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2010-17747

  • FR Doc 2010-17747[Federal Register: July 21, 2010 (Volume 75, Number 139)]

    [Notices]

    [Page 42380-42390]

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

    [DOCID:fr21jy10-38]

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    COMMODITY FUTURES TRADING COMMISSION

    Orders Finding That the SP-15 Financial Day-Ahead LMP Peak

    Contract and SP-15 Financial Day-Ahead LMP Off-Peak Contract Offered

    for Trading on the IntercontinentalExchange, Inc., 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

    [[Page 42381]]

    undertake a determination whether the SP-15 \2\ Financial Day-Ahead LMP

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

    (``OFP'') contract,\3\ 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

    SPM and OFP contracts 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 Federal Register notice also requested comment on the

    SP-15 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

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

    Financial Day-Ahead LMP Off-Peak Daily (``UNP'') contract; these

    contracts will be addressed in a separate Federal Register release.

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    DATES: Effective Date: July 9, 2010.

    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'') \4\

    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.\5\ 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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    \4\ Incorporated as Title XIII of the Food, Conservation and

    Energy Act of 2008, Public Law No. 110-246, 122 Stat. 1624 (June 18,

    2008).

    \5\ 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.\6\ 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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    \6\ 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.\7\ The issuance of such an order also triggers the

    obligations, requirements and timetables prescribed in Commission rule

    36.3(c)(4).\8\

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    \7\ 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).

    \8\ 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

    SPM and OFP contracts \9\ perform a significant price discovery

    function and requested comment from interested parties.\10\ 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'').\11\ The

    comment letters from

    [[Page 42382]]

    FERC \12\ 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 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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    \9\ As noted above, the Federal Register notice also requested

    comment on the SP-15 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 Financial Day-Ahead LMP Peak Daily (``DPN'')

    contract and NP-15 Financial Day-Ahead LMP Off-Peak Daily (``UNP'')

    contract. These contracts will be addressed in a separate Federal

    Register release.

    \10\ 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.

    \11\ 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/2009/09-012.html.

    \12\ FERC expressed the opinion that a determination by the

    Commission that either 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.\13\ 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.\14\ 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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    \13\ 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 SPM

    and OFP 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.

    \14\ 17 CFR 36, Appendix A.

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    IV. Findings and Conclusions

    The Commission's findings and conclusions with respect to the SPM

    and OFP contracts are discussed separately below.

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

    Indicia

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

    peak-hour, day-ahead locational marginal prices (``LMPs'') \15\ posted

    by the California ISO \16\ (``CAISO'') for the SP-15 Existing Zone

    Generation (``EZ Gen'') hub for all peak hours during the contract

    month. The LMPs are derived from power trades that result in physical

    delivery. The size of the SPM contract is 400 megawatt hours (``MWh''),

    and the SPM contract is listed for up to 110 calendar months.

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    \15\ 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.

    \16\ 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 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

    [[Page 42383]]

    quotes offered in advance. Because the power quotes are dependent on

    estimates of supply and demand, electricity needs usually are not

    perfectly satisfied in the day-ahead market. In this regard, 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.\17\ 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 lines at 500 kilovolts (``kV'') and four lines at 230

    kV.\18\ 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 the 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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    \17\ 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-

    California 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.

    \18\ 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 LMP

    data on its Web site.

    1. Material Price Reference Criterion

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

    identified the SPM contract as a potential SPDC based on the material

    price reference and material liquidity statutory 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 SPM 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 SPM 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.\19\ 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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    \19\ 17 CFR 36, Appendix A.

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    The SP-15 power market 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. These traders look to a competitively determined price as an

    indication of expected values of power at the SP-15 hub when entering

    into cash market transactions for electricity, especially those trades

    providing for physical delivery in the

    [[Page 42384]]

    future. Traders use the ICE SPM contract, as well as other ICE power

    contracts, to hedge cash market positions and transactions--activities

    which enhance the SPM contract's price discovery utility. The

    substantial volume of trading and open interest in the SPM contract

    appears to attest to its use for this purpose. While the SPM contract's

    settlement prices may not be the only factor influencing spot and

    forward transactions, electricity traders consider the ICE price to be

    a critical factor in conducting OTC transactions.\20\ As a result, the

    SPM contract satisfies the direct price reference test.

