20050802Comments.pdf

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KIRA DALE PFISTERER
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 6571
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Street Address for Express Mail:
472 W. WASHINGTON
BOISE, ID 83702-5983
Attorney for the Commission Staff
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLI CA TI 0 N OF
IDAHO POWER COMPANY FOR AN ORDER
AUTHORIZING THE BLANKET SALE OF AIR
EMISSION ALLOWANCES AND FOR AN ACCOUNTING ORDER.
CASE NO. IPC-O5-
COMMENTS OF THE
COMMISSION STAFF
COMES NOW the Staff of the Idaho Public Utilities Commission, by and through its
Attorney of record, Kira Dale Pfisterer, Deputy Attorney General, and submits the following
comments in response to Order No. 29821.
BACKGROUND
On June 9, 2005 , Idaho Power Company (Idaho Power) filed an Application with the
Commission seeking (1) blanket authority to sell surplus sulfur dioxide (S02) allowances obtained
through provisions of the federal Clean Air Act (CAA) amendments of 1990, Title IV, and (2) an
Accounting Order to record the proceeds from any such future sale. Each S02 allowance
represents permission from the Environmental Protection Agency (EP A) to emit one ton of S02.
Title IV aims to reduce S02 emissions nationwide by putting a cap on electric utility emission
levels and creating a system of S02 allowances that can be traded or sold on the open market.
ST AFF COMMENTS AUGUST 2, 2005
S02 allowance trading is a regulatory approach to pollution control that emphasizes the use of
market forces rather than forced technological compliance to reduce emissions. Under the CAA, if
Idaho Power holds more S02 allowances than it needs to cover its annual emissions, then it may
trade or sell these allowances on the open market.
THE APPLICATION
Thermal plant owners like Idaho Power are issued allowances for the plant's sulfur
dioxide emissions under Title IV of the Clean Air Act Amendments of 1990. Idaho Power has
an ownership interest in five thermal power plants in the western United States. Three of these
power plants are coal-fired and receive allocations of S02 allowances from the EP A. These
plants include: Jim Bridger Units 1 through 4 (1/3 interest); North Valmy Units 1 and 2 (1/2
interest); and Boardman (1/10 interest). The other two thermal power plants, Danskin and
Bennett Mountain, are gas-fired but receive no allocation of S02 allowances as they were
constructed after Congress enacted the 1990 amendments to the CAA (Title IV).
Idaho Power believes that after retaining sufficient allowances to cover the emissions at
these facilities and a reasonable cushion for unexpected changes and contingencies, it can make
surplus S02 allowances available for sale or trade. To avoid any potential "regulatory cloud"
over the marketability of these surplus S02 allowances, Idaho Power seeks blanket authority to
sell S02 allowances.
Idaho Power believes that the sale of such S02 allowances does not fall under the
provisions of Idaho Code 9 61-328, which prohibits an electric utility from selling or exchanging
property used in the generation, transmission, distribution or supply of electric power "except
when authorized to do so by order of the public utilities commission." Idaho Power submits that
Idaho Code 9 61-328 does not apply because S02 allowances are not property pursuant to the
express provisions of the CAA, 42 D.C. 9 7651 b(f). Further, Idaho Power argues that the S02
allowances are not used in the performance of Idaho Power s utility service obligations.
Idaho Power also requests an Accounting Order to provide for the recording of any
proceeds received from future sales of surplus S02 emission allowances. At this time, Idaho
Power does not seek a Commission decision regarding how such revenue will be treated for
ratemaking purposes.
STAFF COMMENTS AUGUST 2, 2005
Idaho Power recognizes that the Commission has jurisdiction over Idaho s allocable share
of proceeds from the sale of surplus S02 allowances and acknowledges that receipt of blanket
authority to sell S02 allowances and the Commission s initial accounting Order are not a
determination of the appropriate ratemaking treatment for revenue requirement purposes. Idaho
Power recommends that the determination of ratemaking treatment for S02 allowance proceeds be
made at a later date.
