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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

    Register\1\ a notice of its intent to undertake a determination whether

    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: gprice@cftc.gov; or Susan Nathan,

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

    Telephone: (202) 418-5133. E-mail: snathan@cftc.gov.

    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

    Register notice of its intent to undertake a determination whether the

    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

    Register release.

    \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\

    ---------------------------------------------------------------------------

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

    ---------------------------------------------------------------------------

    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\

    ---------------------------------------------------------------------------

    \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.

    ---------------------------------------------------------------------------

    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\

    ---------------------------------------------------------------------------

    \24\ Guidance, supra.

    ---------------------------------------------------------------------------

    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.

    ---------------------------------------------------------------------------

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

    ---------------------------------------------------------------------------

    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.

    ---------------------------------------------------------------------------

    \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.

    ---------------------------------------------------------------------------

    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.

    ---------------------------------------------------------------------------

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

    ---------------------------------------------------------------------------

    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.

    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.\28\ Path 15, along with the

    Pacific

    [[Page 42417]]

    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 500 kV lines and four 230 kV lines.\29\ 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. As noted above, ``NP-15'' refers to the northern

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

    15.

    ---------------------------------------------------------------------------

    \28\ The Pacific Intertie comprises three AC lines and one 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 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.

    \29\ 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.

    ---------------------------------------------------------------------------

    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,

    the ISO 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. This ISO also is responsible for

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

    publishes 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 SQP

    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 SQP contract.

    The Commission also noted that its October 2007 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 SQP contract, while not mentioned by name in the

    ECM Study, warranted further review.

    The Commission explains in its Guidance to the statutory criteria

    for SPDCs that in evaluating a contract under the material price

    reference criterion, it will rely on one of two sources of evidence--

    direct or 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.\30\ 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.

    ---------------------------------------------------------------------------

    \30\ 17 CFR Part 36, Appendix A.

    ---------------------------------------------------------------------------

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

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

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

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

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

    electricity than the daily, off-peak contract (i.e., the SQP contract).

    Specifically, the OFP contract prices power at the SP-15 trading point

    based on the simple average of the off-peak hour prices over the

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

    OFP contract to lock-in electricity prices far into the future (about

    10 weeks). In contrast, the SQP contract is listed for a much shorter

    length of time; with such a limited timeframe, the forward pricing

    capability of the SQP contract is much more constrained than that of

    the OFP contract. Traders use monthly power contracts like the OFP

    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 SQP contract.

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

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

    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 SQP contract is not consulted in this manner and does not satisfy

    the material price reference criterion. Thus, the SQP contract does not

    satisfy the direct price reference test for existence of material price

    reference.

    [[Page 42418]]

    Furthermore, the Commission notes that publication of the SQP

    contract's prices is not indirect evidence of material price reference.

    The SQP 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 SQP 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 SQP contract's price. Moreover,

    the commenters argued that the underlying cash price series against

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

    off-peak 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 off-peak SP-15 price to be as

    important as the off-peak electricity price associated with the monthly

    contract.

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

    data for the SQP 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 SQP contract.

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

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

    conclusive evidence that market participants are buying the ICE data

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

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

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

    The SQP 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 SQP 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 SQP 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

    The Commission finds that the ICE SQP 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 SQP contract's price (direct evidence).

    Moreover, while the SQP contract's price data is sold to market

    participants, those individuals likely do not purchase the ICE data

    packages specifically for the SQP 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

    As noted above, in its October 6, 2009, Federal Register notice,

    the Commission identified the SQP contract as a potential SPDC based on

    the material price reference and material liquidity as potential

    criteria. 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 SQP contract was 2,086 in the second quarter of 2009,

    resulting in a daily average of 32.6 trades. During the same period,

    the SQP contract had a total trading volume of 57,544 contracts and an

    average daily trading volume of 899.1 contracts. Moreover, open

    interest as of June 30, 2009, was 9,904 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.\31\

    ---------------------------------------------------------------------------

    \31\ 74 FR 51264 (October 6, 2009).

    ---------------------------------------------------------------------------

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

    total trading volume in the fourth quarter of 2009 was 43,002 contracts

    (or 661.6 contracts on a daily basis). In terms of number of

    transactions, 1,939 trades occurred in the fourth quarter of 2009 (29.8

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

    contract was 6,424 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 between the second and fourth quarters

    of 2009 was not substantial. In addition, trading activity in the SQP

    contract, as characterized by total quarterly volume, indicates that

    the SQP contract experiences trading activity that is similar to that

    of thinly-traded futures markets.\32\ Thus, the SQP contract does not

    meet a threshold of trading activity that would render it of potential

    importance and no additional statistical analysis is warranted.\33\

    ---------------------------------------------------------------------------

    \32\ 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.

