• Monthly Mid-C Electricity Contracts Found to Provide Significant Price Discovery
  • August 4, 2010 | Author: Jeffrey D. Watkiss
  • Law Firm: Bracewell & Giuliani LLP - New York Office
  • In June 25th Orders, the Commodity Futures Trading Commission (CFTC) for the first time designated two monthly electricity contracts traded at the Mid-Columbia (Mid-C) hub on the Intercontinental Exchange (ICE) - the Mid-C Financial Peak (MDC) and Mid-C Financial Off-Peak (OMC) - as significant price discovery contracts (SPDC) under §2(h)(7) of the Commodity Exchange Act (CEA).  (Two other daily ICE contracts traded at Mid-C - Mid-C Financial Peak Daily and Mid-C Financial Off-Peak Daily - were not so designated.)  SPDC designation subjects the contracts to heightened regulatory oversight and reporting requirements.

     ICE is an Exempt Commercial Market (ECM) under the CFTC Reauthorization Act of 2008.  To determine whether an ECM contract performs a significant price discovery function, the CFTC considers the extent to which a contract:  (1) links to existing exchange-traded contracts; (2) permits arbitrage between ECMs and other markets; (3) provides a direct, material price reference for bids; and (4) trades in sufficient volume to provide material liquidity.  In the past several months, the CFTC has determined that a number of contracts traded on ICE qualify as SPDCs, including a determination in April that seven ICE natural gas contracts serve as SPDCs.

    The CFTC explained that it conferred SPDC status on the two Mid-C monthly electricity contracts because they provide material price reference for bids and material liquidity in ways that the daily ICE contracts did not.  In particular, the CFTC found that electricity cash market transactions are frequently priced at a differential to the MDC and OMC contract price and that traders frequently use the MDC and OMC contracts to hedge cash market positions and transactions.  In addition, market participants were found to consult the MDC and OMC prices on a frequent and recurring basis in pricing electricity cash market transactions.  The CFTC also pointed to the uniqueness of the ICE electricity prices for the Mid-C market, which the CFTC found were derived from ICE’s electronic system and could not be replicated by other firms.

    As to material liquidity criteria, the CFTC found it is reasonable to infer that the MDC and OMC contracts could have a material effect on other contracts listed on the ECM or on Designated Contract Markets.  For example, the CFTC staff’s statistical analysis found that a one percent rise in the MDC contract price elicited a 1.09 percent increase in the ICE OMC contract price, while a one percent rise in the OMC contract price elicited a 0.915 percent increase in the ICE MDC contract price.