[Federal Register Volume 75, Number 139 (Wednesday, July 21, 2010)]
[Notices]
[Pages 42399-42411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-17744]
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COMMODITY FUTURES TRADING COMMISSION
Orders Finding That the PJM WH Real Time Peak Daily Contract, PJM
WH Real Time Off-Peak Daily Contract and PJM WH Day Ahead LMP Peak
Daily Contract Offered for Trading on the IntercontinentalExchange,
Inc., Do Not Perform a Significant Price Discovery Function
AGENCY: Commodity Futures Trading Commission.
ACTION: Final orders.
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SUMMARY: On October 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 Daily
[[Page 42400]]
(``PDP'') contract, PJM WH Real Time Off-Peak Daily (``ODP'') contract
and PJM WH Day Ahead LMP Peak Daily (``PDA'') contract,\4\ which are
listed for trading on the IntercontinentalExchange, Inc. (``ICE''), an
exempt commercial market (``ECM'') under sections 2(h)(3)-(5) of the
Commodity Exchange Act (``CEA'' or the ``Act''), perform a significant
price discovery function pursuant to section 2(h)(7) of the CEA. The
Commission undertook this review based upon an initial evaluation of
information and data provided by ICE as well as other available
information. The Commission has reviewed the entire record in this
matter, including all comments received, and has determined to issue
orders finding that the PDP, ODP and PDA contracts do not perform a
significant price discovery function. Authority for this action is
found in section 2(h)(7) of the CEA and Commission rule 36.3(c)
promulgated thereunder.
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\1\ 74 FR 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 Interconnection's
Western Hub.
\4\ The Federal Register notice also requested comment on the
PJM WH Real Time Peak (``PJM'') contract and PJM WH Real Time Off-
Peak (``OPJ'') contract; these contracts will be addressed in a
separate Federal Register release.
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DATES: Effective Date: July 9, 2010.
FOR FURTHER INFORMATION CONTACT: Gregory K. Price, Industry Economist,
Division of Market Oversight, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5515. E-mail: [email protected]; or Susan Nathan,
Senior Special Counsel, Division of Market Oversight, same address.
Telephone: (202) 418-5133. E-mail: [email protected].
SUPPLEMENTARY INFORMATION:
I. Introduction
The CFTC Reauthorization Act of 2008 (``Reauthorization Act'') \5\
significantly broadened the CFTC's regulatory authority with respect to
ECMs by creating, in section 2(h)(7) of the CEA, a new regulatory
category--ECMs on which significant price discovery contracts
(``SPDCs'') are traded--and treating ECMs in that category as
registered entities under the CEA.\6\ The legislation authorizes the
CFTC to designate an agreement, contract or transaction as a SPDC if
the Commission determines, under criteria established in section
2(h)(7), that it performs a significant price discovery function. When
the Commission makes such a determination, the ECM on which the SPDC is
traded must assume, with respect to that contract, all the
responsibilities and obligations of a registered entity under the Act
and Commission regulations, and must comply with nine core principles
established by new section 2(h)(7)(C).
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\5\ Incorporated as Title XIII of the Food, Conservation and
Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18,
2008).
\6\ 7 U.S.C. 1a(29).
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On March 16, 2009, the CFTC promulgated final rules implementing
the provisions of the Reauthorization Act.\7\ As relevant here, rule
36.3 imposes increased information reporting requirements on ECMs to
assist the Commission in making prompt assessments whether particular
ECM contracts may be SPDCs. In addition to filing quarterly reports of
its contracts, an ECM must notify the Commission promptly concerning
any contract traded in reliance on the exemption in section 2(h)(3) of
the CEA that averaged five trades per day or more over the most recent
calendar quarter, and for which the exchange sells its price
information regarding the contract to market participants or industry
publications, or whose daily closing or settlement prices on 95 percent
or more of the days in the most recent quarter were within 2.5 percent
of the contemporaneously determined closing, settlement or other daily
price of another contract.
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\7\ 74 FR 12178 (Mar. 23, 2009); these rules became effective on
April 22, 2009.
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Commission rule 36.3(c)(3) established the procedures by which the
Commission makes and announces its determination whether a particular
ECM contract serves a significant price discovery function. Under those
procedures, the Commission will publish notice in the Federal Register
that it intends to undertake an evaluation whether the specified
agreement, contract or transaction performs a significant price
discovery function and to receive written views, data and arguments
relevant to its determination from the ECM and other interested
persons. Upon the close of the comment period, the Commission will
consider, among other things, all relevant information regarding the
subject contract and issue an order announcing and explaining its
determination whether or not the contract is a SPDC. The issuance of an
affirmative order signals the effectiveness of the Commission's
regulatory authorities over an ECM with respect to a SPDC; at that time
such an ECM becomes subject to all provisions of the CEA applicable to
registered entities.\8\ The issuance of such an order also triggers the
obligations, requirements and timetables prescribed in Commission rule
36.3(c)(4).\9\
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\8\ Public Law 110-246 at 13203; Joint Explanatory Statement of
the Committee of Conference, H.R. Rep. No. 110-627, 110 Cong., 2d
Sess. 978, 986 (Conference Committee Report). See also 73 FR 75888,
75894 (Dec. 12, 2008).
\9\ For an initial SPDC, ECMs have a grace period of 90 calendar
days from the issuance of a SPDC determination order to submit a
written demonstration of compliance with the applicable core
principles. For subsequent SPDCs, ECMs have a grace period of 30
calendar days to demonstrate core principle compliance.
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II. Notice of Intent To Undertake SPDC Determination
On October 26, 2009, the Commission published in the Federal
Register notice of its intent to undertake a determination whether the
PDP, ODP and PDA contracts\10\ perform a significant price discovery
function and requested comment from interested parties.\11\ Comments
were received from PJM Interconnection, Federal Energy Regulatory
Commission (``FERC''), Electric Power Supply Association (``EPSA''),
Financial Institutions Energy Group (``FIEG''), Edison Electric
Institute (``EEI''), ICE and Public Utility Commission of Texas
(``PUCT'').\12\ The comment letters from PJM
[[Page 42401]]
Interconnection,\13\ FERC \14\ and PUCT did not directly address the
issue of whether or not the subject contracts are SPDCs. The remaining
comment letters raised substantive issues with respect to the
applicability of section 2(h)(7) to the subject contracts and generally
expressed the opinion that the contracts are not SPDCs because they do
not meet the material price reference or material liquidity criteria
for SPDC determination. These comments are more extensively discussed
below, as applicable.
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\10\ As noted above, the Federal Register notice also requested
comment on the PJM WH Real Time Peak (``PJM'') contract and PJM WH
Real Time Off-Peak (``OPJ'') contract. The PJM and OPJ contracts
will be addressed in a separate Federal Register release.
\11\ The Commission's Part 36 rules establish, among other
things, procedures by which the Commission makes and announces its
determination whether a specific ECM contract serves a significant
price discovery function. Under those procedures, the Commission
publishes a notice in the Federal Register that it intends to
undertake a determination whether a specified agreement, contract or
transaction performs a significant price discovery function and to
receive written data, views and arguments relevant to its
determination from the ECM and other interested persons.
