20060424Comments.pdf

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DONOV AN E. WALKER
CECELIA A. GASSNER
DEPUTY ATTORNEYS GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone] AND [phone]
IDAHO BAR NOS. 5921 AND 6977
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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 INVESTIGATION
OF APPROPRIATE RATEMAKING
TREATMENT OF IDAHO POWER
COMP ANY'S S02 ALLOWANCE SALE
PROCEEDS.COMMENTS OF THE
COMMISSION STAFF
CASE NO. IPC-05-
The Staff of the Idaho Public Utilities Commission, by and through its Attorneys ofrecord
Donovan E. Walker and Cecelia A. Gassner, Deputy Attorneys General, respectfully submit the
following comments in response to Order No. 30016, issued on April 11, 2006.
BACKGROUND
On June 9, 2005, Idaho Power Company (Idaho Power, Company) filed an Application
requesting: (1) blanket authority to sell surplus sulfur dioxide (S02) allowances and (2) an
accounting order to provide for recording any sale(s) of such allowances. Case No. IPC-05-20.
The Company s Application also suggested that a detennination of rate making treatment for the
proceeds be made at a later date.
On August 22 2005 , the Idaho Public Utilities Commission (Commission) approved the
Company s Application. Order No. 29852. The Commission, while reserving the review of the
STAFF COMMENTS APRIL 24, 2006
reasonableness of each sale, granted Idaho Power s request for blanket authority to sell S02
emissions allowances and approved the accounting treatment proposed by the Company, on an
interim basis, until such time as the Commission detennines the appropriate ratemaking treatment
ofthe proceeds from the sale of the SO2 allowances. Id. The Company was ordered to file a report
with the Commission within 60 days of the receipt of any S02 proceeds. Id. Additionally, the
Commission ordered that a separate docket be opened for Staff to conduct workshops and make a
recommendation to the Commission regarding the appropriate ratemaking treatment of S02
proceeds. Id.
This docket, IPC-05-, was opened and two workshops were held on November 7 and
November 23 2005 , respectively. During the workshops the parties were unable to reach
agreement upon the ratemaking treatment of the proceeds. On March 6, 2006, the Commission
issued Order No. 29989, establishing a comment deadline of March 31 2006, and a subsequent
briefing schedule. On March 30, 2006, this comment deadline and briefing schedule was vacated
based upon the parties ' notification that an agreement had been reached. The Industrial Customers
of Idaho Power and Micron were the only parties to petition for intervention, which was granted.
The parties met on March 23 2006, and reached agreement upon an appropriate ratemaking
treatment for the allowance proceeds. The parties have signed a Stipulation providing that S02
allowance sales proceeds be included in the Company s annual Power Cost Adjustment (PCA)
proceeding, with 90% of the net proceeds to be passed on to customers, and 10% of the net
proceeds to be retained as a shareholder benefit. This Stipulation has been filed with the
Commission. Idaho Power has filed a Motion for Approval of the Stipulation asking the
Commission to accept the Stipulation in its entirety without material change or condition.
The Stipulation
On April 6, 2006 Idaho Power Company filed a motion with the Commission requesting
approval of an agreement (Stipulation) among the parties (Company, Staff, Micron Technology and
the Industrial Customers ofldaho Power) with respect to sharing and distribution of proceeds
resulting from the sale of SO2 allowances. The Stipulation specifies that net proceeds resulting
from the sales will be distributed through the Power Cost Adjustment (PCA) mechanism, as are
other extraordinary power supply costs and benefits. The net proceeds currently estimated at
approximately $49 million will be jurisdictionally allocated to Idaho at the approved rate of 94.1 %
STAFF COMMENTS APRIL 24, 2006 .
and shared 90%/10% between ratepayers and shareholders. Any proceeds from future sales will be
jurisdictionally allocated to Idaho and shared at the then approved ratios.
The Stipulation further specifies that the Idaho customer benefit, currently amounting to
$42.1 million, will accrue interest at the PCA rate and be reflected in the PCA as a credit to the
PCA true-up balance for amortization in the PCA rates during the June 1 , 2007 through May 31
2008 PCA rate period. Idaho Power will record any proceeds from future sales of surplus S02
allowances, net oftaxes and fees, received after June 2006 in the PCA for allocation and sharing
through the true-up portion of the PCA.