    \33\ 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 Part 36, Appendix A. For the

    reasons discussed above, the Commission has found that the SQP

    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.

    ---------------------------------------------------------------------------

    i. Federal Register Comments

    ICE and WGCEF stated that the SQP contract lacks a sufficient

    number of trades to meet the material liquidity

    [[Page 42419]]

    criterion. These two commenters, along with WPTF, EPSA, FIEG and EEI

    argued that the SQP contract cannot have a material effect on other

    contracts, such as those listed for trading by NYMEX. The commenters

    pointed out that it is not possible for the SQP contract to affect a

    DCM contract because price linkage and the potential for arbitrage do

    not exist. Moreover, the DCM contracts do not cash settle to the SQP

    contract's price. Instead, the DCM contracts and the SQP contract are

    both cash settled based on physical transactions, which neither the ECM

    or 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 SQP 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.'' \34\

    ---------------------------------------------------------------------------

    \34\ Guidance, supra.

    ---------------------------------------------------------------------------

    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'' \35\ rather than solely relying upon an ECM on its own to

    identify any such potential SPDCs to the Commission. Thus, any contract

    that meets this threshold may be subject to scrutiny as a potential

    SPDC; however, the contract will not be found to be a SPDC merely

    because it met the reporting threshold.

    ---------------------------------------------------------------------------

    \35\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ICE asserted 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.'' \36\ It is the Commission's opinion that

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

    of trading activity in particular lead days and, given sufficient

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

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

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

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

    unnecessary to evaluate whether the SQP contract meets the material

    liquidity criterion since it cannot be used alone for SPDC

    determination.

    ---------------------------------------------------------------------------

    \36\ 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 60 percent of all

    transactions in the SQP 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.

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

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

    contract does not meet the material liquidity criterion.

    3. Overall Conclusion Regarding the SQP Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the ICE SQP

    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 SQP 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 SQP 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 SQP

    contract.\37\ Accordingly, with respect to its SQP 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.

    ---------------------------------------------------------------------------

    \37\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    c. The SP-15 Financial Swap Real Time LMP-Peak Daily (SRP) Contract and

    the SPDC Indicia

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

    peak-hour, real-time LMPs posted by CAISO for the SP-15 EZ Gen Hun for

    all peak hours on the generation day. The LMPs are derived from power

    trades that result in physical delivery. The size of the SRP contract

    is 400 MWh, and the SRP contract is listed for 75 consecutive calendar

    days.

    As noted above, electricity 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 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.\38\ Path 15, along with the

    Pacific

    [[Page 42420]]

    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 500 kV lines and four 230 kV lines.\39\ 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.

    ---------------------------------------------------------------------------

    \38\ The Pacific Intertie comprises three AC lines and one 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 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.

    \39\ 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.

    ---------------------------------------------------------------------------

    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 of 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 also 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 the SRP contract as a potential SPDC based on the material

    price reference and material liquidity statutory cirteria. 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 SRP contract.

    The Commission also noted that its October 2007 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 SRP contract, while not mentioned by name in the

    ECM Study, warranted further review.

    The Commission explains in its Guidance to statutory criteria that

    in evaluating a contract under the material price reference criterion,

    it will rely on one of two sources of evidence--direct or 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.\40\ 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.

    ---------------------------------------------------------------------------

    \40\ 17 CFR 36, Appendix A.

    ---------------------------------------------------------------------------

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

    Traders, including producers, keep abreast of the 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 real-time daily peal-hour contract (i.e., the SRP

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

    trading point based on the simple average of the peak-hour day-ahead

    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 calendar months.)

    In contrast, the SRP contract is listed for a much shorter length of

    time (about 10 weeks); with such a limited timeframe, the forward

    pricing capability of the SRP 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 SRP contract.

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

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

    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 SRP contract is not consulted in this manner and does

    [[Page 42421]]

    not satisfy the material price reference criterion. Thus, the SRP

    contract does not satisfy the direct price reference test for existence

    of material price reference. Furthermore, the Commission notes that

    publication of the SRP contract's prices is not indirect evidence of

    material price reference. The SRP 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 SRP 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 SRP contract's price. Moreover,

    the commenters argued that the underlying cash price series against

    which the SRP contract is settled (in this case, the average real-time

    peak 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 average daily real-time peak-hour SP-15

    price to be as important as the peak electricity price associated with

    the monthly day-ahead contract.

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

    data for the SRP 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 SRP contract.

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

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

    conclusive evidence that market participants are buying the ICE data

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

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

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

    The SRP 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 SRP contract's prices and do not

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

    market transactions.

