On February 2, the Federal Energy Regulatory Commission (FERC) issued another set of rules implementing the Energy Policy Act of 2005 (EPAct 2005). The rules eliminate the restriction on utility ownership of qualifying cogeneration and small power production facilities (QFs) and provide standards for determining when a new cogeneration power plant has satisfied the EPAct 2005 requirements that 1) the thermal output is used in a "productive and beneficial" manner and 2) the "fundamental" use of a facility’s electrical, thermal, chemical, and mechanical output be something other than to produce power for sales to a utility. Importantly, this new rule, which will become effective 30 days after it is published in the Federal Register, creates a safe harbor for new cogeneration facilities and a process for determining on a case-by-case basis whether facilities not covered by the safe harbor qualify. Finally, the rules eliminate certain exemptions from the Federal Power Act previously granted to QFs.
The "Productive and Beneficial Manner" Standard
EPAct 2005 added Section 210(n)(1)(A)(i) to the Public Utility Regulatory Policies Act of 1978 (PURPA) requiring that the thermal output from new qualifying cogeneration facilities be used in a "productive and beneficial manner." In the past, the Commission used an irrebuttable "presumptively useful" standard; under the new rule, the presumption of usefulness will be rebuttable. The Commission interprets the new standard as requiring it to weed out "sham" uses.
New cogeneration QFs will have the burden of demonstrating compliance with this standard. 1 Declining to adopt a bright-line standard, the Commission adopts a case-by-case approach that will consider the product produced by the thermal energy, the intended use of the product, and whether there is a market for the product. 2 However, when the thermal host existed prior to the development of the cogeneration facility, the FERC will presume that the thermal output meets the new standard. In addition, uses that met the prior "presumptively useful" standard will be considered "productive and beneficial" uses, subject to challenge.
Responding to concerns that new cogeneration QFs could be subject to postcertification challenges alleging that the thermal output is no longer productive and beneficial, the Commission ruled that once a cogeneration facility is certified based on the new standard, the issue is determined for that QF, even if the economics of a particular use charge over time. 3
The "Fundamentally" Requirement
Section 210(n)(i)(A)(ii) requires the Commission to ensure that the electrical, thermal, and chemical output of a new cogeneration facility is used "fundamentally" for industrial, commercial, or institutional purposes and is not intended "fundamentally" for sale of power to an electric utility. The Commission establishes an "irrebuttable" safe harbor for facilities which demonstrate that at least 50% of the aggregate annual energy output of the facility will be used for industrial, commercial, residential,4 or institutional purposes and not for sale to an electric utility. New cogeneration facilities not within the safe harbor will need to demonstrate what proportion of the output will be used for such purposes and provide support for why the Commission should conclude (on a case-by-case basis) that the new standard is met.5 The Commission provided examples of instances in which the generator may appear to be oversized (including manufacturer’s economics of scale, a thermal host’s need for redundancy, seasonal variation in output used to meet a manufacturing peak, etc.) and will take such factors into account in its case-by-case determination.6
Self-Certification
The Commission retains the self-certification procedure for QFs, but in light of the new standards, the rule provides that the Commission on its own motion may revoke the status of self-certified QFs. Self-certifications and self-recertifications will now, for the first time, be noticed in the Federal Register. In addition, all facilities claiming QF status must either file a notice of self-certification or an application for certification. Existing QFs who have never filed either must do so within 60 days of the publication of this order in the Federal Register.
Elimination of Certain Federal Power Act Exemptions
Sales of electricity from QFs have generally been exempt from rate regulation under Sections 205 and 206 of the Federal Power Act. The new rule revokes this exemption unless the sale of electric power is made pursuant to a state regulatory authority’s implementation of PURPA.7 However, the Commission retains the existing exemption from PUHCA for QFs. Sales under existing contracts will continue to be exempt.
Ownership Criteria
EPAct 2005 eliminated the limitation on utility ownership of QFs to no more than 50%. The new rule eliminates the ownership restriction for all QFs, both existing and new.
Finally, the Commission clarified that there is a rebuttable presumption that an existing QF does not become a "new cogeneration facility" and thus subject to this new rule, merely because it files for recertification.8
Footnotes
1. The Commission is not changing standards relating to the thermal output of existing cogeneration facilities.
2. This information will need to be included in amended Form 556 filed by new QF applicants.
3. The rule provides a rebuttable presumption that cogeneration facilities that are 5 MW or smaller satisfy the test.
4. The rules add "residential" to the EPAct 2005 standard.
5. The Commission made no change to the existing operating standard.
6. The Commission adopts a rebuttable presumption that cogeneration facilities of 5Mw or smaller meet the "fundamentally" test.
7. QFs 20 MW or under will continue to be exempt.
8. However, a major change (for example, an increase in capacity from 50 MW to 350 MW) could cause a facility to be considered "new."
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