The Evolution of the CME Group Electricity Complex

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1 The Evolution of the CME Group Electricity Complex Bradford G. Leach Director, Energy Research and Product Development CME Group Harvard Electricity Policy Group Sixty-Sixth Plenary Session March 9, 2012

2 CME Group Overview The world s most diverse derivatives marketplace Operates four separate Exchanges CME, CBOT, NYMEX, and COMEX The widest range of benchmark products available across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, metals, agricultural, environmental emissions, and alternative investment products All CME Group futures and options contracts are Designated Contract Markets, the highest level of Commodity Futures Trading Commission regulation 2

3 CME Group Overview 3 Leading size and scale 3.4 billion contracts, 2011 Advanced Globex trading technology Financial safeguards Transparent and anonymous marketplace CME ClearPort Brings together more than 10,000 registered users around the world - Commercial, banking, hedge funds, trading entities - IDBs, FCMs and clearing firms. 1,180 listed contracts available for clearing, with more to come. 3

4 CME Group Energy Product Complex Petroleum Ethanol Emissions Natural Gas Electricity Natural Gas Liquids Coal Uranium Freights

5 CME Group Electricity Complex Complex Provides Risk Management and Price Discovery for U.S. ISO/RTO Markets 2.5 and 5 MW Contract Units to Cover DA and RT Risk Management Requirements Contracts Settle on ISO/RTO DA and RT Posted Prices Monthly Futures Contracts Listed for Current and Next Five Years Daily Futures Contracts Listed for Current Month and Next Month 5

6 CME Group Electricity Complex Developments 1996: NYMEX launched its first two electricity futures contracts in the Western U.S. The contracts were deliverable at the California Oregon Border and the Palo Verde nuclear plant. 1998: NYMEX launched its first Eastern electricity futures: Cinergy and Entergy. Final settlement of these contracts was by physical delivery. 2003: NYMEX launched its financially settled electricity futures complex with final settlement on PJM real-time Western Hub prices. These contracts were the first NYMEX futures contracts with ISO price final settlement 2008: CME Group launched a comprehensive slate of PJM zone futures contracts intended to provide aggregator risk management throughout the competitive retail markets of PJM. Day-ahead futures coverage was also extended to primary PJM hubs. 2009: ISO New England futures contracts launched for all state and intra-state zones with the exception of Vermont. 2011: NYISO capacity futures contracts launched for NYC and Rest of State. Open interest reached 1 billion MWh on 10/14/11 Volume Over 2 billion MWh in Cinergy Hub to Indiana Hub MISO transition 6

7 Number of Contracts by Region and Type Region Futures Options Total Canadian ERCOT ISO-NE MISO NYISO PJM Western Power Total

8 CME Group Electricity Futures and Options Complex Market Listed Contract Type PJM 74 DA, RT, Options NYISO 26 DA, Options, Capacity ISO-NE 21 DA, Options MISO 25 DA, RT, Options ERCOT 80 RT, DA CAISO and DJ 22 DA, RT Canadian 14 Total: 262

9 2011 Volume (MWh) MISO: 57 mil, 3% Canada: 1 mil, 0% ERCOT: 0.5 mil, 0% ISO-NE: 95 mil, 5% NYISO: 31 mil, 2% Canada ISO-NE NYISO PJM MISO ERCOT Total MWh: 2,007 mil PJM: 1,822 mil, 91%

10 1,200,000,000 Historical Daily Open Interest by Market 100% 1,000,000,000 90% 80% 800,000,000 70% 60% 600,000,000 50% 400,000,000 40% 30% 200,000,000 20% 10% 0 0% Canadian ERCOT ISO-NE MISO NYISO PJM PJM %

11 1,000.0 Open Interest as of December 22, ,056 million MWhrs mil, 89% mil, 7% 0.1 mil, 0% 16.6 mil, 2% 21.7 mil, 2% 0.3 mil, 0% Canadian ISO-NE NYISO PJM MISO ERCOT

