20080225Comments.pdf

DONALD L. HOWELL, II
DEPUTY ATTORNEY GENERAL
IDAHO PUBLIC UTILITIES COMMISSION
PO BOX 83720
BOISE, IDAHO 83720-0074
[phone]
IDAHO BAR NO. 3366
E:
25 PH il: 34
Street Address for Express Mail:
472 W. WASHINGTON
BOISE, IDAHO 83702-5983
Attorney for the Commission Staff
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.
)
) CASE NO. IPC-E-07-18
)
)
) COMMENTS OF THE
) COMMISSION STAFF
)
On November 9, 2007, Idaho Power Company fied a report disclosing that the Company sold
35,000 sulfur dioxide (S02) allowances in calendar year 2007 for a total (less brokerage fees) of
$19,642,250. The after-tax amount of the proceeds allocated to Idaho for S02 emissions is
$11,257,289. i Rather than utilizing the proceeds from the S02 sales to offset purchased power costs
in this year's Power Cost Adjustment (PCA) case, Idao Power recommended that the Commission
explore other possible uses for the S02 proceeds. The Company requested that the Commission
convene a public workshop for the purose 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 public workshop was held on Januay 15,2008. The
i The total Idaho jurisdictional after-tax amount of the proceeds is $11,257,289. The Idaho jurisdictional after-tax amount
reported by Idaho Power in its November 2007 report is $10,131,560, which represents 90% of the proceeds, or the
proposed customers' share.
STAFF COMMENTS 1 FEBRUARY 25, 2008
following persons or entities attended the workshop: Idaho Power, the U. S. Deparment of Energy,
the Idaho Energy Education Project, Ridgeline Energy, the Snake River Allance, Windland, Avista
Utilties, the Idaho Conservation League, the Commission Staff, Micron, Dean J. Miler, and the
Industrial Customers of Idaho Power (ICIP). Paricipants at the workshop were unable to reach
consensus regarding the disposition of the S02 proceeds. Consequently on February 4,2008, the
Commission issued Order No. 30495 seeking further comments.
THE WORKSHOP ALTERNATIVES
Workshop paricipants generally discussed four possible uses for the S02 proceeds. First, as
was the case last year, S02 proceeds could be included in the anual PCA case this year. Ifincluded
in the PCA, the amount of the S02 revenue would be grossed up to approximately $16.6 milion. This
amount would offset the PCA deferral account and mitigate any pending increase in the PCA rates
this sumer.
Second, Idaho Power suggested that S02 proceeds could be used to purchase multi-year
streams of renewable energy certificates (RECs; "green tags") from the owners of renewable
generation facilties that have entered into PURPA contracts with Idaho Power. Order No. 30478 at 3
citng Idaho Power's Report/Motion at ii 8. Idaho Power suggested that if Congress enacts a
renewable portfolio standard (RPSi for electric utilties, Idaho Power wil be required to purchase
green tags at prices expected to be higher than those existing today. ¡d.
Third, Idaho Power suggested that the S02 proceeds could be used to purchase a wind
project's developmental rights. Under such an 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.
Four, the Idaho Energy Education Project suggested that approximately $500,000 could be
used to develop and implement classroom education programs about energy efficiency. The
remaining balance of the proceeds could be directed to energy effciency operations or other beneficial
uses.
2 A RPS typically requires that a certain percentage of an electric utilty's generating resources be renewable resources
(such as wind, solar, biomass, etc.) by a certin year.
STAFF COMMENTS 2 FEBRUARY 25, 2008
STAFF ANALYSIS
Staff audit verified the S02 sales transactions were booked accurately. The review included
inspection of all contracts, sales terms for allowances sold, vintage of allowances, price per allowance,
and brokerage fees. The evaluation also looked at market conditions to test the reasonableness of
Idaho Power's decision to sell the allowances when sold. Interest is calculated monthly on the
balance and will continue to accrue, increasing the total fuds to be disbursed. Consistent with prior
treatment, Staff recommends the Commission's order direct the Company to continue to accrue
interest on the S02 proceeds until the fuds are reimbursed or used.