\12\ PJM Interconnection, as noted above, is the RTO that
coordinates the generation and distribution of electricity in all or
parts of 13 states and the District of Columbia. 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.'' EEI is the ``association of shareholder-
owned electric companies, international affiliates and industry
associates worldwide.'' ICE is an ECM, as noted above. PUCT is the
independent organization that oversees the Electric Reliability
Council of Texas (``ERCOT'') to ``ensure nondiscriminatory access to
the transmission and distribution systems, to ensure the reliability
and adequacy of the regional electrical network, and to perform
other essential market functions.'' The comment letters are
available on the Commission's Web site: http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2009/09-032.html.
\13\ PJM Interconnection stated that it ``takes no position as
to whether the ICE [contracts] * * * perform significant price
discovery functions.''
\14\ FERC expressed the opinion that a determination by the
Commission that any of the subject contracts performs a significant
price discovery function ``would not appear to conflict with FERC's
exclusive jurisdiction under the Federal Power Act (FPA) over the
transmission or sale for resale of electric energy in interstate
commerce or with its other regulatory responsibilities under the
FPA'' and further that ``FERC staff will monitor proposed SPDC
determinations and advise the CFTC of any potential conflicts with
FERC's exclusive jurisdiction over RTOs, ISOs [(independent system
operators)] or other jurisdictional entities.''
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III. Section 2(h)(7) of the CEA
The Commission is directed by section 2(h)(7) of the CEA to
consider the following criteria in determining a contract's significant
price discovery function:
Price Linkage--the extent to which the agreement, contract
or transaction uses or otherwise relies on a daily or final settlement
price, or other major price parameter, of a contract or contracts
listed for trading on or subject to the rules of a designated contract
market (``DCM'') or derivatives transaction execution facility
(``DTEF''), or a SPDC traded on an electronic trading facility, to
value a position, transfer or convert a position, cash or financially
settle a position, or close out a position.
Arbitrage--the extent to which the price for the
agreement, contract or transaction is sufficiently related to the price
of a contract or contracts listed for trading on or subject to the
rules of a DCM or DTEF, or a SPDC traded on or subject to the rules of
an electronic trading facility, so as to permit market participants to
effectively arbitrage between the markets by simultaneously maintaining
positions or executing trades in the contracts on a frequent and
recurring basis.
Material price reference--the extent to which, on a
frequent and recurring basis, bids, offers or transactions in a
commodity are directly based on, or are determined by referencing or
consulting, the prices generated by agreements, contracts or
transactions being traded or executed on the electronic trading
facility.
Material liquidity--the extent to which the volume of
agreements, contracts or transactions in a commodity being traded on
the electronic trading facility is sufficient to have a material effect
on other agreements, contracts or transactions listed for trading on or
subject to the rules of a DCM, DTEF or electronic trading facility
operating in reliance on the exemption in section 2(h)(3).
Not all criteria must be present to support a determination that a
particular contract performs a significant price discovery function,
and one or more criteria may be inapplicable to a particular
contract.\15\ 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.\16\ For example, for
contracts that are linked to other contracts or that may be arbitraged
with other contracts, the Commission will consider whether the price of
the potential SPDC moves in such harmony with the other contract that
the two markets essentially become interchangeable. This co-movement of
prices would be an indication that activity in the contract had reached
a level sufficient for the contract to perform a significant price
discovery function. In evaluating a contract's price discovery role as
a price reference, the Commission the extent to which, on a frequent
and recurring basis, bids, offers or transactions are directly based
on, or are determined by referencing, the prices established for the
contract.
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\15\ In its October 26, 2009, Federal Register release, the
Commission identified material price reference and material
liquidity as the possible criteria for SPDC determination of the
PDP, ODP and PDA 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.
\16\ 17 CFR Part 36, Appendix A.
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IV. Findings and Conclusions
The Commission's findings and conclusions with respect to the PDP,
ODP and PDA contracts are discussed separately below.
a. The PJM WH Real Time Peak Daily (PDP) Contract and the SPDC Indicia
The PDP contract is cash settled based on the arithmetic average of
peak-hour, real-time locational marginal prices (``LMPs'') \17\
published by PJM Interconnection for its Western Hub for all peak hours
during the specified day of generation. The hourly LMPs are derived
from power trades that result in physical delivery. The size of the PDP
contract is 800 megawatt hours (``MWh''), and the PDP contract is
listed for 38 consecutive days.
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\17\ 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.
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In general, electricity is bought and sold in an auction setting on
an hourly basis at various points along the electrical grid. An LMP
associated with a specific hour is calculated as the volume-weighted
average price of all of the transactions where electricity is to be
supplied and consumed during that hour.
Electricity is traded in a day-ahead market as well as a real-time
market. 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 the offers and bids 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.
PJM Interconnection is an RTO that coordinates the movement of
wholesale electricity in all or parts of Delaware, Illinois, Indiana,
Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio,
Pennsylvania, Tennessee, Virginia, West Virginia and the District of
Columbia. PJM Interconnection's transmission network is the largest
centrally-dispatched grid in North America. PJM Interconnection
dispatches about 163,500 MW of generating capacity over 56,350 miles of
transmission lines and serves more than 51 million customers. The RTO's
[[Page 42402]]
members, totaling more than 500, include power generators, transmission
owners, electricity distributors, power marketers and large consumers.
PJM Interconnection is responsible for operating a competitive
wholesale electricity market as well as maintaining the reliability of
the grid. The RTO acts as a neutral, independent party, and its
activities are regulated by FERC. The company coordinates the
continuous buying, selling and delivery of wholesale electricity
through robust, open and competitive spot markets. In operating the
markets, PJM Interconnection balances the needs of suppliers, wholesale
customers and other market participants, and it continuously monitors
market behavior.
Electricity is priced at individual points along the transmission
network called nodes. An electric grid has many interconnections or
buses. RTOs group certain buses together to form hubs, which do not
necessarily follow along state lines or geographic boundaries. Power
also is priced at the hub level and serves as a basis for trading
electricity. PJM Interconnnection has 11 hubs, including AEP GEN, AEP-
Dayton, Chicago GEN, Chicago, Dominion, Eastern, Northern Illinois, New
Jersey, Ohio, West INT and Western Hub.\18\ The Western Hub is a basket
of 109 buses that stretch all the way from Erie, PA, to Washington,
DC.\19\
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\18\ http://www.ferc.gov/market-oversight/mkt-electric/pjm.asp.
\19\ http://www.ferc.gov/market-oversight/mkt-electric/pjm/2010/05-2010-elec-pjm-archive.pdf.
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1. Material Price Reference Criterion
The Commission's October 26, 2009, Federal Register notice
identified the PDP 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 ``East 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 PDP 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 PDP 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 and
indirect--to determine that the price of a contract was being used as a
material price reference and therefore, serving a significant price
discovery function.\20\ With respect to direct evidence, the Commission
will consider the extent to which, on a frequent and recurring basis,
cash market bids, offers or transactions are directly based on, or
quoted at a differential to, the prices generated on the ECM in
question. Direct evidence may be established when cash market
participants are quoting bid or offer prices or entering into
transactions at prices that are set either explicitly or implicitly at
a differential to prices established for the contract in question. Cash
market prices are set explicitly at a differential to the section
2(h)(3) contract when, for instance, they are quoted in dollars and
cents above or below the reference contract's price. Cash market prices
are set implicitly at a differential to a section 2(h)(3) contract
when, for instance, they are arrived at after adding to, or subtracting
from the section 2(h)(3) contract, but then quoted or reported at a
flat price. With respect to indirect evidence, the Commission will
consider the extent to which the price of the contract in question is
being routinely disseminated in widely distributed industry
publications--or offered by the ECM itself for some form of
remuneration--and consulted on a frequent and recurring basis by
industry participants in pricing cash market transactions.