    Lastly, EEI argued that the ECM Study did not specifically identify

    the SRP 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 SRP 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 SRP contract's

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

    is sold to market participants, those individuals likely do not

    purchase the ICE data packages specifically for the SRP 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

    As noted above, in its October 6, 2009, Federal Register notice,

    the Commission identified material price reference and material

    liquidity as potentially applicablle criteria for SPDC determination of

    the SRP contract. 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 SRP contract was 826 in the second quarter of 2009,

    resulting in a daily average of 12.9 trades. During the same period,

    the SRP contract had a total trading volume of 1,014 contracts and an

    average daily trading volume of 15.8 contracts. Moreover, open interest

    as of June 30, 2009, was 143 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.\41\

    ---------------------------------------------------------------------------

    \41\ 74 FR 51264 (October 6, 2009).

    ---------------------------------------------------------------------------

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

    total trading volume in the fourth quarter of 2009 was 691 contracts

    (or 10.6 contracts on a daily basis). In terms of number of

    transactions, 772 trades occurred in the fourth quarter of 2009 (11.9

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

    contract was 41 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 between the second and fourth quarters

    of 2009 was not substantial. In addition, 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.\42\ Thus, the SRP contract does not

    meet a threshold of trading activity that would render it of potential

    importance and no additional statistical analysis is warranted.\43\

    ---------------------------------------------------------------------------

    \42\ 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.

    \43\ 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 SRP 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.

    ---------------------------------------------------------------------------

    [[Page 42422]]

    i. Federal Register Comments

    ICE and WGCEF stated that the SRP contract lacks a sufficient

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

    commenters, along with WPTF, EPSA, FIEG and EEI argued that the SRP

    contract cannot have a material effect on other contracts, such as

    those listed for trading by 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 SRP contract are both cash settled based on physical

    transactions, which neither the ECM or 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 SRP 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.'' \44\

    ---------------------------------------------------------------------------

    \44\ Guidance, supra.

    ---------------------------------------------------------------------------

    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'' \45\ rather than solely relying upon an ECM on its own to

    identify any such potential SPDCs to the Commission. Thus, any contract

    that meets this threshold may be subject to scrutiny as a potential

    SPDC; however, the contract will not be found to be a SPDC merely

    because it met the reporting threshold.

    ---------------------------------------------------------------------------

    \45\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ICE argued 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.'' \46\ It is the Commission's opinion that liquidity,

    as it pertains to the SRP contract, is typically a function of trading

    activity in particular lead days and, given sufficient liquidity in

    such days, the ICE SRP contract itself would be considered liquid. In

    any event, because the Commission has found that the SRP contract does

    not meet the material price reference criterion, it is unnecessary to

    evaluate whether the SRP contract meets the material liquidity

    criterion since under the Commission's Guidance it cannot be used alone

    for SPDC determination.

    ---------------------------------------------------------------------------

    \46\ 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 51 percent of all

    transactions in the SRP 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.

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

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

    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 SRP

    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 SRP 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 SRP 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 SRP

    contract.\47\ Accordingly, with respect to its SRP 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.

    ---------------------------------------------------------------------------

    \47\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    D. The NP-15 Financial Day-Ahead LMP Peak Daily (DPN) Contract and the

    SPDC Indicia

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

    peak-hour, day-ahead LMPs posted by CAISO for the NP-15 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 DPN

    contract is 400 MWh, and the DPN contract is listed for 70 consecutive

    calendar days.

    As noted above, 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.\48\ Path 15, along with the

    Pacific

    [[Page 42423]]

    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 500 kV lines and four 230 kV lines.\49\ 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.

    ---------------------------------------------------------------------------

    \48\ The Pacific Intertie comprises three AC lines and one 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 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.

    \49\ 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.

    ---------------------------------------------------------------------------

    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 also 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 the DPN contract as a potential SPDC based on the material

    price reference and material liquidity criteria. 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 DPN contract.

    The Commission also noted that its October 2007 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 DPN contract, while not mentioned by name in the

    ECM Study, warranted further review.

    The Commission explains in its Guidance to the statutory criteria

    that in evaluating a contract under the material price reference

    criterion, it will rely on one of two sources of evidence--direct or

    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.\50\ 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.

    ---------------------------------------------------------------------------

    \50\ 17 CFR Part 36, Appendix A.

    ---------------------------------------------------------------------------

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

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

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

    Financial Day-Ahead LMP Peak (``NPM'') 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 DPN contract).

    Specifically, the NPM contract prices power at the NP-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 NPM contract

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

    listed for up to 86 calendar months.) In contrast, the DPN contract is

    listed for a much shorter length of time (about 10 weeks); with such a

    limited timeframe, the forward pricing capability of the DPN contract

    is much more constrained than that of the NPM contract. Traders use

    monthly power contracts like the NPM 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 DPN

    contract.

