20080414final_order_no_30529.pdf

Office of the Secretary
Service Date
April 14 2008
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPROPRIATE
DISPOSITION OF PROCEEDS FOR THE
SALE OF IDAHO POWER COMPANY'S S02
EMISSION ALLOWANCES IN CY 2007 ORDER NO. 30529
CASE NO. IPC-07-
On November 9, 2007, Idaho Power Company filed a report disclosing that the
Company sold 35 000 sulfur dioxide (S02) emission allowances in calendar year 2007 for a total
amount (less brokerage fees) of $19 642 250. Report/Motion at 2. The after-tax amount of
proceeds allocated to Idaho for S02 emissions is $10 131 560. Id at ~ 5. Rather than utilizing
the proceeds from the S02 sales to offset purchased power costs in this year s Power Cost
Adjustment (PCA) case, Idaho Power recommended the Commission explore other possible uses
for the S02 proceeds. The Company requested that the Commission convene a public workshop
for the purpose of allowing interested persons to discuss other possible alternatives.
On December 20, 2007, the Commission issued Order No. 30478 granting the
Company s request to convene a public workshop. The workshop was held on January 15 2008.
Because the participants at the workshop were unable to reach consensus regarding the
disposition of the S02 proceeds, the Commission issued a Notice of Modified Procedure on
February 4 2008. The Commission specifically invited public comments on the four alternatives
discussed at the workshop and on other possible uses of the S02 proceeds. The Commission
also directed that comments should indicate whether a recommended alternative conforms to the
2007 Idaho Energy Plan.
BACKGROUND
Title IV of the Clean Air Act Amendments of 1990 established a national program
for the reduction of acid rain. 42 U.C. ~~ 7651 et seq. The centerpiece of the acid rain
program is the incentive- or market-based "cap and trade" S02 program. Under the cap and
trade program, the Environmental Protection Agency (EP A) sets a cap or ceiling on the total
amount of S02 emissions allowed nationwide. Based upon this cap, EP A allocates a certain
number of S02 emission allowances to thermal power plant owners. Each allowance provides
the authority to emit one ton of S02. See Order No. 29852 at 1.
ORDER NO. 30529
Each year a thermal power plant owner must hold sufficient allowances to cover its
actual S02 emissions. A power plant owner that does not possess sufficient allowances to cover
its annual emissions must purchase additional allowances or it is automatically fined and must
surrender future-year allowances to cover the shortfall. A power plant owner holding surplus
S02 allowances in a given year may retain the allowances or sell them. S02 allowances are
fully marketable commodities and can be traded on the open market or in special EP A-sponsored
auctions. Id Idaho Power has an ownership interest in three thermal power plants in the west:
Jim Bridger, North Valmy, and Boardman.
THE WORKSHOP AND THE FOUR AL TERNA TIVES
The public workshop to discuss theS02 proceeds was held January 15 , 2008. The
following parties attended the workshop and with two exceptions submitted comments: Idaho
Power, the U.S. Department of Energy (did not comment), the Idaho Energy Education Project
Ridgeline Energy, the Snake River Alliance, Windland, Avista Utilities, the Idaho Conservation
League, the Commission Staff, Micron, Dean J. Miller (did not comment), and the Industrial
Customers of Idaho Power (ICIP). The participants generally discussed four possible uses for
the S02 proceeds. The four alternatives are discussed below.
1. Offset the PCA. First, as was the case last year, S02 proceeds could be included
in the annual PCA case this year. If included in the PCA, the amount of the S02 revenue would
be grossed up to approximately $16.6 million. This amount would offset the PCA deferral
account and mitigate any pending increase in the PCA rates this summer. Staff disclosed at the
workshop that the current PCA deferral balance was (then) about $90 million. Staff, Micron and
ICIP favored this alternative.
2. Green Tags . Idaho Power suggested that SO2 proceeds could be used to purchase
multi-year streams of "renewable energy certificates ('green tags ) from the owners of renewable
generation facilities" that have entered into PURP A contracts with Idaho Power. Order No.
30478 at 3 citing Idaho Power s Report/Motion at ~ 8. Idaho Power suggested that if Congress
enacts a renewable portfolio standard (RPS)l for electric utilities, Idaho Power will be required
to purchase green tags at prices expected to be higher than those existing today.
