[Federal Register: February 15, 2006 (Volume 71, Number 31)]
[Rules and Regulations]
[Page 7852-7869]
[DOCID:fr15fe06-4]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 131 and 292

[Docket No. RM05-36-000; Order No. 671]

Revised Regulations Governing Small Power Production and
Cogeneration Facilities

Issued February 2, 2006.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule.

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SUMMARY: Pursuant to section 1253 of the Energy Policy Act of 2005
(EPAct 2005) and section 210 of the Public Utility Regulatory Policies
Act of 1978 (PURPA), the Federal Energy Regulatory Commission
(Commission) revises 18 CFR parts 131 and 292 to implement amended
regulations governing qualifying cogeneration and small power
production facilities.

DATES: Effective Date: The rule will become effective March 17, 2006.

FOR FURTHER INFORMATION CONTACT:

Paul Singh (Technical Information), Office of Markets, Tariffs and
Rates, Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.
Samuel Higginbottom (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.
Eric D. Winterbauer (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Before Commissioners: Joseph T. Kelliher, Chairman; Nora Mead
Brownell, and Suedeen G. Kelly.

I. Introduction

    1. On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005)
\1\ was signed into law. Pursuant to section 210 of the Public Utility
Regulatory Policies Act of 1978 (PURPA), as modified by section 1253 of
EPAct 2005,\2\ the Federal Energy Regulatory Commission (Commission)
hereby issues a rule that (1) ensures that new qualifying cogeneration
facilities are using their thermal output in a productive and
beneficial manner; that the electrical, thermal, chemical and
mechanical output of new qualifying cogeneration facilities is used
fundamentally for industrial, commercial, residential or institutional
purposes; and that there is continuing progress in the development of
efficient electric energy generating technology; (2) amends Form 556
\3\ to reflect the criteria for new qualifying cogeneration facilities;
(3) eliminates ownership limitations for qualifying cogeneration and
small power production facilities; and (4) amends the exemptions
available to qualifying facilities (QFs) from the requirements of the
Federal Power Act (FPA) \4\ and the Public Utility Holding Company Act
of 1935 (PUHCA).\5\
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    \1\ Energy Policy Act of 2005, Pub. L. 109-58, 119 Stat. 594
(2005).
    \2\ Pub. L. 109-58, Sec.  1253, 119 Stat. 594, 967-70 (2005).
    \3\ Form 556 is set forth in 18 CFR 131.80 (2005).
    \4\ 16 U.S.C. 824 et seq. (2000).
    \5\ 15 U.S.C. 79 (2000); Pub. L. 109-58, Sec. Sec.  1261-77, 119
Stat. 594, 972-78 (2005).
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    2. As discussed below, on October 11, 2005, the Commission issued a
notice of proposed rulemaking (NOPR) \6\ in which it proposed certain
modifications and revisions to its regulations governing small power
production and cogeneration facilities. Numerous comments were filed by
a variety of entities.
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    \6\ Revised Regulations Governing Small Power Production and
Cogeneration Facilities, 70 FR 60456 (Oct. 18, 2005), FERC Stats. &
Regs. ] 32,590 (2005).
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    3. In this Final Rule, the Commission adopts some of the proposals
in the NOPR as well as many of the commenters' recommendations.
Specifically, the Final Rule:
    (A) Adopts the NOPR's proposal to require applicants to demonstrate
that the thermal output of a new cogeneration facility is used in a
productive and beneficial manner;
    (B) Adopts a case-by-case approach for determining the
``fundamental'' use of a facility's electrical, thermal, chemical and
mechanical output;
    (C) Retains the existing operating and efficiency standard for new
oil and gas cogeneration facilities;
    (D) Retains the option for new cogeneration facilities to self-
certify as QFs;
    (E) Eliminates certain exemptions from regulation that were
previously granted to QFs;
    (F) Eliminates the ownership limitations for all QFs;
    (G) Retains the ownership disclosure requirement in the
Commission's Form 556; and
    (H) Clarifies that there is a rebuttable presumption that an
existing QF does not become a ``new cogeneration facility'' when it
files an application for recertification reflecting either a change in
ownership or a change in operation.
    4. This Final Rule will be effective on March 17, 2006.

II. Notice of Proposed Rulemaking

    5. On October 18, 2005, the NOPR was published in the Federal
Register.\7\ As discussed in more detail below, the Commission proposed
to revise its regulations governing small power production and
cogeneration pursuant to section 1253 of EPAct and section 210 of
PURPA.
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    \7\ Id.
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III. Discussion

A. Productive and Beneficial

1. Background
    6. Section 210(n) of PURPA requires the Commission to issue a rule
revising the criteria for new cogeneration facilities to ensure that
those facilities meet the requirements of section 210(n)(1)(A) of
PURPA, including that the thermal output of a new qualifying
cogeneration facility be used in a ``productive and beneficial
manner.'' We explained in the NOPR that the Commission has
traditionally relied on a presumptively useful standard that was
irrebuttable in determining whether a cogeneration's facility's thermal
output is useful. To implement PURPA's new ``productive and
beneficial'' requirement for a new qualifying cogeneration facility's
thermal output, the Commission proposed to consider the presumption of
usefulness to be rebuttable rather than irrebuttable. The Commission
also proposed to consider the uses to which the product produced by the
thermal output is put, including such factors as whether the product is
needed and whether there is a market, in determining whether a new
qualifying cogeneration facility's thermal output is ``productive and
beneficial.''
2. Comments
    7. Most commenters support the Commission's proposal to eliminate
the ``presumption of usefulness'' standard in determining whether the
thermal energy output of a new cogeneration facility is used in a
``productive and beneficial'' manner. The California Electricity
Oversight Board (CEOB) notes that the irrebuttable presumption has
resulted in default granting of qualifying status to applicants even
where there was no real need for the thermal output. Delta Power
Company, et al., support the elimination of the irrebuttable
presumption of usefulness. They suggest, moreover, that the

Commission apply a rebuttable presumption that both a thermal use is
``genuine and legitimate'' and ``productive and beneficial'' if a
facility demonstrates that its thermal output would be supplied to the
host from other means; a challenger would have the opportunity to prove
otherwise. Primary Energy Ventures LLC (Primary Energy) and U.S.
Combined Heat and Power Association (USCHPA) support a case-by-case
review of the ``productive and beneficial'' standard. Both commenters
believe a QF applicant should support the application with adequate
reference to the business and economic circumstances of the individual
facility. North Carolina Eastern Municipal Power Agency (NCEMPA)
advocates that the Commission continue to apply the ``presumptively
useful'' standard to small QFs because the alleged abuses have occurred
in the context of large ``PURPA machines.''
    8. Several commenters argued that the irrebuttable presumption of
usefulness should remain in effect in some situations. American Forest
& Paper Association (American Forest & Paper) recommends the Commission
not abandon an irrebuttable presumption of usefulness for many
industrial applications, such as papermaking. American Forest & Paper
argues that a rebuttable presumption of usefulness could open up
applicants who are engaged in traditional manufacturing processes to
the threat of litigation over the usefulness of their enterprise by
cogeneration opponents. American Forest & Paper believes that the
presumptively useful standard served a legitimate purpose in
encouraging the development of qualifying facilities by creating
certainty, limiting wasteful litigation and expediting the review
process. A properly revised standard, which provided assurance to
developers and the utility industry that certain, well-recognized
industrial applications would not be mired in litigation and
controversy, could continue to play an important role in encouraging
the development of cogeneration. Certain well-recognized industrial
processes, such as papermaking, chemical production, petroleum refining
and others, should continue to enjoy a very strong, if not
irrebuttable, presumption of usefulness.
    9. Cinergy Solutions, Inc. (Cinergy) argues that the presumption of
usefulness for common industrial or commercial applications of thermal
energy should be rebuttable only when a new thermal host is being
developed in conjunction with the development of the cogeneration
facility and the presumption should remain irrebuttable when an
economically self-sustaining thermal host already exists at the site.
Cinergy states that the presumption of usefulness, whether rebuttable
or irrebuttable, should depend on the circumstances of the thermal
host. Cinergy advocates that the presumption of usefulness should be
irrebuttable where a thermal host is in existence prior to the
development of a cogeneration facility. Finally, Cinergy notes that a
change to a rebuttable presumption creates unnecessary uncertainty and
could substantially reduce usage and the effectiveness of the self-
certification process.
    10. Cogeneration Coalition of Washington and the Nevada Independent
Energy Coalition (collectively, QF Parties) support identifying current
uses of thermal output that are ``productive and beneficial'' as that
would provide certainty to the cogeneration owner and developer. QF
Parties propose specific uses to be identified in the regulation that
could include, but not be limited to, paper making, the drying of
products such as wallboard, steam used in enhanced oil recovery, and
refining and chemical production.
    11. Several commenters contend that the thermal use standard needs
to be clear and unambiguous which would provide QFs regulatory
certainty. The Public Service Electric and Gas Company jointly with the
Texas-New Mexico Power Company (PSNM and TNMP) believe the Commission
should not rely on ``rebuttable'' or ``irrebuttable'' presumptions, but
should set out unambiguous standards that QF applicants are required to
satisfy as a part of their application so that resort to a presumption
is unnecessary. Clear, objective qualification standards are necessary
in order for QF applicants, their investors, utilities, and the
Commission itself to be able to intelligently evaluate whether the
statutory ``productive and beneficial'' requirement has been met.
    12. Cogentrix Energy, Inc. and Goldman Sachs Group, Inc.
(collectively, Independent Sellers), state that the Commission has not
proposed any ascertainable standards to assist cogenerators in
determining whether they will meet the new requirements that will be
set forth in 18 CFR 292.205(d). They point out that the Commission's
existing standard is an ascertainable one in that if the use of the
thermal output constitutes a common industrial or commercial
application then it is presumptively useful and no further analysis is
required. The presumptively useful standard provides regulatory
certainty that is critical to entities that invest in cogeneration
facilities. Cogentrix argues that a rebuttable presumption of
usefulness creates uncertainty that would harm investment in
cogeneration.
    13. Indeck Energy Services, Inc. (Indeck) supports a rebuttable
presumption of usefulness, but cautions that the proposed new
regulations would make it difficult, if not infeasible, to obtain
financing or build new cogeneration facilities. Indeck claims a case-
by-case approach injects uncertainty at both the construction phase and
when the QF attempts to make facility changes. Indeck advocates for a
bright line test or at least clear standards that remove all ambiguity
concerning what constitutes acceptable uses of thermal output.
    14. Some commenters believe that the Commission's rebuttable
presumption of usefulness proposal is not enough. Edison Electric
Institute (EEI) states that making the previous presumption that any
common use of thermal energy is useful rebuttable rather than
irrebuttable does not satisfy the new ``productive and beneficial''
test. EEI argues that the Commission should instead require QF
applicants to provide evidence, including economic studies, financial
projections, contracts, and other data to indicate that the thermal use
of a facility will be used in a ``productive and beneficial'' manner.
Many commenters endorsed EEI's comments.
    15. In reply comments, EEI opposes those comments that suggest the
Commission should retain its ``presumptively useful'' policy without
change as the means of demonstrating that the thermal energy output
will be used in a ``productive and beneficial'' manner. EEI argues that
just because the thermal output is used in a ``common'' or ``useful''
way does not ensure that the thermal energy use is ``productive and
beneficial,'' which EEI equates with ``economic.'' EEI reiterates its
belief that the only way for the Commission to ensure that the
``productive and beneficial'' requirement is met is for the Commission
to promulgate in its regulations a list of the financial data and
studies that will be required to satisfy the determination mandated by
the statute.
    16. Several commenters disagree with EEI's proposal. Delta Power,
et al., contend that EEI's proposal to require economic analyses
distorts the purpose of section 210 of PURPA by requiring economic
analyses. Process Gas Consumers Group Electricity Committee argues that
EEI's proposal would discourage cogeneration by increasing

