2010-17736

FR Doc 2010-17736[Federal Register: July 21, 2010 (Volume 75, Number 139)]

[Notices]

[Page 42411-42430]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr21jy10-41]

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COMMODITY FUTURES TRADING COMMISSION

Orders Finding That the 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; 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

IntercontinentalExchange, Inc., Do Not Perform a Significant Price

Discovery Function

AGENCY: Commodity Futures Trading Commission.

ACTION: Final orders.

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SUMMARY: On October 6, 2009, the Commodity Futures Trading Commission

(``CFTC'' or ``Commission'') published for comment in the Federal

the SP-15\2\ Financial Day-Ahead LMP Peak Daily (``SDP'') contract; SP-

15 Financial Day-Ahead LMP Off-Peak Daily (``SQP'') contract; SP-15

Financial Swap Real Time LMP-Peak Daily (``SRP'') contract; NP-15\3\

Financial Day-Ahead LMP Peak Daily (``DPN'') contract; and NP-15

Financial Day-Ahead LMP Off-Peak Daily (``UNP'') contract,\4\ which are

listed for trading on the IntercontinentalExchange, Inc. (``ICE''), an

exempt commercial market (``ECM'') under sections 2(h)(3)-(5) of the

Commodity Exchange Act (``CEA'' or the ``Act''), perform a significant

price discovery function pursuant to section 2(h)(7) of the CEA. The

Commission undertook this review based upon an initial evaluation of

information and data provided by ICE as well as other available

information. The Commission has reviewed the entire record in this

matter, including all comments received, and has determined to issue

orders finding that the SDP, SQP, SRP, DPN and UNP contracts do not

perform a significant price discovery function. Authority for this

action is found in section 2(h)(7) of the CEA and Commission rule

36.3(c) promulgated thereunder.

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\1\ 74 FR 51264 (October 6, 2009).

\2\ The acronym ``SP'' stands for ``South Path.''

\3\ The acronym ``NP'' stands for ``North Path.''

\4\ The Federal Register notice also requested comment on the

SP-15 Financial Day-Ahead LMP Peak (``SPM'') contract and SP-15

Financial Day-Ahead LMP Off-Peak (``OFP'') contract; these contracts

will be addressed in a separate Federal Register release.

DATES: Effective date: July 9, 2010.

[[Page 42412]]

FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,

Division of Market Oversight, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

Telephone: (202) 418-5515. E-mail: [email protected]; or Susan Nathan,

Senior Special Counsel, Division of Market Oversight, same address.

Telephone: (202) 418-5133. E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

I. Introduction

The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \5\

significantly broadened the CFTC's regulatory authority with respect to

ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory

category--ECMs on which significant price discovery contracts

(``SPDCs'') are traded--and treating ECMs in that category as

registered entities under the CEA.\6\ The legislation authorizes the

CFTC to designate an agreement, contract or transaction as a SPDC if

the Commission determines, under criteria established in section

2(h)(7), that it performs a significant price discovery function. When

the Commission makes such a determination, the ECM on which the SPDC is

traded must assume, with respect to that contract, all the

responsibilities and obligations of a registered entity under the Act

and Commission regulations, and must comply with nine core principles

established by new section 2(h)(7)(C).

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\5\ Incorporated as Title XIII of the Food, Conservation and

Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,

2008).

\6\ 7 U.S.C. 1a(29).

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On March 16, 2009, the CFTC promulgated final rules implementing

the provisions of the Reauthorization Act.\7\ As relevant here, rule

36.3 imposes increased information reporting requirements on ECMs to

assist the Commission in making prompt assessments whether particular

ECM contracts may be SPDCs. In addition to filing quarterly reports of

its contracts, an ECM must notify the Commission promptly concerning

any contract traded in reliance on the exemption in section 2(h)(3) of

the CEA that averaged five trades per day or more over the most recent

calendar quarter, and for which the exchange sells its price

information regarding the contract to market participants or industry

publications, or whose daily closing or settlement prices on 95 percent

or more of the days in the most recent quarter were within 2.5 percent

of the contemporaneously determined closing, settlement or other daily

price of another contract.

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\7\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on

April 22, 2009.

