[Federal Register Volume 60, Number 87 (Friday, May 5, 1995)]
[Rules and Regulations]
[Pages 22257-22261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10718]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Parts 2 and 35
[Docket No. PL95-1-000]
Ratemaking Treatment of the Cost of Emissions Allowances in
Coordination Rates; Order No. 579
Issued April 26, 1995.
agency: Federal Energy Regulatory Commission, DOE.
action: Final rule amendment and confirmation of interim rules as
final.
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summary: On December 15, 1994, the Commission issued a Policy Statement
and Interim Rule Regarding Ratemaking Treatment of the Cost of
Emissions Allowances in Coordination Rates. In the Policy Statement,
codified in Sec. 2.25, the Commission set forth the elements of what
generally constitutes appropriate ratemaking treatment of sulfur
dioxide emissions allowances in coordination transactions under the
Federal Power Act. The Interim Rule, codified in Sec. 35.23,
implemented the filing guidelines set forth in the Policy Statement.
This order is issued in response to comments on the Interim rule
(Sec. 35.23). It clarifies the Policy Statement (Sec. 2.25) in certain
respects and adopts the Interim Rule, without modification, as a Final
Rule.
effective date: June 5, 1995.
for further information contact:
Wayne W. Miller (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 825 North Capitol Street NE.,
Washington, DC 20426, Telephone: (202) 208-0466
Moira Notargiacomo (Technical Information), Office of Electric Power
Regulation, Federal Energy Regulatory Commission, 825 North Capitol
Street NE., Washington, DC 20426, Telephone: (202) 208-1079.
[[Page 22258]] supplementary information: In addition to publishing the
full text of this document in the Federal Register, the Commission also
provides all interested persons an opportunity to inspect or copy the
contents of this document during normal business hours in Room 3104,
941 North Capitol Street NE., Washington, DC 20426.
The Commission Issuance Posting System (CIPS), an electronic
bulletin board service, provides access to the texts of formal
documents issued by the Commission. CIPS is available at no charge to
the user and may be accessed using a personal computer with a modem by
dialing (202) 208-1397. To access CIPS, set your communications
software to 19200, 14400, 12000, 9600, 7200, 4800, 2400, 1200 or 300
bps, full duplex, no parity, 8 data bits, and 1 stop bit. The full text
of this document will be available on CIPS for 60 days from the date of
issuance in ASC II and WordPerfect 5.1 format. After 60 days, the
document will be archived, but still accessible. The complete text on
diskette in WordPerfect format may also be purchased from the
Commission's copy contractor, LaDorn Systems Corporation, also located
in Room 3104, 941 North Capitol Street NE., Washington, DC 20426.
I. Introduction
On January 23, 1995, Illinois Power Company (Illinois Power), the
Pennsylvania Public Utility Commission (Pennsylvania Commission), and
the Edison Electric Institute (EEI) filed comments requesting
clarification of the Policy Statement and Interim Rule issued on
December 15, 1994.\1\
\1\Policy Statement and Interim Rule Regarding Ratemaking
Treatment of the Cost of Emissions Allowances in Coordination Rates,
59 FR 65930 (December 15, 1994), III FERC Stats. and Regs.,
Regulations Preambles 31,009 (1994).
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After considering the comments, the Federal Energy Regulatory
Commission (Commission) is revising its Policy Statement on the
Ratemaking Treatment of the Cost of Emissions Allowances in
Coordination Transactions. Specifically, the Commission is revising the
Policy Statement to provide that public utilities may require customers
to declare, no later than the beginning of the coordination
transaction, whether they will pay for the cost of emission allowances
reflected in the purchased electric energy or, in the alternative,
deliver emissions allowances in time for ``true-up,''\2\ and to provide
that public utilities may structure arrangements when customers provide
allowances so as to remain risk neutral (i.e., neutral as to risks of
non-delivery). The Commission rejects Illinois Power's request to
clarify the Policy Statement and Interim Rule to provide that selling
public utilities need not designate indices in their rate filings. The
Commission also addresses the Pennsylvania Commission's concerns
regarding Federal and state jurisdiction over emissions allowance costs
in wholesale and retail rates.
\2\See infra note 4 (describing ``true-up'' requirements).
