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, 42380-42390 [2010-17747]
Download as PDF
<![CDATA[
42380
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
DEPARTMENT OF COMMERCE
International Trade Administration
[A–427–001]
Revocation of Antidumping Duty Order
on Sorbitol From France
Import Administration,
International Trade Administration,
Department of Commerce.
SUMMARY: On July 1, 2009, the
Department of Commerce (the
Department) initiated the sunset review
of the antidumping duty order on
sorbitol from France. See Initiation of
Five-year (‘‘Sunset’’) Review, 74 FR
31412 (July 1, 2009). Pursuant to section
751(c) of the Tariff Act of 1930, as
amended (the Act), the U.S.
International Trade Commission (the
Commission) determined that
revocation of the existing antidumping
duty order on sorbitol from France
would not be likely to lead to
continuation or recurrence of material
injury to an industry in the United
States within a reasonably foreseeable
time. Sorbitol From France;
Determination, 75 FR 39277 (July 8,
2010) (ITC Final). Therefore, pursuant to
section 751(d)(2) of the Act and 19 CFR
351.222(i)(1)(iii), the Department is
revoking the antidumping duty order on
sorbitol from France.
DATES: Effective Date: August 5, 2009.
FOR FURTHER INFORMATION CONTACT:
Steve Bezirganian or Robert James, AD/
CVD Operations Office 7, Import
Administration, International Trade
Administration, U.S. Department of
Commerce, 14th Street and Constitution
Avenue, NW., Washington, DC 20230;
telephone: (202) 482–1131 and (202)
482–0649, respectively.
SUPPLEMENTARY INFORMATION:
AGENCY:
erowe on DSKG8SOYB1PROD with NOTICES
Background
On April 9, 1982, the Department
published the antidumping duty order
on sorbitol from France. See Sorbitol
From France; Antidumping Duty Order,
47 FR 15391 (April 9, 1982). On June 29,
1984, the order was revoked, in part.
See Sorbitol From France; Revocation in
Part of Antidumping Duty Order, 49 FR
26773 (June 29, 1984). On July 1, 2009,
the Department initiated its most recent
sunset review of the antidumping duty
order on sorbitol from France. See
Initiation of Five-year (‘‘Sunset’’) Review.
On July 2, 2009, the Commission
instituted its most-recent five-year
review of the order. See Sorbitol From
France, 74 FR 31762 (July 2, 2009).
As a result of the Department’s sunset
review, the Department determined that
revocation of the antidumping duty
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
order would be likely to lead to the
continuation or recurrence of dumping.
See Sorbitol from France: Final Results
of Expedited Five-year (Sunset) Review
of Antidumping Duty Order, 74 FR
56793 (November 3, 2009). The
Department notified the Commission of
the magnitude of the margin likely to
prevail were the antidumping duty
order to be revoked.
On July 8, 2010, the Commission
published its determination that,
pursuant to section 751(c) of the Act,
revocation of the antidumping duty
order on sorbitol from France would not
be likely to lead to continuation or
recurrence of material injury to an
industry in the United States within a
reasonably foreseeable time. See ITC
Final and USITC Publication 4164 (June
2010), titled Sorbitol from France
(Investigation No. 731–TA–44 (Third
Review)).
Scope of the Order
The products covered by the order are
shipments of crystalline sorbitol.
Crystalline sorbitol is a polyol produced
by the catalytic hydrogenation of sugars
(glucose). It is used in the production of
sugarless gum, candy, groceries, and
pharmaceuticals. The above-described
sorbitol is currently classifiable under
item 2905.44.00 of the Harmonized
Tariff Schedule of the United States
(HTSUS). Although the HTSUS
subheading is provided for convenience
and customs purposes, the written
description remains dispositive.
Determination
As a result of the determination by the
Commission that revocation of the
antidumping duty order is not likely to
lead to the continuation or recurrence of
material injury to an industry in the
United States, the Department, pursuant
to section 751(d) of the Act, is revoking
the antidumping duty order on sorbitol
from France. Pursuant to section
751(d)(2) of the Act and 19 CFR
351.222(i)(2)(i), the effective date of
revocation is August 5, 2009 (i.e., the
fifth anniversary of the publication in
the Federal Register of the notice of
continuation of this order). The
Department will notify U.S. Customs
and Border Protection to terminate
suspension of liquidation and collection
of cash deposits on entries of the subject
merchandise entered or withdrawn from
warehouse on or after August 5, 2009.
Entries of subject merchandise prior to
the effective date of revocation will
continue to be subject to suspension of
liquidation and antidumping duty
deposit requirements. The Department
will complete any pending
administrative reviews of this order.
PO 00000
Frm 00007
Fmt 4703
Sfmt 4703
This five-year sunset review and
notice are in accordance with section
751(d)(2) of the Act and published
pursuant to section 777(i)(1) of the Act.