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\20\ 17 CFR Part 36, Appendix A.
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The PJM Western hub is a major pricing center for electricity in
the eastern portion of the United States. Traders, including producers,
keep abreast of the electricity prices at PJM Interconnection's Western
Hub when conducting cash deals. Power prices in other neighboring
markets, such as New York ISO's Zone A (Western New York), Zone G
(Hudson Valley region) and Zone J (New York City) as well as Midwest
ISO's Cinergy hub are typically based implicitly relative to the prices
reported for PJM Interconnection's Western hub. However, ICE's PJM WH
Real Time Peak (``PJM'') contract, which is a monthly contract, is used
more widely as a source of pricing information for electricity than the
daily, peak-hour contract (i.e., the PDP contract). Specifically, the
PJM contract prices power at the Western Hub based on the simple
average of peak-hour prices over the contract month, as reported by PJM
Interconnection. Market participants use the PJM contract to lock-in
electricity prices far into the future. (The PJM contract is listed for
110 months into the future.) In contrast, the PDP contract is listed
for a much shorter length of time (about five weeks); with such a
limited timeframe, the forward pricing capability of the PDP contract
is much more constrained than that of the PJM contract. Traders use
monthly power contracts like the PJM contract to price electricity
commitments in the future, where such commitments are based on long
range forecasts of power supply and demand. As generation and usage
nears, market participants have a better understanding of actual power
supply and needs. As a result, traders can modify previously-
established hedges with the daily power contracts, like the PDP
contract.
Accordingly, although the Western Hub is a major trading center for
electricity and, as noted, ICE sells price information for the PDP
contract, the Commission has explained in its Guidance that a contract
meeting the material price reference criterion would routinely be
consulted by industry participants in pricing cash market transactions.
The PDP contract is not consulted in this manner and does not satisfy
the material price reference criterion. Thus, the PDP contract does not
satisfy the direct price reference test for existence of material price
reference. Furthermore, the Commission notes that publication of the
PDP contract's prices is not indirect evidence of material price
reference. The PDP contract's prices are published with those of
numerous other contracts, including ICE's monthly electricity contracts
(such as the PJM contract), which are of more interest to market
participants. In these circumstances, the Commission has concluded that
traders likely do not specifically purchase ICE data packages for the
PDP contract's prices and do not consult such prices on a frequent and
recurring basis in pricing cash market transactions.
i. Federal Register Comments
EPSA, FIEG, EEI and ICE stated that no other contract directly
references or settles to the PDP contract's price. Moreover, the
commenters argued that the underlying cash price series against which
the PDP contract is settled \21\ is
[[Page 42403]]
the authentic reference price and not the ICE contract itself.
Commission staff 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 [the derivatives contract] on a frequent and recurring
basis'' when pricing forward, fixed-price commitments or other cash-
settled derivatives that seek to ``lock-in'' a fixed price for some
future point in time to hedge against adverse price movements. As noted
above, while Western Hub is a major power market, traders do not
consider the daily average peak-hour Western Hub price to be as
important as the peak electricity price associated with the monthly
contract.
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\21\ In this case, the average of the real-time peak-hour
Western hub electricity prices over the day of generation, which are
derived from cash market transactions.
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In addition, EPSA stated that the publication of price data for the
PDP contract price is a weak justification for material price reference
because market participants generally do not purchase ICE data sets for
one contract's prices, such as those for the PDP contract. Instead,
traders are interested in the settlement prices, so the fact that ICE
sells the PDP prices as part of a broad package is not conclusive
evidence that market participants are buying the ICE data sets because
they find the PDP prices have substantial value. As noted above, the
Commission indicated that publication of the PDP contract's prices is
not indirect evidence of routine dissemination. The PDP contract's
prices are published with those of numerous other contracts, which are
of more interest to market participants. The Commission has concluded
that traders likely do not specifically purchase the ICE data packages
for the PDP contract's prices and do not consult such prices on a
frequent and recurring basis in pricing cash market transactions.
Lastly, ICE and EEI criticized the ECM Study since it did not
specifically identify the PDP contract as a contract that is referred
to by market participants on a frequent and recurring basis. In
response, the Commission notes that it cited the ECM Study's general
finding that some ICE electricity contracts appear to be regarded as
price discovery markets merely as indication that an investigation of
certain ICE contracts may be warranted. The ECM Study was not intended
to serve as the sole basis for determining whether or not a particular
contract meets the material price reference criterion.
ii. Conclusion Regarding Material Price Reference
Based on the above, the Commission finds that the ICE PDP contract
does not meet the material price reference criterion because cash
market transactions are not priced either explicitly or implicitly on a
frequent and recurring basis at a differential to the PDP contract's
price (direct evidence). Moreover, while the PDP contract's price data
is sold to market participants, those individuals likely do not
purchase the ICE data packages specifically for the PDP contract's
prices and do not consult such prices on a frequent and recurring basis
in pricing cash market transactions (indirect evidence).
2. Material Liquidity Criterion
To assess whether a contract meets the material liquidity
criterion, the Commission first examines trading activity as a general
measurement of the contract's size and potential importance. If the
Commission finds that the contract in question meets a threshold of
trading activity that would render it of potential importance, the
Commission will then perform a statistical analysis to measure the
effect that changes to the subject contract's prices potentially may
have on prices for other contracts listed on an ECM or a DCM.
The total number of transactions executed on ICE's electronic
platform in the PDP contract was 48,072 in the second quarter of 2009,
resulting in a daily average of 751.1 trades. During the same period,
the PDP contract had a total trading volume of 68,586 contracts and an
average daily trading volume of 1,071.7 contracts. Moreover, open
interest as of June 30, 2009, was 1,856 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\
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\22\ 74 FR 54966 (October 26, 2009).
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In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 64,233 contracts
(or 988.2 contracts on a daily basis). In terms of number of
transactions, 45,167 trades occurred in the fourth quarter of 2009
(694.9 trades per day). As of December 31, 2009, open interest in the
PDP contract was 710 contracts, which included trades executed on ICE's
electronic trading platform, as well as trades executed off of ICE's
electronic trading platform and then brought to ICE for clearing.
The number of trades per day was substantial between the second and
fourth quarters of 2009. However, trading activity in the PDP contract,
as characterized by total quarterly volume, indicates that the PDP
contract experiences trading activity that is similar to that of
thinly-traded futures markets.\23\ Thus, the PDP contract does not meet
a threshold of trading activity that would render it of potential
importance and no additional statistical analysis is warranted.\24\
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\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\ In establishing guidance to illustrate how it will evaluate
the various criteria, or combinations of criteria, when determining
whether a contract is a SPDC, the Commission made clear that
``material liquidity itself would not be sufficient to make a
determination that a contract is a [SPDC], * * * but combined with
other factors it can serve as a guidepost indicating which contracts
are functioning as [SPDCs].'' 17 CFR 36, Appendix A. For the reasons
discussed above, the Commission has found that the PDP contract does
not meet the material price reference criterion. In light of this
finding and the Commission's Guidance cited above, there is no need
to evaluate further the material liquidity criteria since the
Commission believes it is not useful as the sole basis for a SPDC
determination.