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Commission rule 36.3(c)(3) established the procedures by which the

Commission makes and announces its determination whether a particular

ECM contract serves a significant price discovery function. Under those

procedures, the Commission will publish notice in the Federal Register

that it intends to undertake an evaluation whether the specified

agreement, contract or transaction performs a significant price

discovery function and to receive written views, data and arguments

relevant to its determination from the ECM and other interested

persons. Upon the close of the comment period, the Commission will

consider, among other things, all relevant information regarding the

subject contract and issue an order announcing and explaining its

determination whether or not the contract is a SPDC. The issuance of an

affirmative order signals the effectiveness of the Commission's

regulatory authorities over an ECM with respect to a SPDC; at that time

such an ECM becomes subject to all provisions of the CEA applicable to

registered entities.\8\ The issuance of such an order also triggers the

obligations, requirements and timetables prescribed in Commission rule

36.3(c)(4).\9\

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\8\ Public Law 110-246 at 13203; Joint Explanatory Statement of

the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d

Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888,

75894 (Dec. 12, 2008).

\9\ For an initial SPDC, ECMs have a grace period of 90 calendar

days from the issuance of a SPDC determination order to submit a

written demonstration of compliance with the applicable core

principles. For subsequent SPDCs, ECMs have a grace period of 30

calendar days to demonstrate core principle compliance.

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II. Notice of Intent To Undertake SPDC Determination

On October 6, 2009, the Commission published in the Federal

SDP, SQP, SRP, DPN and UNP contracts\10\ perform a significant price

discovery function and requested comment from interested parties.\11\

Comments were received from the Federal Energy Regulatory Commission

(``FERC''), Electric Power Supply Association (``EPSA''), Financial

Institutions Energy Group (``FIEG''), Working Group of Commercial

Energy Firms (``WGCEF''), ICE, California Public Utilities Commission

(``CPUC''), Edison Electric Institute (``EEI''), Western Power Trading

Forum (``WPTF'') and Public Utility Commission of Texas (``PUCT'').\12\

The comment letters from FERC\13\ and PUCT did not directly address the

issue of whether or not the subject contracts are SPDCs. CPUC stated

that the subject contracts are SPDCs but did not provide reasons for

how the contracts meet the criteria for

[[Page 42413]]

SPDC determination. The remaining comment letters raised substantive

issues with respect to the applicability of section 2(h)(7) to the

subject contracts and generally expressed the opinion that the

contracts are not SPDCs because they do not meet the material price

reference or material liquidity criteria for SPDC determination. These

comments are more extensively discussed below, as applicable.

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\10\ As noted above, the Federal Register notice also requested

comment on the SP-15 Financial Day-Ahead LMP Peak (``SPM'') contract

and SP-15 Financial Day-Ahead LMP Off-Peak (``OFP'') contract. The

SPM and OFP contracts will be addressed in a separate Federal

\11\ The Commission's Part 36 rules establish, among other

things, procedures by which the Commission makes and announces its

determination whether a specific ECM contract serves a significant

price discovery function. Under those procedures, the Commission

publishes a notice in the Federal Register that it intends to

undertake a determination whether a specified agreement, contract or

transaction performs a significant price discovery function and to

receive written data, views and arguments relevant to its

determination from the ECM and other interested persons.