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

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

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

    meeting the material price reference

    [[Page 42424]]

    criterion would routinely be consulted by industry participants in

    pricing cash market transactions. The DPN contract is not consulted in

    this manner and does not satisfy the material price reference

    criterion. Thus, the DPN contract does not satisfy the direct price

    reference test for existence of material price reference. Furthermore,

    the Commission notes that publication of the DPN contract's prices is

    not indirect evidence of material price reference. The DPN 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 DPN 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 DPN contract's price. Moreover,

    the commenters argued that the underlying cash price series against

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

    peak 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 NP-15 is a major power market,

    traders do not consider the daily average peak-hour NP-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 DPN 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 DPN contract.

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

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

    conclusive evidence that market participants are buying the ICE data

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

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

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

    The DPN 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 DPN contract's prices and do not

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

    market transactions.

    Lastly, EEI argued that the ECM Study did not specifically identify

    the DPN 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 DPN 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 DPN contract's

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

    is sold to market participants, those individuals likely do not

    purchase the ICE data packages specifically for the DPN 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

    As noted above, in its October 6, 2009, Federal Register notice,

    the Commission identified material price reference and material

    liquidity as potentially applicable criteria for SPDC determination of

    the DPN contract. 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 DPN contract was 2,782 in the second quarter of 2009,

    resulting in a daily average of 43.5 trades. During the same period,

    the DPN contract had a total trading volume of 5,766 contracts and an

    average daily trading volume of 90.1 contracts. Moreover, open interest

    as of June 30, 2009, was 947 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.\51\

    ---------------------------------------------------------------------------

    \51\ 74 FR 51264 (October 6, 2009).

    ---------------------------------------------------------------------------

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

    total trading volume in the fourth quarter of 2009 was 5,801 contracts

    (or 89.2 contracts on a daily basis). In terms of number of

    transactions, 2,160 trades occurred in the fourth quarter of 2009 (33.2

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

    contract was 573 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 between the second and fourth quarters

    of 2009 was not substantial. However, trading activity in the DPN

    contract, as characterized by total quarterly volume, indicates that

    the DPN contract experiences trading activity that is similar to that

    of thinly-traded futures markets.\52\ Thus, the DPN contract does not

    meet a threshold of trading activity that would render it of potential

    importance and no additional statistical analysis is warranted.\53\

    ---------------------------------------------------------------------------

    \52\ 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.

    \53\ 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 Part 36, Appendix A. For the

    reasons discussed above, the Commission has found that the DPN

    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.

    ---------------------------------------------------------------------------

    [[Page 42425]]

    i. Federal Register Comments

    ICE and WGCEF stated that the DPN contract lacks a sufficient

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

    commenters, along with WPTF, EPSA, FIEG and EEI argued that the DPN

    contract cannot have a material effect on other contracts, such as

    those listed for trading by NYMEX because price linkage and the

    potential for arbitrage do not exist. Moreover, the DCM contracts do

    not cash settle to the DPN contract's price. Instead, the DCM contracts

    and the DPN contract are both cash settled based on physical

    transactions, which neither the ECM or 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 DPN 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.''\54\

    ---------------------------------------------------------------------------

    \54\ Guidance, supra.

    ---------------------------------------------------------------------------

    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''\55\ rather than solely relying upon an ECM on its own to

    identify any such potential SPDCs to the Commission. Thus, any contract

    that meets this threshold may be subject to scrutiny as a potential

    SPDC; however, the contract will not be found to be a SPDC merely

    because it met the reporting threshold.

    ---------------------------------------------------------------------------

    \55\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ICE argued 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.'' \56\ 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 DPN contract itself would be considered liquid. In

    any event, in light of the fact that the Commission has found that the

    DPN contract does not meet the material price reference criterion,

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

    evaluate whether the DPN contract meets the material liquidity

    criterion since it cannot be used alone for SPDC determination.

    ---------------------------------------------------------------------------

    \56\ 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 34 percent of all

    transactions in the DPN 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.

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

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

    contract does not meet the material liquidity criterion.

    3. Overall Conclusion Regarding the DPN Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the ICE DPN

    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 DPN 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 DPN 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 DPN

    contract.\57\ Accordingly, with respect to its DPN 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.

    ---------------------------------------------------------------------------

    \57\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    e. The NP-15 Financial Day-Ahead LMP Off-Peak Daily (UNP) Contract and

    the SPDC Indicia

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

    off-peak hour, day-ahead LMPs posted by CAISO for the NP-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 UNP contract is 25 MWh, and the UNP 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 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 the 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

    [[Page 42426]]

    Project.\58\ Path 15, along with the Pacific 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 500 kV lines and four 230 kV

    lines.\59\ 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. As noted above, ``NP-15''

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

    the lower half of Path 15.