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i. Federal Register Comments
ICE stated that the PDP contract lacks a sufficient number of
trades to meet the material liquidity criterion. Along with EPSA and
EEI, ICE argued that the PDP contract cannot have a material effect on
other contracts, such as those listed for trading by the New York
Mercantile Exchange (``NYMEX''), a DCM, because price linkage and the
potential for arbitrage do not exist. Moreover, the DCM contracts do
not cash settle to the PDP contract's price. Instead, the DCM contracts
and the PDP contract are both cash settled based on physical
transactions, which neither the ECM nor the DCM contracts can
influence.
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 PDP 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
[[Page 42404]]
would define material liquidity may differ from one market or commodity
to another.'' \25\
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\25\ Guidance, supra.
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ICE opined that the Commission ``seems to have adopted a five trade
per day test for material liquidity.'' To the contrary, the Commission
adopted a five trades-per-day threshold as a reporting requirement to
enable it to ``independently be aware of ECM contracts that may develop
into SPDCs'' \26\ rather than solely relying upon an ECM to identify
potential SPDCs to the Commission. Thus, any contract that meets this
threshold may be subject to scrutiny as a potential SPDC; however, a
contract will not be found to be a SPDC merely because it met the
reporting threshold.
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\26\ 73 FR 75892 (December 12, 2008).
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ICE proposed that the statistics provided by ICE were
misinterpreted and misapplied by the Commission. In particular, ICE
stated that the volume figures used in the Commission's analysis (cited
above) ``include trades made in all months'' as well as in strips of
contract months. ICE suggested that a more appropriate method of
determining liquidity is to examine the activity in a single traded
month of a given contract.'' \27\ It is the Commission's opinion that
liquidity, as it pertains to the PDP contract, is typically a function
of trading activity in particular lead days and, given sufficient
liquidity in such days, the ICE PDP contract itself would be considered
liquid. In any event, in light of the fact that the Commission has
found that the PDP contract does not meet the material price reference
criterion, according to the Commission's Guidance, it would be
unnecessary to evaluate whether the PDP contract meets the material
liquidity criterion since it cannot be used alone for SPDC
determination.
---------------------------------------------------------------------------
\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 26, 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 10 percent of all
transactions in the PDP contract (as of the fourth quarter of 2009).
Commission acknowledges that the open interest information it
provided in its October 26, 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 PDP
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the PDP Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE PDP
contract does not perform a significant price discovery function under
the criteria established in section 2(h)(7) of the CEA. Specifically,
the Commission has determined that the PDP contract does not meet the
material price reference or material liquidity criteria at this time.
Accordingly, the Commission is issuing the attached Order declaring
that the PDP contract is not a SPDC.
Issuance of this Order indicates that the Commission does not at
this time regard ICE as a registered entity in connection with its PDP
contract.\28\ Accordingly, with respect to its PDP contract, ICE is not
required to comply with the obligations, requirements and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,
ICE must continue to comply with the applicable reporting requirements
for ECMs.
---------------------------------------------------------------------------
\28\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------
b. The PJM WH Real Time Off-Peak Daily (ODP) Contract and the SPDC
Indicia
The ODP contract is cash settled based on the arithmetic average of
off-peak hour, real-time LMPs published by PJM Interconnection for its
Western Hub for all peak hours during the specified day of generation.
The hourly LMPs are derived from power trades that result in physical
delivery. The size of the ODP contract is 50 MWh, and the ODP contract
is listed for 38 consecutive days.
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 calculated as the volume-weighted
average price of all of the transactions where electricity is to be
supplied and consumed during that hour.
Electricity is traded in a day-ahead market as well as a real-time
market. 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 the offers and bids 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.
PJM Interconnection is an RTO that coordinates the movement of
wholesale electricity in all or parts of Delaware, Illinois, Indiana,
Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio,
Pennsylvania, Tennessee, Virginia, West Virginia and the District of
Columbia. PJM Interconnection's transmission network is the largest
centrally-dispatched grid in North America. PJM Interconnection
dispatches about 163,500 MW of generating capacity over 56,350 miles of
transmission lines and serves more than 51 million customers. The RTO's
members, totaling more than 500, include power generators, transmission
owners, electricity distributors, power marketers and large consumers.
PJM Interconnection is responsible for operating a competitive
wholesale electricity market as well as maintaining the reliability of
the grid. The RTO acts as a neutral, independent party, and its
activities are regulated by FERC. The company coordinates the
continuous buying, selling and delivery of wholesale electricity
through robust, open and competitive spot markets. In operating the
markets, PJM Interconnection balances the needs of suppliers, wholesale
customers and other market participants, and it continuously monitors
market behavior.
Electricity is priced at individual points along the transmission
network called nodes. An electric grid has many interconnections or
buses. RTOs group certain buses together to form hubs, which do not
necessarily follow along state lines or geographic boundaries. Power
also is priced at the hub level and serves as a basis for trading
electricity. PJM Interconnnection has 11 hubs, including AEP GEN, AEP-
Dayton, Chicago GEN, Chicago, Dominion, Eastern, Northern Illinois, New
Jersey,
[[Page 42405]]
Ohio, West INT and Western Hub.\29\ The Western Hub is a basket of 109
buses that stretch all the way from Erie, PA, to Washington, DC.\30\
---------------------------------------------------------------------------
\29\ http://www.ferc.gov/market-oversight/mkt-electric/pjm.asp.
\30\ http://www.ferc.gov/market-oversight/mkt-electric/pjm/2010/05-2010-elec-pjm-archive.pdf.
---------------------------------------------------------------------------
1. Material Price Reference Criterion
The Commission's October 26, 2009, Federal Register notice
identified the ODP 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 ``East 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 ODP 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 ODP 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 and
indirect--to determine that the price of a contract was being used as a
material price reference and therefore, serving a significant price
discovery function.\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 Part 36, Appendix A.
---------------------------------------------------------------------------
The PJM Western hub is a major pricing center for electricity in
the eastern portion of the United States. Traders, including producers,
keep abreast of the electricity prices at PJM Interconnection's Western
Hub when conducting cash deals. Power prices in other neighboring
markets, such as New York ISO's Zone A (Western New York), Zone G
(Hudson Valley region) and Zone J (New York City) as well as Midwest
ISO's Cinergy hub are typically based implicitly relative to the prices
reported for PJM Interconnection's Western hub. However, ICE's PJM WH
Real Time Off-Peak (``OPJ'') contract, which is a monthly contract, is
used more widely as a source of pricing information for electricity
than the daily, off-peak hour contract (i.e., the ODP contract).
Specifically, the OPJ contract prices power at the Western Hub based on
the simple average of off-peak hour prices over the contract month, as
reported by PJM Interconnection. Market participants use the OPJ
contract to lock-in electricity prices far into the future. (The OPJ
contract is listed up to 86 months into the future.) In contrast, the
ODP contract is listed for a much shorter length of time (about five
weeks); with such a limited timeframe, the forward pricing capability
of the ODP contract is much more constrained than that of the OPJ
contract. Traders use monthly power contracts like the OPJ contract to
price electricity commitments in the future, where such commitments are
based on long range forecasts of power supply and demand. As generation
and usage nears, market participants have a better understanding of
actual power supply and needs. As a result, traders can modify
previously-established hedges with the daily power contracts, like the
ODP contract.
Accordingly, although the Western Hub is a major trading center for
electricity and, as noted, ICE sells price information for the ODP
contract, the Commission has explained in its Guidance that a contract
meeting the material price reference criterion would routinely be
consulted by industry participants in pricing cash market transactions.