1 A RPS typically requires that an electric utility obtain a certain percentage of its generation from renewableresources (such as wind, solar, biomass, etc.) by a certain year. For example, Oregon s RPS generally requires large
Oregon utilities to obtain 25% of their generation from renewable resources by 2025.
ORDER NO. 30529
3. Wind Proiects. Idaho Power next suggested that the S02 proceeds could be used
to purchase a wind project's development rights. Under this approach , Idaho Power would enter
into negotiations or issue a request for proposal (RFP) to purchase a permitted wind generation
project. In essence, the Company would be purchasing the wind project with capital contributed
by customers. This would result in a reduction in the Company s rate base. See Order No.
30478 at 4. The wind developers supported the third option and Idaho Power supported either
the second or the third option.
4. Education The Idaho Energy Education Project (IEEP) suggested that
approximately $500 000 could be used to develop and implement classroom education programs
about energy efficiency and conservation. The remaining balance of the proceeds could be
directed to energy efficiency operations or other beneficial uses.
THE COMMENTS
Because the participants at the workshop were unable to reach consensus regarding
the disposition of the S02 proceeds, the Commission issued a Notice of Modified Procedure
seeking public comment in this matter. Order No. 30495. The Commission received timely
comments from most of the workshop participants, Renewable Northwest Project, and 14
individual customers.
A. Include Proceeds in PCA
Micron, ICIP, Staff, and Avista all recommended using the $16 635 0222 in grossed-
up S02 proceeds to mitigate the PCA deferral account.
1. Micron.In its comments, Micron recommended that the funds be used to offset
the projected PCA rate increase. It argued that using the proceeds to purchase green tags or wind
development rights was too speculative. Micron Comments at 1-2. Micron noted that current
law does not require the purchase of green tags and there is no guarantee that prices for green
tags will be higher than current prices. Id at 1. It also expressed concern that buying wind
development rights could "turn out to be a 'dry hole' that is never built because of economic or
legal constraints. For its part, Micron does not wish to be forced into the wind development
business and it respectfully suggests many other Idaho Power ratepayers would agree.Id at 2.
2. ICIP. ICIP stated that the PCA deferral balance was in excess of $111 million as
of the date of its comments. If this deferral balance were maintained it would roughly equate a
2 This amount included interest up to March 31, 2008. Additional interest will accrue.
ORDER NO. 30529
15% increase in the PCA rate. This projected increase, coupled with the recent base rate increase
effective March 1 , supports using the S02 proceeds in this year s PCA case. Ameliorating these
back-to-back rate cases will serve the public interest to a much greater extent than Idaho
Power s proposed speculative ventures (with green tags or wind development projects)." ICIP
Comments at 2. ICIP also argued that because Idaho Power does not currently operate under a
mandated green-tag portfolio, the "pre-purchase of green tags by the Company would be nothing
more than pure speculation in a market that is yet to mature.
ICIP and Micron also took exception to using S02 proceeds for energy efficient
education efforts. In particular, ICIP stated that Idaho Power has an active energy conservation
education program in place funded with ratepayer dollars. "There has been no assertion. . . that
these efforts are currently underfunded or not effective." ICIP at
3. Staff.For its part, Staff also recommended that the S02 proceeds be used to
mitigate the potential increase in PCA rates this year. The Staff indicated that if current trends
continue, the PCA deferral balance may be the third-highest ever
, "
surpassed only in 2000 and
2001 when the extreme run-up in regional electric prices occurred. The extremely high PCA
balance is due to a below average water year in 2007 and an inaccurate forecast of power supply
costs last spring." Staff Comments at 3.
Staff suggested the Commission not use this year s S02 proceeds for the purchase of
green tags or wind project development rights. Although Staff found some merit in the purchase
of future wind project rights, Staff did not support using 2007 S02 sale proceeds for this
purpose. "Early acquisition of renewable sites or development rights to projects is something
that Idaho Power should be doing anyway, without needing incentive to do so from funds
available as a result of S02 allowance sales. In addition, Staff believes that Idaho Power
ownership of renewable projects could possibly result in lower project costs than simply
acquiring project output through power purchase agreements. . .." Staff Comments at 5.