12 NI Hub, 55 million, 3.0% 2011 PJM Volume by Market Segment (MWh) Eastern Hub, 0.4 million, 0% All Zones, 20 million, AD Hub, 50 million, 2.7% 1.1% Zonal Contracts WH Hub Contracts NI Hub Contracts AD Hub Contracts WH, 1,695 million, 93.1% Eastern Hub Contracts

13 CMEG PJM and ISO-NE Zone MWh Open Interest as of 3/5/12 CMEG PJM Peak Zone Futures CMEG ISO-NE Peak State and Intrastate Zone Futures 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000-1,400,000 1,200,000 1,000, , , , ,000-13

14 PJM Western Hub Peak Calendar-Month Real-Time LMP Swap Futures Contract Unit: 80 Megawatt hours (MWh) (5 MW per peak hour). Price Quotation: The contract quantity shall be 80 Megawatt Hours (MWH) and is based on 5 megawatts for peak daily hours. Transaction sizes for trading in any delivery month shall be restricted to whole number multiples of the number of peak days in the contract month. Floating Price: The Floating Price for each contract month will be equal to the arithmetic average of the PJM Western Hub Real- Time LMP for peak hours provided by PJM Interconnection, LLC (PJM) for the contract month. For settlement of this contract, the prices provided by PJM will be considered final on the payment date stated in Rule and will not be subject to any further adjustment. Termination of Trading: Trading shall cease on the last business day of the contract month 14

15 PJM Western Hub and PSEG Peak Day-Ahead 2/29/12 Settlement Prices $60 $50 $40 $30 $20 $10 $0 West Hub PSEG 15

16 CFTC Commitment of Traders Report Distribution of Positions Held by Different Type of Traders 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 45% 54% Open Interests by Trader Type as of December 20, % 78% 9% 91% 44% 46% 4% 93% 33% 67% 0% 100% 36% 40% 41% 58% 2% 8% 98% 92% 16% 34% 64% 61% 8% 92% 23% 26% 39% 34% 61% 66% 31% 45% 19% 63% 16% 82% 30% 62% 19% 46% 9% 56% 14% 74% 5% 37% 4% 65% 52% 33% 0% E4 N9 L3 B6 H2 W6 F5 JO J4 K4 N3 JM B3 U6 Z9 D7 L6 OE JP PTM T3 VM VP P2 UO UM 6O Commercials Swap Dealers Money Managers Other Non-Reportable 16

17 Contract Code and Name Contract Code E4 N9 L3 B6 H2 W6 F5 JO J4 K4 N3 JM B3 U6 Z9 D7 L6 OE JP PTM T3 VM VP P2 UO UM 6O Contract Name PJM Western Hub Off-Peak Calendar-Month Day-Ahead LMP Swap Futures PJM Western Hub Off-Peak Calendar-Month Real-Time LMP Swap Futures PJM Northern Illinois Hub Off-Peak Calendar-Month Day-Ahead LMP Swap Futures PJM Northern Illinois Hub 5 MW Off-Peak Calendar-Month Real-Time LMP Swap Futures ISO New England Internal Hub 5 MW Off-Peak Calendar-Month Day-Ahead LMP Swap Futures PJM PSEG Zone Off-Peak Calendar-Month Day-Ahead LMP Swap Futures PJM PPL Zone Off-Peak Calendar-Month Day-Ahead LMP Swap Futures PJM Calendar-Month LMP Swap Options PJM Western Hub Peak Calendar-Month Day-Ahead LMP Swap Futures NYISO Zone A 5 MW Off-Peak Calendar-Month Day-Ahead LBMP Swap Futures PJM Northern Illinois Hub Peak Calendar-Month Day-Ahead LMP Swap Futures PJM Peak Calendar-Month LMP Swap Futures PJM Northern Illinois Hub 5 MW Peak Calendar-Month Real-Time LMP Swap Futures ISO New England Internal Hub 5 MW Peak Calendar-Month Day-Ahead LMP Swap Futures PJM AEP Dayton Hub 5MW Peak Calendar-Month Real-Time LMP Swap Futures PJM AEP Dayton Hub Peak Calendar-Month Day-Ahead LMP Swap Futures PJM PSEG Zone Peak Calendar-Month Day-Ahead LMP Swap Futures ISO New England Peak Calendar-Month LMP Swap Options PJM Off-Peak Calendar-Month LMP Swap Futures Midwest ISO Indiana Hub 5 MW Peak Calendar-Month Real-Time Swap Futures NYISO Zone G 5 MW Peak Calendar-Month Day-Ahead LBMP Swap Futures PJM AEP Dayton Hub Peak Calendar-Month LMP Swap Futures PJM AEP Dayton Hub Off-Peak LMP Swap Futures ISO New England Connecticut Zone 5 MW Peak Calendar-Month Day-Ahead LMP Swap Futures PJM Northern Illinois Hub Off-Peak LMP Swap Futures PJM Northern Illinois Hub Peak Calendar-Month LMP Swap Futures PJM Electricity Option on Calendar Futures Strip Options 17