The ODP contract is not consulted in this manner and does not satisfy
the material price reference criterion. Thus, the ODP contract does not
satisfy the direct price reference test for existence of material price
reference. Furthermore, the Commission notes that publication of the
ODP contract's prices is not indirect evidence of material price
reference. The ODP contract's prices are published with those of
numerous other contracts, including ICE's monthly electricity contracts
(such as the OPJ contract), which are of more interest to market
participants. In these circumstances, the Commission has concluded that
traders likely do not specifically purchase ICE data packages for the
ODP contract's prices and do not consult such prices on a frequent and
recurring basis in pricing cash market transactions.
i. Federal Register Comments
EPSA, FIEG, EEI and ICE stated that no other contract directly
references or settles to the ODP contract's price. Moreover, the
commenters argued that the underlying cash price series against which
the ODP contract is settled \32\ is the authentic reference price and
not the ICE contract itself. Commission staff 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 [the derivatives contract]
on a frequent and recurring basis'' when pricing forward, fixed-price
commitments or other cash-settled derivatives that seek to ``lock-in''
a fixed price for some future point in time to hedge against adverse
price movements. As noted above, while Western Hub is a major power
market, traders do not consider the daily average off-peak hour Western
Hub price to be as important as the peak electricity price associated
with the monthly contract.
---------------------------------------------------------------------------
\32\ In this case, the average of the real-time peak-hour
Western hub electricity prices over the day of generation, which are
derived from cash market transactions.
---------------------------------------------------------------------------
In addition, EPSA stated that the publication of price data for the
ODP contract price is a weak justification for material price reference
because market participants generally do not purchase ICE data sets for
one contract's prices, such as those for the ODP contract. Instead,
traders are interested in the settlement prices, so the fact that ICE
sells the ODP prices as part of a broad package is not conclusive
evidence that market participants are buying the ICE data sets because
they find the ODP prices have substantial value. As noted
[[Page 42406]]
above, the Commission indicated that publication of the ODP contract's
prices is not indirect evidence of routine dissemination. The ODP
contract's prices are published with those of numerous other contracts,
which are of more interest to market participants. The Commission has
concluded that traders likely do not specifically purchase the ICE data
packages for the ODP contract's prices and do not consult such prices
on a frequent and recurring basis in pricing cash market transactions.
Lastly, ICE and EEI criticized the ECM Study since it did not
specifically identify the ODP contract as a contract that is referred
to by market participants on a frequent and recurring basis. In
response, the Commission notes that it cited the ECM Study's general
finding that some ICE electricity contracts appear to be regarded as
price discovery markets merely as indication that an investigation of
certain ICE contracts may be warranted. The ECM Study was not intended
to serve as the sole basis for determining whether or not a particular
contract meets the material price reference criterion.
ii. Conclusion Regarding Material Price Reference
Based on the above, the Commission finds that the ICE ODP contract
does not meet the material price reference criterion because cash
market transactions are not priced either explicitly or implicitly on a
frequent and recurring basis at a differential to the ODP contract's
price (direct evidence). Moreover, while the ODP contract's price data
is sold to market participants, those individuals likely do not
purchase the ICE data packages specifically for the ODP contract's
prices and do not consult such prices on a frequent and recurring basis
in pricing cash market transactions (indirect evidence).
2. Material Liquidity Criterion
To assess whether a contract meets the material liquidity
criterion, the Commission first examines trading activity as a general
measurement of the contract's size and potential importance. If the
Commission finds that the contract in question meets a threshold of
trading activity that would render it of potential importance, the
Commission will then perform a statistical analysis to measure the
effect that changes to the subject contract's prices potentially may
have on prices for other contracts listed on an ECM or a DCM.
The total number of transactions executed on ICE's electronic
platform in the ODP contract was 723 in the second quarter of 2009,
resulting in a daily average of 11.3 trades. During the same period,
the ODP contract had a total trading volume of 7,448 contracts and an
average daily trading volume of 116.4 contracts. Moreover, open
interest as of June 30, 2009, was 256 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.\33\
---------------------------------------------------------------------------
\33\ 74 FR 54966 (October 26, 2009).
---------------------------------------------------------------------------
In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 12,304 contracts
(or 189.3 contracts on a daily basis). In terms of number of
transactions, 737 trades occurred in the fourth quarter of 2009 (11.3
trades per day). As of December 31, 2009, open interest in the ODP
contract was 488 contracts, which included trades executed on ICE's
electronic trading platform, as well as trades executed off of ICE's
electronic trading platform and then brought to ICE for clearing.
The number of trades per day between the second and fourth quarters
of 2009 was not substantial. In addition, trading activity in the ODP
contract, as characterized by total quarterly volume, indicates that
the ODP contract experiences trading activity that is similar to that
of thinly traded futures markets.\34\ Thus, the ODP contract does not
meet a threshold of trading activity that would render it of potential
importance and no additional statistical analysis is warranted.\35\
---------------------------------------------------------------------------
\34\ 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.
\35\ In establishing guidance to illustrate how it will evaluate
the various criteria, or combinations of criteria, when determining
whether a contract is a SPDC, the Commission made clear that
``material liquidity itself would not be sufficient to make a
determination that a contract is a [SPDC], * * * but combined with
other factors it can serve as a guidepost indicating which contracts
are functioning as [SPDCs].'' 17 CFR 36, Appendix A. For the reasons
discussed above, the Commission has found that the ODP contract does
not meet the material price reference criterion. In light of this
finding and the Commission's Guidance cited above, there is no need
to evaluate further the material liquidity criteria since the
Commission believes it is not useful as the sole basis for a SPDC
determination.
---------------------------------------------------------------------------
i. Federal Register Comments
ICE stated that the ODP contract lacks a sufficient number of
trades to meet the material liquidity criterion. Along with EPSA and
EEI, ICE argued that the ODP contract cannot have a material effect on
other contracts, such as those listed for trading by NYMEX, a DCM,
because price linkage and the potential for arbitrage do not exist.
Moreover, the DCM contracts do not cash settle to the ODP contract's
price. Instead, the DCM contracts and the ODP contract are both cash
settled based on physical transactions, which neither the ECM nor the
DCM contracts can influence.
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 ODP 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.'' \36\
---------------------------------------------------------------------------
\36\ 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'' \37\ rather than solely relying upon an ECM to identify
potential SPDCs to the Commission. Thus, any contract that meets this
threshold may be subject to scrutiny as a potential SPDC; however, a
contract will not be found to be a SPDC merely because it met the
reporting threshold.
---------------------------------------------------------------------------
\37\ 73 FR 75892 (December 12, 2008).
---------------------------------------------------------------------------
ICE proposed that the statistics provided by ICE were
misinterpreted and misapplied by the Commission. In particular, ICE
stated that the volume figures used in the Commission's analysis (cited
above) ``include trades made in all months'' as well as in strips of
contract months. ICE suggested that a more appropriate method of
determining liquidity is to examine the activity in a single traded
month of a given contract.'' \38\ It is the Commission's
[[Page 42407]]
opinion that liquidity, as it pertains to the ODP contract, is
typically a function of trading activity in particular lead days and,
given sufficient liquidity in such days, the ICE ODP contract itself
would be considered liquid. In any event, in light of the fact that the
Commission has found that the ODP contract does not meet the material
price reference criterion, according to the Commission's Guidance, it
would be unnecessary to evaluate whether the ODP contract meets the
material liquidity criterion since it cannot be used alone for SPDC
determination.