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    \20\ In addition to referencing ICE prices, firms participating

    in the SP-15 power market may rely on other cash market quotes as

    well as industry publications and price indices that are published

    by third-party price reporting firms in entering into power

    transactions.

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    The fact that ICE's SPM monthly contract is used more widely as a

    source of pricing information rather than the daily contract (i.e., the

    SDP contract) \21\ bolsters the argument that it serves as a direct

    price reference. In this regard, the SPM contract prices power at the

    SP-15 hub up to almost five years into the future. Thus, market

    participants can use the SPM contract to lock-in electricity prices far

    into the future. Traders use monthly power contracts like the SPM

    contract to price future electric power commitments, where such

    commitments are based on long range forecasts of power supply and

    demand. In contrast, the SDP contract is listed for a much shorter

    length of time--up to 75 days in the future. As generation and usage

    nears, market participants have a better understanding of actual power

    supply and needs. As a result, they can modify previously-established

    hedges with daily contracts, like the SDP contract.

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    \21\ The SDP contract is cash settled based on the arithmetic

    average of peak-hour, day-ahead LMPs posted by CAISO for the SP-15

    EZ Gen hub 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 MWh, and the SDP contract is

    listed for 75 consecutive calendar days.

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    The Commission notes that SP-15 is a major trading point for

    electricity, and the SPM contract's prices are well regarded in the

    industry as indicative of the value of power at the SP-15 hub.

    Accordingly, the Commission believes that it is reasonable to conclude

    that market participants purchase the data packages that include the

    SPM contract's prices in substantial part because the SPM contract's

    prices have particular value to them. Moreover, such prices are

    consulted on a frequent and recurring basis by industry participants in

    pricing cash market transactions. In these circumstances, the SPM

    contract meets the indirect price reference test.

    i. Federal Register Comments:

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

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

    the commenters argued that the underlying cash price series against

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

    peak-hour SP-15 electricity prices over the contract month, 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, the SP-15 hub is a major trading center for

    electricity in the western United States. Traders, including producers,

    keep abreast of the prices of the SPM contract when conducting cash

    deals. These traders look to a competitively determined price as an

    indication of expected values of electricity at the SP-15 hub when

    entering into cash market transaction for power, especially those

    trades that provide for physical delivery in the future. Traders use

    the ICE SPM contract to hedge cash market positions and transactions,

    which enhances the SPM contract's price discovery utility. While the

    SPM contract's settlement prices may not be the only factor influencing

    spot and forward transactions, natural gas traders consider the ICE

    price to be a crucial factor in conducting OTC transactions.

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

    data for the SPM 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 SPM contract.

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

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

    conclusive evidence that market participants are buying the ICE data

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

    As noted above, the Commission notes that publication of the SPM

    contract's prices is indirect evidence of routine dissemination. The

    SPM contract's prices, while sold as a package, are of particular

    interest to market participants. Thus, the Commission has concluded

    that traders likely specifically purchase the ICE data packages for the

    SPM contract's prices and 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 SPM 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 SPM contract meets the material

    price reference criterion because cash market transactions are priced

    either explicitly or implicitly on a frequent and recurring basis at a

    differential to the SPM contract's price (direct evidence). Moreover,

    the SPM contract's price data are sold to market participants, and

    those individuals likely purchase the ICE data packages specifically

    for the SPM contract's prices and 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 SPM contract as a potential SPDC based on

    the material price reference and material liquidity 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 SPM contract was 3,235 in the second quarter of 2009,

    resulting in a daily average of 50.5 trades. During the same period,

    the SPM contract had a

    [[Page 42385]]

    total trading volume of 143,717 contracts and an average daily trading

    volume of 2,245.6 contracts. Moreover, open interest as of June 30,

    2009, was 460,583 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.\22\

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

    \22\ 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 311,819

    contracts (or 4,797.2 contracts on a daily basis). In terms of number

    of transactions, 6,199 trades occurred in the fourth quarter of 2009

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

    SPM contract was 622,503 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. In addition, trading activity in the SPM

    contract, as characterized by total quarterly volume, indicates that

    the SPM contract experiences trading activity that is greater than that

    of thinly-traded futures markets.\23\ Thus, it is reasonable to infer

    that the SPM contract could have a material effect on other ECM

    contracts or on DCM contracts.