Dated: July 15, 2010.
Ronald K. Lorentzen,
Deputy Assistant Secretary for Import
Administration.
[FR Doc. 2010–17800 Filed 7–20–10; 8:45 am]
BILLING CODE 3510–DS–P
COMMISSION OF FINE ARTS
Notice of Meeting
The next meeting of the U.S.
Commission of Fine Arts is scheduled
for 15 July 2010, at 10 a.m. in the
Commission offices at the National
Building Museum, Suite 312, Judiciary
Square, 401 F Street, NW., Washington,
DC 20001–2728. Items of discussion
may include buildings, parks and
memorials.
Draft agendas and additional
information regarding the Commission
are available on our Web site: https://
www.cfa.gov. Inquiries regarding the
agenda and requests to submit written
or oral statements should be addressed
to Thomas Luebke, Secretary, U.S.
Commission of Fine Arts, at the above
address; by e-mailing staff@cfa.gov; or
by calling 202–504–2200. Individuals
requiring sign language interpretation
for the hearing impaired should contact
the Secretary at least 10 days before the
meeting date.
Dated: July 6, 2010 in Washington, DC.
Thomas Luebke,
AIA, Secretary.
[FR Doc. 2010–17653 Filed 7–20–10; 8:45 am]
BILLING CODE 6330–01–M
COMMODITY FUTURES TRADING
COMMISSION
Orders Finding That the SP–15
Financial Day-Ahead LMP Peak
Contract and SP–15 Financial DayAhead LMP Off-Peak Contract Offered
for Trading on the
IntercontinentalExchange, Inc.,
Perform a Significant Price Discovery
Function
Commodity Futures Trading
Commission.
ACTION: Final orders.
AGENCY:
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
SUMMARY:
1 74
E:\FR\FM\21JYN1.SGM
FR 51264 (October 6, 2009).
21JYN1
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
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.
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. Email: 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
2 The
acronym ‘‘SP’’ stands for ‘‘South Path.’’
Federal Register notice also requested
comment on the SP–15 Financial Day-Ahead LMP
Peak Daily (‘‘SDP’’) contract; SP–15 Financial DayAhead 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 DayAhead LMP Off-Peak Daily (‘‘UNP’’) contract; these
contracts will be addressed in a separate Federal
Register release.
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).
erowe on DSKG8SOYB1PROD with NOTICES
3 The
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
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).
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.
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
6 74 FR 12178 (Mar. 23, 2009); these rules became
effective on April 22, 2009.
PO 00000
Frm 00008
Fmt 4703
Sfmt 4703
42381
entities.7 The issuance of such an order
also triggers the obligations,
requirements and timetables prescribed
in Commission rule 36.3(c)(4).8
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
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.
9 As noted above, the Federal Register notice also
requested comment on the SP–15 Financial DayAhead 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 DayAhead 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
E:\FR\FM\21JYN1.SGM
Continued
21JYN1
42382
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
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.
erowe on DSKG8SOYB1PROD with NOTICES
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,
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 shareholderowned 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: https://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.’’
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
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
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.
PO 00000
13 In
Frm 00009
Fmt 4703
Sfmt 4703
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.
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 peakhour, 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.
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 volumeweighted 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
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.
E:\FR\FM\21JYN1.SGM
21JYN1
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
erowe on DSKG8SOYB1PROD with NOTICES
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
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 https://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 https://
www.wapa.gov/sn/ops/transmission/path15/
factSheet.pdf.
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
substations. ‘‘NP–15’’ refers to the
northern half of Path 15; conversely,
‘‘SP–15’’ refers to the lower half of Path
15.
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
PO 00000
Frm 00010
Fmt 4703
Sfmt 4703
42383
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.
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
19 17
E:\FR\FM\21JYN1.SGM
CFR 36, Appendix A.
21JYN1
42384
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
erowe on DSKG8SOYB1PROD with NOTICES
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.
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 previouslyestablished hedges with daily contracts,
like the SDP contract.
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
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.
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.
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
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
PO 00000
Frm 00011
Fmt 4703
Sfmt 4703
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
E:\FR\FM\21JYN1.SGM
21JYN1
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
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
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.
To measure the effect that the SPM
contract potentially could have on
another ECM contract staff performed a
statistical analysis 24 using daily
erowe on DSKG8SOYB1PROD with NOTICES
22 74
FR 51264 (October 6, 2009).
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.
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
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
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.
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
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
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.
25 Guidance, supra.
26 73 FR 75892 (December 12, 2008).
PO 00000
Frm 00012
Fmt 4703
Sfmt 4703
42385
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.
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.
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…or an
electronic trading facility operating in
reliance on the exemption in section
2(h)(3) of the Act.’’
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.