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II. Public Reporting Burden
The Final Rule would clarify how existing filing requirements apply
to public utilities filing amendments to coordination rate schedules to
provide for the recovery of emissions allowance costs. Because this
Final Rule only clarifies, and does not amend, how existing filing
requirements are to be implemented, the public reporting burden for
these information collections (including the time for reviewing
instructions, searching existing data sources, gathering and
maintaining the data needed, and completing and reviewing the
collection of information) is not estimated to increase the number of
hours per response for each public utility currently involved in the
filing of rate schedule amendments. Send comments regarding these
burden estimates or any other aspect of these collections of
information, including suggestions for reducing the burden, by
contacting the Federal Energy Regulatory Commission, 941 North Capitol
Street NE., Washington, DC 20426 [Attention: Michael Miller,
Information Services Division, (202) 208-1415], and to the Office of
Management and Budget, Washington, DC 20503 (Attention: Desk Officer
for the Federal Energy Regulatory Commission), FAX: (202) 395-5167.
III. Background
On October 14, 1994, EEI filed a petition under section 207 of the
Commission's Rules of Practice and Procedure,\3\ requesting a policy
statement regarding the ratemaking treatment of emissions allowances in
coordination transactions under the Federal Power Act (FPA). EEI also
requested the Commission to clarify that the sale or transfer of
emissions allowances does not require Commission authorization under
section 203 of the FPA and does not require filing under section 205 of
the FPA.
\3\18 CFR 385.207.
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In the Policy Statement, the Commission adopted, with certain
modifications to reflect the concerns raised by intervenors, EEI's
proposals. Specifically, the Commission found that it would allow the
recovery of incremental costs of emissions allowances in coordination
rates whenever the coordination rate also provides for recovery of
other variable costs on an incremental basis. If a coordination rate
does not reflect incremental cost pricing for other costs, the
Commission stated that it would require the seller to propose an
alternative costing method for emissions allowances, or demonstrate
that any inconsistency between the proposed costing method and the
coordination rate does not produce unreasonable results.
In support of these determinations, the Commission made a number of
related findings. First, it found that the cost to replace an allowance
is an appropriate basis to establish incremental cost. Second, the
Commission found that sellers of emissions allowances should be
permitted to choose their own index or a combination of indices, if
done consistently, in pricing allowances in coordination transactions.
Third, the Commission found that the use of incremental costing for
emissions allowances should be consistent with the use of incremental
costing for economic dispatch decisions, and stated that any
differences between incremental costing for coordination sales and
dispatch decisions regarding emissions allowances should be explained
and reconciled. Fourth, the Commission found that sellers of emissions
allowances should explain how they will compute the amount of emissions
allowances that will be attributed to each coordination transaction.
Fifth, the Commission found that public utilities should provide
information to purchasing utilities regarding the timing of
opportunities for purchasers to stipulate whether they will purchase or
return emissions allowances. The Commission stated that customers that
choose to provide allowances in kind should be permitted to do so by
the appropriate Environmental Protection Agency (EPA) reporting
date.,\4\ rather than at the time [[Page 22259]] of the transaction.
The Commission also stated that the seller should explain how
fractional allowances will be handled, and suggested a ``rounding''
approach, i.e., rounding up to the next whole number if the fraction is
greater than one-half, or down if the fraction is less than one-half.
Finally, the Commission stated that the ratemaking treatment of
emissions allowance costs endorsed in the Policy Statement does not
preclude other approaches proposed by individual public utilities on a
case-by-case basis.
\4\On January 30 (or the first subsequent business day) of each
calendar year, EPA determines whether companies have the right
number of emissions, allowances of appropriate vintage on hand for
each ton of sulfur dioxide emitted during the previous calendar
year. See Policy Statement and Interim Rule, III FERC States. and
Regs., Regulations Preambles at 31,201, 31,203 n.18 Utilities must
``true up'' their emissions allowance accounts by the EPA reporting
date so that they will have a sufficient number of allowances on
hand to avoid EPA penalties. The penalty for not having the
requisite number of allowances on hand by the EPA reporting date is
$2,000 per ton plus surrender of an emissions allowance equivalent
in the following year, plus other possible punishments depending on
the degree of violation. Id. at 31,201.