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

    \23\ 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.

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

    To measure the effect that the SPM contract potentially could have

    on another ECM contract staff performed a statistical analysis \24\

    using daily settlement prices (between July 1, 2008 and December 31,

    2009) for the ICE SPM and OFP contracts. The simulation suggest that,

    on average over the sample period, a one percent rise in the SPM

    contract's price elicited a 0.7 percent increase in ICE OFP contract's

    price.

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

    \24\ Specifically, Commission staff econometrically estimated a

    cointegrated vector autoregression (CVAR) model using daily

    settlement prices. CVAR methods permit a dichotomization of the data

    relationships into long run equilibrium components (called the

    cointegration space or cointegrating relationships) and a short run

    component. A CVAR model was chosen over the more traditional vector

    autoregression model in levels because the statistical properties of

    the data (lack of stationarity and ergodicity) precluded the more

    traditional modeling treatment. Moreover, the statistical properties

    of the data necessitated the modeling of the contracts' prices as a

    CVAR model containing both first differences (to handle

    stationarity) and an error-correction term to capture long run

    equilibrium relationships. The prices were treated as a single

    reduced-form model in order to test hypothesis that power prices in

    the same market affect each other. The prices of ICE's SPM and OFP

    contracts are positively related to each other in a cointegrating

    relationship and display a high level of statistical strength. On

    average, during the sample period, each percentage rise in SPM

    contract's price elicited a 0.7 percent rise in OFP contract's

    price.

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

    i. Federal Register Comments:

    ICE and WGCEF stated that the SPM 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 SPM

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

    those listed for trading by the New York Mercantile Exchange

    (``NYMEX''), a DCM. The commenters pointed out that it is not possible

    for the SPM contract to affect a DCM contract because price linkage and

    the potential for arbitrage do not exist. The DCM contracts do not cash

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

    SPM contract are both cash settled based on physical transactions,

    which neither the ECM or the DCM contracts can influence. The

    Commission's statistical analysis shows that changes in the ICE SPM

    contract's price significantly influences the prices of other ECM

    contracts (namely, the OFP contract).

    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 SPM 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.'' \25\

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

    \25\ 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'' \26\ 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.

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

    \26\ 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.'' \27\ It is the Commission's opinion that liquidity,

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

    activity in particular lead months and, given sufficient liquidity in

    such months, the ICE SPM contract itself would be considered liquid.

    ICE's analysis of its own trade data confirms this to be the case for

    the SPM contract, and thus, the Commission believes that it applied the

    statistical data cited above in an appropriate manner for gauging

    material liquidity.

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

    \27\ 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 66 percent of all

    transactions in the SPM 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 SPM

    satisfies the material liquidity criterion. Specifically, there is

    sufficient trading activity in the SPM contract to have a material

    effect on ``other agreements, contracts or transactions listed for

    trading on or subject to the rules of a designated contract

    market[hellip]or an electronic trading facility operating in reliance

    on the exemption in section 2(h)(3) of the Act.''

    [[Page 42386]]

    3. Overall Conclusion Regarding the SPM Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the ICE SPM

    contract performs a significant price discovery function under two of

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

    Specifically, the Commission has determined that the SPM contract meets

    the material price reference and material liquidity criteria at this

    time. Accordingly, the Commission is issuing the attached Order

    declaring that the SPM contract is a SPDC.

    Issuance of this Order signals the immediate effectiveness of the

    Commission's authorities with respect to ICE as a registered entity in

    connection with its SPM contract,\28\ and triggers the obligations,

    requirements--both procedural and substantive--and timetables

    prescribed in Commission rule 36.3(c)(4) for ECMs.

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

    \28\ See 73 FR 75888, 75893 (Dec. 12, 2008).

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

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

    SPDC Indicia

    The OFP 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 hub

    for all peak hours during the contract month. The LMPs are derived from

    power trades that result in physical delivery. The size of the OFP

    contract is 25 MWh, and the SPM contract is listed for up to 86

    calendar months.

    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.\29\ 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 lines at 500 kilovolts (``kV'') and four lines at 230

    kV.\30\ 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 the 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.