Include Proceeds in the PCA
Staff believes that the proceeds from S02 allowance sales should be used to satisfy the greatest
need at this time, which in Staffs opinion, is to offset purchased power costs in this year's Power
Cost Adjustment (PCA) case. So far, the balance that will have to be recovered in this year's PCA
case is the third highest ever, surassed only in 2000 and 2001 when the extreme ru-up in regional
electric prices occured. 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. The PCA balance as of the end of
Januar 2008 is $111.2 milion. The PCA surcharge that is currently in place is designed to recover
approximately $30.7 milion. Therefore, if the current PCA balance neither increases nor decreases,
an additional $80.5 milion more than is currently being collected must be collected through a higher
PCA surcharge beginning in June 2008. The result could be a PCA surcharge that is more than three
times the curent surcharge. The current PCA surcharge is 0.2419 cents per kWh and is applied to the
energy charge for all metered customers in all classes.
The effect of passing 90 percent of the S02 allowances sales proceeds (including the gross-up)
through the PCA would be to reduce the surcharge by approximately 0.1248 cents per kWh.
According to Idaho Power, the temporar rate reduction would be as follows for each customer class3:
Customer Class
Industrial
Large Commercial
Small Commercial
Residential
Irrigation
Rate Reduction
-3.7%
-2.9%
-1.6%
-2.0%
-2.6%
3 The amount of the temporary rate reduction is based on a total value of the S02 benefits of $16,814,806 as of December
2007, which includes a tax benefit of$6,503,461. The percentage rate reductions are reductions from curent rates
inclusive of the 2007/08 peA adjustment of 0.2419 cents per kWh.
STAFF COMMENTS 3 FEBRUARY 25,2008
Given the extremely large PCA balance that will likely need to be recovered this year, Staff
believes that reducing the PCA balance presents the greatest need and is the highest value for use of
the S02 allowances sales proceeds. Retuing the proceeds to customers through the PCA provides
the greatest immediate benefit to customers. Although other suggested uses of the funds may have
merit, Staff does not believe that these paricular funds should be used for those puroses at a time
when the PCA surcharge is likely to be extremely high.
Purchase of Renewable Energy Certificates
Staff recognizes the possibilty that renewable portfolio standards might be implemented in
Idaho in the future, either through state or federal legislation. Staff also recognizes that the cost of
RECs may be higher and that they may be less readily available in the futue.
Nevertheless, Staff does not support using S02 sales proceeds to purchase RECs. First, there
is currently no requirement for Idaho Power to own RECs and no assurance that such a requirement
wil exist anytime soon. Second, the future value of RECs is completely unown. RECs could
become more valuable over time as the demand for them increases and availability decreases. On the
other hand, RECs could also become less valuable over time if the cost of renew abIes remains
competitive or becomes less than other non-renewable types of generation, and the need to pay a
premium for renewables goes away.
If the Commission did decide to allow sales proceeds to be used to acquire RECs, however,
Staff would strongly recommend that only RECs from as yet unbuilt projects be considered. Staff
contends that purchasing RECs from existing projects would do nothing to cause more renewables
projects to be built. Instead, REC sales revenue would likely just be used to enrich existing projects.
In addition, ifIdaho Power is allowed to purchase RECs with the fuds, Staff believes that Idaho
Power should be expected to sell them until the need is known and to retur any excess revenue to
customers in the meantime.
Purchase of Wind Project Development Rights
Staff believes that Idaho Power's suggestion to purchase wind project development rights has
merit. We believe that renewable resources must become an increasingly larger par of the
Company's portfolio. The cost of renewable projects is likely to increase as the competition for them
increases due to renewable portfolio standards in neighboring states and possible restrictions on
greenhouse gas emissions from fossil-fueled generation. The short-term options for new generation
are becoming limited and other longer-term options such as coal with carbon capture and
STAFF COMMENTS 4 FEBRUARY 25, 2008
sequestration, IGCC and nuclear depend on advances in technology and greater clarty in terms of
permitting.