---------------------------------------------------------------------------
\38\ 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 26, 2009, Federal Register
notice includes 2(h)(1) transactions, which were not completed on
the electronic trading platform and should not be considered in the
SPDC determination process. The Commission staff asked ICE to review
the data it sent in its quarterly filings; ICE confirmed that the
volume data it provided and which the Commission cited includes only
transaction data executed on ICE's electronic trading platform. As
noted above, supplemental data supplied by ICE confirmed that block
trades are in addition to the trades that were conducted on the
electronic platform; block trades comprise about 34 percent of all
transactions in the ODP contract (as of the fourth quarter of 2009).
Commission acknowledges that the open interest information it
provided in its October 26, 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 ODP
contract does not meet the material liquidity criterion.
3. Overall Conclusion Regarding the ODP Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE ODP
contract does not perform a significant price discovery function under
the criteria established in section 2(h)(7) of the CEA. Specifically,
the Commission has determined that the ODP contract does not meet the
material price reference or material liquidity criteria at this time.
Accordingly, the Commission is issuing the attached Order declaring
that the ODP contract is not a SPDC.
Issuance of this Order indicates that the Commission does not at
this time regard ICE as a registered entity in connection with its ODP
contract.\39\ Accordingly, with respect to its ODP contract, ICE is not
required to comply with the obligations, requirements and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,
ICE must continue to comply with the applicable reporting requirements
for ECMs.
---------------------------------------------------------------------------
\39\ See 73 FR 75888, 75893 (Dec. 12, 2008).
---------------------------------------------------------------------------
c. The PJM WH Day-Ahead LMP Peak Daily (PDA) Contract and the SPDC
Indicia
The PDA contract is cash settled based on the arithmetic average of
the peak-hour, day-ahead LMPs published by PJM Interconnection for its
Western Hub for all peak hours during the day prior to power
generation. The hourly LMPs are derived from power trades that result
in physical delivery. The size of the PDA contract is 800 MWh, and the
PDA contract is listed for 38 consecutive days.
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 calculated as the volume-weighted
average price of all of the transactions where electricity is to be
supplied and consumed during that hour.
Electricity is traded in a day-ahead market as well as a real-time
market. 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 the offers and bids 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.
PJM Interconnection is an RTO that coordinates the movement of
wholesale electricity in all or parts of Delaware, Illinois, Indiana,
Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio,
Pennsylvania, Tennessee, Virginia, West Virginia and the District of
Columbia. PJM Interconnection's transmission network is the largest
centrally-dispatched grid in North America. PJM Interconnection
dispatches about 163,500 MW of generating capacity over 56,350 miles of
transmission lines and serves more than 51 million customers. The RTO's
members, totaling more than 500, include power generators, transmission
owners, electricity distributors, power marketers and large consumers.
PJM Interconnection is responsible for operating a competitive
wholesale electricity market as well as maintaining the reliability of
the grid. The RTO acts as a neutral, independent party, and its
activities are regulated by FERC. The company coordinates the
continuous buying, selling and delivery of wholesale electricity
through robust, open and competitive spot markets. In operating the
markets, PJM Interconnection balances the needs of suppliers, wholesale
customers and other market participants, and it continuously monitors
market behavior.
Electricity is priced at individual points along the transmission
network called nodes. An electric grid has many interconnections or
buses. RTOs group certain buses together to form hubs, which do not
necessarily follow along state lines or geographic boundaries. Power
also is priced at the hub level and serves as a basis for trading
electricity. PJM Interconnnection has 11 hubs, including AEP GEN, AEP-
Dayton, Chicago GEN, Chicago, Dominion, Eastern, Northern Illinois, New
Jersey, Ohio, West INT and Western Hub.\40\ The Western Hub is basket
of 109 buses that stretch all the way from Erie, PA, to Washington,
DC.\41\
---------------------------------------------------------------------------
\40\ http://www.ferc.gov/market-oversight/mkt-electric/pjm.asp.
\41\ http://www.ferc.gov/market-oversight/mkt-electric/pjm/2010/05-2010-elec-pjm-archive.pdf.
---------------------------------------------------------------------------
1. Material Price Reference Criterion
The Commission's October 26, 2009, Federal Register notice
identified the PDA 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 ``East 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 PDA 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 PDA 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
[[Page 42408]]
price reference criterion, it will rely on one of two sources of
evidence--direct and indirect--to determine that the price of a
contract was being used as a material price reference and therefore,
serving a significant price discovery function.\42\ 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.
---------------------------------------------------------------------------
\42\ 17 CFR Part 36, Appendix A.
---------------------------------------------------------------------------
The PJM Western hub is a major pricing center for electricity in
the eastern portion of the United States. Traders, including producers,
keep abreast of the electricity prices at PJM Interconnection's Western
Hub when conducting cash deals. Power prices in other neighboring
markets, such as New York ISO's Zone A (Western New York), Zone G
(Hudson Valley region) and Zone J (New York City) as well as Midwest
ISO's Cinergy hub are typically based implicitly relative to the prices
reported for PJM Interconnection's Western hub. However, ICE's PJM WH
Real Time Peak (``PJM'') contract, which is a monthly contract, is used
more widely as a source of pricing information for electricity than the
daily, peak-hour day-ahead contract (i.e., the PDA contract).
Specifically, the PJM contract prices power at the Western Hub based on
the simple average of the real time, peak-hour prices over the contract
month, as reported by PJM Interconnection. Market participants use the
PJM contract to lock-in electricity prices far into the future. (The
PJM contract is listed up to 110 months into the future.) In contrast,
the PDA contract is listed for a much shorter length of time (about
five weeks); with such a limited timeframe, the forward pricing
capability of the PDA contract is much more constrained than that of
the PJM contract. Traders use monthly power contracts like the PJM
contract to price electricity commitments in the future, where such
commitments are based on long range forecasts of power supply and
demand. As generation and usage nears, market participants have a
better understanding of actual power supply and needs. As a result,
traders can modify previously-established hedges with the daily power
contracts.
Accordingly, although the Western Hub is a major trading center for
electricity and, as noted, ICE sells price information for the PDA
contract, the Commission has explained in its Guidance that a contract
meeting the material price reference criterion would routinely be
consulted by industry participants in pricing cash market transactions.
The PDA contract is not consulted in this manner and does not satisfy
the material price reference criterion. Thus, the PDA contract does not
satisfy the direct price reference test for existence of material price
reference. Furthermore, the Commission notes that publication of the
PDA contract's prices is not indirect evidence of material price
reference. The PDA contract's prices are published with those of
numerous other contracts, including ICE's monthly electricity contracts
(such as the PJM contract), which are of more interest to market
participants. In these circumstances, the Commission has concluded that
traders likely do not specifically purchase ICE data packages for the
PDA contract's prices and do not consult such prices on a frequent and
recurring basis in pricing cash market transactions.
i. Federal Register Comments
EPSA, FIEG, EEI and ICE stated that no other contract directly
references or settles to the PDA contract's price. Moreover, the
commenters argued that the underlying cash price series against which
the PDA contract is settled \43\ is the authentic reference price and
not the ICE contract itself. Commission staff 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 [the derivatives contract]
on a frequent and recurring basis'' when pricing forward, fixed-price
commitments or other cash-settled derivatives that seek to ``lock-in''
a fixed price for some future point in time to hedge against adverse
price movements. As noted above, while Western Hub is a major power
market, traders do not consider the daily average peak-hour, day-ahead
Western Hub price to be as important as the peak, real-time electricity
price associated with the monthly contract.