\12\ FERC is an independent Federal regulatory agency that,

among other things, regulates the interstate transmission of natural

gas, oil and electricity. EPSA describes itself as the ``national

trade association representing competitive power suppliers,

including generators and marketers.'' FIEG describes itself as an

association of investment and commercial banks who are active

participants in various sectors of the natural gas markets,

``including acting as marketers, lenders, underwriters of debt and

equity securities, and proprietary investors.'' WGCEF describes

itself as ``a diverse group of commercial firms in the domestic

energy industry whose primary business activity is the physical

delivery of one or more energy commodities to customers, including

industrial, commercial and residential consumers'' and whose

membership consists of ``energy producers, marketers and

utilities.'' ICE is an ECM, as noted above. CPUC is a

``constitutionally established agency charged with the

responsibility for regulating electric corporations within the State

of California.'' EEI is the ``association of shareholder-owned

electric companies, international affiliates and industry associates

worldwide.'' WPTF describes itself as a ``broad-based membership

organization dedicated to encouraging competition in the Western

power markets * * * WTPF strives to reduce the long-run cost of

electricity to consumers throughout the region while maintaining the

current high level of system reliability.'' PUCT is the independent

organization that oversees the Electric Reliability Council of Texas

(``ERCOT'') to ``ensure nondiscriminatory access to the transmission

and distribution systems, to ensure the reliability and adequacy of

the regional electrical network, and to perform other essential

market functions.'' The comment letters are available on the

Commission's Web site: http://www.cftc.gov/lawandregulation/

federalregister/federalregistercomments/2009/-012.html.

\13\ FERC expressed the opinion that a determination by the

Commission that any of the subject contracts performs a significant

price discovery function ``would not appear to conflict with FERC's

exclusive jurisdiction under the Federal Power Act (FPA) over the

transmission or sale for resale of electric energy in interstate

commerce or with its other regulatory responsibilities under the

FPA'' and further that ``FERC staff will monitor proposed SPDC

determinations and advise the CFTC of any potential conflicts with

FERC's exclusive jurisdiction over RTOs, [(regional transmission

organizations)], ISOs [(independent system operators)] or other

jurisdictional entities.''

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III. Section 2(h)(7) of the CEA

The Commission is directed by section 2(h)(7) of the CEA to

consider the following criteria in determining a contract's significant

price discovery function:

Price Linkage--The extent to which the agreement, contract

or transaction uses or otherwise relies on a daily or final settlement

price, or other major price parameter, of a contract or contracts

listed for trading on or subject to the rules of a designated contract

market (``DCM'') or derivatives transaction execution facility

(``DTEF''), or a SPDC traded on an electronic trading facility, to

value a position, transfer or convert a position, cash or financially

settle a position, or close out a position.

Arbitrage--The extent to which the price for the

agreement, contract or transaction is sufficiently related to the price

of a contract or contracts listed for trading on or subject to the

rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of

an electronic trading facility, so as to permit market participants to

effectively arbitrage between the markets by simultaneously maintaining

positions or executing trades in the contracts on a frequent and

recurring basis.

Material price reference--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 or

consulting, the prices generated by agreements, contracts or

transactions being traded or executed on the electronic trading

facility.

Material liquidity--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).

Not all criteria must be present to support a determination that a

particular contract performs a significant price discovery function,

and one or more criteria may be inapplicable to a particular

contract.\14\ Moreover, the statutory language neither prioritizes the

criteria nor specifies the degree to which a SPDC must conform to the

various criteria. In Guidance issued in connection with the Part 36

rules governing ECMs with SPDCs, the Commission observed that these

criteria do not lend themselves to a mechanical checklist or formulaic

analysis. Accordingly, the Commission has indicated that in making its

determinations it will consider the circumstances under which the

presence of a particular criterion, or combination of criteria, would

be sufficient to support a SPDC determination.\15\ For example, for

contracts that are linked to other contracts or that may be arbitraged

with other contracts, the Commission will consider whether the price of

the potential SPDC moves in such harmony with the other contract that

the two markets essentially become interchangeable. This co-movement of

prices would be an indication that activity in the contract had reached

a level sufficient for the contract to perform a significant price

discovery function. In evaluating a contract's price discovery role as

a price reference, the Commission the extent to which, on a frequent

and recurring basis, bids, offers or transactions are directly based

on, or are determined by referencing, the prices established for the

contract.

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\14\ In its October 6, 2009, Federal Register release, the

Commission identified material price reference and material

liquidity as the possible criteria for SPDC determination of the

SDP, SQP, SRP, DPN and UNP contracts. Arbitrage and price linkage

were not identified as possible criteria. As a result, arbitrage and

price linkage will not be discussed further in this document and the

associated Orders.

\15\ 17 CFR Part 36, Appendix A.