Staff asserted that returning the S02 allowance proceeds to customers in this year
PCA is consistent with the State Energy Plan. In particular, the PCA mechanism includes a
shareholder incentive to generate surplus credits. Id at 6. Although Staff did not object to
maintaining the historic 90/1 0 sharing of S02 allowances
, "
Staff believes that the 90/1 0 split
should be re-examined if the proceeds are used for other purposes or credit proceeds are derived
from other sources." Staff continued by noting:
ORDER NO. 30529
There is a strong possibility that CO2 will be a regulated greenhouse gas in
the future, with a cap and trade system similar to S02. From time to time
Idaho Power may have surplus CO2 allowances that, if sold, could potentially
dwarf the amounts being received from the sale of surplus S02 allowances.
Consequently, disposition of funds from the sale allowances could become
an even bigger issue in the future. To the extent intermittent proceeds are
used for purposes other than to offset PCA deferral balances or proceeds
become a significant annual revenue stream, then Staff believes the
Commission should consider establishing a methodology to maximize sales
proceeds and include the revenue in base rates without PCA sharing.
Id. at 7.
4. Avista Avista also supported paSSIng the S02 credits through the PCA
mechanism. A vista asserted that it was important to develop a consistent policy for handling the
costs or credits associated with "trade emissions-related credits, such as S02, greenhouse gas
(GHG) credits, and renewable energy credits (RECs) to meet (our) legal obligations.Avista
Comments at 1. A vista noted that emission sales are relatively unique and unpredictable;
consequently, energy credits or RECs should be passed through the PCA. The 10% sharing
mechanism does encourage utilities to be diligent in the pursuit of voluntary emission credits.
This is the reason why Avista has joined the Chicago Climate Exchange (CCX). If long-term
sales or purchases of emission credits "are known and measurable, they could be pro formed into
base rates.Id at 2.
B. Energy Education
The Idaho Energy Education Project (IEEP) maintained that a portion of the S02
money should be devoted to energy education. In particular, IEEP proposed that $250 000 be
used for energy education (conservation and efficiency) and $250 000 be made available as
grants to schools for students involved in efficiency, conservation, and renewable education
projects. IEEP recommended that the balance of the S02 proceeds be used to buy wind
generation projects.
If the Commission determines that the proceeds should be used to mitigate the cost of
the PCA account or green tags, then IEEP still recommended that $500 000 be used for energy
education and $500 000 be dedicated for energy-efficiency/renewable/education project for
residential, small business, and agricultural customers. Except for low-income customers, the
project grants should be based upon a 75/25 cost sharing, where 25% of a project's cost would be
contributed by the applicant.
ORDER NO. 30529
Other commenters also supported IEEP's education recommendation and blended it
with other recommendations. These "blended" recommendations are discussed in Section D
below.
C. Wind Development Rights
1. Ridgeline Energy. Ridgeline urged the Commission to use the S02 proceeds to
purchase a wind project's development rights. Given the ever-rising cost oflabor and materials
Ridgeline characterized the investment in wind as "investing in clean renewable energy as a
hedge against rising gas prices and the uncertain expense associated with likely federal carbon
reduction programs.Ridgeline Comments at 1. Use of the S02 proceeds will also develop
Idaho renewable resources, create jobs, and promote rural economic development. Ridgeline
insisted that many ideal Idaho wind sites have already been committed to out-of-state utilities
and these sites have the highest capacity factor with the lowest construction costs. Id. at 2.
Ridgeline also evaluated the green-tag and PCA alternatives. Absent the purchase of
wind development rights and the accompanying green tags, Ridgeline argued that investment in
green tags probably will be spent out of state. In addition, it insisted that investment in green
tags is a potentially speculative use of the S02 proceeds. Regarding the PCA alternative
Ridgeline said that using the proceeds to mitigate the PCA "will benefit only a few large
industrial customers. The bulk of IPCo' s customers , residences and small business are unlikely
to receive significant benefit." Id. at ~ 6.
2. ICL.The Idaho Conservation League supported using S02 proceeds to buy a
wind project's development rights. ICL advanced several reasons for supporting this option.