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\43\ In this case, the average of the real-time peak-hour
Western hub electricity prices over the day of generation, which are
derived from cash market transactions.
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In addition, EPSA stated that the publication of price data for the
PDA contract price is a weak justification for material price reference
because market participants generally do not purchase ICE data sets for
one contract's prices, such as those for the PDA contract. Instead,
traders are interested in the settlement prices, so the fact that ICE
sells the PDA prices as part of a broad package is not conclusive
evidence that market participants are buying the ICE data sets because
they find the PDA prices have substantial value. As noted above, the
Commission indicated that publication of the PDA contract's prices is
not indirect evidence of routine dissemination. The PDA contract's
prices are published with those of numerous other contracts, which are
of more interest to market participants. The Commission has concluded
that traders likely do not specifically purchase the ICE data packages
for the PDA contract's prices and do not consult such prices on a
frequent and recurring basis in pricing cash market transactions.
Lastly, ICE and EEI criticized the ECM Study since it did not
specifically identify the ODP contract as a contract that is referred
to by market participants on a frequent and recurring basis. In
response, the Commission notes that it cited the ECM Study's general
finding that some ICE electricity contracts appear to be regarded as
price discovery markets merely as indication that an investigation of
certain ICE contracts may be warranted. The ECM Study was not intended
to serve as the sole basis for determining whether or not a particular
contract meets the material price reference criterion.
ii. Conclusion Regarding Material Price Reference
Based on the above, the Commission finds that the ICE PDA contract
does not meet the material price reference criterion because cash
market transactions are not priced either explicitly or implicitly on a
frequent
[[Page 42409]]
and recurring basis at a differential to the PDA contract's price
(direct evidence). Moreover, while the PDA contract's price data is
sold to market participants, those individuals likely do not purchase
the ICE data packages specifically for the PDA contract's prices and do
not consult such prices on a frequent and recurring basis in pricing
cash market transactions (indirect evidence).
2. Material Liquidity Criterion
To assess whether a contract meets the material liquidity
criterion, the Commission first examines trading activity as a general
measurement of the contract's size and potential importance. If the
Commission finds that the contract in question meets a threshold of
trading activity that would render it of potential importance, the
Commission will then perform a statistical analysis to measure the
effect that changes to the subject contract's prices potentially may
have on prices for other contracts listed on an ECM or a DCM.
The total number of transactions executed on ICE's electronic
platform in the PDA contract was 1,063 in the second quarter of 2009,
resulting in a daily average of 16.6 trades. During the same period,
the PDA contract had a total trading volume of 1,435 contracts and an
average daily trading volume of 22.4 contracts. Moreover, open interest
as of June 30, 2009, was 75 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.\44\
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\44\ 74 FR 54966 (October 26, 2009).
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In a subsequent filing dated March 24, 2010, ICE reported that
total trading volume in the fourth quarter of 2009 was 1,960 contracts
(or 30.2 contracts on a daily basis). In terms of number of
transactions, 1,181 trades occurred in the fourth quarter of 2009 (19.2
trades per day). As of December 31, 2009, open interest in the PDA
contract was 45 contracts, which included trades executed on ICE's
electronic trading platform, as well as trades executed off of ICE's
electronic trading platform and then brought to ICE for clearing.
The number of trades per day between the second and fourth quarters
of 2009 was not substantial. In addition, trading activity in the PDA
contract, as characterized by total quarterly volume, indicates that
the PDA contract experiences trading activity that is similar to that
of thinly-traded futures markets.\45\ Thus, the PDA contract does not
meet a threshold of trading activity that would render it of potential
importance and no additional statistical analysis is warranted.\46\
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\45\ 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.
\46\ In establishing guidance to illustrate how it will evaluate
the various criteria, or combinations of criteria, when determining
whether a contract is a SPDC, the Commission made clear that
``material liquidity itself would not be sufficient to make a
determination that a contract is a [SPDC], * * * but combined with
other factors it can serve as a guidepost indicating which contracts
are functioning as [SPDCs].'' 17 CFR Part 36, Appendix A. For the
reasons discussed above, the Commission has found that the PDA
contract does not meet the material price reference criterion. In
light of this finding and the Commission's Guidance cited above,
there is no need to evaluate further the material liquidity criteria
since the Commission believes it is not useful as the sole basis for
a SPDC determination.
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i. Federal Register Comments
ICE stated that the PDA contract lacks a sufficient number of
trades to meet the material liquidity criterion. Along with EPSA and
EEI, ICE argued that the PDA contract cannot have a material effect on
other contracts, such as those listed for trading by NYMEX, a DCM,
because price linkage and the potential for arbitrage do not exist.
Moreover, the DCM contracts do not cash settle to the PDA contract's
price. Instead, the DCM contracts and the PDA contract are both cash
settled based on physical transactions, which neither the ECM nor the
DCM contracts can influence.
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 PDA 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.'' \47\
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\47\ Guidance, supra.
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ICE opined that the Commission ``seems to have adopted a five trade
per day test for material liquidity.'' To the contrary, the Commission
adopted a five trades-per-day threshold as a reporting requirement to
enable it to ``independently be aware of ECM contracts that may develop
into SPDCs'' \48\ rather than solely relying upon an ECM to identify
potential SPDCs to the Commission. Thus, any contract that meets this
threshold may be subject to scrutiny as a potential SPDC; however, a
contract will not be found to be a SPDC merely because it met the
reporting threshold.
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\48\ 73 FR 75892 (December 12, 2008).
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ICE proposed that the statistics provided by ICE were
misinterpreted and misapplied by the Commission. In particular, ICE
stated that the volume figures used in the Commission's analysis (cited
above) ``include trades made in all months'' as well as in strips of
contract months. ICE suggested that a more appropriate method of
determining liquidity is to examine the activity in a single traded
month of a given contract.'' \49\ It is the Commission's opinion that
liquidity, as it pertains to the PDA contract, is typically a function
of trading activity in particular lead days and, given sufficient
liquidity in such days, the ICE PDA contract itself would be considered
liquid. In any event, in light of the fact that the Commission has
found that the PDA contract does not meet the material price reference
criterion, according to the Commission's Guidance, it would be
unnecessary to evaluate whether the PDA contract meets the material
liquidity criterion since it cannot be used alone for SPDC
determination.
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\49\ 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 26, 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 five percent of all
transactions in the PDA contract (as of the fourth quarter of 2009).
Commission acknowledges that the open interest information it
provided in its October 26, 2009, Federal Register notice includes
transactions made off the ICE platform. However, once open interest
is created, there is no way for ICE to differentiate between ``on-
exchange'' versus ``off-exchange'' created positions, and all such
positions are fungible with one another and may be offset in any way
agreeable to the position holder regardless of how the position was
initially created.
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ii. Conclusion Regarding Material Liquidity
For the reasons discussed above, the Commission finds that the PDA
contract does not meet the material liquidity criterion.
[[Page 42410]]
3. Overall Conclusion Regarding the PDA Contract
After considering the entire record in this matter, including the
comments received, the Commission has determined that the ICE PDA
contract does not perform a significant price discovery function under
the criteria established in section 2(h)(7) of the CEA. Specifically,
the Commission has determined that the PDA contract does not meet the
material price reference or material liquidity criteria at this time.