STAFF ANALYSIS
A. SO2 Emissions Trading Under the Clean Air Act
Allowance trading is the centerpiece of the EPA's Acid Rain Program. The purpose of
this program is to allow utilities to adopt the most cost-effective strategies to manage available
resources to comply with the acid rain requirements of the Clean Air Act.
An S02 allowance authorizes a utility generating unit to emit one ton of S02 during a
given year or any year thereafter if the S02 allowance is not used in the year in which it is
issued. At the end of each year, the utility generating unit must hold allowances at least equal to
its annual S02 emissions as measured by its Continuous Emissions Monitoring System (CEMS)
and reported to the EP A. If a utility holds a sufficient quantity of allowances over its annual
requirement, then it is considered to have surplus S02 allowances.
Pursuant to the Clean Air Act, and underlying regulations, S02 allowances are fully
marketable commodities. Utilities may sell or trade S02 allowances to other utilities or
interested parties on the open market or through EP A-sponsored auctions held annually.
S02 allowances are allocated in two phases. Phase I allowances are allocated for each
year beginning in 1995. The EPA allocated allowances at an emission rate of2.05 pounds of
S02/mmBtu (million British thermal units) of heat input, multiplied by the unit's baseline
mmBtu output (the average fossil fuel consumed from 1985 through 1987). Additional
allowance allocations were made based upon a pro rata share.
In Phase II, which began in the year 2000, the EP A expanded the group of affected
sources to include virtually all units over 25 MW in generating capacity and tightened the
allowance allocation. All of Idaho Power s S02 allowances fall under the provisions
Regardless of how many allowances a unit holds, it is never entitled to exceed the emissions limits set under Title
of the Clean Air Act to protect public health.
STAFF COMMENTS AUGUST 2, 2005
Phase II. These allowance allocation calculations were based upon coal- and gas-fired units with
low and high emissions rates. The EP A allocated allowances to each unit at an emission rate
of 1.2 pounds of S02/mmBtu of heat input, multiplied by the unit's baseline mmBtu output.
Phase II, the Clean Air Act places a cap of 8.95 million on the number of allowances issued to
units each year. This effectively caps emissions at 8.95 million tons annually and ensures that
mandated emissions reductions be maintained over time.
EP A records all trading and transfers of allowances that are used for compliance and
ensures at the end of the year that a unit's emissions do not exceed the number of allowances it
holds. To accomplish this task the EP A maintains an Allowance Tracking System (ATS). Each
affected utility unit, corporation, group, or individual holding allowances has an account on the
ATS. ATS accounts track issuance of allowances, how many allowances an account holds
allowance reserves, allowance deductions for compliance, and transfers of allowances between
accounts.
Prices for S02 allowances are set on a system of supply and demand. These allowances
are traded and sold just like commodity futures on the Chicago Board of Trade. The Air Daily
Index tracks prices and volumes of S02 allowances available on the market. In addition, S02
allowances are also sold and traded through EP A sponsored auctions held once a year.
Allowances provided for auction purposes extend from the EP A, which sets aside special
allowance reserves of approximately 2.8 percent of the total annual allowances allocated to all
units. These allowances are offered in the (1) Spot Auction (allowances dated for the year in
which they are offered or previous years) or (2) Advance Auction (allowances 7 years in the
future). For 2005 , the spot auction and the advance auction were held in March with a total of
250 000 emission allowances for bid. Out of the 250 000 total allowances, 125 000 were sold on
the spot auction for a weighted average price of$702.51 per allowance, and 125 000 were sold
on the advance auction for a weighted average price of $297.49 per allowance. The gross
proceeds of the 2005 emissions allowance auctions amounted to $124 999 175.
2 These auctions are sponsored by the EP A to ensure the availability of allowances, thus ensuring both the economic
efficiency of the emissions limitation program and the addition of new electric-generating capacity. Auctions help
ensure that new units have a public source of allowances beyond those allocated initially to existing units.