E:\FR\FM\21JYN1.SGM
21JYN1
42386
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
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.
erowe on DSKG8SOYB1PROD with NOTICES
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 volumeweighted 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
28 See
73 FR 75888, 75893 (Dec. 12, 2008).
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
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.
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
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 https://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 https://
www.wapa.gov/sn/ops/transmission/path15/
factSheet.pdf.
PO 00000
Frm 00013
Fmt 4703
Sfmt 4703
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.
E:\FR\FM\21JYN1.SGM
21JYN1
erowe on DSKG8SOYB1PROD with NOTICES
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
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.
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
31 17
CFR 36, Appendix A.
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
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.
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.
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
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.
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.
PO 00000
Frm 00014
Fmt 4703
Sfmt 4703
42387
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
E:\FR\FM\21JYN1.SGM
21JYN1
42388
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
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).
erowe on DSKG8SOYB1PROD with NOTICES
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
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
transaction executed off its trading
platform.34
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.
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
FR 51264 (October 6, 2009).
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.
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.
PO 00000
34 74
35 Staff
Frm 00015
Fmt 4703
Sfmt 4703
contract’s price elicited a 1.4 percent
increase in ICE 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
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.
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
37 Guidance,
38 73
E:\FR\FM\21JYN1.SGM
supra.
FR 75892 (December 12, 2008).
21JYN1
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
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.
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.’’
erowe on DSKG8SOYB1PROD with NOTICES
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
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.
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
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.
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.
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.
When a futures contract begins to
serve a significant price discovery
PO 00000
73 FR 75888, 75893 (Dec. 12, 2008).
U.S.C. 3507(d).
42 7 U.S.C. 19(a).
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.
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
40 See
41 44
Frm 00016
Fmt 4703
Sfmt 4703
42389
43 5
U.S.C. 601 et seq.
FR 42256, 42268 (Aug. 10, 2001).
44 66
E:\FR\FM\21JYN1.SGM
21JYN1
42390
Federal Register / Vol. 75, No. 139 / Wednesday, July 21, 2010 / Notices
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.
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
erowe on DSKG8SOYB1PROD with NOTICES
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
45 7
U.S.C. 1a(29).
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).
47 7 U.S.C. 1a(29).
46 Because
VerDate Mar<15>2010
15:19 Jul 20, 2010
Jkt 220001
Day-Ahead LMP Off-Peak contract and
is subject to all the provisions of the
Commodity Exchange Act applicable to
registered entities.
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
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
COMMODITY FUTURES TRADING
COMMISSION
Orders Finding That the PJM WH Real
Time Peak Contract and PJM WH Real
Time Off-Peak Contract Offered for
Trading on the
IntercontinentalExchange, Inc.,
Perform a Significant Price Discovery
Function
Commodity Futures Trading
Commission.
ACTION: Final orders.
AGENCY:
On October 26, 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
PJM 2 WH 3 Real Time Peak (‘‘PJM’’)
contract and PJM WH Real Time OffPeak (‘‘OPJ’’) 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
SUMMARY:
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).
1 74 FR 54966 (October 26, 2009).
2 The acronym ‘‘PJM’’ stands for Pennsylvania
New Jersey Maryland Interconnection, LLC (‘‘PJM
Interconnection’’), and signifies the regional
electricity transmission organization (‘‘RTO’’) that
coordinates the generation and distribution of
electricity in all or parts of 13 states and the District
of Columbia.
3 The acronym ‘‘WH’’ signifies the PJM’s Western
Hub.
4 The Federal Register notice also requested
comment on the PJM WH Real Time Peak Daily
(‘‘PDP’’) contract, PJM WH Day Ahead LMP Peak
Daily (‘‘PDA’’) contract and PJM WH Real Time OffPeak Daily (‘‘ODP’’) contract. Those contracts will be
addressed in a separate Federal Register release.
PO 00000
Frm 00017
Fmt 4703
Sfmt 4703
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 PJM and OPJ
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.
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. Email: 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).
On March 16, 2009, the CFTC
promulgated final rules implementing
the provisions of the Reauthorization
Act.7 As relevant here, rule 36.3
5 Incorporated as Title XIII of the Food,
Conservation and Energy Act of 2008, Public Law
No. 110–246, 122 Stat. 1624 (June 18, 2008).
6 7 U.S.C. 1a(29).
7 74 FR 12178 (Mar. 23, 2009); these rules became
effective on April 22, 2009.
E:\FR\FM\21JYN1.SGM
21JYN1
]]>Agencies
[Federal Register Volume 75, Number 139 (Wednesday, July 21, 2010)]
[Notices]
[Pages 42380-42390]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-17747]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\6\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on
April 22, 2009.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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: https://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.''
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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
https://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 https://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 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.
---------------------------------------------------------------------------
\19\ 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 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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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 https://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 https://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