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

    \29\ 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 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.

    \30\ 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 is also responsible for operating

    the hourly auctions in which the power is traded and publishing the LMP

    data on its Web site.

    1. Material Price Reference Criterion

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

    identified the OFP 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 OFP 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 OFP contract, while not mentioned by name in the

    ECM Study, warranted further review.

    [[Page 42387]]

    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.\31\ 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.

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

    \31\ 17 CFR 36, Appendix A.

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

    The SP-15 power market 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. These traders look to a competitively determined price as an

    indication of expected values of power at the SP-15 hub when entering

    into cash market transaction for electricity, especially those trades

    providing for physical delivery in the future. Traders use the OFP

    contract, as well as other ICE power contracts, to hedge cash market

    positions and transactions--activities which enhance the OFP contract's

    price discovery utility. The substantial volume of trading and open

    interest in the OFP contract appear to attest to its use for this

    purpose. While the OFP contract's settlement prices may not be the only

    factor influencing spot and forward transactions, electricity traders

    consider the ICE price to be a critical factor in conducting OTC

    transactions.\32\ In these circumastances, the OFP contract satisfies

    the direct price reference test.

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

    \32\ In addition to referencing ICE prices, firms participating

    in the SP-15 power market may rely on other cash market quotes as

    well as industry publications and price indices that are published

    by third-party price reporting firms in entering into power

    transactions.

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

    The fact that ICE's OFP monthly contract is used more widely as a

    source of pricing information rather than the daily contract (i.e., the

    SQP contract) \33\ is further evidence of direct price reference. In

    this regard, OFP contract prices power at the SP-15 hub up to six years

    into the future. Thus, market participants can use the OFP contract to

    lock-in electricity prices far into the future. Traders use monthly

    power contracts like the OFP contract to price future power electricity

    commitments, where such commitments are based on long range forecasts

    of power supply and demand. In contrast, the SQP contract is listed for

    a much shorter length of time--up to 38 days in the future. As

    generation and usage nears, market participants have a better

    understanding of actual power supply and needs. As a result, they can

    modify previously-established hedges with daily contracts, like the SQP

    contract.

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

    \33\ The SDP contract is cash settled based on the arithmetic

    average of peak-hour, day-ahead LMPs posted by CAISO for the SP-15

    EZ Gen hub 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 MWh, and the SDP contract is

    listed for 75 consecutive calendar days.

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

    The Commission notes that SP-15 is a major trading point for

    electricity, and the OFP contract's prices are well regarded in the

    industry as indicative of the value of power at the SP-15 hub.

    Accordingly, the Commission believes that it is reasonable to conclude

    that market participants purchase the data packages that include the

    OFP contract's prices in substantial part because the SPM contract's

    prices have particular value to them. Moreover, such prices are

    consulted on a frequent and recurring basis by industry participants in

    pricing cash market transactions. In light of the above, the OFP

    contract satisfies the indirect price reference test.

    i. Federal Register Comments:

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

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

    the commenters argued that the underlying cash price series against

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

    peak-hour SP-15 electricity prices over the contract month, 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, the SP-15 hub is a major trading center for

    electricity in the western United States. Traders, including producers,

    keep abreast of the prices of the OFP contract when conducting cash

    deals. These traders look to a competitively determined price as an

    indication of expected values of electricity at the SP-15 hub when

    entering into cash market transactions for power, especially those

    trades that provide for physical delivery in the future. Traders use

    the ICE OFP contract to hedge cash market positions and transactions,

    which enhances the OFP contract's price discovery utility. While the

    OFP contract's settlement prices may not be the only factor influencing

    spot and forward transactions, natural gas traders consider the ICE

    price to be a crucial factor in conducting OTC transactions.

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

    data for the OFP 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 OFP contract.