the costs and risks of the regulatory process.
3. Commission Determination
    17. To implement section 210(n)(1)(A)(i) of PURPA, which requires
``that the thermal output of the cogeneration facility is used in a
productive and beneficial manner,'' the Commission will incorporate the
statutory standard into its regulations. The Final Rule accordingly
will require an applicant to demonstrate that a new cogeneration
facility's thermal output is used in a productive and beneficial
manner. As we said in the NOPR, the Commission prior to the enactment
of EPAct 2005, in deciding whether to grant certification,
traditionally relied on a ``presumptively useful'' standard that was
essentially irrebuttable in determining whether a QF's thermal output
is ``useful.'' The Commission finds that ``productive and beneficial''
is nearly synonymous with ``useful,'' but was intended to require the
Commission to take a closer look at the use of the thermal output of a
new cogeneration facility; the Commission's examination of the use of
thermal output of a new cogeneration facility is intended to weed out
those uses that are ``shams.'' Thus, the Commission, as a starting
point in its analysis of the use of a new cogeneration facility's
thermal output, will look to see if the new cogeneration's thermal
output is ``presumptively useful.'' As we stated in the NOPR, however,
the Commission will no longer consider this presumption to be
``irrebuttable.'' The Commission will examine the use of a cogeneration
facility's thermal output to assure that the use is not a ``sham,'' and
that the thermal output is used in a ``productive and beneficial
manner.'' In determining whether the thermal output is used in a
``productive and beneficial manner,'' the Commission will consider
factors such as whether the product produced by the thermal energy is
needed and whether there is a market for the product. Consistent with
the arguments of Cinergy, we find that where a thermal host existed
prior to the development of a cogeneration facility whose thermal
output will supplant the thermal source currently in use by that
thermal host, it is appropriate to presume that the thermal output of
such facility is productive and beneficial and to apply a very high
hurdle to overcome the presumption. We foresee only rare circumstances
in which the output of a facility would not be productive and useful if
it is replacing a previously used thermal source.
    18. Form 556 is being amended to include a new section in which a
new cogeneration QF applicant must show ``the thermal energy output of
the cogeneration facility is used in a productive and beneficial
manner.'' \8\ The initial burden of demonstrating compliance with this
new standard is on the new cogeneration QF applicant.
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    \8\ See 18 CFR 131.80, part C, 15(i) (2005).
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    19. We decline to institute a bright line test or specific
standards concerning what constitutes acceptable uses of thermal
output. The type of information that a new cogeneration QF applicant
must provide will vary depending on the thermal output of the
cogeneration facility and on the circumstances of the thermal host. The
level of support needed may vary depending on the product produced by
the thermal energy, the intended use of that product in the market and
the level of need for the particular product. As we stated in the NOPR,
in some geographic areas, thermal energy used to produce distilled
water can be used in a productive and beneficial manner, but in other
geographic areas it may not. Therefore, any application for QF status
for new cogeneration facilities must provide enough detailed
information, as prescribed in the updated Form 556,\9\ for the
Commission to determine compliance with the new ``productive and
beneficial'' standard.
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    \9\ QF applicants may provide studies or testimony to support
compliance with this new standard.
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    20. EEI's proposal to require economic or financial studies to show
compliance with the ``productive and beneficial'' standard is
misplaced. Our interpretation of the meaning of ``productive and
beneficial'' in the context of cogeneration is that there is a real,
genuine need for the thermal output of the facility. Relying solely on
an economic analysis of the type suggested by EEI, however, may be too
narrow and may deny certification to cogeneration facilities which
produce thermal output that ``is used in a productive and beneficial
manner.'' Adopting a case-by-case approach that permits an applicant
the opportunity to demonstrate, whether through narrative description
or economic analysis, that its QF will have a ``productive and
beneficial'' thermal output will provide a sufficient means to detect
situations where the thermal output's application is not productive and
beneficial. An applicant may receive a determination that its thermal
output is being used in a productive and beneficial manner if it can
show through a narrative description of the facility's operations that
the use of the facility's thermal output is for a common industrial or
commercial application, and that the proposed use is genuine, and not
merely to allow the applicant to achieve QF status, i.e., a ``sham''; a
detailed economic analysis will not be necessary in most cases.
However, the Commission reserves the right to require additional
support when appropriate.
    21. Many commenters request the Commission to identify current uses
of thermal energy that would satisfy the new ``productive and
beneficial'' standard. We decline to do so because a thermal use may be
``productive and beneficial'' in some circumstances and not
``productive and beneficial'' in others (e.g., the production of
distilled water).
    22. Several commenters call for the Commission to institute a clear
and unambiguous standard which they claim would provide needed
regulatory certainty. While the Commission recognizes the value of
regulatory certainty, we believe that the case-by-case process proposed
in the NOPR and adopted here will provide a better means to determine
what satisfies the ``productive and beneficial'' standard of section
210(n) of PURPA.
    23. We note that the Commission does not intend to change current
standards related to the thermal output for existing cogeneration
facilities; as discussed later in the Final Rule, the standards for new
cogeneration facilities adopted herein will apply to new cogeneration
facilities and not existing cogeneration facilities.
    24. In the NOPR, we stated that we would consider the previously
irrebuttable presumption of usefulness to be a rebuttable presumption.
Some of the comments suggest a misunderstanding of the meaning of the
term ``rebuttable presumption.'' Many in the QF industry fear, in
particular, that new cogeneration facilities, once they have been
certified as QFs, will be subject to post-certification challenges to
their QF status alleging that the thermal output of a facility has
become no longer ``productive and beneficial.''
    25. We address here two circumstances: Certification of new
cogeneration facilities; and post-certification challenges after the
new cogeneration facilities have been certified. We clarify that, in
proceedings for Commission certification of new cogeneration
facilities, if certain uses of thermal output were previously
considered ``presumptively useful'' under the prior regulations and
case precedent, they will be considered ``productive and beneficial''
uses, but those who oppose certification will have the opportunity to
demonstrate that the thermal output is not, in fact, being used in a
productive and beneficial manner.

However, once the Commission has granted a new cogeneration facility
certification based on the new standard adopted herein, the issue of
that particular QF's use of its thermal output is determined, even if
the economics of a particular use may change over time. Unless there
are changes in the way the QF operates, such that it does not operate
as described in the application for certification, and thus no longer
meets the statutory criteria, a QF may continue to rely on the
Commission's certification of its facility even if the economics of the
particular use have changed over time. Thus, after a QF has been
certified by the Commission, absent a change in the operations of the
facility, a purchaser of the electrical output of a new cogeneration
facility may not return to the Commission to allege that the thermal
output of a facility is not ``productive and beneficial.''
    26. Finally, in applying our new regulation implementing section
210(n)(1)(A)(i) of PURPA, Sec.  292.203(d)(1) of our regulations, we
will apply a rebuttable presumption that new cogeneration facilities
that are 5 MW or smaller satisfy the requirement that the thermal
energy output of the new cogeneration facility is used in a productive
and beneficial manner. We will apply this presumption because it is our
experience that such small cogeneration facilities are not generally
designed with a ``sham'' use of thermal output whose only purpose is to
achieve QF status. Rather, such smaller cogeneration facilities are
designed to meet the thermal needs of the facility's steam host and any
electrical output available for sale is a byproduct of the thermal
process.