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In the Interim Rule (codified in Sec. 35.23 of its regulations),
the Commission stated that if public utilities have rate schedules on
file that expressly provide for the recovery of all incremental or out-
of-pocket costs, these utilities may make abbreviated rate filings,
limited to detailing how they would recover emissions allowance costs.
Regarding coordination rates that do not provide for the recovery of
all incremental costs, the Commission concluded that the public utility
may include rate schedule amendments together with the abbreviated
filing if customers agree to the rate change; if the customers do not
agree to revise such rates, the Commission stated that the public
utility must tender its emissions allowance proposal in a separate
section 205 rate filing, fully justifying its proposal.
In a separate order disclaiming jurisdiction,\5\ the Commission
concluded that emissions allowances are not facilities subject to the
Commission's jurisdiction under section 203. The Commission further
concluded that a sale or transfer of emissions allowances does not
require a filing under section 205 when that sale or transfer occurs
outside of a sale by a public utility for resale in interstate
commerce.
\5\Edison Electric Institute, 69 FERC 61,344 (1994).
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The Commission invited interested persons to submit additional
written comments on the matters addressed in the Interim Rule by
January 23, 1995. EEI, Illinois Power and the Pennsylvania Commission
timely submitted comments. As explained in greater detail below, EEI
and Illinois Power suggest clarification of the Policy Statement
provision regarding timing. Illinois Power also suggests clarification
of the Policy Statement and Interim Rule regarding the use of
indices.\6\
\6\Illinois Power also refers to the findings in the Policy
Statement and Interim Rule regarding the calculation of the amount
of emissions allowances associated with a coordination transaction
and reconciliation of inconsistencies in dispatch criteria, but does
not suggest any modifications to these findings.
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The Pennsylvania Commission request clarification of the Interim
Rule to state that the Rule applies to jurisdictional rates only, and
does not contemplate preemption of the states' ratemaking treatment of
emissions allowances.
IV. Discussion
A. Timing
EEI and Illinois Power maintain that the Policy Statement, as
issued, could be construed to give customers the option of waiting
until the ``true-up'' date to declare whether they will pay or return
emissions allowances in kind.\7\ Thus, EEI argues, utilities might not
know how many allowances the customers would return until it is too
late to avoid incurring EPA penalties.\8\ EEI maintains that to assure
that they have sufficient emissions allowances on hand, and thus avoid
penalties, utilities would have to either: (1) tie up their own capital
to create an allowance reserve, or (2) be prepared to purchase
allowances at the last minute, possibly paying a premium in the form of
a scarcity rent. To remedy this situation, EI suggests clarifying the
Policy Statement to state that utilities may require customers, to
declare, at or near the time of the coordination transaction (or
earlier), whether they will pay or return emissions allowances in kind,
and, if they return allowances in kind, the time at which they will do
so.\9\
\7\Illinois Power notes the Commission's order in Southern
Company Services, Inc., 69 FERC 61,437 (1994), reh'g pending, in
which the Commission, consistent with the Policy Statement and
Interim Rule, directed the Southern Companies to modify their
submittal to allow customers that choose to return allowances in
kind to do so up to the EPA reporting date rather than at the time
of the transaction.
\8\See supra note 4.
\9\EEI emphasizes that because of EPA's administrative
requirements, utilities must have the requisite number of allowances
on hand several weeks before the ``true-up'' deadline. Similarly,
Illinois Power argues that providing a utility the option to make an
in-kind return of allowances ``up to the EPA reporting date,'' does
not necessarily allow for sufficient time to complete a transfer
through EPA's Allowance Tracking System. Illinois Power also argues
that allowing customers who return allowances in kind to do so up to
the EPA reporting date conflicts with payment terms previously
established by mutual agreement of the affected parties.
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EEI further notes the public utilities face risks associated with
the timing of the return of allowances in kind, including: (a) the risk
that if a sale is arranged by a power broker or marketer, that entity
may become insolvent and not deliver allowances; and (b) the risk
associated with the failure of customers to settle their accounts
within the standard billing period. For these reasons, EEI asks the
Commission to clarify the Policy Statement to state that utilities may
propose arrangements with their customers for indemnification from such
risks.