    ---------------------------------------------------------------------------

    \58\ The Pacific Intertie comprises three AC lines and one 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 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.

    \59\ 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.

    ---------------------------------------------------------------------------

    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 also 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 the UNP contract as a potential SPDC based on the material

    price reference and material liquidity criteria. 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 UNP contract.

    The Commission also noted that its October 2007 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 UNP contract, while not mentioned by name in the

    ECM Study, might warrant further review.

    The Commission explains in its Guidance to the statutory criteria

    that in evaluating a contract under the material price reference

    criterion, it will rely on one of two sources of evidence--direct or

    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.\60\ 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.

    ---------------------------------------------------------------------------

    \60\ 17 CFR Part 36, Appendix A.

    ---------------------------------------------------------------------------

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

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

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

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

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

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

    contract). Specifically, the ONP contract prices power at the NP-15

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

    over the contract month, as reported by CAISO. Market participants can

    use the ONP contract to lock-in electricity prices far into the future.

    In contrast, the UNP contract is listed for a much shorter length of

    time; with such a limited timeframe, the forward pricing capability of

    the UNP contract is much more constrained than the ONP contract.

    Traders use monthly power contracts like the ONP contract to price

    electricity commitments in the future. The ONP contract is listed for

    up to 86 calendar months.) In contrast, the UNP contract is listed for

    a much shorter length of time (about 10 weeks). 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 UNP

    contract.

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

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

    contract, the Commission has

    [[Page 42427]]

    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 UNP contract is

    not consulted in this manner and does not satisfy the material price

    reference criterion. Thus, the UNP contract does not satisfy the direct

    price reference test for existence of material price reference.

    Furthermore, the Commission notes that publication of the UNP

    contract's prices is not indirect evidence of material price reference.

    The UNP 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 UNP 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 UNP contract's price. Moreover,

    the commenters argued that the underlying cash price series against

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

    off-peak NP-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 NP-15 is a major power market,

    traders do not consider the daily average off-peak NP-15 price to be as

    important as the off-peak electricity price associated with the monthly

    contract.

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

    data for the UNP 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 UNP contract.

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

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

    conclusive evidence that market participants are buying the ICE data

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

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

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

    The UNP 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 UNP contract's prices and do not

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

    market transactions.

    Lastly, EEI argued that the ECM Study did not specifically identify

    the UNP 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

    The Commission finds that the ICE UNP 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 UNP contract's price (direct evidence).

    Moreover, while the UNP contract's price data is sold to market

    participants, those individuals likely do not purchase the ICE data

    packages specifically for the UNP 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

    As noted above, in its October 6, 2009, Federal Register notice,

    the Commission identified material price reference and material

    liquidity as potentially applicable criteria for SPDC determination of

    the UNP contract. 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 UNP contract was 1,925 in the second quarter of 2009,

    resulting in a daily average of 30.1 trades. During the same period,

    the UNP contract had a total trading volume of 36,936 contracts and an

    average daily trading volume of 577.1 contracts. Moreover, open

    interest as of June 30, 2009, was 4,152 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.\61\

    ---------------------------------------------------------------------------

    \61\ 74 FR 51264 (October 6, 2009).

    ---------------------------------------------------------------------------

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

    total trading volume in the fourth quarter of 2009 was 19,859 contracts

    (or 305.5 contracts on a daily basis). In terms of number of

    transactions, 1,022 trades occurred in the fourth quarter of 2009 (15.7

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

    contract was 3,416 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 between the second and fourth quarters

    of 2009 was not substantial. In addition, trading activity in the UNP

    contract, as characterized by total quarterly volume, indicates that

    the UNP contract experiences trading activity that is similar to that

    of thinly-traded futures markets.\62\ Thus, the UNP contract does not

    meet a threshold of trading activity that would render it of potential

    importance and no additional statistical analysis is warranted.\63\

    ---------------------------------------------------------------------------

    \62\ 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.

    \63\ 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 UNP 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.

    ---------------------------------------------------------------------------

    [[Page 42428]]

    i. Federal Register Comments

    ICE and WGCEF stated that the UNP contract lacks a sufficient

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

    commenters, along with WPTF, EPSA, FIEG and EEI argued that the UNP

    contract cannot have a material effect on other contracts, such as

    those listed for trading by NYMEX, because price linkage and the

    potential for arbitrage do not exist. Moreover, the DCM contracts do

    not cash settle to the UNP contract's price. Instead, the DCM contracts

    and the UNP contract are both cash settled based on physical

    transactions, which neither the ECM or 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 UNP 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.'' \64\

    ---------------------------------------------------------------------------

    \64\ Guidance, supra.