B. Fundamentally Requirement

1. Background
    27. Section 210(n)(1)(A)(ii) of PURPA requires the Commission to
revise Sec.  292.205 of its regulations to ensure 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 to an electric utility, taking
into account technological, efficiency, economic, and variable thermal
energy requirements, as well as state laws applicable to sales of
electric energy from a qualifying facility to its host facility. The
NOPR proposed to incorporate the language of section 210(n)(1)(A)(ii)
of PURPA as Sec.  292.205(d)(ii) of the Commission's regulations, and
to apply this language on a case-by-case basis to determine whether a
new cogeneration facility can be considered a qualifying cogeneration
facility. In addition, the Commission proposed adding the term
``mechanical'' output to the statutory criteria, because this has
traditionally been a part of the Commission's analysis of cogeneration
output, and is consistent with the statutory language.
    28. As described in the NOPR, applications for certification under
new section 210(n) of PURPA, and under new Sec.  292.205(d)(ii) of our
regulations, would be required to provide a detailed explanation of how
the cogeneration facility meets the requirements of those sections. The
NOPR requested comments on whether we should adopt this general case-
by-case approach for determining the ``fundamental'' use of a
facility's output, or whether we should adopt a specific standard,
e.g., requiring some specified percentage of the total energy output to
be used for industrial, commercial, or institutional purposes, rather
than for sale to electric utilities.
2. Comments
    29. Many commenters favor a case-by-case evaluation of compliance
to the new ``fundamentally'' requirement, and argue (1) that the
different operating characteristics of QFs and cogenerators render the
use of a specific standard unworkable, (2) that the Congressional
language in the new section 210(n)(1)(A)(ii) of PURPA to ``[take] into
account technological, efficiency, economic, and variable thermal
energy requirements, as well as State laws applicable to sales of
electric energy from a qualifying facility to its host facility''
clearly contemplates a case-by-case evaluation, (3) that any ``bright-
line'' test will, by its nature, be prone to becoming outdated, (4)
that the Commission does not currently have sufficient experience with
the new ``fundamentally'' requirement to develop specific standards
(although it may in the future), and (5) that the standards proposed by
the utilities generally seem to be designed to discourage cogeneration.
Some of these commenters also argue that that the Final Rule should
provide additional detail on how the case-specific determination will
be made, or that the Final Rule should include specific ``safe
harbors'' that will decrease the risk and uncertainty associated with
planning and constructing a cogeneration facility.
    30. Many other commenters favor a specific, numerical standard,
arguing (1) that a case-by-case evaluation will necessarily lead to
large amounts of uncertainty and litigation, both for new cogeneration
applicants and for utilities, (2) that Congress required the Commission
to act through rulemaking to adopt new qualification standards in order
to provide transparent criteria by which both new cogeneration QF
applicants and utilities can know in advance the requirements of the
statute and be assured that these requirements are being consistently
interpreted and applied, and (3) that Congress specifically required
revision to 18 CFR 292.205, which contains very specific mathematical
formulae and numerical standards, implying their desire for some sort
of objective standard.
    31. Many of the same commenters who advocate a specific, numerical
standard for the total energy output also argue that the operating
standard should be significantly increased from the current five
percent to ensure that any proposed new cogenerator is fully integrated
with its host and that the output of the facility complies with the new
``fundamentally'' requirement. In particular, EEI and other utilities
advocate increasing the operating standard to 20 percent, and Southern
California Edison Company (SoCal Edison) advocates an increase to 60
percent. Some of these commenters cite claims made in public by
cogeneration advocates as evidence that such significant increases in
operating standards are achievable and appropriate. Others argue that
an increase in the operating standard is not necessary to implement the
``fundamentally'' requirements. Some argue that the cogeneration
advocates' public claims are not a sound basis for establishing a
standard, and that, in any case, the utilities are misapplying these
public claims. They point out that, since the Commission considers only
half the thermal energy output in its calculations, that such
comparisons between operating standards are not appropriate. Others
argue that Congress could have required such an increase of the
operating standard in the text of EPAct 2005, but specifically chose
not to do so.
    32. EEI and others point out that some commenters advocate taking
essentially no action whatsoever in response to new section
210(n)(1)(A)(ii) of PURPA, and argue that this cannot be the intent of
Congress. Instead, they argue, the structure of the language in the
statute suggests that the entire output of a cogeneration facility is
to be aggregated, and that by calculating the percentage of the
facility's output used for industrial, commercial or institutional
purposes, the Commission can determine whether the new ``fundamentally
for'' test has been met. In particular, EEI recommends a two-part test:
First, a minimum threshold of 67 percent of the

cogenerator's total energy output, over the course of 12 months; and
second, if the facility will generate electricity on a continuous
basis, the cogenerator should also demonstrate that the facility has
not been ``oversized.'' Others argue that it has not been shown how a
67 percent ``total energy output operating standard'' follows from the
``fundamental'' use requirement, and that such a restrictive standard
may eliminate certain applications that could otherwise meet the
fundamental use criteria through other means. EEI responds by stating
that the Commission could establish a case-by-case waiver process for
unique technologies and industrial processes, where the applicant would
have the opportunity to demonstrate that such a waiver is warranted.
EEI also states that the notion of safe harbors is compatible with its
recommendations, so long as such safe harbors are not absolute.
    33. Other types of numeric tests are also advocated by various
commenters. FICA recommends that any cogeneration facility, regardless
of fuel use, owned or operated by and appurtenant to an industrial
mining or manufacturing operation, where at least 25 percent of the
electric energy or 25 percent of the thermal energy is consumed in such
industrial operation, is in compliance with the ``fundamentally''
requirement. Cinergy proposes that, if the Commission decides to
establish a numerical standard as urged by EEI and others, the standard
be set at 25 percent.
    34. Entergy argues that, in addition to demonstrating compliance
with its proposed 67 percent standard, the Commission should require
that cogeneration applicants, at a minimum, submit the following
technical data as part of the certification process: (1) Average annual
hourly useful electrical output in Btu/hr; (2) average annual hourly
useful thermal output in Btu/hr; (3) average annual hourly useful
mechanical output in Btu/hr; and (4) utilization of thermal, electrical
and mechanical output along with the steam, electrical and mechanical
usage diagrams for the facility. This data, Entergy argues, should be
accompanied by an affidavit of a senior officer, attesting to the
accuracy of the data.
    35. As discussed in more detail below, some commenters urge the
Commission to consider that it may often be legitimate for a
cogeneration plant to have considerably more electric generation
capacity than is needed for consumption by the thermal host, and the
existence of such excess generation capacity does not indicate that
such output is ``intended'' fundamentally for sale to an electric
utility. Some commenters argue that EPAct 2005 and PURPA clearly
recognize that QF facilities will often produce a steady stream of
electricity for sale to third parties, as evidenced by the must-take
and competitive market opportunities that Congress has required be
available to QF's.
    36. Entergy suggests that, as an alternative to the traditional
certification of QF facilities on an ``all or nothing'' basis, the
Commission should consider certifying as a QF only the portion of a new
cogeneration facility that the applicant is able to demonstrate will
meet the revised criteria for new qualifying facilities. Entergy
suggests that only this portion of a QF's total capacity should be
eligible for the benefits provided by PURPA, including the put rights
traditionally afforded to QFs. Under Entergy's proposal, a generator
selling any excess capacity above that capacity which meets the
proposed ``fundamentally'' criteria for new qualifying facilities would
have to be sold in the market like any other generator. Entergy
believes this would encourage the sizing of QFs appropriately to the
needs of the host, in the manner that PURPA intended.
    37. Several commenters indicate that they agree with the
Commission's statement in the NOPR that Congress intended in EPAct 2005
to discourage so-called PURPA machines, but go on to argue that PURPA
machines came to exist as a direct result of specific avoided cost
policies by certain states, and by the inability of independent power
producers to interconnect to the grid without obtaining QF status. This
Commission and state regulatory authorities have enacted policies such
that conditions are now different, they argue, and thus significant
changes to the Commission's regulations are not necessary. Others agree
with the Commission's statement in the NOPR, but argue that the
Commission must be precise in crafting its regulatory language so that
QFs which bear absolutely no resemblance to PURPA machines are not
inadvertently captured by the new rules.
    38. Cinergy argues that no quantitative requirements for the total
energy output that must be supplied to a thermal host should be
established for cogeneration facilities where power from a facility
will be sold at avoided costs rates that reflect market forces.
    39. Delta Power, et al., argue that the application of the new
requirements should focus on whether a facility is built to supply a
thermal product that would be generated or procured from another fuel-
consuming source in the absence of cogeneration, and that facilities
that meet this standard should be presumed to have satisfied the new
requirements unless a challenger demonstrates otherwise.
    40. USCHPA argues that no detailed analysis or explanation of the
proposed outputs of the facility should be required unless utility
sales on an ongoing basis are proposed. It argues that where the
electricity output from a facility is less than the electricity
required at the site of the facility, and there may be few or no
occasions when power is exported onto the grid from that site,
certification as a QF should be virtually automatic.
    41. USCHPA also points out that facilities are increasingly being
built to serve multi-family housing complexes, apartment buildings,
public housing projects and other residential applications. They argue
that, in the same manner as the Commission has appropriately added
``mechanical'' energy to the listed types of useful energy output
Congress listed in EPAct, the Commission should add ``residential'' to
the valid purposes for which a QF can intend its energy outputs other
than sales of electricity to a utility.
    42. Several commenters request clarification that thermal hosts are
not necessarily required to use each of the enumerated electrical,
thermal, chemical and mechanical outputs. Several other commenters
request clarification that cogeneration facilities that utilize waste
heat as their primary fuel (i.e., bottoming cycle cogeneration
facilities) are presumed to be in compliance with the new
``fundamentally'' requirements. The Independent Sellers request
clarification that the technical requirements for new cogeneration
facilities will apply only to those facilities that sell their
electrical output at avoided cost pursuant to the mandatory purchase
requirement.
    43. Some utility commenters argue that Congress intended in EPAct
2005 to implement requirements that fundamentally change the nature of
what kind of cogeneration plants can qualify for QF status, and that
make such qualification much more difficult. Several other commenters
point out that Congress has not eliminated the requirement for the
Commission to issue rules which encourage the use of cogeneration, and
argue that implementing the ``fundamentally'' requirement in a way that
significantly increases the difficulty of obtaining QF status for a
cogeneration plant frustrates the encouragement of cogeneration, and

so cannot have been the intent of Congress.
    44. Several commenters argue that the comments of the utilities on
the procedures for demonstrating compliance with the ``fundamentally''
rule demonstrate the need for procedures to protect QFs' confidential
and commercially sensitive information, and that Entergy's proposal in
particular is a thinly-veiled attempt to gain access to QFs' most
commercially sensitive information, and goes far beyond what is needed
to prevent sham transactions or curb PURPA abuses. These commenters
argue that QFs cannot be required to hand over sensitive cost data to a
utility and then be expected to engage in bilateral power purchase
negotiations on a level playing field, and that the new Sec.  292.205
should thus specify that the new cogeneration facilities will be able
to obtain confidential treatment for commercially sensitive information
submitted in support of their applications for certification and
notices of self-certification. SoCal Edison states that it understands
the QFs' desire to protect their business information and is willing to
agree to an appropriate protective order or other procedure for
protecting confidential QF information. However, SoCal Edison and
others argue that potential challengers to a QF application need access
to all information relevant to the application in order to evaluate
whether the potential QF meets the criteria for QF status and to
challenge the QF application, if appropriate.
    45. The Council of Industrial Boiler Owners (CIBO) objects to the
Commission's use of the word ``limited'' in the NOPR to describe its
discretion to ``[take] into account technological, efficiency,
economic, and variable thermal energy requirements, as well as State
laws applicable to sales of electric energy from a qualifying facility
to its host facility.'' \10\ They argue that Congress did not
specifically limit the Commission's discretion beyond its statutory
terms and such a self-limitation should not be used by the Commission
to avoid undertaking the searching inquiry necessary to meet Congress's
goal of encouraging energy efficiency. Other commenters also argue that
the Commission should be sure to take into account all of the criteria
specified in section 210(n)(1)(A)(ii).
---------------------------------------------------------------------------

    \10\ See NOPR at P 14.
---------------------------------------------------------------------------