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IV. Findings and Conclusions

The Commission's findings and conclusions with respect to the SDP,

SQP, SRP, DPN and UNP contracts are discussed separately below.

a. The SP-15 Financial Day-Ahead LMP Peak Daily (SDP) Contract and the

SPDC Indicia

The SDP contract is cash settled based on the arithmetic average of

peak-hour, day-ahead locational marginal prices (``LMPs'') \16\ posted

by the California ISO\17\ (``CAISO'') for the SP-15 Existing Zone

Generation (``EZ Gen'') Hun for all peak hours on the day prior to

generation. The LMPs are derived from power trades that result in

physical delivery. The size of the SDP contract is 400 megawatt hours

(``MWh''), and the SDP contract is listed for 75 consecutive calendar

days.

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\16\ An LMP represents the additional cost associated with

producing an incremental amount of electricity. LMPs account for

generation costs, congestion along the transmission lines, and

electricity loss.

\17\ The acronym ``ISO'' signifies ``Independent System

Operator,'' which is an entity that coordinates electricity

generation and transmission, as well as grid reliability, throughout

its service area.

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In general, electricity is bought and sold in an auction setting on

an hourly basis at various points along the electrical grid. An LMP

associated with a specific hour is derived as a volume-weighted average

price of all of the transactions where electricity is to be supplied

and consumed during that hour.

Electricity is traded in a day-ahead market as well as a real-time

market. Typically, the bulk of energy transactions occur in the day-

ahead market. The day-ahead market establishes prices for electricity

that is to be delivered during the specified hour on the following day.

Day-ahead prices are determined based on generation and energy

transaction quotes offered in advance. Because power quotes are

dependent on estimates of supply and demand, electricity needs usually

are not perfectly satisfied in the day-ahead market. Consequently, on

the day the electricity is transmitted and used, auction participants

typically realize that they bought or sold either too much power or too

little power. A real-time auction is operated to alleviate this problem

by serving as a balancing mechanism. Specifically, electricity traders

use the real-time market to sell excess electricity and buy additional

power to meet demand. Only a relatively small amount of electricity is

traded in the real-time market as compared to the day-ahead market.

Path 15 is an 84-mile portion of the north-south power transmission

corridor in California, forming part of the Pacific AC Intertie and the

California-Oregon Transmission Project.\18\ Path 15, along with the

Pacific

[[Page 42414]]

DC Intertie running far to the east, completes an important

transmission interconnection between the hydroelectric plants to the

north and the fossil fuel plants to the south. Path 15 currently

consists of three lines at 500 kilovolts (``kV'') and four lines at 230

kV.\19\ The 500 kV lines connect Los Banos to Gates (two lines) and Los

Banos to Midway (one line); all four 230 kV lines have Gates at one end

with the other ends terminating at Panoche 1, Panoche

2, Gregg, or McCall substations. ``NP-15'' refers to the

northern half of Path 15; conversely, ``SP-15'' refers to the lower

half of Path 15.

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\18\ The Pacific Intertie comprises three alternating current

(``AC'') lines and one direct current (``DC'') line. Together, these

lines comprise the largest single electricity transmission program

in the United States. The northern end of the DC line is at the

Bonneville Power Administration's Celilo Converter Station, which is

just south of The Dalles Dam about 90 miles east of Portland. The

southern end is 846 miles away at the Sylmar Converter Station on

the northern outskirts of Los Angeles. That station is operated by

utilities including the Los Angeles Department of Water and Power

(``LADWP'') and Southern California Edison. The AC lines follow

generally the same path but terminate in Northern California. Only a

few parties actually own the Intertie, but numerous entities have

contracts to share its transmission capacity. The California-Oregon

border is a dividing line for Intertie ownership and capacity

sharing. Depending on seasonal conditions, the Intertie is capable

of transmitting up to 7,900 MW-- 4,800 MW of AC power (1,600 MW of

this amount is in the California-Oregon Transmission Project, also

known as the ``Third AC Line'') and 3,100 MW of DC power. Over the

past five years, the limit has ranged between about 6,300 MW and

7,900 MW. Most of the power transmitted on the Intertie is surplus

to regional needs, but some firm power also is transmitted. See

http://www.nwcouncil.org/LIBRARY/2001/2001-11.pdf.

\19\ The third 500 kV line was installed between 2003 and 2004

in order to relieve constraints on the existing north-south

transmission lines. This capacity constraint contributed to the

California energy crisis in 2000 and 2001. See http://www.wapa.gov/

sn/ops/transmission/path15/factSheet.pdf.

