[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