    46. NCEMPA and APPA argue that small QF's (e.g., those of five or
fewer megawatts (MW)) should be categorically exempt from regulations
aimed at implementing the ``fundamental'' use requirement. They argue
that there is little valid or widespread concern that small QFs are
constructed primarily for any purpose other than for commercial,
industrial, or institutional use, and that the output of small QFs is
not likely to cause price distortion in the energy markets.
3. Commission Determination
    47. As an initial matter, we address certain requests for
clarification. First, we agree that many residential uses of thermal
output have long been considered legitimate for the purposes of
cogeneration certification, and that ``residential purposes'' is
subsumed within ``institutional purposes.'' We therefore find that
residential purposes should be maintained as acceptable for the purpose
of satisfying the requirements of section 210(n)(1)(a)(ii), and we will
revise the regulatory text in Sec.  292.205(d)(ii) to specifically
reference residential purposes. We also clarify that new cogeneration
facilities will not need to have each of the enumerated individual
outputs (electrical, thermal, chemical and mechanical) used for
industrial, commercial, residential or institutional purposes, so long
as the cumulative safe harbor standard, as discussed below, is met, or
other sufficient support for certification is provided.
    48. We also agree with commenters who point out that the
Commission's obligation to encourage cogeneration has not been
eliminated. This obligation was established in section 210(a) of PURPA,
which has not been repealed by EPAct 2005. As such, in implementing
EPAct 2005, the Commission's goal is to interpret the requirements of
new section 210(n)(1)(A)(ii) in light of the requirement to encourage
cogeneration as reflected in the existing section 210(a).
    49. Turning to the central issues regarding the ``fundamentally''
requirement, we find no statutory basis for the suggestions by some
commenters that the Commission focus solely on the goal of eliminating
so-called PURPA machines instead of implementing the specific
requirements of section 210(n)(1)(A)(ii) for all new cogeneration
facilities. The discussion of PURPA machines in the NOPR \11\ was
intended to provide context, and not to establish a policy objective
that could replace the implementation of the specific requirements of
section 210(n)(1)(A)(ii). We find that section 210(n)(1)(A)(ii)
requires new cogeneration facilities seeking certification to make a
showing that their energy output is used fundamentally for industrial,
commercial, residential or institutional purposes and is not intended
fundamentally for sale to an electric utility. In short, we will
implement the requirements of section 210(n)(1)(A)(ii) as written.
---------------------------------------------------------------------------

    \11\ Id. at P 11.
---------------------------------------------------------------------------

    50. Despite comments to the contrary, we continue to believe that a
case-by-case approach to the implementation of section 210(n)(1)(A)(ii)
best provides the flexibility required to appropriately address various
facilities and circumstances. However, we agree that the adoption of a
safe harbor will provide greater certainty to the industry, make the
evaluation of applications by the Commission more manageable, and make
the certification process more objective. Thus, we will establish a
safe harbor, within which a facility will be presumed to comply with
the requirements of section 210(n)(1)(A)(ii). Because, as discussed
below, we will design the safe harbor to reflect the requirements of
section 210(n)(1)(A)(ii), the presumption that facilities falling
within the safe harbor comply with section 210(n)(1)(A)(ii) will be
irrebuttable; the safe harbor will define those facilities which will
automatically be deemed to comply with the requirements of section
210(n)(1)(A)(ii). However, as also discussed below, the Commission, in
determining whether a new cogeneration facility's energy output is used
fundamentally for industrial, commercial, residential or institutional
purposes and is not intended fundamentally for sale to an electric
utility, must also take ``into account technological, efficiency,
economic, and variable thermal energy requirements, as well as State
laws applicable to sales of electric energy from a qualifying facility
to its host facility;'' a finding that one of those factors exists may
warrant a finding that facilities that do not fall within the safe
harbor nevertheless comply with section 210(n)(1)(A)(ii).
    51. We agree with commenters who argue that the structure of the
language in section 210(n)(1)(A)(ii) suggests that compliance of new
cogeneration facilities with that section will generally depend on the
percentage of the total, aggregated energy output that is used for
industrial, commercial, residential or institutional purposes, and not
sold to an electric utility. We, therefore, believe that a safe harbor
should be similarly structured to capture the intent of the overall
requirement. After careful consideration of various recommendations of
commenters, we believe a standard of at least 50 percent is a
reasonable interpretation of section 210(n)(1)(A)(ii) in light of the

Commission's continuing obligation under section 210(a) to encourage
cogeneration. Thus, new cogeneration facilities seeking QF status,
where the electrical output of the facility is intended to be sold
pursuant to section 210,\12\ will be required to include a
demonstration that at least 50 percent of the aggregated annual energy
output of the facility is to be used for industrial, commercial,
residential or institutional purposes, and not sold to an electric
utility, in order to qualify under the safe harbor provisions. New
cogeneration facilities complying with the safe harbor provision will
be required to comply with the safe harbor provision both for the 12-
month period beginning with the date the facility first produces
electric energy, and for any calendar year subsequent to the year in
which the facility first produces electric energy. New cogeneration
facilities that do not fall within the safe harbor provision should
demonstrate in their applications the percentage of aggregated annual
energy output that is used for industrial, commercial, residential or
institutional purposes, along with discussion of and support for why
the Commission should conclude that section 210(n)(1)(A)(ii) is
nevertheless met ``taking into account technological, efficiency,
economic, and variable thermal energy requirements, as well as State
laws applicable to sales of electric energy from a qualifying facility
to its host facility.'' Unless a new cogeneration facility qualifies
under the safe harbor provision, the information submitted by the
applicant concerning the percentage of total energy that is to be used
for industrial, commercial, residential or institutional purposes will
establish the standard that that facility must comply with, both for
the 12-month period beginning with the date the facility first produces
electric energy, and for any calendar year subsequent to the year in
which the facility first produces electric energy.
---------------------------------------------------------------------------

    \12\ See Pub. L. 109-58, Sec.  1253(a), 119 Stat. 595, 970
(2005) (adopting new section 210(n)(1)(B)).
---------------------------------------------------------------------------

    52. Entergy has argued that, as part of the process of
demonstrating compliance with the ``fundamentally'' standard, the
Commission should require that new cogeneration facilities, at a
minimum, submit (1) average annual hourly useful electrical output in
Btu/hr; (2) average annual hourly useful thermal output in Btu/hr; (3)
average annual hourly useful mechanical output in Btu/hr; and (4)
utilization of thermal, electrical and mechanical output along with the
steam, electrical and mechanical usage diagrams for the facility. This
data, Entergy argues, should be accompanied by an affidavit of a senior
officer, attesting to the accuracy of the data. We note that the first
four items are already required by Items 10 and 13 of Form 556.\13\
With respect to the request to require applicants to submit an
affidavit, we note that Form 556 already requires the applicant to
submit with the filing the signature of an authorized individual
evidencing accuracy and authenticity of information.\14\ This system
seems to be working, and in the absence of any demonstration that it
has not worked or is not working, we find that Entergy's proposal is
unnecessary.
---------------------------------------------------------------------------

    \13\ 18 CFR 131.80 (2005).
    \14\ 18 CFR 131.80, part A (2005).
---------------------------------------------------------------------------

    53. Many parties commented on the legitimacy of a new cogeneration
facility having ``excess capacity'' beyond that needed to provide for
the electricity needs of the host facility. These parties present
various situations and circumstances, which, they argue, justify
ongoing sales of electricity from a new cogeneration facility to a
utility, without violation of the requirements of section
210(n)(1)(A)(ii). In particular, commenters point out (1) that some
thermal hosts may require redundant generation capacity and/or
redundant thermal capacity to ensure the reliability of their process;
(2) that long lead times and high costs associated with siting
approvals and equipment orders often make it significantly more
economic to construct a large increment of capacity at one time, rather
than several smaller increments as needed over time; (3) that it is
generally more cost-effective for an applicant to keep a cogeneration
unit operating during periods of host shutdown or curtailment; (4) that
the thermal energy requirements of some thermal hosts are so large
relative to their electricity requirements that optimizing electricity
production from that facility generates a continuous surplus of power
that can only be exported; (5) that a new cogeneration facility may
require its higher capital cost to be offset in the long term with an
income stream based on electric sales to the grid; (6) that it may be
advantageous or necessary to all concerned for a manufacturing company
to export some of its power to a utility for a short time during
periods of peak demand, generally during the summer cooling season and
occasionally during the winter heating season; (7) that power plants
are extremely capital intensive and the maximum economies of scale are
found at the largest end of an original equipment manufacturer's
product line, which also typically have the best combined cycle heat
rates and lowest emission rates; and (8) that cogenerators must size
their plants to be able to provide for the largest expected steam
demand of the customer, but also must size the steam turbine to be able
to take the excess steam created when the steam host reduces its steam
needs. Some commenters also point out that certain states require that
a cogeneration facility provide all of its output to the local utility,
and that the local utility provide electricity to the industrial host,
and that such requirements should not disqualify a new cogeneration
facility from eligibility for QF status.
    54. The above-listed circumstances represent circumstances where
the Commission may possibly want to exercise its discretion and find
that a new cogeneration facility complies with section
210(n)(1)(A)(ii), even when such facility does not fall within the safe
harbor. There may, of course, be other circumstances that would also
justify such treatment. In each particular case, the determination of
whether a new cogeneration facility meets section 210(n)(1)(A)(ii) will
depend upon the extent to which the applicant has sufficiently
demonstrated that the facts and circumstances warrant certification
under the new standard.
    55. In response to the comments of CIBO, who objected to the
Commission's use of the word ``limited'' in the NOPR to describe its
discretion under section 210(n)(1)(A)(ii), we clarify that we did not
intend to imply an aversion to the exercise of our discretion, where
warranted, to certify certain facilities that do not comply with the
safe harbor standard. Rather, we intended to indicate that such
exercise of discretion will depend on the applicants making a
sufficient showing to justify certification, and that the Commission
will limit its exercise of discretion to consideration of the criteria
enumerated by Congress in section 210(n)(1)(A)(ii). We also take this
opportunity to clarify that we interpret our discretion to take into
account technological and efficiency requirements as relating closely
to our obligation under section 210(a) to encourage cogeneration and to
the new provisions under section 210(n)(1)(A)(iii) requiring the
Commission to ensure continuing progress in the development of
efficient electric energy generating technology. Also, applicants that
do not fall within the section 210(n)(1)(A)(ii) safe harbor may request
the Commission to exercise its discretion to grant their application,
``taking into account technological, efficiency, economic and variable
thermal energy requirements.'' The Commission will be more inclined to