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When the weather is hot in California and the Desert Southwest, it

is comparatively cool in the Pacific Northwest. Conversely, when the

weather is cold in the Pacific Northwest it is comparatively warm in

California and the Desert Southwest. Consumers on the West Coast take

advantage of seasonal weather differences to share large amounts of

power between the Desert Southwest and the Pacific Northwest. In the

spring and summer, when generators (mostly hydroelectric plants)

generally have surplus power in the Northwest and temperatures climb in

the Southwest, power is shipped south to help meet increasing power

demand, particularly for air conditioning. Conversely in the winter,

when generators in the Southwest generally have surplus power and

temperatures drop in the Northwest, power is shipped north to meet

increasing electricity demand, particularly for heating.

CAISO is charged with operating the high-voltage grid in

California. Because CAISO's service area is basically the entire State

of California, it is responsible for serving millions of businesses and

households, particularly in the Los Angeles and San Francisco areas.

CAISO's current mission is to ensure the efficient and reliable

operation of the power grid, provide fair and open transmission access,

promote environmental stewardship, facilitate effective markets,

promote infrastructure development and support the timely and accurate

dissemination of information. CAISO is responsible for operating the

hourly auctions in which the power is traded, and CAISO publishes the

LMP data on its Web site.

1. Material Price Reference Criterion

The Commission's October 6, 2009, Federal Register notice

identified material price reference and material liquidity as the

potential basis for a SPDC determination with respect to the SDP

contract. The Commission considered the fact that ICE sells its price

data to market participants in a number of different packages which

vary in terms of the hubs covered, time periods, and whether the data

are daily only or historical. For example, ICE offers the ``West Power

of Day'' package with access to all price data or just current prices

plus a selected number of months (i.e., 12, 24, 36 or 48 months) of

historical data. This package includes price data for the SDP contract.

The Commission also noted that its October 2007 Report on the

Oversight of Trading on Regulated Futures Exchanges and Exempt

Commercial Markets (``ECM Study'') found that in general, market

participants view ICE as a price discovery market for certain

electricity contracts. The study did not specify which markets

performed this function; nevertheless, the Commission determined that

the SDP contract, while not mentioned by name in the ECM Study,

warranted further review.

The Commission explains in its Guidance to the Part 36 rules that

in evaluating a contract under the material price reference criterion,

it will rely on one of two sources of evidence--direct and indirect--to

determine that the price of a contract was being used as a material

price reference and therefore, serving a significant price discovery

function.\20\ With respect to direct evidence, the Commission will

consider the extent to which, on a frequent and recurring basis, cash

market bids, offers or transactions are directly based on, or quoted at

a differential to, the prices generated on the ECM in question. Direct

evidence may be established when cash market participants are quoting

bid or offer prices or entering into transactions at prices that are

set either explicitly or implicitly at a differential to prices

established for the contract in question. Cash market prices are set

explicitly at a differential to the section 2(h)(3) contract when, for

instance, they are quoted in dollars and cents above or below the

reference contract's price. Cash market prices are set implicitly at a

differential to a section 2(h)(3) contract when, for instance, they are

arrived at after adding to, or subtracting from the section 2(h)(3)

contract, but then quoted or reported at a flat price. With respect to

indirect evidence, the Commission will consider the extent to which the

price of the contract in question is being routinely disseminated in

widely distributed industry publications--or offered by the ECM itself

for some form of remuneration--and consulted on a frequent and

recurring basis by industry participants in pricing cash market

transactions.

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\20\ 17 CFR 36, Appendix A.

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SP-15 is a major pricing center for electricity on the West Coast.

