20111021Decision Memo.pdf

DECISION MEMORANDUM 1
DECISION MEMORANDUM

TO: COMMISSIONER KJELLANDER
COMMISSIONER REDFORD
COMMISSIONER SMITH
COMMISSION SECRETARY
COMMISSION STAFF
LEGAL

FROM: KARL KLEIN
DEPUTY ATTORNEY GENERAL

DATE: OCTOBER 21, 2011

SUBJECT: IDAHO POWER’S SALE OF SO2 EMISSION ALLOWANCES,
CASE NO. IPC-E-11-17

On September 19, 2011, Idaho Power Company filed its report about the Company’s
sale of SO2 emissions allowances in 2011.
THE REPORT
The Company says it has sold or contracted to sell 6,216 surplus sulfur dioxide
emission allowances in 2011. The Company says it expects to receive $21,756 in net proceeds
from the sale (after deducting brokerage fees of $1,554). The Company says it will account for
the proceeds using the same interim accounting method that the Commission approved in Order
29852 (briefly described in § B, below). See Report ¶ 4, 7 and 8.
In addition, the Company says the Commission previously authorized it to record
proceeds net of income taxes and transaction fees from future SO2 allowances sales in the PCA
for purposes of calculating interest. However, the Company’s review of tax law and policy have
lead the Company to determine that it is more appropriate to record the gross benefits (less
transaction costs) of the sale of excess SO2 allowances. The Company says that if SO2
allowances sales exist and the PCA’s sharing mechanisms are triggered, customers will benefit
by earning interest on the gross amount of the income from the SO2 allowances instead of the
net amount. Report at ¶ 6.
The Company says it will file a subsequent report that includes contracts for the sale
of surplus SO2 emission allowances entered into after the instant report was filed. See Report at
¶ 9.
DECISION MEMORANDUM 2
BACKGROUND
A. The SO2 Program
Title IV of the Clean Air Act Amendments of 1990 establishes a national plan to
reduce acid rain. 42 U.S.C. §§ 7651, et seq. The acid rain plan’s centerpiece is the incentive- or
market-based “cap and trade” SO2 emission program. Under the cap and trade program, the
Environmental Protection Agency (EPA) caps the total amount of SO2 emissions allowed
nationwide. Based on this cap, EPA allocates a certain number of SO2 emission allowances to
thermal power plant owners. Each allowance provides a plant owner with authority to emit one
ton of SO2. Order No. 29852 at 1.
Each year a plant owner must hold sufficient allowances to cover actual SO2
emissions. If a plant owner has insufficient allowances to cover its annual emissions, it must
purchase additional allowances or it is automatically fined and must surrender future year
allowances to cover the shortfall. A plant owner with surplus SO2 allowances in a given year
either may save the surplus allowances or sell them. SO2 emission allowances are fully
marketable commodities and can be traded on the open market or in special EPA-sponsored
auctions. Idaho Power has an ownership interest in three thermal power plants in the western
United States that receive SO2 allowances from EPA. Id.
B. Prior Commission Orders
The Commission previously issued an Order related to the sale of Idaho Power’s
surplus SO2 emission allowances. These include, without limitation, the following Orders.
In 2005, the Commission authorized Idaho Power to sell the Company’s surplus SO2
emission allowances. See Order No. 29852. Pending Commission determination of how to treat
the allowances for ratemaking purposes, the Commission said Idaho Power could account for the
proceeds by booking them into Account 131 (Cash) flowing to Account 236 (Taxes Accrued)
and Account 254 (Other Regulatory Liabilities). See Order No. 29852 at 2 and 4. The
Commission also required Idaho Power to report the SO2 sale proceeds within 60 days of
receipt. Id.
In 2006, the Commission directed the Company to include SO2 allowance sales
proceeds in the Company’s annual Power Cost Adjustment (“PCA”) as an off-set to reduce the
level of PCA rates. See Order No. 30041. The Commission decided that, like the then-approved
DECISION MEMORANDUM 3
PCA sharing arrangement, “90% of the net proceeds [were] to be passed onto customers, and
10% [were] . . . to be retained as a shareholder benefit.” Id.
In 2009, the Commission modified Idaho Power’s PCA mechanism by changing how
customers and shareholders were to share power purchase costs and benefits. See Order No.
30715. The Commission changed the 90%/10% customer/shareholder allocation to 95%/5%. Id.
In 2011, the Commission applied this change for use in allocating net proceeds from
the Company’s sale of SO2 emissions allowances during the 2010 calendar year. Thus, 95% of
Idaho’s jurisdictional share of the net sale proceeds, including tax effects, was allocated to
customers, and the remaining 5% was allocated to shareholders. See Order No. 32162.
STAFF RECOMMENDATION
Staff recommends that the Commission process this matter under Modified Procedure
with a 21-day comment period.
COMMISSION DECISION
Does the Commission wish to process this matter under Modified Procedure with a
21-day comment period?

M:IPC-E-11-17_kk