18 NYISO Capacity Futures Contracts 18 A Fundamentally Different Contract: Max Demand vs. Consumption (Capacity vs. Flow) Annual Auction Volume: 63,000 MW-Month for NYC 134,000 MW-Month for Rest of the State Recent Spot Prices: $3-12 per kw-month for NYC $ per kw-mont for Rest of the State Market Participants: Generators Load Serving Entities Wholesale Energy Marketers Financial Participants

19 $14.00 NYISO Capacity Forward Curve $/kw-month As of 2/27/ $12.00 $11.88 $11.00 $10.00 $8.00 $7.63 $7.50 $6.00 $4.88 $5.00 $4.00 $2.00 $0.00 $1.10 $1.48 $1.30 $1.45 $0.90 $0.11 Mar12-Aril12 May'12-Oct'12 Nov'12-April'13 May13-Oct13 Cal 2013 Cal 2014 NYC In-City Rest of State

20 $14.00 NYISO NYC In-City Capacity Contract Historical Price $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Mar-12 Contract Jul-12 Contract

21 50% January 2012 NG and JM 20 Day Hist Vol 45% 40% 39% 35% 30% 25% 20% 25% 22% 26% 23% 31% 19% 28% 30% 15% 14% 14% 10% 5% 10% 7% 10% 0% NG JM 21

22 70% July 2012 NG and JM 20 Day Hist Vol 64% 60% 50% 40% 33% 30% 25% 25% 20% 10% 16% 11% 19% 11% 14% 22% 12% 16% 6% 6% 0% NG JM

23 $120 Henry Hub Natural Gas & PJM Western Hub Peak Prompt Month Forward Price Since January 2008 $12.00 $100 $10.00 $80 $8.00 $60 $6.00 $40 $4.00 $20 $2.00 $0 $0.00 JM NG Correlation: 93% 23

24 $80 Henry Hub Natural Gas & PJM Western Hub Peak Prompt Month Forward Price Since January 2010 $7.00 $70 $6.00 $60 $50 $40 $30 $20 $5.00 $4.00 $3.00 $2.00 $10 $1.00 $0 $0.00 JM NG Correlation: 83% 24

25 DISCLAIMER Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. CME Group is the trademark of CME Group, Inc. The Globe logo, Globex and CME are trademarks of Chicago Mercantile Exchange, Inc. CBOT is the trademark of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. All other trademarks are the property of their respective owners. The information within this presentation has been compiled by CME Group for general purposes only. Although every attempt has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation Current rules should be consulted in all cases concerning contract specifications. Copyright 2009 are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT, NYMEX and CME Group rules. CME Group. All rights reserved.

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