Iowa Admin. Code r. 199-20.17

Current through Register Vol. 47, No. 8, October 30, 2024

Rule 199-20.17 - Ratemaking treatment of emission allowances

(1)Applicability and purpose. This rule applies to all rate-regulated utilities providing electric service in Iowa. Under the Clean Air Act, each electric utility is required to hold sufficient emission allowances to offset emissions at all affected and new units. The acquisition and disposition of emission allowances will be treated for ratemaking purposes as defined in this rule.

(2)Definitions. The following words and terms, when used in this rule, shall have the meaning indicated below:

"Auction allowances" are allowances acquired or sold through EPA's annual allowance auction.

"Boot" means something acquired or forfeited to equalize a trade.

"Direct sale allowances " are allowances purchased from the EPA in its annual direct sale.

"Fair market value " is the amount at which an allowance could reasonably be sold in a transaction between a willing buyer and a willing seller other than in a forced or liquidation sale.

"Historical cost" is the amount of cash or its equivalent paid to acquire an asset, including any direct acquisition expenses. Any commissions paid to brokers shall be considered a direct acquisition expense.

"Original cost" is the historical cost of an asset to the person first devoting the asset to public service.

"Statutory allowances " are allowances allocated by the EPA at no cost to affected units under the Clean Air Act either through annual allocations as a matter of statutory right and those for which a utility may qualify by using certain compliance options or effective use of conservation and renewables.

(3)Valuing allowances for ratemaking purposes.

a. Statutory allowances. Valued at zero cost to electric utility.

b. Direct sale allowances. Valued at historical cost.

c. Auction allowances. Valued at historical cost.

d. Purchased allowances. Valued at historical cost.

(4)Valuing allowance inventory accounts. Allowance inventory accounts shall be valued at the weighted average cost of all allowances eligible for use during that year.

(5)Valuing allowances acquired as part of a package. Allowances acquired as part of a package with equipment, fuel, or electricity shall be valued at their fair market value at the time the allowances were acquired.

(6)Valuing allowances acquired through exchanges.

a.Exchanges without boot. Electric utilities shall value allowances received in exchanges based on the recorded inventory value of the allowances relinquished.

b.Exchanges with boot. Electric utilities shall value allowances as the sum of the inventory cost of the allowances given up and the monetary consideration paid in boot for the newly acquired allowances. In determining the historical cost of allowances received, a gain (or loss) shall be recorded to the extent that the amount of boot received exceeds a proportionate share of the recorded weighted average inventory cost of the allowance surrendered. The proportionate share shall be based upon the ratio of the monetary consideration received (i.e., boot) to the total consideration received (monetary consideration plus the fair market value of the allowances received). The historical cost of the allowances received shall be equal to the amount derived by subtracting the difference between the boot received and the gain from the old inventory cost.

(7)Valuing allowances transferred among affiliates.

a. Allowances transferred from a utility to a parent or unregulated subsidiary. Allowances shall be transferred at the higher of historical cost or fair market value.

b. Allowances transferred from an unregulated subsidiary or parent to a utility. Allowances shall be transferred at the lesser of original cost or fair market value.

c. Allowances transferred from a utility to an affiliated utility. Allowances shall be transferred at fair market value.

(8)Expense recognition and recovery of allowance costs.

a.Expense recognition. Electric utilities shall charge allowances (including fractional amounts) to expense in the month in which related emissions occur.

b.Expense recovery. The expense associated with allowances used for compliance shall be passed through the energy adjustment as specified in rule 199-20.9 (476). The expense associated with allowances used for compliance shall include expenses associated with vintage trades and emission for emission trades.

c.Allowance inventory shortage. If a utility emits more emissions in a month than it has allowances in inventory, the utility shall pass the estimated cost of acquiring the needed allowances through the energy adjustment. When the needed allowances are acquired, any difference between the estimated and actual cost of the allowances shall be passed through the energy adjustment as specified in rule 199-20.9 (476).

(9)Gains/losses from allowance transactions. The gains and losses, including net gains and losses, from allowance transactions shall be passed through the energy adjustment as specified in rule 199-20.9 (476). Allowance transactions shall include vintage trades and emission for emission trades.

(10)Allowance futures or option contracts.

a.Price hedging. Electric utilities shall defer the costs or benefits from hedging transactions and include such amounts in inventory values when the related allowances are acquired, sold, or otherwise disposed of. Where the costs or benefits of hedging transactions are not identifiable with specific allowances, the amounts shall be included in inventory values when the futures contract is closed.

b.Speculation. Allowance transactions entered into for the purpose of speculation shall not affect allowance inventory pricing.

(11)Working capital reserve of allowances. A working capital reserve of allowances shall be established in each utility's rate case proceeding based on the probability of forced outages, fuel quality variability, variability in load growth, nuclear exposure, the price and availability of allowances on the national market, and any other factors that the board deems appropriate. The working capital reserve will earn at the utility's authorized rate of return.

(12)Allowances banked for future use. Allowances banked for future use shall be considered plant held for future use in utility rate proceedings if a definitive plan and schedule for use of the allowances is deemed adequate by the board.

(13)Prudence of allowance transactions. The prudence of allowance transactions shall be determined by the board in the periodic electric energy supply and cost review. The prudency review of allowance transactions and accompanying compliance plans shall be based on information available at the time the options or plans were developed. Costs recovered from ratepayers through the energy adjustment that are deemed imprudent by the board shall be refunded with interest to ratepayers through the energy adjustment as specified in rule 199-20.9 (476).

Iowa Admin. Code r. 199-20.17

Amended by IAB December 5, 2018/Volume XLI, Number 12, effective 1/9/2019