make an affirmative section 210(n)(1)(A)(ii) finding for facilities
employing modern, efficient technologies, both in order to encourage
cogeneration under section 210(a) and to specifically encourage
continuing progress in the development of efficient electric energy
generating technology under section 210(n)(1)(A)(iii).
    56. Several commenters have requested that the Commission limit the
applicability of the ``fundamentally'' requirement to topping-cycle
cogeneration facilities. While section 210(n)(1)(A)(ii), as a matter of
law, applies to both new topping-cycle and new bottoming-cycle
cogeneration facilities, we believe that many, if not most, bottoming-
cycle cogeneration facilities will readily satisfy the requirements of
section 210(n)(1)(A)(ii). The very nature of bottoming-cycle facilities
is that they utilize waste heat from a thermal process to produce
electric energy, as opposed to the consumption of a scarce fuel source.
If the fuel utilized in a bottoming-cycle facility is merely enough to
run the thermal process and has not been augmented for the purposes of
power production, the facility clearly should satisfy the requirements
of section 210(n)(1)(A)(ii) that the electrical, thermal, chemical and
mechanical output of the facility is used fundamentally for industrial,
commercial, residential or institutional purposes; in any event, such
facilities may satisfy the requirements of section 210(n)(1)(A)(ii) by
virtue of our discretion to make an affirmative finding after taking
into account technological, efficiency, economic, and variable thermal
requirements.
    57. However, some bottoming-cycle facilities supplement the heat
provided to the initial thermal process, with the intention of
producing additional power from the resulting additional steam energy.
We find that, as additional supplemental firing is added to bottoming
cycles, the basis for giving them deference under section
210(n)(1)(A)(ii) is weakened. Therefore, in order for bottoming-cycle
facilities to comply with section 210(n)(1)(A)(ii), applicants should
demonstrate that the heat input is sized only for the thermal process,
or explain to what extent supplemental firing is utilized. If there is
supplemental firing, applicants should either comply with the safe
harbor provision of the regulations, or explain the situation and
justify why the Commission should exercise its discretion to make an
affirmative section 210(n)(1)(A)(ii) finding.
    58. We disagree with commenters who advocate a change to the
Commission's existing operating standard. The language of section
210(n)(1)(A)(ii) does not in our view direct a change to the operating
standard, and we do not believe that an increase in the operating
standard is necessary at this time.
    59. In response to Entergy's suggestion that the Commission
consider certifying as a QF only that portion of a new cogeneration
facility that the applicant is able to demonstrate will meet the
revised criteria under section 210(n)(1)(A)(ii), the statute does not
require this approach and it would be unduly cumbersome to administer.
    60. Finally, in applying our new regulation implementing section
210(n)(1)(A)(ii) of PURPA, Sec.  292.203(d)(2) of our regulations, we
will apply a rebuttable presumption that new cogeneration facilities
that are 5 MW or smaller satisfy the requirement that the electrical,
thermal, chemical, and mechanical output of the cogeneration facility
is used fundamentally for industrial, commercial, residential or
institutional purposes. We will apply this presumption because it is
our experience that such small cogeneration facilities are generally
designed to meet their thermal host's needs.
    61. Lastly, we note that some commenters have stated that there is
a need for special procedures to protect QFs' confidential and
commercially sensitive information. However, under Sec.  388.112 of the
Commission's regulations,\15\ any person submitting a document to the
Commission may request privileged treatment for some or all of its
document. While the party requesting privileged treatment must support
that claim, none of the material for which confidential treatment is
requested will be disclosed unless pursuant to a confidentiality
agreement, a protective order, or a finding that material does not
warrant confidential treatment. Given these procedures that the
Commission already has in place, we see no need to promulgate new
procedures specifically for QF applications.
---------------------------------------------------------------------------

    \15\ 18 CFR 388.112 (2005).
---------------------------------------------------------------------------

C. Continuing Progress in the Development of Efficient Electrical
Energy Generating Technology and the Efficiency Standard for Coal-Fired
Generation

1. Background
    62. Section 210(a)(1)(A)(iii) of PURPA requires that all new
cogeneration facilities seeking QF status demonstrate ``continuing
progress in the development of efficient electric energy generating
technology.'' The NOPR proposed that the Commission's regulations
repeat the statutory language. In addition, the NOPR proposed to (1)
retain the existing operating standard for all cogeneration facilities;
(2) retain the existing efficiency standards for oil cogeneration
facilities for which any of the energy input is natural gas or oil, but
(3) apply an efficiency standard to new coal-burning cogeneration
facilities.
2. Comments
    63. EEI states that the Commission must update the efficiency
standards in its regulations for new cogeneration facilities, and
agrees with the addition of an efficiency standard for coal-fired
generation. EEI argues that the efficiency standard should apply to all
cogeneration fuel inputs. EEI recommends that the Commission revise the
definitions in Sec.  292.202(m) to use higher heating values instead of
lower heating values. EEI also recommends that the Commission revise
the definition in Sec.  292.202(m) to take into account the total
energy input of all fuels, including coal and waste fuels, not just oil
and natural gas. EEI argues that facilities that utilize a renewable
energy resource or waste fuel should be qualified as a small power
producer and not as cogenerators. EEI states that the efficiency
standards for cogeneration QFs, which have existed for 25 years, should
be increased for new facilities to reflect modern, more efficient
technology.
    64. As an interim measure, EEI believes the 60 percent efficiency
standard for new cogeneration facilities primarily fueled by natural
gas is appropriate. Several comments offered support for EEI's
comments, while others argued that a 60 percent efficiency standard is
not achievable or that 60 percent is an arbitrary value that has no
rational basis other than to reduce the number of QFs that are entitled
to sell their power under PURPA. Commenters state that fixed, objective
standards as advocated by EEI are too simplistic to be applied to the
full range of facilities that could be designed and developed.
    65. Although Indeck does not object to increased efficiency
standards for new cogeneration QF plants, they must be reasonable, and
based on clear and definite standards. NARUC states that the Commission
should take care to encourage the use of better technology and not
prevent the use of any improved technologies by setting the standards
unreasonably high. Any standard the Commission adopts must recognize
that

the requirement of greater efficiency is a technological, not an
environmental standard. USCHPA states that requiring QFs to implement a
``best available technology'' standard would result in fearsome costs
and constraints. Primary Energy states the rule should embrace the
philosophy that deployment of existing technology in innovative and
creative ways defines continuing progress in achieving greater overall
resource efficiency. The Cogeneration Association California states
that requiring each applicant to demonstrate that it would contribute
to this ``continuing progress'' standard might discourage the continued
use of well-established technologies proven to produce efficiencies,
but which may no longer be considered ``progressive.''
    66. The EPA believes there is little, if any, need to alter
existing PURPA criteria or processes. The EPA also believes that
because combined heat and power (CHP) systems are inherently more
efficient than the alternative (separate heat and power generation),
they always improve total efficiency, reduce fossil fuel consumption,
and therefore advance the objectives of EPAct 2005.
    67. Other commenters concur with the Commission that an efficiency
standard be applied to new coal-burning cogeneration facilities in a
manner similar to that applied to natural gas and oil-burning
cogeneration facilities. In light of the advances in generating
technology, they argue that there is no policy basis to exempt new
coal-burning cogeneration facilities from efficiency standards. Indeed,
requiring compliance with efficiency standards will help speed the
adoption of the latest and most efficient coal-burning technology. Yet
other commenters argue that there is no reason to impose an efficiency
standard on coal-burning QFs. Given the abundance of coal, market
forces should regulate the efficiency of coal-fired QFs. Commenters
state the imposition of a minimum efficiency standard on new coal-fired
cogeneration facilities is inconsistent with the intent of PURPA, as
amended. Commenters state that the Commission lacks record support for
such a decision on an efficiency standard for coal-fired units, which
is technical and would require significant analysis and each case must
be evaluated individually.
3. Commission Determination
    68. Section 210(n)(1)(A)(iii) of PURPA requires the Commission to
issue rules to ensure ``continuing progress in the development of
efficient electric energy generating technology.'' As an initial
matter, upon review of the comments on this issue, the Commission now
believes that the regulations it is issuing implementing sections
210(n)(1)(A)(i) and 210(n)(1)(A)(ii) of PURPA are sufficient by
themselves to ensure ``continuing progress in the development of
efficient energy generating technology'' through, for example, the
application of efficiency standards and appropriate exemptions from
certain regulatory requirements discussed herein. Accordingly, the
Commission will not require that applicants for certification of new
cogeneration facilities, provide a description of how a particular
technology used by a particular applicant contributes to the continuing
progress in the development of efficient energy generating technology.
We will delete the requirement contained in the NOPR that applicants do
so.
    69. While some commenters support increasing the existing
efficiency standards, and some commenters support the Commission's
applying an efficiency standard to coal-fired cogeneration facilities
for the first time, the Commission will retain the existing operating
and efficiency standards for new oil and gas cogeneration facilities,
and, will not impose new efficiency standards for new coal-burning
cogeneration facilities at this time.\16\
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    \16\ To the extent that commenters suggest that the Commission
change its regulations containing criteria applicable to existing
cogeneration facilities, those suggestions are inconsistent with
section 210(n)(2) of PURPA, which states that the Commission does
not have the authority to change the criteria for existing QFs:
    ``Notwithstanding rule revisions under paragraph (1), the
Commission's criteria for qualifying cogeneration facilities in
effect prior to the date on which the Commission issues the final
rule required by paragraph (1) shall continue to apply to any
cogeneration facility that--(A) Was a qualifying cogeneration
facility on the date of enactment of subsection (m) [i.e., August 8,
2005], or (B) had filed with the Commission a notice of self-
certification, self-recertification or an application for Commission
certification under 18 CFR 292.207 prior to the date on which the
Commission issues the final rule required by paragraph (1) [i.e.,
the date of issuance of this Final Rule].''
---------------------------------------------------------------------------

    70. We find persuasive the EPA comments that there is little, if
any, need to alter existing PURPA criteria or processes. The EPA states
that CHP (combined heat and power) remains one of the most significant
opportunities to improve the efficiency and reduce the environmental
impact of United States energy production and it is critical that this
rulemaking advance, not constrain, these opportunities. The EPA further
states that since CHP systems are inherently more efficient than the
alternative (separate heat and power generation) they always improve
total efficiency, reduce fossil fuel consumption, and therefore advance
the objectives of EPAct 2005. We find the comments of Solar Turbines
compelling as well. Solar Turbines, a manufacturer of generation
equipment, states that, while its products have standard efficiencies
greater than 60 percent, their PURPA efficiency is less than 50
percent. They are still much more efficient than conventional separate
electric and thermal generation (49 percent conventional/34 percent
PURPA efficiency), however. Solar Turbines states that the existing
PURPA standard of 42.5 percent LHV/38.6 percent HHV is sufficient to
ensure efficient CHP systems and still accommodate the wide range of
technologies and applications. Therefore, the Commission will retain
the existing operating and efficiency standards for new cogeneration
facilities.\17\
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    \17\ Recently built cogeneration facilities have been dominated
by natural gas fired technologies. Their construction has been
driven by lower capital costs in comparison to coal facilities and
the anticipation of moderately priced natural gas. A coal-fired
facility, in contrast, typically will recover its more substantial
investment over a longer period of time. While newer coal-fired
generation technologies could offer greater fuel efficiency and
better environmental performance than older designs, they also
require greater capital investment. It is not the intent of the
Commission to discourage more economic coal-fired generation
technologies. Commenters also feel that applying an efficiency
standard to coal-fired facilities is likely to impose additional
barriers for cogeneration at coal-fired facilities, undercutting the
underlying statutory directive to encourage cogeneration by
hampering the flexibility of coal-fired cogeneration units to
shutdown their facilities for repairs, or engage in other
maintenance. Therefore, the Commission will impose no new efficiency
standards for new coal-fired cogeneration facilities at this time.
---------------------------------------------------------------------------

    71. Developers of cogeneration facilities, moreover, have an
economic incentive to employ the efficient, modern technology giving
due consideration to the costs of that technology. We see no reason at
this time to impose higher efficiency standards on cogeneration
facilities. As the EPA and others point out, CHP processes are
inherently more efficient than producing electric energy and heat
separately.
    72. In sum, the increased efficiency that will result from our
implementation of sections 210(n)(1)(A)(i) and 210(n)(1)(A)(ii) of
PURPA satisfy the statutory requirement that the Commission ensure
continuing progress in the development of efficient electric energy
generating technology.