Traders, including producers, keep abreast of electricity prices in the

SP-15 power market when conducting cash deals. However, ICE's SP-15

Financial Day-Ahead LMP Peak (``SPM'') contract, which is a monthly

contract, is used more widely as a source of pricing information for

electricity than the daily, peak-hour contract (i.e., the SDP

contract). Specifically, the SPM contract prices power at the SP-15

trading point based on the simple average of the peak-hour prices over

the contract month, as reported by CAISO. Market participants use the

SPM contract to lock-in electricity prices far into the future. (The

SPM contract is listed for 110 months into the future.) In contrast,

the SDP contract is listed for a much shorter length of time (about 10

weeks); with such a limited timeframe, the forward pricing capability

of the SDP contract is much more constrained than that of the SPM

contract. Traders use monthly power contracts like the SPM contract to

price electricity commitments in the future, where such commitments are

based on long range forecasts of power supply and demand. As generation

and usage nears, market participants have a better understanding of

actual power supply and needs. As a result, traders can modify

previously-established hedges with the daily power contracts, like the

SDP contract.

Accordingly, although the SP-15 is a major trading center for

electricity and, as noted, ICE sells price information for the SDP

contract, the Commission has explained in its Guidance that a contract

meeting the material price reference criterion would routinely be

consulted by industry participants in pricing cash market transactions.

The SDP contract is not consulted in this manner and does not satisfy

the material price reference criterion. Thus, the SDP contract does

[[Page 42415]]

not satisfy the direct price reference test for existence of material

price reference. Furthermore, the Commission notes that publication of

the SDP contract's prices is not indirect evidence of material price

reference. The SDP contract's prices are published with those of

numerous other contracts, including ICE's monthly electricity

contracts, which are of more interest to market participants. In these

circumstances, the Commission has concluded that traders likely do not

specifically purchase ICE data packages for the SDP contract's prices

and do not consult such prices on a frequent and recurring basis in

pricing cash market transactions.

i. Federal Register Comments

WGCEF, EPSA, WPTF, FIEG, EEI and ICE stated that no other contract

directly references or settles to the SDP contract's price. Moreover,

the commenters argued that the underlying cash price series against

which the SDP contract is settled (in this case, the average day-ahead

peak-hour SP-15 electricity prices on a particular day, which is

derived from cash market transactions) is the authentic reference price

and not the ICE contract itself. The Commission believes that this

interpretation of price reference is too narrow and believes that a

cash-settled derivatives contract could meet the price reference

criterion if market participants ``consult on a frequent and recurring

basis'' the derivatives contract when pricing forward, fixed-price

commitments or other cash-settled derivatives that seek to ``lock-in''

a fixed price for some future point in time to hedge against adverse

price movements. As noted above, while SP-15 is a major power market,

traders do not consider the daily average peak-hour SP-15 price to be

as important as the peak electricity price associated with the monthly

contract.

In addition, WGCEF and EPSA stated that the publication of price

data for the SDP contract price is weak justification for material

price reference. Market participants generally do not purchase ICE data

sets for one contract's prices, such as those for the SDP contract.

Instead, traders are interested in the settlement prices, so the fact

that ICE sells the SDP prices as part of a broad package is not

conclusive evidence that market participants are buying the ICE data

sets because they find the SDP prices have substantial value to them.

As noted above, the Commission indicated that publication of the SDP

contract's prices is not indirect evidence of routine dissemination.

The SDP contract's prices are published with those of numerous other

contracts, which are of more interest to market participants. The

Commission has concluded that traders likely do not specifically

purchase the ICE data packages for the SDP contract's prices and do not

consult such prices on a frequent and recurring basis in pricing cash

market transactions.

Lastly, EEI criticized that the ECM Study did not specifically

identify the SDP contract as a contract that is referred to by market

participants on a frequent and recurring basis. In response, the

Commission notes that it cited the ECM Study's general finding that

some ICE electricity contracts appear to be regarded as price discovery

markets merely as indication that an investigation of certain ICE

contracts may be warranted. The ECM Study was not intended to serve as

the sole basis for determining whether or not a particular contract

meets the material price reference criterion.

ii. Conclusion Regarding Material Price Reference

Based on the above, the Commission finds that the ICE SDP contract

does not meet the material price reference criterion because cash

market transactions are not priced either explicitly or implicitly on a

frequent and recurring basis at a differential to the SDP contract's

price (direct evidence). Moreover, while the SDP contract's price data

is sold to market participants, those individuals likely do not

purchase the ICE data packages specifically for the SDP contract's

prices and do not consult such prices on a frequent and recurring basis

in pricing cash market transactions (indirect evidence).