However, despite our support of baning a wind project site for future development, Staff does
not support using 2007 S02 sales proceeds for this purpose. Early acquisition of renewables sites or
development rights to projects is something 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 as it is now doing. Moreover,
Staff believes that all renewables, not just wind, should be considered. Geothermal, in paricular,
offers some advantages, and biomass may present opportunities as technologies mature and projects
become more cost effective.
Energy Efficiency and Renewables Education
One additional recommendation made during the Januar 15,2008 workshop was to dedicate
at least a portion of the funds to education programs for effciency and renewables. Although Staff is
supportive of energy education programs, we believe that they can be conducted in conjunction with
existing programs for energy conservation and demand side management activities.
Conformance with the 2007 Idaho Energy Plan
The 2007 Idaho Energy Plan offers a number of recommendations aimed at increasing
investments in energy conservation and in-state renewable resources. As stated in the Plan,
"Conservation and renewables diversify the state's resource base, reducing its dependence on
imported fossil fuels and providing insurance against increasing fuel prices. Conservation and in-state
renewables also contribute to Idaho's economic development by creating local jobs and tax revenues,
frequently in rual areas that are most in need of new economic activity." 2007 Idaho Energy Plan
at 1.
The Plan includes policies for Idaho's utilties to "acquire reliable, diverse, cost-effective and
environmentally sound resource portfolios sufficient to meet their customers' long-term electricity
needs" and "to have access to a broad variety of resource options consistent with Idaho's policy
objectives, including both renewable and conventional resources." Id at 47. In addition, the Plan
recommends that when acquiring resources, priority be given to conservation, energy efficiency,
demand response, and renewable resources. The Commission and Idaho's utilities must ensure that
their policies provide ratepayer and shareholder incentives that are consistent with this priority order.
Id at 48. More specifically, the Plan calls on the Commission to establish appropriate shareholder
STAFF COMMENTS 5 FEBRUARY 25, 2008
incentives for investments in Idaho renewable resources by investor-owned utilties, such as increased
retur on investments in renewable resources located in Idaho or by allowing shareholders a share of
the net societal benefits attributable to a renewable energy purchase. Id at 55.
Staff believes that the four workshop suggestions all conform with the policies and priorities
as laid out in the 2007 Idaho Energy Plan. In paricular, Staff believes that returng the S02
allowance proceeds to customers by including them in this year's PCA is consistent with the Plan
because it is economical for customers and provides shareholder incentive to generate surlus credits.
90/10 Sharing
Under each of the proposals advanced initially by Idaho Power, 90 percent of the net proceeds
are proposed to be used for the benefit of customers and 10 percent of the net proceeds are proposed
to be retained as a shareholder benefit. The 90/10 sharing of S02 allowance proceeds was first
established in a stipulation that was accepted in Case No. IPC-E-05-26 following the Company's first
series of S02 sales in 2006. In its final Order in that case, the Commission stated,
Sharing the proceeds, 90% to customers and 10% to shareholders, will suffciently
align the interests of the Company's shareholders and customers, and provide a
financial incentive to the Company to maximize any S02 allowance sales for the
benefit of both shareholder and customer.
Order No. 30041 at 4. As rationale for the 90/10 sharing of S02 allowance proceeds, the
Commission found that:
S02 allowances are allocated to the Company based on the ownership and operation of
its thermaVcoal 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 surlus 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 maner. 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.
Order No. 30041 at 4.