    ---------------------------------------------------------------------------

    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'' \65\ rather than solely relying upon an ECM on its own to

    identify any such potential SPDCs to the Commission. Thus, any contract

    that meets this threshold may be subject to scrutiny as a potential

    SPDC; however, the contract will not be found to be a SPDC merely

    because it met the reporting threshold.

    ---------------------------------------------------------------------------

    \65\ 73 FR 75892 (December 12, 2008).

    ---------------------------------------------------------------------------

    ICE argued 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.'' \66\ It is the Commission's opinion that liquidity,

    as it pertains to the UNP contract, is typically a function of trading

    activity in particular lead days and, given sufficient liquidity in

    such days, the ICE UNP contract itself would be considered liquid. In

    any event, in light of the fact that the Commission has found that the

    UNP contract does not meet the material price reference criterion,

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

    evaluate whether the UNP contract meets the material liquidity

    criterion since it cannot be used alone for SPDC determination.

    ---------------------------------------------------------------------------

    \66\ 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 45 percent of all

    transactions in the UNP 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.

    ---------------------------------------------------------------------------

    ii. Conclusion Regarding Material Liquidity

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

    contract does not meet the material liquidity criterion.

    3. Overall Conclusion Regarding the UNP Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the ICE UNP

    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 UNP 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 UNP 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 UNP

    contract.\67\ Accordingly, with respect to its UNP 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.

    ---------------------------------------------------------------------------

    \67\ See 73 FR 75888, 75893 (Dec. 12, 2008).

    ---------------------------------------------------------------------------

    V. Related Matters

    a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \68\ imposes certain

    requirements on Federal agencies, including the Commission, in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. Certain provisions of Commission

    rule 36.3 impose new regulatory and reporting requirements on ECMs,

    resulting in information collection requirements within the meaning of

    the PRA. OMB previously has approved and assigned OMB control number

    3038-0060 to this collection of information.

    ---------------------------------------------------------------------------

    \68\ 44 U.S.C. 3507(d).

    ---------------------------------------------------------------------------

    b. Cost-Benefit Analysis

    Section 15(a) of the CEA \69\ requires the Commission to consider

    the costs and benefits of its actions before issuing an order under the

    Act. By its terms, section 15(a) does not require the Commission to

    quantify the costs and benefits of an order or to determine whether the

    benefits of the order outweigh its costs; rather, it requires that the

    Commission ``consider'' the costs and benefits of its actions. Section

    15(a) further specifies that the costs and benefits shall be evaluated

    in light of five broad areas of market and public concern: (1)

    Protection of market participants and the public; (2) efficiency,

    competitiveness and financial integrity of futures markets; (3) price

    discovery; (4) sound risk management practices; and (5) other public

    interest considerations. The Commission may in its discretion give

    greater weight to any one of the five enumerated areas and could in its

    discretion determine that, notwithstanding its costs, a particular

    order is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or accomplish any of the purposes of

    the Act.

    ---------------------------------------------------------------------------

    \69\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    When a futures contract begins to serve a significant price

    discovery function, that contract, and the ECM on which it is traded,

    warrants increased oversight to deter and prevent price

    [[Page 42429]]

    manipulation or other disruptions to market integrity, both on the ECM

    itself and in any related futures contracts trading on DCMs. An Order

    finding that a particular contract is a SPDC triggers this increased

    oversight and imposes obligations on the ECM calculated to accomplish

    this goal. The increased oversight engendered by the issue of a SPDC

    Order increases transparency and helps to ensure fair competition among

    ECMs and DCMs trading similar products and competing for the same

    business. Moreover, 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 CEA and Commission regulations.

    Additionally, the ECM must comply with nine core principles established

    by section 2(h)(7) of the Act--including the obligation to establish

    position limits and/or accountability standards for the SPDC. Section

    4(i) of the CEA authorize the Commission to require reports for SPDCs

    listed on ECMs. These increased responsibilities, along with the CFTC's

    increased regulatory authority, subject the ECM's risk management

    practices to the Commission's supervision and oversight and generally

    enhance the financial integrity of the markets.

    The Commission has concluded that the SDP, SQP, SRP, DNP and UNP

    contracts, which are the subject of the attached Orders, are not SPDCs;

    accordingly, the Commission's Orders impose no additional costs and no

    additional statutorily or regulatory mandated responsibilities on the

    ECM.

    c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \70\ requires that

    agencies consider the impact of their rules on small businesses. The

    requirements of CEA section 2(h)(7) and the Part 36 rules affect ECMs.

    The Commission previously has determined that ECMs are not small

    entities for purposes of the RFA.\71\ Accordingly, the Chairman, on

    behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)

    that these Orders, taken in connection with section 2(h)(7) of the Act

    and the Part 36 rules, will not have a significant impact on a

    substantial number of small entities.