D. Self Certification

1. Background
    73. In the NOPR, the Commission invited comments on whether the
Commission's self-certification

procedures \18\ should be available to new cogeneration facilities in
light of the criteria proposed for certification of new cogeneration
facilities as QFs.
---------------------------------------------------------------------------

    \18\ 18 CFR 292.207 (2005).
---------------------------------------------------------------------------

2. Comments
    74. Several commenters argue that self-certification can remain an
option as long as clear standards are established, but that it is
difficult to understand exactly how self-certification would work
without such standards.
    75. Some commenters argue that self-certification should remain an
option for certain new cogeneration facilities. American Forest & Paper
asserts that self-certification should remain available to new
cogeneration facilities where there is (1) a traditional manufacturing
use, (2) the facility fits into safe harbor provisions, and (3) employs
a proven or innovative cogeneration technology. NCEMPA believes the
self-certification procedures should remain available for small QFs
(e.g., 5 MWs or smaller) because the substantial burden associated with
complying with new certification procedures may greatly discourage
development of small QFs. The York County Solid Waste and Refuse
Authority (York County) asserts self-certification should remain
available to new cogeneration facilities except for those facilities
owned largely or wholly by traditional utilities.
    76. A few commenters contend that new cogeneration facilities
should not be allowed to self-certify. Calpine Corporation (Calpine)
believes that the case-by-case approach proposed by the Commission
seems inconsistent with a self-certification option. NARUC speculates
that self-certification will inevitably lead to the qualification of
questionable facilities which undermines Congress's intent to foster
responsible QF development.
    77. Several commenters maintain that self-certification should
remain an option despite the subjective nature of the new standards.
The PGC Electricity Committee, Indeck, and Ridgewood state that the
self-certification procedures are efficient, self-implementing, less
time-consuming, and relatively inexpensive. Delta Power, et al., assert
that QFs have always been responsible for ensuring that they meet the
requirements for QF status, regardless of how they achieve
certification. They further state that owners of new cogeneration
facilities should have the option to either self-certify or to apply
for Commission certification, depending on their comfort level with the
characteristics of their facilities.
3. Commission Determination
    78. The Commission will retain the option to self-certify for new
cogeneration facilities. NARUC and others fear that questionable
cogeneration facilities will attain QF status through the self-
certification process due to the subjective nature of the new standards
unless the Commission establishes clear and objective standards. As
Indeck and Ridgeway correctly note in their comments, however, the
Commission has the authority to review and question a self-
certification.
    79. Nevertheless, we note that the Commission's currently effective
regulations do not make explicit the Commission's authority to revoke
the QF status of self-certified QFs absent the filing of a petition for
declaratory order that the self-certified QF does not meet the
applicable requirements for QF status.\19\ Given that EPAct 2005 calls
for greater Commission scrutiny of QF status, we will modify Sec.
292.207(d)(1)(iii) of the Commission's regulations to provide that the
Commission may on its own motion revoke the QF status of self-certified
and self-recertified QFs.
---------------------------------------------------------------------------

    \19\ 18 CFR 292.207(d)(1)(iii) (2005).
---------------------------------------------------------------------------

    80. In light of the new standards directed by Congress for new
cogeneration facilities, we find it appropriate to now publish in the
Federal Register notices of self-certifications and self-
recertifications of new cogeneration facilities; currently, the
Commission does not notice any self-certifications or self-
recertifications in the Federal Register.\20\ Publication of notices of
self-certification and self-recertification of new cogeneration
facilities will enhance the visibility of self-certifications for
interested parties other than the host electric utility. Thus, we will
require self-certifications and self-recertifications of new
cogeneration facilities to include a form of notice of the self
certification or self-recertification suitable for publication in the
Federal Register. Accordingly, we will amend Sec.  292.205(d) of the
Commission's regulations to provide for publication of notice of self-
certifications and self-recertifications of new cogeneration
facilities.
---------------------------------------------------------------------------

    \20\ 18 CFR 292.207(a)(1)(iv) (2005).
---------------------------------------------------------------------------

    81. Pursuant to Sec.  292.207(a) of the Commission's regulations,
``[a] small power production facility or cogeneration facility that
meets the applicable criteria established in Sec.  292.203 is a
qualifying facility.'' There is no express requirement in Sec.  292.203
that a facility make a filing to satisfy the requirements for QF
status. While the current Commission's regulations do state that an
owner or operator of a self-certifying facility ``must'' file a
``notice of self-certification which contains a completed Form 556,''
\21\ the Commission has interpreted this requirement as being for
record keeping purposes, and not necessary for QF status.
---------------------------------------------------------------------------

    \21\ 18 CFR 292.207(a)(1)(ii) (2005).
---------------------------------------------------------------------------

    82. The Commission, particularly in light of the criteria for new
cogeneration facilities, does not believe that a facility should be
able to claim QF status without having made any filing with this
Commission. Accordingly, the Commission is amending section 292.203 to
expressly require that a facility claiming QF status must file either a
notice of self-certification or an application for Commission
certification. Any existing QF that has never filed either a notice of
self-certification or an application for Commission certification, must
do so within sixty (60) days of the date this order is published in the
Federal Register, to continue claiming QF status.
    83. The original reasons that the Commission instituted the self-
certification process are still valid. Among the reasons for the
Commission's adoption of the self-certification process were that the
complexity, delays, and uncertainties created by a case-by-case
qualification procedure would act as an economic disincentive to owners
of smaller facilities. The Commission also envisioned that the
initiation of purchase and sale arrangements would require the flow of
substantial information between the proposed QF and the purchasing
utility so that the filing of substantial information with the
Commission would be unnecessary. While many new cogeneration facilities
may want the assurance that Commission certification, as opposed to
self-certification, provides, we believe that the self-certification
option should still be available to new cogeneration facilities.
Moreover, the new requirement that a facility claiming certification
file at least a notice of self-certification, the publication of notice
of self-certifications and self-recertifications for new cogeneration
facilities, and the modification of the Commission's regulations to
make explicit that the Commission, on its own motion, can revoke the QF
status of a self-certified QF, remove the danger that a questionable
new cogeneration

facility, in particular, will obtain and retain QF status.

E. Exemptions

1. Background
    84. In the NOPR, the Commission noted that, in implementing section
210(e)(1) of PURPA, which provides that the Commission shall prescribe
rules under which QFs are exempt in whole or in part, from the FPA,
from PUHCA, from state laws respecting rates or respecting the
financial or organization regulation of electric utilities, or from any
combination of the foregoing, the Commission granted very broad
exemptions from the FPA, PUHCA and state laws in order to remove the
disincentive of utility-type regulation from QFs. The Commission stated
that in the context of this rulemaking proceeding it found it
appropriate to reexamine the broad exemptions from the FPA granted to
QFs, partly because those broad exemptions may no longer be needed, and
partly because the Commission through experience realized that the
broad exemptions it granted QFs removed a large number of generation
sales from any regulatory oversight. The Commission therefore proposed
to eliminate the exemptions from sections 205 and 206 of the FPA that
the Commission previously granted, except for the exemptions from
sections 205 and 206 that are for sales that are governed by state
regulatory authorities. In addition, the Commission proposed that QFs
would not be exempt from new sections 220, 221 and 222 of the FPA that
were added to the FPA by sections 1281 (Electric Market Transparency),
1282 (False Statements) and 1283 (Market Manipulation) of EPAct
2005.\22\
---------------------------------------------------------------------------

    \22\ Pub. L. 109-58, Sec. Sec.  1281-83, 119 Stat. 594, 978-80
(2005).
---------------------------------------------------------------------------

