20071214Decision memo.pdf

DECISION MEMORANDUM
TO:COMMISSIONER REDFORD
COMMISSIONER SMITH
CO MMISSI 0 NER KEMPTON
COMMISSION SECRETARY
COMMISSION STAFF
FROM:DON HOWELL
DEPUTY ATTORNEY GENERAL
DATE:DECEMBER 13, 2007
SUBJECT:IDAHO POWER'S SECOND REPORT ON ITS SALE OF S02
ALLOWANCES IN 2007 AND MOTION FOR WORKSHOP,
CASE NO. IPC-07-
On November 9 , 2007, Idaho Power Company filed a report disclosing that the
Company made a subsequent sale of 15 000 sulfur dioxide (S02) emission allowances in 2007.
Report/Motion at 2. For the entire year of 2007, Idaho Power reports that it sold 35 000 S02
allowances for a total amount (less brokerage fees) of $19 642 250. Id. The after-tax amount of
proceeds allocated to Idaho for S02 emissions is $10 131 560. Id. at ~ 5. This amount assumes
an income tax rate of 39.095% and a jurisdictional allocation to Idaho of 94.1 %. Id. Last year
the Commission approved a settlement that the S02 revenues were used to offset power purchase
costs in the 2007 Power Cost Adjustment (PCA) case.
In addition to its report, Idaho Power also filed a "Motion for a Workshop Schedule.
Rather than utilizing the proceeds from the 2007 S02 sales to offset the PCA next year, Idaho
Power "believes that other opportunities presently exist with the potential to provide greater
long-term value to customers." Report/Motion at 3. If the Commission agrees that Idaho Power
should investigate other potential uses for the S02 revenues, the Company "respectfully requests
the Commission schedule a workshop for the purpose of receiving feedback from interested
parties concerning possible alternatives to benefit customers.Id. at 4.
BACKGROUND
A. SO2 Allowances
Title IV of the Clean Air Act amendments of 1990 established a national program for
the reduction of acid rain. 42 U.C. 997651 et seq. The centerpiece of the acid rain program is
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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.
Each year a thermal power plant owner must hold sufficient allowances to cover
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 thermal power plant 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.
B. The Prior SO2 Cases
In Order No. 29852 issued in August 2005, the Commission granted Idaho Power
blanket authority to sell its surplus S02 allowances. The Commission also directed that Idaho
Power file a report no later than 60 days after each sale. Finally, the Commission Staff was to
conduct workshops to explore the appropriate ratemaking treatment of the S02 proceeds and
advise the Commission. Case No. IPC-05-20.
Although the workshop participants were initially unable to reach an agreement upon
the appropriate ratemaking treatment, Idaho Power, Staff, the Industrial Customers of Idaho
Power and Micron reached agreement upon an appropriate ratemaking treatment. The parties
proposed that the revenues from the S02 sales be included in the Company s 2006-2007 PCA
mechanism, 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. Case No. IPC-05-26.
In April 2006, the Commission issued Order No. 30016 requesting public comment
on the settlement proposal. In response to the Commission s Notice of Modified Procedure
comments were filed by the Commission Staff, NW Energy Coalition, the U.S. Department of
Energy (DOE), the Idaho Energy Education Project, and six customers of Idaho Power. DOE
supported the settlement but questioned the calculation of the credit. The NW Energy Coalition
and the Idaho Energy Education Project also supported the proposed use of the sale proceeds in
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the PCA, but suggested the Commission consider some alternative uses for the proceeds. For
example, the proceeds could be used for long-term conservation and efficiency programs
measures designed to reduce the Company s coal plant emissions, acquire renewable generating
resources, and implementing energy education programs in schools. Order No. 30041 at 3.
After reviewing the comments, the Commission found that the PCA is the logical
mechanism to track and distribute proceeds from the sale of excess S02 allowances.
approving the stipulation, the Commission found that
the PCA which is designed to track and true-up abnormal power supply costs
and revenues is the logical mechanism to track and distribute proceeds from
the sale of excess S02 allowances. S02 allowances are allocated to the
Company based on the ownership and operation of its thermal/coal powered
plants. Excess allowances are a direct result of many factors associated with
the operation of the coal plants including installation of environmental
equipment, the geographic location of the plant, the total time the plant is
operated, the nature of the coal used to fuel the plant, as well as other factors.
The allowances 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. To the extent that coal costs, environmental costs, and surplus energy
sales increase/decrease(,) these costs/benefits are passed through to the
customers. We find it logical that S02 allowances pass through in a similar
manner. Consequently, we approve and adopt the Stipulation as a reasonable
and logical method to both pass on a major portion of the proceeds to
customers as well as align shareholder and ratepayer interests in obtaining the
best possible price for excess allowance sales.
Id.
Order No. 30041 at 4 (emphasis added). The Commission also found that the 90% of allowances
allocated to customers should be grossed-up to recognize the tax savings that accrues when the
credit is actually provided to customers through the PCA. Id. at 5.
THE MOTION FOR WORKSHOPS
Although Idaho Power believes that the proceeds from the 2007 sales of S02
allowances could again be included in the next PCA, the Company suggests that the Commission
consider other opportunities "with the potential to provide greater long-term value to customers.
Report/Motion at 3. More specifically, Idaho Power would like to discuss at least two
alternatives with other workshop participants. The first alternative is using the customer s share
of the proceeds (the 90%) to purchase multi-year streams of "Renewable Energy Certificates
('green tags ) from the owners of renewable generation facilities" that have entered into PURP
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contracts with Idaho Power. Id. at ~ 8. "If a federal renewable portfolio standard ("RPS") is
enacted, Idaho Power will be required to purchase green tags at prices expected to be higher than
those existing today. ... If Idaho Power purchased green tags prior the enactment of a federal
RPS or in excess thereof, the Company would sell the green tags on a short-term basis and flow
the proceeds from the sales to customers through the PCA." Id.
Second, Idaho Power would like to discuss the possibility of using the 90% share "
buy down a portion of the rate base associated with the purchase of wind project development
rights.Id. at ~ 9. Under such an approach, Idaho Power would enter into negotiations or issue a
request for proposal (RFP) to purchase a permitted wind project. The Company maintains that
by owning a wind project rather than purchasing equivalent energy elsewhere, customers would
have additional access to renewable energy at competitive prices and retain the value of the
green tags associated with such wind projects.
If the Commission agrees" that Idaho Power should investigate other potential uses
of the customers ' share of the S02 proceeds , then the Company requests that the Commission
schedule a workshop to allow interested parties to consider possible alternatives to benefit
customers. Idaho Power states that it would then report the results of such workshops to the
Commission for its approval. Id. at 4.
COMMISSION DECISION
Is the Commission interested in examining other uses for the S02 proceeds? Does
the Commission wish to schedule a workshop for interested persons to discuss Idaho Power
two suggestions in addition to other uses of the proceeds?
Don Howell
Deputy Attorney General
bls/M:IPC-O7-18 dh
DECISION MEMORANDUM