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

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

    conclusive evidence that market participants are buying the ICE data

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

    As noted above, the Commission notes that publication of the OFP

    contract's prices is indirect evidence of routine dissemination. The

    OFP contract's prices, while sold as a package, are of particular

    interest to market participants. Thus, the Commission has concluded

    that traders likely purchase the ICE data packages specifically for the

    OFP contract's prices and 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 OFP contract as a contract that is referred to by market

    participants on a frequent and recurring basis. The Commission notes

    [[Page 42388]]

    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 OFP contract meets the material

    price reference criterion because cash market transactions are priced

    either explicitly or implicitly on a frequent and recurring basis at a

    differential to the OFP contract's price (direct evidence). Moreover,

    the OFP contract's price data are sold to market participants, and

    those individuals likely purchase the ICE data packages specifically

    for the OFP contract's prices and 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 OFP contract as a potential SPDC based on

    the material price reference and material liquidity 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 OFP contract was 187 in the second quarter of 2009,

    resulting in a daily average of 2.9 trades. During the same period, the

    OFP contract had a total trading volume of 116,559 contracts and an

    average daily trading volume of 1,793.2 contracts. Moreover, open

    interest as of June 30, 2009, was 1,408,870 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.\34\

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

    \34\ 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 406,418

    contracts (or 6,252.6 contracts on a daily basis). In terms of number

    of transactions, 329 trades occurred in the fourth quarter of 2009 (5.1

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

    contract was 2,009,556 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 during the period between the second

    and fourth quarters of 2009 was not substantial. However, trading

    activity in the OFP contract, as characterized by total quarterly

    volume, indicates that the OFP contract experiences trading activity

    that is greater than that of thinly-traded futures markets.\35\ Thus,

    it is reasonable to infer that the OFP contract could have a material

    effect on other ECM contracts or on DCM contracts.

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

    \35\ 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.

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

    To measure the effect that the SPM contract potentially could have

    on another ECM contract staff performed a statistical analysis \36\

    using daily settlement prices (between July 1, 2008 and December 31,

    2009) for the ICE SPM and OFP contracts. The simulation suggest that,

    on average over the sample period, a one percent rise in the OFP

    contract's price elicited a 1.4 percent increase in ICE SPM contract's

    price.

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

    \36\ Specifically, Commission staff econometrically estimated a

    cointegrated vector autoregression (CVAR) model using daily

    settlement prices. CVAR methods permit a dichotomization of the data

    relationships into long run equilibrium components (called the

    cointegration space or cointegrating relationships) and a short run

    component. A CVAR model was chosen over the more traditional vector

    autoregression model in levels because the statistical properties of

    the data (lack of stationarity and ergodicity) precluded the more

    traditional modeling treatment. Moreover, the statistical properties

    of the data necessitated the modeling of the contracts' prices as a

    CVAR model containing both first differences (to handle

    stationarity) and an error-correction term to capture long run

    equilibrium relationships. The prices were treated as a single

    reduced-form model in order to test the hypothesis that power prices

    in the same market affect each other. The prices of ICE's SPM and

    OFP contracts are positively related to each other in a

    cointegrating relationship and display a high level of statistical

    strength. On average during the sample period, each percentage rise

    in OFP contract's price elicited a 1.4 percent rise in SPM

    contract's price.

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

    i. Federal Register Comments:

    ICE and WGCEF stated that the OFP 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 OFP

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

    those listed for trading by the NYMEX. The commenters pointed out that

    it is not possible for the OFP contract to affect a DCM contract

    because price linkage and the potential for arbitrage do not exist. The

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

    the DCM contracts and the OFP contract are both cash settled based on

    physical transactions, which neither the ECM or the DCM contracts can

    influence. The Commission's statistical analysis shows that changes in

    the ICE OFP contract's price significantly influences the prices of

    other ECM contracts (namely, the SPM contract).

    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 OFP 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.''\37\

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

    \37\ 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'' \38\ 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.

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

    \38\ 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

    [[Page 42389]]

    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.''

    \39\ It is the Commission's opinion that liquidity, as it pertains to

    the SPM contract, is typically a function of trading activity in

    particular lead months and, given sufficient liquidity in such months,

    the ICE OFP contract itself would be considered liquid. ICE's analysis

    of its own trade data confirms this to be the case for the OFP

    contract, and thus, the Commission believes that it applied the

    statistical data cited above in an appropriate manner for gauging

    material liquidity.

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

    \39\ 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 79 percent of all

    transactions in the OFP 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 OFP

    meets the material liquidity criterion. Specifically, there is

    sufficient trading activity in the OFP contract to have a material

    effect on ``other agreements, contracts or transactions listed for

    trading on or subject to the rules of a designated contract market * *

    * or an electronic trading facility operating in reliance on the

    exemption in section 2(h)(3) of the Act.''