2. Comments
    85. As a general matter, the QFs were opposed to lifting of the
total exemption from sections 205 and 206 of the FPA in the current
regulations. First, those opposed argue that in deciding to build the
generating facility, the owners relied on the existence of the
exemption. For example, the Electric Power Supply Association argues
that FPA rate regulation of existing contracts will upset long-standing
expectations and create unnecessary disruptive uncertainty regarding
the financial integrity of numerous QFs. ARIPPA argues that the
Commission's proposal amounts to a ``bait-and-switch'' on investors who
were encouraged to build and operate renewable small power production
facilities and cogeneration facilities. Occidental Chemical Corporation
(Occidental) adds that the Commission's proposal creates incentives for
utilities to challenge all existing QF contracts, which will result in
litigation. They also argue that subjecting all non-PURPA sales to
regulation under the FPA is unnecessary and would discourage the
development of cogeneration.
    86. Several QFs suggest that, in addition to exemptions being given
to sales pursuant to a state PURPA program, QFs selling into an
organized market under applicable market rules and tariff requirements
should remain exempt from the FPA.
    87. Most QFs supported the Commission's proposal to continue to
exempt QFs smaller than five MW from the provisions of the FPA. Others
suggested that the Commission raise the size of the QFs that would
retain all exemptions to 20 or 30 MW. For example, PGC Electricity,
ENEL North America and the Illinois Landfill Gas Coalition propose
exemptions for projects having capacities of 20 MW or less. Cinergy and
the American Wind Energy Association argue that facilities under 30 MW
do not have a significant market effect and should remain exempt.
    88. A number of QFs suggest that, rather than removing the
exemptions for all non-PURPA sales, the Commission remove the
exemptions only for those QFs with majority utility ownership. Other
QFs, such as USCHPA and York County, suggest that QFs that are
independent of traditional utilities be permitted to retain all of the
existing exemptions from the FPA. Other commenters note that removing
exemptions is not required by EPAct 2005. Commenters note that a
blanket elimination of exemptions will remove the incentive to
cogenerate for non-utility owned QFs.
    89. Other commenters request that QFs remain exempt from definition
of ``electric utility company'' under PUHCA 2005. For example, the
American Chemistry Council states that this would provide an important
incentive for the development of QFs by entities that otherwise are
primarily engaged in business other than the generation and sale of
electricity.
    90. Utilities, on the other hand, generally support limiting the
exemptions from the FPA. AEP, for example, argues that no QF should be
exempt from the FPA, noting that QFs have the ability to participate in
the economic dispatch process within an RTO. The California Electricity
Oversight Board comments that the Commission should not exempt any QF
electrical sales from its regulatory oversight unless it finds that
either: (1) The energy sales from the QF are governed by a state
regulatory authority, or (2) the QF is less than 5 MW and owned by
individuals or small businesses that are unconnected to any electric
utility, electric utility holding company, power marketer, transmission
provider, transmission owner, or others in the electricity business.
Entergy argues that QFs should be required to obtain market-based rate
authority for all non-PURPA sales. NRECA comments that the Commission
should no longer exempt QFs from the non-rate provisions of the FPA and
should require QFs owned by public utilities to make rate filings under
section 205 of the FPA for avoided cost sales and all QFs should make
rate filings under section 205 of the FPA for non-PURPA sales. The
Transmission Access Policy Study Group supports the elimination of
sections 205 and 206 exemptions, except for sales governed by state
regulatory authorities. Some of the utilities suggested that the
Commission's current proposal which states that a QF that sells
electric energy ``pursuant to a state regulatory authority avoided-cost
ratemaking regime would remain exempt from section 205'' (unless it
also makes sales of electric energy that are not pursuant to a state
regulatory authority avoided-cost ratemaking regime) is not
sufficiently clear. One commenter suggests the exemption be applied to
``sales * * * made pursuant to a state regulatory authority's
implementation of PURPA.'' This, the commenter states, would more
accurately limit the exemptions to ``PURPA sales.'' Others point out
that bilateral contracts between a QF and a utility often satisfy the
requirements of being pursuant to a state regulatory authority's
implementation of PURPA.
    91. Commenters also propose that the Commission should add section
203 to the list of sections with which QFs must comply. The
Transmission Access Policy Study Group argues that the Commission
should eliminate entirely the section 203 exemption. It states that the
consumer protection concerns that led Congress to expand the
Commission's section 203 authority over generation acquisitions are
relevant to QF transfers as well.
3. Commission Determination
    92. We will eliminate certain exemptions that were previously
granted to QFs as proposed in the NOPR. However, we will clarify that
QFs will retain the exemption from sections 205 and 206 of the FPA when
a sale is made pursuant to a state

regulatory authority's implementation of PURPA. The Final Rule will
also essentially retain the pre-existing exemption from PUHCA so that a
QF will not be considered ``an electric utility company'' under the new
Public Utility Holding Company Act of 2005.\23\
---------------------------------------------------------------------------

    \23\ See Pub. L. 109-58, Sec. Sec.  1261-77, 119 Stat. 594 972-
78 (2005).
---------------------------------------------------------------------------

    93. Section 210(e)(1) of PURPA states that the Commission ``shall *
* * prescribe rules under which [certain qualifying facilities] are
exempted, in whole or in part, from the Federal Power Act, from the
Public Utility Holding Company Act, from State laws and regulations
respecting the rates, or respecting the financial or organization
regulation, of electric utilities, or from any combination of the
foregoing, if the Commission determines such exemption is necessary to
encourage cogeneration and small power production.'' Section 210(e)(2)
of PURPA provides that the Commission is not authorized to exempt small
power production facilities of 30 to 80 MW capacity from these laws,
except for geothermal power production facilities. Such facilities
between 30 and 80 MW may be exempted from PUHCA and from state laws and
regulations, but may not be exempted from the FPA. Thus section 210(e)
requires the Commission's regulations to grant regulatory exemptions
for certain QFs, in whole, or in part, and if necessary to encourage
cogeneration and small power production.
    94. In Order No. 69, the Commission first implemented section
210(e) of PURPA. The Commission stated that a broad exemption was then
appropriate to remove the disincentive of utility-type regulation from
QFs, including sections 203, 205, 206, 208, 301 and 304 of the FPA. In
Sec.  292.601 of its regulations, the Commission exempted QFs (other
than non-geothermal small power production facilities between 30 and 80
MW) from sections 203, 205, 206, 208, 301 and 304 of the FPA.
    95. When the Commission first granted the exemptions from sections
205 and 206 of the FPA in Order No. 69, there was no market for
electric energy produced by non-utility generators. Indeed this was a
primary reason that PURPA was enacted. The Commission wrote its
regulations, including the provisions for exemptions from sections 205
and 206, with the expectation that all sales of electric energy from
QFs would take place as a result of the section 210 of PURPA purchase
obligation, and that they would take place pursuant to state regulatory
authority implementation of the Commission's avoided-cost rules under
PURPA. Thus, there was no expectation that QFs would make sales that,
by virtue of the Commission's granting a broad exemption from sections
205 and 206 of the FPA, would be subject to neither this Commission's
nor a state regulatory authority's oversight. However, largely as a
result of PURPA, markets for electric energy produced by non-
traditional power producers developed. And QFs participated in those
markets and began to make sales that were not subject to either
Commission or state regulatory authority oversight.
    96. Therefore, in light of the significant changes that have
occurred in the industry since the first QF facilities were introduced
and in light of the changing electric markets and resulting market
power issues that have arisen in recent years, we no longer believe
that it continues to be necessary or appropriate to completely exempt
QFs from sections 205 and 206 of the FPA. We conclude that such a
complete exemption is not necessary to encourage the development of
cogeneration and small power production facilities and, moreover, the
broad nature of the exemptions currently set forth in Sec.  292.601
removes a large number of electric energy sales from any regulatory
oversight. Further we note that many QFs are large and their non-PURPA
sales could potentially have a significant market effect.
    97. We are not convinced by the comments that eliminating
exemptions will cause undue uncertainty or upset the legitimate
expectations of QF owners and lenders. The exemptions from regulation
previously granted were always subject to revision and QFs had no
justifiable expectation that, no matter the change in circumstances,
changes in the regulatory regime would not occur. Further, our partial
removal of the exemption from sections 205 and 206 of the FPA does not
affect a facility's QF status under PURPA or the obligation of an
electric utility to purchase power from the QF. However, we take note
of the comments requesting that existing contracts not be subject to
this change in our regulations and we will provide that sales that
occur pursuant to existing contracts will continue to be exempt from
sections 205 and 206 of the FPA.
    98. As we also stated in the NOPR, we are aware that partial
removal of exemptions might create a hardship for smaller QFs,
particularly those owned by individuals or small businesses. The
Commission stated that we would consider that at least some of the
exemptions previously granted in Sec.  292.601 should remain in effect
for smaller QFs, such as those under five MW. Numerous commenters
suggested that the Commission should consider larger facilities, such
as 20 MW or 30 MW facilities, to be small facilities for purposes of
retaining the exemptions from section 205 and 206 of the FPA. We agree,
and modify our proposal so that the Final Rule provides that facilities
20 MW or smaller shall remain exempt from sections 205 and 206 of the
FPA. However, when an existing contract for sales from a facility
expires, sales from the facility, whether pursuant to a renewal of the
existing contract or pursuant to a new contract, will be subject to
sections 205 and 206, unless otherwise exempt.\24\
---------------------------------------------------------------------------

    \24\ As we discuss below, such sales may be otherwise exempt
because they are from facilities 20 MW or smaller or because they
are made pursuant to a state regulatory authority's implementation
of PURPA.
---------------------------------------------------------------------------

    99. In the NOPR we also stated that a QF which sells electric
energy pursuant to a state regulatory authority avoided-cost ratemaking
regime would remain exempt from sections 205 and 206 of the FPA. In
response to comments, we clarify the regulatory language to make clear
that a QF will retain exemption from sections 205 and 206 of the FPA
when its sales are pursuant to a state regulatory authority's
implementation of PURPA (as opposed to the proposed regulations
``pursuant to a state regulatory authority avoided cost regime''). We
believe that this is appropriate because ``avoided cost regime'' is not
defined and could be interpreted to include state programs that are not
grounded in PURPA. Moreover, many sales made pursuant to bilateral
contracts between QFs and electric utilities (including contracts at
market-based rates) are made pursuant to a state regulatory authority's
implementation of PURPA. The change in language, providing exemptions
for QF sales made pursuant to a state regulatory authority's
implementation of PURPA, will ensure that such sales from QFs, even
where they happen to be pursuant to a bilateral contract and at market-
based rates, will continue to be exempt from sections 205 and 206 of
the FPA.
    100. EEI states that the elimination of the ownership requirements
should not permit a qualifying facility to sell electric energy other
than electric energy produced by itself or another qualifying facility
and still retain QF status. EEI comments that paragraph 25 of the NOPR
should be deleted and the Commission should maintain the ``net output
rule.'' According to EEI, the net output rule requires a utility to
purchase only a QF's net output production, i.e.,

the QF's total capacity minus the power the QF requires to operate its
generating facility (often called station use or auxiliary load). EEI
argues that if a QF's sales to a utility are not limited to its net
output, then the QF in essence would be getting credit for more
capacity than it is displacing on the utility's system. EEI states that
QFs, whether or not they are majority-owned by utilities, should not be
able to take advantage of PURPA to buy power from a utility at one
price and sell it back to the utility at a higher price. EEI's comments
are supported by NYSEG, Rochester, Progress Energy, SoCal Edison, PSNM,
TNP, PG&E and Entergy Services, Inc.
    101. We disagree with EEI that the elimination of the ownership
requirement should be interpreted to preclude a QF from selling
electric energy other than electric energy produced by itself or
another QF without losing QF status. The loss of QF status in the past
by a facility that sold non-QF power, such as power in excess of the
net capacity of a facility, rested on the statutory and regulatory
ownership requirements for QF status. Removal of the ownership
prohibition removes the bar to a QF selling non-QF electric energy
while retaining QF status. However, as we explained in the NOPR, any
non-QF electric energy sold by a QF must be sold pursuant to the FPA.
Before making sales of non-QF power, the QF must obtain authority
pursuant to section 205 of the FPA to make such sales, if a QF has not
already obtained such section 205 authority. To the extent that EEI and
others are concerned that a QF will attempt to substitute lower-cost
non-QF electric energy for the electric energy that utilities are
purchasing pursuant to the purchase obligation of section 210 of PURPA,
the Commission does not believe that such purchases are required by
PURPA. What electric utilities are required to purchase is the
``electric energy from such facilities'' \25\ which the Commission
interprets to mean electric energy produced by the QF and not non-QF
electric energy which the QF has purchased or has produced itself
through a process that does not satisfy the technical requirements for
QF status. Thus, for example, if a cogeneration QF decides to produce
electric energy through non-sequential supplemental firing or a small
power production QF decides to produce electric energy by burning a
non-small power fuel, the electric energy would not be subject to the
PURPA purchase obligation and the sales of such electric energy should
not be exempt from sections 205 and 206 of the FPA. Similarly, purchase
and re-sale of non-QF power produced by others would not be exempt from
sections 205 and 206 of the FPA. Whether such purchases are otherwise
required by an agreement between a utility and a QF is a separate
matter of contract law, however.
---------------------------------------------------------------------------