Accordingly, the Commission is issuing the attached Order declaring
that the PDA contract is not a SPDC.
Issuance of this Order indicates that the Commission does not at
this time regard ICE as a registered entity in connection with its PDA
contract.\50\ Accordingly, with respect to its PDA contract, ICE is not
required to comply with the obligations, requirements and timetables
prescribed in Commission rule 36.3(c)(4) for ECMs with SPDCs. However,
ICE must continue to comply with the applicable reporting requirements
for ECMs.
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\50\ See 73 FR 75888, 75893 (Dec. 12, 2008).
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V. Related Matters
a. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \51\ 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.
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\51\ 44 U.S.C. 3507(d).
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b. Cost-Benefit Analysis
Section 15(a) of the CEA \52\ 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.
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\52\ 7 U.S.C. 19(a).
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When a futures contract begins to serve a significant price
discovery function, that contract, and the ECM on which it is traded,
warrants increased oversight to deter and prevent price manipulation or
other disruptions to market integrity, both on the ECM itself and in
any related futures contracts trading on DCMs. An Order finding that a
particular contract is a SPDC triggers this increased oversight and
imposes obligations on the ECM calculated to accomplish this goal. The
increased oversight engendered by the issue of a SPDC Order increases
transparency and helps to ensure fair competition among ECMs and DCMs
trading similar products and competing for the same business. Moreover,
the ECM on which the SPDC is traded must assume, with respect to that
contract, all the responsibilities and obligations of a registered
entity under the CEA and Commission regulations. Additionally, the ECM
must comply with nine core principles established by section 2(h)(7) of
the Act--including the obligation to establish position limits and/or
accountability standards for the SPDC. Section 4(i) of the CEA
authorize the Commission to require reports for SPDCs listed on ECMs.
These increased responsibilities, along with the CFTC's increased
regulatory authority, subject the ECM's risk management practices to
the Commission's supervision and oversight and generally enhance the
financial integrity of the markets.
The Commission has concluded that the PDP, OPD and PDA contracts,
which are the subject of the attached Orders, are not SPDCs;
accordingly, the Commission's Orders impose no additional costs and no
additional statutorily or regulatory mandated responsibilities on the
ECM.
c. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \53\ 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.\54\ 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.
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\53\ 5 U.S.C. 601 et seq.
\54\ 66 FR 42256, 42268 (Aug. 10, 2001).
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VI. Orders
a. Order Relating to the PJM WH Real Time Peak Daily Contract
After considering the complete record in this matter, including the
comment letters received in response to its request for comments, the
Commission has determined to issue the following Order:
The Commission, pursuant to its authority under section 2(h)(7) of
the Act, hereby determines that the PJM WH Real Time Peak Daily
contract, traded on the IntercontinentalExchange, Inc., does not at
this time satisfy the material price preference or material liquidity
criteria for significant price discovery contracts. Consistent with
this determination, the IntercontinentalExchange, Inc., is not
considered a registered entity \55\ with respect to the PJM WH Real
Time Peak Daily contract and is not subject to the provisions of the
Commodity Exchange Act applicable to registered entities. Further, the
obligations, requirements and timetables prescribed in Commission rule
36.3(c)(4) governing core principle compliance by the
IntercontinentalExchange, Inc., are not applicable to the PJM WH Real
Time Peak Daily contract with the issuance of this Order.
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\55\ 7 U.S.C. 1a(29).
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This Order is based on the representations made to the Commission
by the IntercontinentalExchange, Inc., dated July 27, 2009, and March
24, 2010, and other supporting material. Any material change or
omissions in the facts and circumstances pursuant to which this order
is granted might require the Commission to reconsider its current
determination that the PJM WH Real Time Peak Daily contract is not a
significant price discovery contract. Additionally, to the extent that
it continues to rely upon the exemption in Section 2(h)(3) of the Act,
the IntercontinentalExchange, Inc., must continue to comply with all of
the applicable requirements of Section
[[Page 42411]]
2(h)(3) and Commission Regulation 36.3.
b. Order Relating to the PJM WH Real Time Off-Peak Daily Contract
After considering the complete record in this matter, including the
comment letters received in response to its request for comments, the
Commission has determined to issue the following Order:
The Commission, pursuant to its authority under section 2(h)(7) of
the Act, hereby determines that the PJM WH Real Time Off-Peak Daily
contract, traded on the IntercontinentalExchange, Inc., does not at
this time satisfy the material price preference or material liquidity
criteria for significant price discovery contracts. Consistent with
this determination, the IntercontinentalExchange, Inc., is not
considered a registered entity \56\ with respect to the PJM WH Real
Time Off-Peak Daily contract and is not subject to the provisions of
the Commodity Exchange Act applicable to registered entities. Further,
the obligations, requirements and timetables prescribed in Commission
rule 36.3(c)(4) governing core principle compliance by the
IntercontinentalExchange, Inc., are not applicable to the PJM WH Real
Time Off-Peak Daily contract with the issuance of this Order.
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\56\ 7 U.S.C. 1a(29).
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This Order is based on the representations made to the Commission
by the IntercontinentalExchange, Inc., dated July 27, 2009, and March
24, 2010, and other supporting material. Any material change or
omissions in the facts and circumstances pursuant to which this order
is granted might require the Commission to reconsider its current
determination that the PJM WH Real Time Off-Peak Daily contract is not
a significant price discovery contract. Additionally, to the extent
that it continues to rely upon the exemption in Section 2(h)(3) of the
Act, the IntercontinentalExchange, Inc., must continue to comply with
all of the applicable requirements of Section 2(h)(3) and Commission
Regulation 36.3.
c. Order Relating to the PJM WH Day Ahead LMP Peak Daily Contract
After considering the complete record in this matter, including the
comment letters received in response to its request for comments, the
Commission has determined to issue the following Order:
The Commission, pursuant to its authority under section 2(h)(7) of
the Act, hereby determines that the PJM WH Day Ahead LMP Peak Daily
contract, traded on the IntercontinentalExchange, Inc., does not at
this time satisfy the material price preference or material liquidity
criteria for significant price discovery contracts. Consistent with
this determination, the IntercontinentalExchange, Inc., is not
considered a registered entity \57\ with respect to the PJM WH Day
Ahead LMP Peak Daily contract and is not subject to the provisions of
the Commodity Exchange Act applicable to registered entities. Further,
the obligations, requirements and timetables prescribed in Commission
rule 36.3(c)(4) governing core principle compliance by the
IntercontinentalExchange, Inc., are not applicable to the PJM WH Day
Ahead LMP Peak Daily contract with the issuance of this Order.
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\57\ 7 U.S.C. 1a(29).
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This Order is based on the representations made to the Commission
by the IntercontinentalExchange, Inc., dated July 27, 2009, and March
24, 2010, and other supporting material. Any material change or
omissions in the facts and circumstances pursuant to which this order
is granted might require the Commission to reconsider its current
determination that the PJM WH Day Ahead LMP Peak Daily contract is not
a significant price discovery contract. Additionally, to the extent
that it continues to rely upon the exemption in Section 2(h)(3) of the
Act, the IntercontinentalExchange, Inc., must continue to comply with
all of the applicable requirements of Section 2(h)(3) and Commission
Regulation 36.3.
Issued in Washington, DC, on July 9, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-17744 Filed 7-20-10; 8:45 am]
BILLING CODE 6351-01-P