2. Material Liquidity Criterion

To assess whether a contract meets the material liquidity

criterion, the Commission first examines trading activity as a general

measurement of the contract's size and potential importance. If the

Commission finds that the contract in question meets a threshold of

trading activity that would render it of potential importance, the

Commission will then perform a statistical analysis to measure the

effect that changes to the subject contract's prices potentially may

have on prices for other contracts listed on an ECM or a DCM.

The total number of transactions executed on ICE's electronic

platform in the SDP contract was 6,159 in the second quarter of 2009,

resulting in a daily average of 96.2 trades. During the same period,

the SDP contract had a total trading volume of 23,365 contracts and an

average daily trading volume of 365.1 contracts. Moreover, open

interest as of June 30, 2009, was 3,387 contracts, which included

trades executed on ICE's electronic trading platform, as well as trades

executed off of ICE's electronic trading platform and then brought to

ICE for clearing. In this regard, ICE does not differentiate between

open interest created by a transaction executed on its trading platform

and that created by a transaction executed off its trading

platform.\21\

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\21\ 74 FR 51264 (October 6, 2009).

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In a subsequent filing dated March 24, 2010, ICE reported that

total trading volume in the fourth quarter of 2009 was 40,840 contracts

(or 628.3 contracts on a daily basis). In terms of number of

transactions, 6,664 trades occurred in the fourth quarter of 2009

(102.5 trades per day). As of December 31, 2009, open interest in the

SDP contract was 16,786 contracts, which included trades executed on

ICE's electronic trading platform, as well as trades executed off of

ICE's electronic trading platform and then brought to ICE for clearing.

The number of trades per day was substantial between the second and

fourth quarters of 2009. However, trading activity in the SDP contract,

as characterized by total quarterly volume, indicates that the SDP

contract experiences trading activity that is similar to that of

thinly-traded futures markets.\22\ Thus, the SDP contract does not meet

a threshold of trading activity that would render it of potential

importance and no additional statistical analysis is warranted.\23\

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\22\ Staff has advised the Commission that in its experience, a

thinly-traded contract is, generally, one that has a quarterly

trading volume of 100,000 contracts or less. In this regard, in the

third quarter of 2009, physical commodity futures contracts with

trading volume of 100,000 contracts or fewer constituted less than

one percent of total trading volume of all physical commodity

futures contracts.

\23\ In establishing guidance to illustrate how it will evaluate

the various criteria, or combinations of criteria, when determining

whether a contract is a SPDC, the Commission made clear that

``material liquidity itself would not be sufficient to make a

determination that a contract is a [SPDC], * * * but combined with

other factors it can serve as a guidepost indicating which contracts

are functioning as [SPDCs].'' 17 CFR 36, Appendix A. For the reasons

discussed above, the Commission has found that the SDP contract does

not meet the material price reference criterion. In light of this

finding and the Commission's Guidance cited above, there is no need

to evaluate further the material liquidity criteria since the

Commission believes it is not useful as the sole basis for a SPDC

determination.

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i. Federal Register Comments

ICE and WGCEF stated that the SDP contract lacks a sufficient

number of trades to meet the material liquidity criterion. These two

commenters, along with WPTF, EPSA, FIEG and EEI argued

[[Page 42416]]

that the SDP contract cannot have a material effect on other contracts,

such as those listed for trading by the New York Mercantile Exchange

(``NYMEX''), a DCM, because price linkage and the potential for

arbitrage do not exist. Moreover, the DCM contracts do not cash settle

to the SDP contract's price. Instead, the DCM contracts and the SDP

contract are both cash settled based on physical transactions, which

neither the ECM nor the DCM contracts can influence.

WGCEF and ICE noted that the Commission's Guidance had posited

concepts of liquidity that generally assumed a fairly constant stream

of prices throughout the trading day and noted that the relatively low

number of trades per day in the SDP contract did not meet this standard

of liquidity. The Commission observes that a continuous stream of

prices would indeed be an indication of liquidity for certain markets

but the Guidance also notes that ``quantifying the levels of immediacy

and price concession that would define material liquidity may differ

from one market or commodity to another.''\24\

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\24\ Guidance, supra.