Although Staff does not object in this case to maintaining the historic 90/10 sharing of S02
allowance proceeds as are other surlus revenues that are passed through the PCA, Staff believes that
the 90/1 0 split should be reexamined if the proceeds are used for other purposes or credit proceeds are
STAFF COMMENTS 6 FEBRUARY 25, 2008
derived from other sources. There is a strong possibilty 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
surlus CO2 allowances that, if sold, could potentially dwar the amounts being received from the sale
of surlus S02 allowances. Consequently, disposition of fuds from the sale of allowances could
become an even bigger issue in the future. To the extent intermittent proceeds are used for puroses
other than to offset PCA deferral balances or proceeds become a significant anual 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.
STAFF RECOMMENDATIONS
Staff is pleased that Idaho Power is wiling to explore alternative ways to make use ofthe
proceeds from the sale of S02 allowances. However, while some of the suggested uses for the
proceeds are good, Staff does not believe that this is the proper time or that these are the proper fuds
to make investments that mayor may not prove beneficiaL.
Staff recommends that the customers' share ofS02 sales proceeds be passed through the PCA
for the curent year. Passing the customers' share of fuds through the PCA wil reduce the curent
PCA balance and help to soften the impact of what will stil likely be a very large surcharge for 2008.
Furher, Staff recommends that the historic 90/10 split between fuds dedicated to customers and
fuds available to be retained by shareholders be maintained for this case so long as fuds are passed
through the PCA as surlus revenue, but that the Commission reexamine whether such a sharing
should continue if proceeds are used for other purposes.
Staffs recommendations address only the use of proceeds for 2007 sales of allowances. If
sales of additional allowances are made in future years, and if circumstances are different, Staff may
make different recommendations than those being made today. If the expected PCA balance is
projected to be a credit, for example, and if there is more certainty with regard to the cost and
necessity for RECs, Staff would be more inclined to consider alternate uses for S02 allowance
proceeds.
STAFF COMMENTS 7 FEBRUARY 25,2008
Respectfully submitted this Z 5~ day of Februar 2008.
Technical Staff: Rick Sterling
Terri Carlock
i:umisc/commentsipce07. i 4dhrps
STAFF COMMENTS 8 FEBRUARY 25, 2008
CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT I HAVE THIS 25TH DAY OF FEBRUARY 2008,
SERVED THE FOREGOING COMMENTS OF THE COMMISSION STAFF IN CASE
NO. IPC-E-07-18, BY ELECTRONIC MAIL TO THE FOLLOWING:
MARTIN FULLENBAUM
marinf(iexeterassociates.com
JOE MILLER
joe(imcdevitt-miler .com
BILL CHISHOLM
chisholm3 (imindspring.com
BARTON KLINE
bkline(iidahopower .com
PETER RICHARDSON
peter(irichardsonandoleary.com
CELESTE SCHWENDIMAN
cschwendiman(iidahopower .com
RICH RA YHILL
rrayhil(irl -en. com
MARK STOKES
mstokes(iidahopower .com
KEN MILLER
kmiler(isnakeriverallance.org
RANDY ALLPHIN
rallphin(iidahopower .com
ROALD DOSKELAND
wind(iwindland.com
PATRICK EHRBAR
pat.ehrbar(iavistacorp.com
BJORN DOSKELAND
bj orn(iwindland.com
LINDA GERVAIS
linda. gervais(iavistacorp.com
LISA NORDSTROM
lnordstrom(iidahopower .com
RICH HOWARD
atlatl_l ~yahoo.com
JOHN R GALE
rgale(iidahopower .com
GREG SAID
gsaid(iidahopower .com
CONLEY WARD
cew(igivenspursley.com
KARL BOKENKAMP
kbokenkamp(iidahopower .com
DONALD L. HOWELL, II
don.howell(ipuc.idaho. gov
RANDY LOBB
randy.lobb(ipuc.idaho. gov
TERR CARLOCK
terri.carlock(ipuc.idaho. gov
RICK STERLING
rick. sterling(ipuc. idaho . gov
DONN ENGLISH
donn.english(ipuc.idaho. gov ~.~SECRETARY
CERTIFICATE OF SERVICE