First, acquiring wind resources promotes a policy of reducing hazardous emissions and
supporting renewable energy resources.ICL Comments at 1-Second, this option
compatible with Idaho Power s Integrated Resource Plan (IRP). The 2006 IRP indicates that
Idaho Power plans to add 250 MW of wind energy by 2025. Third, given the ever-increasing
costs of generating electricity, ICL asserted that it is appropriate to promote sources of energy
with "stable cost projections and long-term economic benefits for customers.Id. at 2. Besides
the lack of fuel costs, purchasing wind development rights can reduce Idaho Power s initial costs
associated with expected federal carbon regulations.
Fourth, by using S02 credits for wind development rights, Idaho Power would also
own the "green tags" that are associated with such facilities. In essence, investing in wind
ORDER NO. 30529
facilities will allow Idaho Power to receive the benefits of renewable generation and the green
tags such facilities provide. Finally, investing in renewable energy generation will mitigate
increases by providing contributed capital. Id.
3. Windland. Windland sees win-win benefits by utilizing S02 emission revenues to
purchase wind generation facilities. More specifically, ratepayers could gain access to carbon-
risk-free, fuel-free energy at a 20-year levelized cost of less than $60/MWh. Windland
Comments at 1. The wind developer indicated that utilizing S02 proceeds now will ensure that
Idaho Power has sufficient capital to acquire the best wind sites before they are acquired by other
parties. Given the general interest emanating from out-of-state interests, the Commission would
be wise to allow Idaho Power to use the proceeds now to acquire wind rights. Acquiring such
rights is also in compliance with the 2007 State Energy Plan. In particular, the Plan calls for a
diverse mix of generating resources and places the highest priority on "local renewable
resources.Id. citing Energy Plan at 48.
Acquiring wind-generating resources within Idaho promotes fuel diversity, job
creation, and rural economic development. More to the point, Windland stated that "Action
Item" E-15 of the State Energy Plan urges the Commission to establish appropriate shareholder
incentives which, in this case, would be provided by the use of S02 proceeds. Id. citing Energy
Plan at 55. Finally, Windland noted that 89% of the respondents in Boise State s 2007 Energy
Policy Survey agree that Idaho should provide incentives to promote renewable electricity
generation. Windland concluded that using S02 proceeds to procure wind farm development
rights is the appropriate path to take. Id.
D. Blended Alternatives
1. Snake River Alliance. The Alliance congratulated Idaho Power for its creative
approach in developing alternative uses for the S02 credits. While the Alliance recognized that
using the proceeds for the PCA "is laudable, the Alliance believes there are opportunities to
better use the funds at issue. . ." SRA Comments at 1. More specifically, the Alliance
supported the $500 000 energy education alternative suggested by the Idaho Energy Education
Project (IEEP). The Alliance recommended that the remaining balance of the proceeds be used
in a blend of both renewable energy projects and conservation and efficiency programs.Id.
2. While the Alliance does not oppose acquiring wind development rights, it cautioned that such
an investment should return benefits to ratepayers within a reasonable timeframe. The Alliance
ORDER NO. 30529
would not necessarily limit the proceeds to wind renewable facilities. It declared that other
renewable resources (e., geothermal) offer attractive benefits. Turning to the green-tag
alternative, the Alliance does not oppose this alternative provided the proceeds are used for
renewable projects. Id.
In conjunction with the education alternative, the Alliance encouraged the
Commission to consider an enhancement of energy-efficiency and conservation programs
through the existing DSM structure. The Alliance claimed
, "
An investment in new programs (as
opposed to existing DSM programs) is both appropriate and would help extend the value of the
funds." Other DSM programs might include "smart grid" or other non-wired initiatives, which
promote efficiency and conservation. Id. Because the S02 funds are the result of reduced
environmental impact associated with existing thermal plants
, "
the fund should be used in ways
that improve the Company s clean-energy portfolio - whether by investing in renewable energy,
conservation and efficiency programs, or a combination of the two." SRA concluded that such a
use of the fund would certainly comport with the 2007 Idaho Energy Plan.
2. Public Comments. The Commission also received 14 comments from members of
the public. Five comments supported IEEP's proposals, while other commenters supported the
blending of educational programs and other forms of renewable generation. Two customers
supported the educational programs and proposed using the balance of the S02 proceeds for
solar PV projects. One customer suggested that the Commission allocate 85% of the proceeds
among customers, 7% to shareholders, and 8% to green tags. Another customer recommended
an allocation of 45% wind, 45% education, and 10% to develop efficiency measures for Idaho
Power s headquarters building in Boise.