Commission Ruling
In the Policy Statement and Interim Rule, the Commission stated
that purchasing utilities that choose to return allowances in kind
should be allowed to return the allowances by the appropriate EPA
reporting date, rather than at the time of the transaction, i.e., a
``timing option.'' However, if purchasing utilities wait until the time
of ``true-up'' before declaring whether they will pay cash or return
emissions allowances in kind, this accords the selling public utilities
little, if any, opportunity to determine how many emissions allowances
they will need to avoid EPA penalties. To remedy this situation, the
Commission will clarify 18 CFR 2.25(e) to state that public utilities
may require purchasing utilities to declare, no later than the
beginning of the coordination transaction: (a) whether they will pay or
return allowances in kind; and (b) if they return allowances in kind,
to specify a date by which they will return the allowances.\10\ The
Commission also will clarify section 2.25(e) to state that public
utilities may include, in their agreements, provisions to indemnify
themselves if customers do not return allowances when they have
declared they will do so.\11\
\10\Such date should afford the selling public utility
sufficient time to meet its requirements to EPA. The close of the
calendar year would appear to be more than adequate. However,
customers should be allowed to designate a date comparable to that
which the utility itself would internally designate if it were
purchasing allowances to meet its EPA requirements. In other words,
the selling utility may not require its customers to provide
allowances any earlier than the utility's internal deadlines for
purchasing allowances to meet EPA requirements for the prior
calendar year. Thus, if the public utility purchases allowances on,
for example, January 15, we see no reason to require customers to
provide allowances any earlier.
\11\Such indemnification provisions should be applied in a non-
discriminatory manner. While EEI notes that power marketers and
brokers may become insolvent, we note that such a entities are not
the only entities that may become insolvent; a few traditional
utilities have sought bankruptcy protection in recent years.
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B. Use of Indices
Illinois Power argues that the requirement in the Policy Statement
and Interim Rule (see 18 CFR 2.25(c)) that utilities use the same
incremental cost index or indices in pricing coordination sales and in
dispatch decisions (or [[Page 22260]] explain and justify the use of
different indices for pricing coordination sales and dispatch) makes
the source of the index irrelevant. Accordingly, Illinois Power argues,
utilities should not be burdened with having to make rate filings with
the Commission (see 18 CFR 35.23(b)) indicating their choice of
indices.
Commission Ruling
We disagree. Public utilities must indicate their choice of indices
so that the Commission can determine whether the selling utility is
using consistent criteria for pricing coordination sales and in
dispatch decisions. If the selling public utility is not using the same
index in its dispatch decisions as in pricing coordination sales (or
does not explain and justify the difference if it uses different
indices), there is no assurance that the index reflects the utility's
incremental costs. Also, if there is no requirement that the selling
utility indicate the index or combination of indices to be used in its
filing, the seller may simply choose an index with the highest price at
the time of the transaction, rather than the index that best reflects
its incremental cost. Finally, the index or indices must be filed since
they are part of the formula rate. Accordingly, we will not clarify the
Policy Statement and Interim Rule as Illinois Power requests.
C. Federal vs. State Jurisdiction
The Pennsylvania Commission commends this Commission for its prompt
consideration of EEI's application and for expedited issuance in this
proceeding of the Policy Statement and Interim Rule. Nevertheless, the
Pennsylvania Commission expresses concern that the Commission did not
fully address all jurisdictional issues arising from EEI's application.
Specifically, the Pennsylvania Commission expresses concern with
the Commission's decision in the Policy Statement to allow utilities to
value emissions allowances at their incremental price, based on a
market index. The Pennsylvania Commission states that it fully
understands, and does not challenge, the basis for this decision--to
encourage the development of a vigorous trading market and to provide
for consistent rate treatment for emissions allowances in coordination
sales rates. The Pennsylvania Commission also states, however, that it
is compelled under Pennsylvania state law to value emissions allowances
on the basis of historic costs for retail ratemaking purposes. Citing
``jurisdictional uncertainty,'' the Pennsylvania Commission urges this
Commission to clarify that the Policy Statement is limited in scope to
Commission-jurisdictional rates and is not intended to preempt state
ratemaking treatment of emissions allowances in state jurisdictional
rates.