    ---------------------------------------------------------------------------

    \70\ 5 U.S.C. 601 et seq.

    \71\ 66 FR 42256, 42268 (Aug. 10, 2001).

    ---------------------------------------------------------------------------

    VI. Orders

    a. Order Relating to the SP-15 Financial Day-Ahead LMP Peak Daily

    Contract

    After considering the complete record in this matter, including the

    comment letters received in response to its request for comments, the

    Commission has determined to issue the following Order:

    The Commission, pursuant to its authority under section 2(h)(7) of

    the Act, hereby determines that the SP-15 Financial Day-Ahead LMP Peak

    Daily contract, traded on the IntercontinentalExchange, Inc., does not

    at this time satisfy the material price preference or material

    liquidity criteria for significant price discovery contracts.

    Consistent with this determination, the IntercontinentalExchange, Inc.,

    is not considered a registered entity \72\ with respect to the SP-15

    Financial Day-Ahead LMP Peak Daily contract and is not subject to the

    provisions of the Commodity Exchange Act applicable to registered

    entities. Further, the obligations, requirements and timetables

    prescribed in Commission rule 36.3(c)(4) governing core principle

    compliance by the IntercontinentalExchange, Inc., are not applicable to

    the SP-15 Financial Day-Ahead LMP Peak Daily contract with the issuance

    of this Order.

    ---------------------------------------------------------------------------

    \72\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the IntercontinentalExchange, Inc., dated July 27, 2009, and March

    24, 2010, and other supporting material. Any material change or

    omissions in the facts and circumstances pursuant to which this order

    is granted might require the Commission to reconsider its current

    determination that the SP-15 Financial Day-Ahead LMP Peak Daily

    contract is not a significant price discovery contract. Additionally,

    to the extent that it continues to rely upon the exemption in Section

    2(h)(3) of the Act, the IntercontinentalExchange, Inc., must continue

    to comply with all of the applicable requirements of Section 2(h)(3)

    and Commission Regulation 36.3.

    b. Order Relating to the SP-15 Financial Day-Ahead LMP Off-Peak Daily

    Contract

    After considering the complete record in this matter, including the

    comment letters received in response to its request for comments, the

    Commission has determined to issue the following Order:

    The Commission, pursuant to its authority under section 2(h)(7) of

    the Act, hereby determines that the SP-15 Financial Day-Ahead LMP Off-

    Peak Daily contract, traded on the IntercontinentalExchange, Inc., does

    not at this time satisfy the material price preference or material

    liquidity criteria for significant price discovery contracts.

    Consistent with this determination, the IntercontinentalExchange, Inc.,

    is not considered a registered entity \73\ with respect to the SP-15

    Financial Day-Ahead LMP Off-Peak Daily contract and is not subject to

    the provisions of the Commodity Exchange Act applicable to registered

    entities. Further, the obligations, requirements and timetables

    prescribed in Commission rule 36.3(c)(4) governing core principle

    compliance by the IntercontinentalExchange, Inc., are not applicable to

    the SP-15 Financial Day-Ahead LMP Off-Peak Daily contract with the

    issuance of this Order.

    ---------------------------------------------------------------------------

    \73\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the IntercontinentalExchange, Inc., dated July 27, 2009, and March

    24, 2010, and other supporting material. Any material change or

    omissions in the facts and circumstances pursuant to which this order

    is granted might require the Commission to reconsider its current

    determination that the SP-15 Financial Day-Ahead LMP Off-Peak Daily

    contract is not a significant price discovery contract. Additionally,

    to the extent that it continues to rely upon the exemption in Section

    2(h)(3) of the Act, the IntercontinentalExchange, Inc., must continue

    to comply with all of the applicable requirements of Section 2(h)(3)

    and Commission Regulation 36.3.

    c. Order Relating to the SP-15 Financial Swap Real Time LMP-Peak Daily

    Contract

    After considering the complete record in this matter, including the

    comment letters received in response to its request for comments, the

    Commission has determined to issue the following Order:

    The Commission, pursuant to its authority under section 2(h)(7) of

    the Act, hereby determines that the SP-15 Financial Swap Real Time LMP-

    Peak Daily contract, traded on the IntercontinentalExchange, Inc., does

    not at this time satisfy the material price preference or material

    liquidity criteria for significant price discovery contracts.