STAFF COMMENTS AUGUST 2, 2005
B. Authority to Sell SO2 Allowances
Pursuant to Idaho Code 9 61-328, an electric utility, such as Idaho Power, may not sell or
transfer any property located in the State of Idaho that it owns, controls, or operates and which is
used in the generation, transmission, distribution, or supply of electric power and energy
without Commission approval. Idaho Code 9 61-328(1). Further, prior to approving each
transaction, the Commission must find that: (1) the transaction is consistent with the public
interest; (2) the cost of and rates for supplying service will not be increased due to the
transaction; and (3) the applicant for such acquisition or transfer must have the bona fide intent
and financial ability to operate and maintain the property in the public service." 9 61-328(3).
While S02 allowances are necessary in order for Idaho Power to generate electricity
from its thermal generating plants, the S02 allowances are not directly used in the "generation
transmission, distribution, or supply of electric power and energy" and cannot be "operated and
maintained in the public service.Idaho Code 99 61-328(1), (3). Therefore, this statutory
provision does not apply to the sale of S02 allowances.
Because Idaho Code 9 61-328 does not apply to the sale of S02 allowances, it is entirely
appropriate for the Commission to issue an Order providing blanket authority to enter such
transactions. Nonetheless, following each sale, the Commission shall retain the authority to
evaluate the reasonableness of the transaction and appropriate treatment of the revenue for
ratemaking purposes.
C. Accounting Treatment
In the Application, Idaho Power submits an initial proposed accounting pursuant to Code
of Federal Regulations No. 18, in accordance with paragraph H of General Instructions 21. This
regulation states that if there is uncertainty regarding the regulatory treatment, the gain should be
deferred in Account 254, Other Regulatory Liabilities, pending resolution of uncertainty.
The following is Idaho Power s proposed accounting to record the proceeds from the sale
of surplus S02 emission allowances net of income taxes for the initial transactions:
131- Cash $XXX.
236 - Taxes Accrued $XXX.
254 - Other Regulatory Liabilities $XXX.
STAFF COMMENTS AUGUST 2, 2005
Idaho Power requested that the determination of ratemaking treatment for the proceeds be
made at a later date. In determining the accounting treatment for S02 allowances, Idaho Power
stated that it would file a report with the Commission within sixty (60) days after receipt of any
proceeds from the sale of S02 emissions allowances, assuming blanket authority will be given.
According to Idaho Power, this report would initiate the Commission s consideration of
appropriate ratemaking treatment.
STAFF RECOMMENDATION
Staff supports Idaho Power s Application both for an Order providing blanket authority
to sell excess S02 allowances and for an Accounting Order. In addition, Staff would like the
Commission to explicitly retain the regulatory authority to determine whether each sale or
transaction was reasonable and in the public interest.
Staff recommends that a workshop setting be utilized to determine the appropriate
treatment of all revenues obtained through the future sale of S02 allowances. These workshops
should involve Idaho Power, Staff and other interested parties. Staff further recommends that
these workshops be conducted expeditiously to assure determination of ratemaking treatment in a
timely fashion. It is Staff s position that customers are entitled to receive the benefits associated
with the sale or trade of any S02 allowances. Staff believes a workshop setting with the intent
of reaching a settlement is an appropriate process to resolve any issues dealing with future
accounting and ratemaking treatment. Any proposed resolution of remaining issues andlor
negotiated settlement will be filed with the Commission.
Respectfully submitted this J..day of August 2005.
Kira Dale Pfister
Deputy Attorney General
Technical Staff:Eric Johnson
i :umisc/comments/ipceO5 .20kdpej
ST AFF COMMENTS AUGUST 2, 2005
CERTIFICATE OF SERVICE
HEREBY CERTIFY THAT I HAVE THIS 2ND DAY OF AUGUST 2005
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF IN CASE
NO. IPC-05-, BY MAILING A COpy THEREOF POSTAGE PREPAID TO THE
FOLLOWING:
BARTON L KLINE
LARRY D RIPLEY
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
JOHN R GALE
VPREGULATORY AFFAIRS
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
CERTIFICATE OF SERVICE