Commission Ruling
We clarify that the general jurisdictional pronouncements made in
the Policy Statement and Interim Rule are intended to address only the
Commission's consideration of FERC-jurisdictional rates. The Commission
has not made any preemptive determination as to any ratemaking
treatment of emissions allowances to be applied at the retail level by
the States. Whether there would be any preemption would have to be
determined based on the facts of a particular case.
V. Environmental Statement
Commission regulations require that an environmental assessment or
an environmental impact statement be prepared for any Commission action
that may have a significant adverse effect on the human
environment.\12\ The Commission has categorically excluded certain
actions from this requirement as not having a significant effect on the
human environment.\13\ No environmental consideration is necessary for
the promulgation of a rule that involves electric rate filings that
public utilities submit under sections 205 and 206 of the FPA and the
establishment of just and reasonable rates.\14\ Because this final rule
involves such filings submitted under sections 205 and 206 of the FPA
and the establishment of just and reasonable rates, no environmental
consideration is necessary.
\12\Regulations Implementing the National Environmental Policy
Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. & Regs., Regulations
Preambles 1986-90 30,783 (1987).
\13\18 CFR 380.4.
\14\18 CFR 380.4(15).
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VI. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (RFA)\15\ requires rulemakings to
either contain a description and analysis of the effect that the rule
will have on small entities or to certify that the rule will not have a
substantial economic impact on a substantial number of small entities.
Because most, if not all, of the entities that would be required to
comply with this rule are large public utilities that do not fall
within the RFA's definition of small entities,\16\ the Commission
certifies that this rule will not have a ``significant impact on a
substantial number of small entities.''
\15\5 U.S.C. 601-12.
\16\5 U.S.C. 601(13) (citing section 3 of the Small Business
Act, 15 U.S.C. 632). Section 3 of the Small Business Act defines a
small business concern as a business that is independently owned and
operated and that is not dominant in its field of operation. 15
U.S.C. 632(a).
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VII. Information Collection Statement
The Office of Management and Budget's (OMB) regulations\17\ require
that OMB approve certain information collection requirements imposed by
an agency. This rule neither contains new information collection
requirements nor significantly modifies any existing information
collection requirements in Part 35; therefore, it is not subject to OMB
approval. However, the Commission will submit a copy of this rule to
OMB for information purposes only.
\17\5 CFR 1320.13.
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VIII. Effective Date
This document adopts the interim rule in part 35 as final and
amends the policy statement in part 2 effective June 5, 1995.
List of Subjects
18 CFR Part 2
Administrative practice and procedure, Electric power, Natural gas
pipelines, Reporting and recordkeeping requirements.
18 CFR Part 35
Electric power rates, Electric utilities, Reporting and
recordkeeping requirements.
By the Commission.
Lois D. Cashell,
Secretary.
In consideration of the foregoing, the interim rule amending 18 CFR
Part 35 which was published at 59 FR 65930 on December 22, 1994, is
adopted as a final rule without change and 18 CFR Part 2 which was
amended as a final rule at 59 FR 65930 is further amended as set forth
below.
PART 2--GENERAL POLICY AND INTERPRETATIONS
1. The authority citation for part 2 continues to read as follows:
Authority: 15 U.S.C. 717-717w, 3301-3432; 16 U.S.C. 791a-825r,
2601-2645; 42 U.S.C. 4321-4361, 7101-7352.
2. Part 2, Sec. 2.25, is amended by revising Sec. 2.25(e) to read
as follows: [[Page 22261]]
Sec. 2.25 Ratemaking Treatment of Cost of Emissions Allowances in
Coordination Transactions.
* * * * *
(e) Timing. (1) Public utilities should provide information to
purchasing utilities regarding the timing of opportunities for
purchasers to stipulate whether they will purchase or return emissions
allowances. A public utility may require a purchasing utility to
declare, no later than the beginning of the coordination transaction:
(i) whether it will purchase or return emissions allowances; and
(ii) if it will return emissions allowances, the date on which
those allowances will be returned.
(2) Public utilities may include in agreements with purchasing
utilities non-discriminatory provisions for indemnification if the
purchasing utility fails to provide emissions allowances by the date on
which it declares that the allowances will be returned.
* * * * *
[FR Doc. 95-10718 Filed 5-4-95; 8:45 am]
BILLING CODE 6717-01-M