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ICE opined that the Commission ``seems to have adopted a five trade

per day test for material liquidity.'' To the contrary, the Commission

adopted a five trades-per-day threshold as a reporting requirement to

enable it to ``independently be aware of ECM contracts that may develop

into SPDCs'' \25\ rather than solely relying upon an ECM to identify

potential SPDCs to the Commission. Thus, any contract that meets this

threshold may be subject to scrutiny as a potential SPDC; however, a

contract will not be found to be a SPDC merely because it met the

reporting threshold.

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\25\ 73 FR 75892 (December 12, 2008).

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ICE proposed that the statistics provided by ICE were

misinterpreted and misapplied by the Commission. In particular, ICE

stated that the volume figures used in the Commission's analysis (cited

above) ``include trades made in all months'' as well as in strips of

contract months. ICE suggested that a more appropriate method of

determining liquidity is to examine the activity in a single traded

month of a given contract.'' \26\ It is the Commission's opinion that

liquidity, as it pertains to the SDP contract, is typically a function

of trading activity in particular lead days and, given sufficient

liquidity in such days, the ICE SDP contract itself would be considered

liquid. In any event, in light of the fact that the Commission has

found that the SDP contract does not meet the material price reference

criterion, according to the Commission's Guidance, it would be

unnecessary to evaluate whether the SDP contract meets the material

liquidity criterion since it cannot be used alone for SPDC

determination.

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\26\ In addition, ICE stated that the trades-per-day statistics

that it provided to the Commission in its quarterly filing and which

were cited in the Commission's October 6, 2009, Federal Register

notice includes 2(h)(1) transactions, which were not completed on

the electronic trading platform and should not be considered in the

SPDC determination process. The Commission staff asked ICE to review

the data it sent in its quarterly filings; ICE confirmed that the

volume data it provided and which the Commission cited includes only

transaction data executed on ICE's electronic trading platform. As

noted above, supplemental data supplied by ICE confirmed that block

trades are in addition to the trades that were conducted on the

electronic platform; block trades comprise about 29 percent of all

transactions in the SDP contract (as of the fourth quarter of 2009).

Commission acknowledges that the open interest information it

provided in its October 6, 2009, Federal Register notice includes

transactions made off the ICE platform. However, once open interest

is created, there is no way for ICE to differentiate between ``on-

exchange'' versus ``off-exchange'' created positions, and all such

positions are fungible with one another and may be offset in any way

agreeable to the position holder regardless of how the position was

initially created.

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ii. Conclusion Regarding Material Liquidity

For the reasons discussed above, the Commission finds that the SDP

contract does not meet the material liquidity criterion.

3. Overall Conclusion Regarding the SDP Contract

After considering the entire record in this matter, including the

comments received, the Commission has determined that the ICE SDP

contract does not perform a significant price discovery function under

the criteria established in section 2(h)(7) of the CEA. Specifically,

the Commission has determined that the SDP contract does not meet the

material price reference or material liquidity criteria at this time.

Accordingly, the Commission is issuing the attached Order declaring

that the SDP contract is not a SPDC.

Issuance of this Order indicates that the Commission does not at

this time regard ICE as a registered entity in connection with its SDP

contract.\27\ Accordingly, with respect to its SDP contract, ICE is not

required to comply with the obligations, requirements and timetables

prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,

ICE must continue to comply with the applicable reporting requirements

for ECMs.

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\27\ See 73 FR 75888, 75893 (Dec. 12, 2008).

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b. The SP-15 Financial Day-Ahead LMP Off-Peak Daily (SQP) Contract and

the SPDC Indicia

The SQP contract is cash settled based on the arithmetic average of

off-peak hour, day-ahead LMPs posted by CAISO for the SP-15 EZ Gen Hun

for all off-peak hours on the day prior to generation. The LMPs are

derived from power trades that result in physical delivery. The size of

the SQP contract is 25 MWh, and the SQP contract is listed for 75

consecutive calendar days.

As noted above, electricity generally is bought and sold in an

auction setting on an hourly basis at various point along the

electrical grid. An LMP associated with a specific hour is calculated

as the volume-weighted average price of all of the transactions where

electricity is to be supplied and consumed during that hour.