Finally, one customer recommended that the Commission utilize the proceeds to
install demand response/smart metering. "Demand response can be the answer to the
intermittency of renewable resource power generation, allowing a larger integration of this type
of energy.
DISCUSSION AND FINDINGS
At the outset, we commend Idaho Power, the other participants and the commenters
in this case for their thoughtful suggestions and recommendations regarding the disposition of
the S02 sale proceeds. We too believe that it is beneficial to "think outside the box" and
consider non-traditional uses of one-time revenues.
ORDER NO. 30529
Having carefully reviewed the comments in this case, we find that the most
appropriate use of this year s S02 proceeds is to offset the potential increase in the power cost
adjustment (PCA) rates this year. As the ICIP and Staff noted in their comments, this year
PCA deferral balance may be the third highest since the Commission established the PCA
mechanism in 1993. ICIP observed that the PCA deferral balance is currently in excess of $111
million. If current trends continue, this may result in a double-digit PCA rate increase this year.
Consequently, we find that the most appropriate use (with the possible exception noted below) is
to use the S02 proceeds to offset the PCA deferral balance.
Although we find that the majority of the S02 proceeds should be used to offset the
PCA, we are intrigued by the Idaho Energy Education Project's (IEEP) proposal to utilize
$500 000 for energy education and associated project grants. Under IEEP's proposal, $250 000
would be dedicated to classroom conservation and efficiency education and the remaining half
would be used for grants for renewable and efficiency projects in those participating schools.
The grants would be for schools served by Idaho Power and these participating schools should
publicly track energy savings. We find that classroom "instruction on energy conservation and
efficiency" may be in the public interest. Although IEEP has provided the basic structure of its
proposal, it has not provided sufficient detail for us to fully evaluate its merits. Consequently,
we reserve judgment on $500 000 of the S02 proceeds until IEEP provides us with additional
information regarding its proposal. In particular, IEEP should provide us with a
course/classroom syllabus and additional detail regarding any arrangements with school districts
or state agencies.
We have determined that the best use of this year s S02 proceeds is to offset the
PCA deferral balance. However, we also recognize there may be merit in the wind power
alternative in the future. Using S02 proceeds to purchase a wind project would be equivalent to
using customers' contributed capital to "buy down" the cost of a generating asset. We encourage
Idaho Power to continue investigating the acquisition of wind resources and wind generating
opportunities through interconnection agreements with Bonneville Power Administration or
other Northwest utilities. Indeed, the Company s 2006 Integrated Resource Plan envisions
adding 250 MW of wind to its generation.
ORDER NO. 30529
ORDER
IT IS HEREBY ORDERED that the $16 635 022 in grossed-up proceeds from the
sale of Idaho Power s S02 allowances (with the possible exception of $500 000 as noted below)
be used to offset this year s PCA deferral balance. The $16.63 million shall continue to accrue
interest.
IT IS FURTHER ORDERED that the Commission reserves judgment on the
appropriateness of using $500 000 of the S02 proceeds for IEEP's energy education program.
IEEP is directed to provide the Commission with additional information regarding its educational
proposal such as a syllabus, curriculum, and any arrangements it has with school districts or state
agencies. IEEP shall file this additional material within 14 days of the date of this Order. At that
time, the Commission will consider whether to authorize S02 proceeds to be used to fund
IEEP's energy education program.
THIS IS A FINAL ORDER EXCEPT FOR THE RESERVED ISSUE. Any person
interested in this Order (or in issues finally decided by this Order) may petition for
reconsideration within twenty-one (21) days of the service date of this Order with regard to any
final matter decided in this Order. Within seven (7) days after any person has petitioned for
reconsideration, any other person may cross-petition for reconsideration. See Idaho Code ~ 61-
626.
ORDER NO. 30529
DONE by Order of the Idaho Public Utilities Commission at Boise, Idaho this l'f~
day of April 2008.
MACK FORD, P Sj ENT
~~
A H. SMITH, COMMISSIONER
ATTEST:
bls/O:IPC-07-18 dh3
ORDER NO. 30529