    Consistent with this determination, the IntercontinentalExchange, Inc.,

    is not considered a registered entity \74\ with respect to the SP-15

    Financial Swap Real Time LMP-Peak Daily contract and is not subject to

    the provisions of the Commodity Exchange Act applicable to registered

    entities. Further, the obligations, requirements and timetables

    [[Page 42430]]

    prescribed in Commission rule 36.3(c)(4) governing core principle

    compliance by the IntercontinentalExchange, Inc., are not applicable to

    the SP-15 Financial Swap Real Time LMP-Peak Daily contract with the

    issuance of this Order.

    ---------------------------------------------------------------------------

    \74\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the IntercontinentalExchange, Inc., dated July 27, 2009, and March

    24, 2010, and other supporting material. Any material change or

    omissions in the facts and circumstances pursuant to which this order

    is granted might require the Commission to reconsider its current

    determination that the SP-15 Financial Swap Real Time LMP-Peak Daily

    contract is not a significant price discovery contract. Additionally,

    to the extent that it continues to rely upon the exemption in Section

    2(h)(3) of the Act, the IntercontinentalExchange, Inc., must continue

    to comply with all of the applicable requirements of Section 2(h)(3)

    and Commission Regulation 36.3.

    d. Order Relating to the NP-15 Financial Day-Ahead LMP Peak Daily

    Contract

    After considering the complete record in this matter, including the

    comment letters received in response to its request for comments, the

    Commission has determined to issue the following Order:

    The Commission, pursuant to its authority under section 2(h)(7) of

    the Act, hereby determines that the NP-15 Financial Day-Ahead LMP Peak

    Daily contract, traded on the IntercontinentalExchange, Inc., does not

    at this time satisfy the material price preference or material

    liquidity criteria for significant price discovery contracts.

    Consistent with this determination, the IntercontinentalExchange, Inc.,

    is not considered a registered entity \75\ with respect to the NP-15

    Financial Day-Ahead LMP Peak Daily contract and is not subject to the

    provisions of the Commodity Exchange Act applicable to registered

    entities. Further, the obligations, requirements and timetables

    prescribed in Commission rule 36.3(c)(4) governing core principle

    compliance by the IntercontinentalExchange, Inc., are not applicable to

    the NP-15 Financial Day-Ahead LMP Peak Daily contract with the issuance

    of this Order.

    ---------------------------------------------------------------------------

    \75\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the IntercontinentalExchange, Inc., dated July 27, 2009, and March

    24, 2010, and other supporting material. Any material change or

    omissions in the facts and circumstances pursuant to which this order

    is granted might require the Commission to reconsider its current

    determination that the NP-15 Financial Day-Ahead LMP Peak Daily

    contract is not a significant price discovery contract. Additionally,

    to the extent that it continues to rely upon the exemption in Section

    2(h)(3) of the Act, the IntercontinentalExchange, Inc., must continue

    to comply with all of the applicable requirements of Section 2(h)(3)

    and Commission Regulation 36.3.

    e. Order Relating to the NP-15 Financial Day-Ahead LMP Off-Peak Daily

    Contract

    After considering the complete record in this matter, including the

    comment letters received in response to its request for comments, the

    Commission has determined to issue the following Order:

    The Commission, pursuant to its authority under section 2(h)(7) of

    the Act, hereby determines that the NP-15 Financial Day-Ahead LMP Off-

    Peak Daily contract, traded on the IntercontinentalExchange, Inc., does

    not at this time satisfy the material price preference or material

    liquidity criteria for significant price discovery contracts.

    Consistent with this determination, the IntercontinentalExchange, Inc.,

    is not considered a registered entity \76\ with respect to the NP-15

    Financial Day-Ahead LMP Off-Peak Daily contract and is not subject to

    the provisions of the Commodity Exchange Act applicable to registered

    entities. Further, the obligations, requirements and timetables

    prescribed in Commission rule 36.3(c)(4) governing core principle

    compliance by the IntercontinentalExchange, Inc., are not applicable to

    the NP-15 Financial Day-Ahead LMP Off-Peak Daily contract with the

    issuance of this Order.

    ---------------------------------------------------------------------------

    \76\ 7 U.S.C. 1a(29).

    ---------------------------------------------------------------------------

    This Order is based on the representations made to the Commission

    by the IntercontinentalExchange, Inc., dated July 27, 2009, and March

    24, 2010, and other supporting material. Any material change or

    omissions in the facts and circumstances pursuant to which this order

    is granted might require the Commission to reconsider its current

    determination that the NP-15 Financial Day-Ahead LMP Off-Peak Daily

    contract is not a significant price discovery contract. Additionally,

    to the extent that it continues to rely upon the exemption in Section

    2(h)(3) of the Act, the IntercontinentalExchange, Inc., must continue

    to comply with all of the applicable requirements of Section 2(h)(3)

    and Commission Regulation 36.3.

    Issued in Washington, DC on July 9, 2010 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-17736 Filed 7-20-10; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: July 21, 2010



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