    3. Overall Conclusion Regarding the OFP Contract

    After considering the entire record in this matter, including the

    comments received, the Commission has determined that the ICE OFP

    contract performs a significant price discovery function under the two

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

    Specifically, the Commission has determined that the OFP contract meets

    the material price reference and material liquidity criteria at this

    time. Accordingly, the Commission is issuing the attached Order

    declaring that the OFP contract is a SPDC.

    Issuance of this Order signals the immediate effectiveness of the

    Commission's authorities with respect to ICE as a registered entity in

    connection with its OFP contract,\40\ and triggers the obligations,

    requirements--both procedural and substantive--and timetables

    prescribed in Commission rule 36.3(c)(4) for ECMs.

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

    \40\ See 73 FR 75888, 75893 (Dec. 12, 2008).

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

    V. Related Matters

    a. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \41\ 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.

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

    \41\ 44 U.S.C. 3507(d).

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

    b. Cost-Benefit Analysis

    Section 15(a) of the CEA \42\ 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.

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

    \42\ 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 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.

    c. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \43\ 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.\44\ 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.

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

    \43\ 5 U.S.C. 601 et seq.

    \44\ 66 FR 42256, 42268 (Aug. 10, 2001).

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

    VI. Orders

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

    [[Page 42390]]

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

    contract, traded on the IntercontinentalExchange, Inc., satisfies the

    material price preference and material liquidity criteria for

    significant price discovery contracts. Consistent with this

    determination, and effective immediately, the IntercontinentalExchange,

    Inc., must comply with, with respect to the SP-15 Financial Day-Ahead

    LMP Peak contract, the nine core principles established by new section

    2(h)(7)(C). Additionally, the IntercontinentalExchange, Inc., shall be

    and is considered a registered entity \45\ with respect to the SP-15

    Financial Day-Ahead LMP Peak contract and is subject to all the

    provisions of the Commodity Exchange Act applicable to registered

    entities.

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

    \45\ 7 U.S.C. 1a(29).

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

    Further with respect to the SP-15 Financial Day-Ahead LMP Peak

    contract, the obligations, requirements and timetables prescribed in

    Commission rule 36.3(c)(4) governing core principle compliance by the

    IntercontinentalExchange, Inc., commence with the issuance of this

    Order.\46\

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

    \46\ Because ICE already lists for trading a contract (i.e., the

    Henry Financial LD1 Fixed Price contract) that was previously

    declared by the Commission to be a SPDC, ICE must submit a written

    demonstration of compliance with the Core Principles within 30

    calendar days of the date of this Order. 17 CFR 36.3(c)(4).

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

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

    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 contract, traded on the IntercontinentalExchange, Inc., satisfies

    the statutory material price reference and material liquidity criteria

    for significant price discovery contracts. Consistent with this

    determination, and effective immediately, the IntercontinentalExchange,

    Inc., must comply with, with respect to the SP-15 Financial Day-Ahead

    LMP Off-Peak contract, the nine core principles established by new

    section 2(h)(7)(C). Additionally, the IntercontinentalExchange, Inc.,

    shall be and is considered a registered entity \47\ with respect to the

    SP-15 Financial Day-Ahead LMP Off-Peak contract and is subject to all

    the provisions of the Commodity Exchange Act applicable to registered

    entities.

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

    \47\ 7 U.S.C. 1a(29).

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

    Further with respect to the SP-15 Financial Day-Ahead LMP Off-Peak

    contract, the obligations, requirements and timetables prescribed in

    Commission rule 36.3(c)(4) governing core principle compliance by the

    IntercontinentalExchange, Inc., commence with the issuance of this

    Order.\48\

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

    \48\ Because ICE already lists for trading a contract (i.e., the

    Henry Financial LD1 Fixed Price contract) that was previously

    declared by the Commission to be a SPDC, ICE must submit a written

    demonstration of compliance with the Core Principles within 30

    calendar days of the date of this Order. 17 CFR 36.3(c)(4).

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

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-17747 Filed 7-20-10; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: July 21, 2010



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