Staff Analysis
Staff believes the Stipulation, signed by all parties to this case, aligns the interest of
shareholders and ratepayers by reasonably sharing the net proceeds from the sale of S02
allowances. Staff supports the tenns laid out in the Stipulation and recommends Commission
approval.
However, the Stipulation reflects the SO2 proceeds net of tax. In subsequent discussions, it
has been determined that the taxes will be a timing difference only. Therefore it will be appropriate
to gross-up the current $42.1 million benefit when it is returned to customers in the PCA. Idaho
Power has informed Staff that it agrees with this concept. Staff recommends that the Commission
include the provision for gross-up ofthe benefits when returned to customers in the PCA if it
approves the Stipulation.
Staff s support for the settlement is based on its belief that SO2 allowances are an attribute
of coal plants paid for by ratepayers and that the benefits derived from the sale of such excess
allowances (credits) should be returned to the ratepayer. The credits accrue as a direct result of
plant operation and ownership in much the same way that energy generated from the plant is used to
meet ratepayer demand and generate surplus sales revenue to offset plant-operating costs.
The generation of S02 credits results from the plant configuration with respect to installed
environmental equipment, the geographic location of the plant, the total time the plant is operated
and the nature of the coal used to fuel the plant. All of these factors dictate the cost of plant
generation, the volume of generation available for surplus sales and the environmental
costs/benefits expected from the plant. To the extent coal costs increase, they are passed through to
customers, to the extent surplus revenues decline or environmental costs increase, they too are
passed on to customers. The reverse is also true. When coal costs decline, when surplus sales
STAFF COMMENTS APRIL 24, 2006
revenue increases or when environmental costs/benefits of the project declinelincrease
savings/benefits are returned to customers.
An analysis of the S02 allowance program in 1998 showed that of the 18 states addressing
the issue of cost and benefit distribution associated with the purchase and sale of SO2 credits, 15
required automatic pass through of costs and savings to ratepayers through power cost adjustment
mechanisms. Several states employed an incentive based sharing to align the interest of ratepayers
and shareholders.
Staff believes that the PCA, designed to track and true-up for abnormal power supply costs
and revenues, is the logical mechanism to track and distribute proceeds from the sale of SO2
allowances in this case. While Staff believes that SO2 proceeds are similar to surplus generation
sales revenue in that the magnitude of such proceeds in any year can be affected by market price
variability and perhaps weather conditions, Staff also believes that normalization of annual proceeds
in base rates would be difficult if not impossible to achieve. More importantly, sharing of the
proceeds through the existing PCA mechanism provides a financial incentive to the Company to
maximize SO2 allowance sales for the benefit of both shareholder and ratepayer. Therefore, Staff
supports the use of the PCA as specified in the Stipulation for distribution of the S02 proceeds with
the understanding that proceeds will be grossed-up for taxes when returned to customers through
the PCA.
Finally, the Stipulation provides that the current proceeds be returned as part of the PCA
true-up in the 2007 through 2008 PCA period. Although Staff supports the stipulated period for
proceed distribution, Staff would not be opposed to modification of the period over which proceeds
were returned if conditions warranted and the other parties to the stipulation agreed.
Respectfully submitted this day of April 2006.
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Donovan E. Walker
Cecelia A. Gassner
Deputy Attorneys General
Technical Staff:Randy Lobb
Terri Carlock
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STAFF COMMENTS APRIL 24, 2006
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 24TH DAY OF APRIL 2006
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
IDAHO POWER COMPANY
PO BOX 70
BOISE ID 83707-0070
PETER J RICHARDSON
RICHARDSON & O'LEARY
515 N 27TH ST
PO BOX 7218
BOISE ID 83702
CONLEY E WARD
GIVENS PURLSEY LLP
601 WBANNOCKST
PO BOX 2720
BOISE ID 83701-2720
DON READING
BEN JOHNSON ASSOCIATES
6070 HILL ROAD
BOISE ID 83703
DENNIS E PESEAU, PH.D.
UTILITY RESOURCES INC
1500 LIBERTY ST SE
SUITE 250
SALEM OR 97320
SECRETARY
CERTIFICATE OF SERVICE