 74 Fed. 

Reg. 12,178, 12,203 (23 March 2009) (the "SPDC Order"). 

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

potential benefit. 4 

III. THE COMMISSION HAS NOT PROVIDED A SUFFIOENT 

OPPORTUNITY FOR COMMENT 

The Notices of Intent provide only a 15-day window for providing 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 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. 5 This requires users of these 

contracts to provide details on multiple contracts, in response to multiple Notices of 

Intent, all within a compressed time period. 

4 17 CFR Parts 15, 16 and 17 (March 23, 2009). 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 

IntercontinentalExchange, Inc., Perform Significant Price Discovery Functions, Notice of action and 

request for comment," 74 Fed. Reg. 51,264, 51,268 (October 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, Notice of action and request for comment," 74 Federal 

Register 53,720, 53722 (October 20, 2009). 

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Given the unique characteristics of the evolving electricity trading markets, 

coupled with the fact that the process for designating SPDCs is still new for both the 

Commission and the affected public (with 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 Notices of Intent, the Commission should either extend 

the comment period for 30 days, or establish public hearing procedures to provide further 

opportunity for comment. 6 

N. THE ICE CONTRACTS DO NOT MEET ANY OF THE SPDC 

DETERMINATION CRITERIA 

EEl respectfully submits tlnt none of the ICE Contracts meets any of 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 

and material liquidity in making its determination. 7 

A. There Is No Price Linkage Between The ICE Contracts And The 

Corresponding NYMEX Contracts. 

Although the Commission does not specify the exchange-traded contracts to 

which it is comparing the ICE Contracts, the Commission's analysis should focus on 

power contracts listed on the New York Mercantile Exchange ("NYMEX") (a designated 

contract market) that correspond to the ICE Contracts (e.g., Dow Jones Mid-Columbia 

Electricity Price Index Swap Contract). The remaining comments provided herein 

6 Mid-C Notice oflntent at n. 3, (stating: "[w ]here appropriate, the Commission may choose to interview 

market participants regarding their impressions of a particular contract.") 7 SPDC Order at 12,181. 

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assume that the Commission intends to focus on these corresponding NYMEX power 

contracts. None of the ICE Contracts has the requisite price linkage to the NYMEX 

contracts that the Commission must find in order to determine that they are SPDCs. 8 

The Commission can take official notice that the Mid-C contracts, for example, 

settle based on different price indices than those used to settle the NYMEX equivalent 

contract. The prices of the two contracts, therefore, do not bear a direct relationship to 

each other. 

B. There Is No Effective Arbitrage Between The ICE Contracts And The 

Corresponding NYMEX Contracts 

The Commission's Notice of Intent does not provide either real world or 

hypothetical examples illustrating how arbitrage would occur between the ICE and 

NYMEX markets. The NYMEX Dow Jones Mid-Columbia Electricity Price Index Swap 

Contract is considerably less liquid than the ICE Contracts. 9 Notwithstanding any 

similarities in the referenced prices used to settle the contracts, EEl members and other 

market participants cannot effectively arbitrage between these markets because they 

cannot execute simultaneous trades or liquidate positions in the contracts on a sufficiently 

frequent basis to protect themselves against exposure to unacceptably high price risk. As 

a result, the ICE Contracts do not "permit market participants to effectively arbitrage 

8 /d. 

9 A brief review of available statistical information related to recent trading activity on the Mid-C contract 

shows either no open interest or activity, or the trading of only very small amounts of contracts. See, e.g., 

<<http://www.cmegroup.com/daily _ bulletin/Section02C _Summary_ Volume_ And_ Open _Interest_(Exclud 

es%20TRAKRS)_ Energy _Futures_ And_ Options_ 2009202.pdf and http://www.cmegroup.com/marketdata!files/NYMEX _Monthly_ volumes-2009 .pdf>>. 

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between the markets by simultaneously maintaining positions or executing trades in the 

contracts on a frequent and recurring basis."10 

C. No Material Price Reference 

The Commission's Notice of Intent references its study of exempt commercial 

markets ("ECM Study"), which found only generally that "market participants view the 

ICE as a price discovery market for certain electricity contracts". 11 However, the Notice 

of Intent also acknowledges that the ECM Study "did not specifically address the power 

contracts under review."12 A more in depth analysis of the specific contracts reveals that 

there is no material price reference as defined by the Commission. 13 As noted above, the 

ICE Mid-C contracts settle based on the day-ahead index price (or calendar-month 

average prices) for the Mid-Columbia hub published in the settlement month by the ICE 

for the specified day (or month). The index price is derived from physical transactions. 

Thus, the ICE Mid-C contract settles based on the price of the underlying physical 

transactions; not the other way around. The bids, offers, or transactions in physical 

electric power are not primarily "based on," or "determined by referencing, the prices 

generated by" any of the ICE Contracts, as the Commission's regulations require. 14 

10 "Order Finding That the ICE Henry Financial LDI Fixed Price Contract Traded on the 

Intercontinenta!Exchange, Inc., Performs a Significant Price Discovery Function, Final Order" 74 Federal 

Register 37,989 (30 July 2009) (the "ICE Henry Financial SPDC Order"). 11 See CFTC Report on the Oversight of Trading on Regulated Futures Exchanges and Exempt 

Commercial Markets, Oct. 2007. See also Mid-C Notice oflntent at 51,262, 51,264. 12 Mid-C Notice oflntent at 51,262, 51,264. 13 ICE Henry Financial SPDC Order at 37,989. 14 See 17 CFR § 36.3(c)(1)(iii). 

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D. No Material Liquidity 

The Notice of Intent concluded that the ICE Contracts may satisfy the material 

liquidity provision outlined in the SPDC Order apparently based solely on the average 

number of daily contracts and the average number of separate transactions for each of the 

relevant ICE Contracts. 15 However, 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 exchange-traded contracts such as the NYMEX contracts listed above. 16 As noted 

above, there is no direct price linkage between the ICE Contracts and the corresponding 

NYMEX contracts. Thus, the ICE Contracts cannot have a direct material effect on the 

NYMEX contracts. Moreover, as also discussed above, potential arbitrage between the 

contracts is hindered by the lack of liquidity in the NYMEX contracts. 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. 17 

V. THE COSTS AND RISKS THAT WOULD RESULT FROM 

DESIGNATING THE ICE CONTRACTS AS SPDCS SIGNIFICANTLY 

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. 

15 See Mid-C Notice oflntent at 51,262, 51,264. 16 See ICE Henry Financial SPDC Order at 37989. 17 See ICE Henry Financial SPDC Order at 37989 (in whch 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 or electronic trading 

facility operating in reliance on the exemption in section 2(h)(3).") 

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Setting position limits for the ICE Contracts could adversely affect the underlying 

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 would 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, should give the 

CFTC significant pause. In addition to the known risks discussed above, there is still the 

potential for 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 LD I Fixed Price Contract, was identified in July of 2009 

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 

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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 extert that the ICE Contracts are designated as SPDCs and position 

limits are imposed, the limits should be set high enough to 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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VI. 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, 

- II -

Richard F. McMahon, Jr. 

Executive Director 

Edison Electric Institute 

701 Pennsylvania Ave., NW 

Washington, DC 20004 

202-508-5571 (Phone) 

rmcmahon(a}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