    \25\ 16 U.S.C. 824a-1(a)(2).
---------------------------------------------------------------------------

    102. In addition, we reject proposals to eliminate the QF exemption
from the FPA section 203(a)(i) filing requirements. We are not
persuaded such a change to our existing practice is called for. With
respect to the NOPR proposal to eliminate the QF exemption from PUHCA,
we have rethought this proposal in light of the Public Utility Holding
Company Act of 2005. We interpret PURPA to permit us to exempt QFs from
the Public Utility Holding Company Act of 2005 in Sec.  292.602 of our
regulations. Section 292.602 will thus provide that a QF shall not be
considered an ``electric utility company'' as defined by the Public
Utility Holding Company Act of 2005. However, consistent with our
recent actions on FPA section 203, QFs will be considered an ``electric
utility company'' for purposes of 203(a)(2) of the FPA.
    103. Lastly, we see no reason to exempt QFs from the newly added
FPA sections 220, 221 and 222, added by EPAct 2005 sections 1281
(Electric Market Transparency), 1282 (False Statements) and 1283
(Market Manipulation).

F. General Requirements for Qualification and Ownership Criteria

1. Background
    104. Section 1253(b) of EPAct 2005 amended sections 3(17)(C) and
3(18)(B) of the FPA by eliminating the ownership limitations for QFs
previously contained in those sections. Section 292.206 of the
Commission's regulations was designed to implement the prior statutory
requirement that a qualifying cogeneration or small power production
facility must be owned by a person not primarily engaged in the
generation or sale of electric power (other than electric power solely
from cogeneration facilities or small power production facilities). In
the NOPR, the Commission proposed to implement section 1253(b) of EPAct
2005 by eliminating Sec.  292.206 from its regulations, and thus
eliminating the ownership limitations for all QFs--both existing and
new.
    105. Section 292.203 lists the general requirements for
qualification status. Section 292.203(a)(3) requires that a small power
production facility must ``[m]eet[] the ownership criteria specified in
Sec.  292.206.'' Section 292.203(b)(2) requires that a cogeneration
facility must ``[m]eet[] the ownership criteria specified in Sec.
292.206.'' In light of the elimination of the ownership limitations for
all QFs and the Commission's proposal to delete Sec.  292.206, in the
NOPR the Commission also proposed to delete from Sec.  292.203 these
references to the ownership limitation from the requirements for
qualifying small power production facilities and qualifying
cogeneration facilities. Therefore, the Commission proposed to delete
Sec. Sec.  292.206, 292.203(a)(3) and 292.203(b)(2) from its
regulations.
2. Comments
    106. No commenter has opposed the ownership limitation from QFs and
deletion of section 292.206 and revision of definitions of cogeneration
and small power production facility in section 292.203 of the
Commission's regulations.
3. Commission Determination
    107. There is no opposition to the Commission's proposal in the
NOPR. We will, therefore, implement section 1253(b) of EPAct 2005 by
eliminating Sec.  292.206 from our regulations, and thus eliminate the
ownership limitations for all QFs--both existing and new. We will
simultaneously delete Sec. Sec.  292.203(a)(3) and 292.203(b)(2) from
our regulations describing the general requirements for qualifying
status.

G. Form 556

1. Background
    108. In the NOPR, the Commission proposed changes in Form 556 for
new qualifying cogeneration facilities. Form 556 is used by Applicants
seeking qualifying facility status, whether by Commission application
or by self-certification. The Commission's removal of Sec.  292.206
prompted the amendment of Form 556 to reflect the new criteria for QF
status. Specifically, the Commission proposed to eliminate references
in Form 556 to the requirement that a QF may not be owned more than 50
percent by certain entities and also proposed to eliminate the
requirements designed to help the Commission enforce that 50 percent
ownership limitation. Nevertheless, the Commission also proposed to
retain a requirement that a QF provide in Form 556 ownership
information, including the percentage of ownership held by any electric
utility or electric utility holding company, or by any person owned by
either. While ownership limitations were no longer part of the criteria
for QF

status, the Commission nevertheless believed that an applicant for QF
status should inform the Commission of the identity of its owners, and
their percentage interests. The Commission believed that this
information would help the Commission determine in the future, as it
gained experience subsequent to the enactment of EPAct 2005, whether
the exemptions from the FPA and state laws should continue to be
available to all QFs, especially those affiliated with traditional
utilities, transmission providers and other power producers. It would
also allow the Commission to better monitor for undue discrimination or
preference both in the provision of transmission service and sales for
resale in interstate commerce.
2. Comments
    109. Several commenters supported the Commission's proposal to
retain the facility ownership disclosure requirement in the
Commission's Form No. 556. These commenters believe that such
information will allow the Commission to better monitor potential
discrimination in the provision of service to customers and would
assist the Commission in reviewing the extent to which various QFs
should continue to be exempt from state laws and various provisions of
the FPA. However, Independent Sellers disagreed with the NOPR but
maintained that the ownership disclosure should be limited to those
owners that hold 10 percent or more of the equity interests in the QF.
3. Commission Determination
    110. Upon consideration of comments, we conclude that we should
still include an ownership disclosure requirement in the Commission's
Form No. 556, as proposed in the NOPR. Contrary to Independent Sellers
request to limit the ownership enquiry to 10%, the Commission would
like to know all utility owners. This information will assist us in
monitoring potential discrimination in the provision of service to
customers and will assist the Commission in reviewing the extent to
which various QFs should continue to be exempt from various provisions
of the FPA and state laws.

H. Other Issues With Respect to Section 210(n)

1. Background
    111. A number of commenters have asked the Commission to define
what a ``new cogeneration facility'' is for purposes of EPAct 2005.
Specifically, they want the Commission to clarify that an existing QF
does not become subject to the requirements of newly added section
210(n) of PURPA when it files for recertification.
2. Comments
    112. ELCON and many other commenters maintain that change in
ownership or other modifications should not convert an ``existing
facility'' to ``new facility'' on recertification. They request that
the regulations clarify that the new standards apply only to ``new
facilities,'' those being built and first certified after the EPAct
2005 effective date. They argue that the requirements of section 210(n)
of PURPA should not apply to facilities that are requesting
recertification.
    113. SoCal Edison opposes ELCON's suggestion arguing that the
Commission's revised regulation for ``new'' qualifying cogeneration
facility should apply to a cogeneration facility that seeks
recertification as a QF. It argues that an existing qualifying
cogeneration facility substantially modified or altered in a way not
covered by 18 CFR 292.207(a)(2)(i) and completing an extensive re-
powering of the facility or converting from one technology to another
should be subjected to the revised regulation for ``new'' qualifying
cogeneration facilities.
    114. Cinergy Solutions and EPSA seek clarification from the
Commission that a QF facility designated as an old facility under the
Commission's rules should not subsequently become a new facility
because of non-compliance for a certain period or withdrawal of an
application. EPSA requests that the Commission confirm that,
notwithstanding future changes in the allocation of QF benefits, as a
result of elimination of QF ownership criteria or otherwise, such
future changes will have no retroactive effect on the QF status for
periods prior to the effective date of the new rules.
3. Commission Determination
    115. Initially, we note that the regulatory text adopted in Sec.
292.207(d) defines what cogeneration facilities will be considered new
cogeneration facilities. In addition, we clarify that there is a
rebuttable presumption that an existing QF does not become a ``new
cogeneration facility'' for purposes of the requirements of newly added
section 210(n) of PURPA merely because it files for recertification.
However, we caution that changes to an existing cogeneration facility
could be so great (such as an increase in capacity from 50 MW to 350
MW) that what an applicant is claiming to be an existing facility
should, in fact, be considered a ``new'' cogeneration facility at the
same site.

IV. Information Collection Statement

    116. The Office of Management and Budget (OMB) regulations require
approval of certain information collection requirements imposed by
agency rules.\26\ Upon approval of a collection of information, OMB
will assign an OMB control number and an expiration date. Respondents
subject to the filing requirements of this rule will not be penalized
for failing to respond to these collections of information unless the
collections of information display a valid OMB control number.
---------------------------------------------------------------------------

    \26\ 5 CFR 1320.13 (2005).
---------------------------------------------------------------------------

    117. The Commission is amending its regulations to implement
section 1253(a) of the EPAct 2005; specifically, its regulations
governing qualifying small power production and cogeneration
facilities. The Commission's regulations, in 18 CFR Parts 131 and 292,
specify the certification procedures that must be followed by small
power production and cogeneration facilities seeking QF status; specify
the criteria that must be met; specify the information which must be
submitted to the Commission in order to obtain QF status; specify the
benefits which are available to QFs; and specify the transaction
obligations of electric utilities with respect to QFs. The information
provided to the Commission under Parts 131 and 292 is identified as
Form 556. In addition, the Commission is amending its regulations
providing exemptions to qualifying facilities; among other things,
certain entities will be subject to the provisions of section 205 of
the FPA and part 35 of the Commission's regulations. The information
provided to the Commission under part 35 is identified as FERC-516.
    The Commission is submitting these reporting requirements to OMB
for its review and approval under section 3507(d) of the Paperwork
Reduction Act.\27\ Comments were solicited on the Commission's need for
this information, whether the information will have practical utility,
the accuracy of provided burden estimates, ways to enhance the quality,
utility, and clarity of the information to be collected, and any
suggested methods for minimizing the respondent's burden, including the
use of automated information techniques. Comments were received noting
that the NOPR only mentioned costs associated with filing a revised
Form 556, and does not address the new applications and reports that
will be required due to the elimination of certain exemptions from the
FPA for

QFs. Below we have revised the estimates provided in the NOPR to
account for the elimination of exemptions.
---------------------------------------------------------------------------

    \27\ 44 U.S.C. 3507(d) (2000).
---------------------------------------------------------------------------

    Burden Estimate: The Public Reporting burden for the requirements
proposed here are as follows:

----------------------------------------------------------------------------------------------------------------
                                                     Number of       Number of       Hours per     Total annual
                 Data collection                    respondents      responses       response          hours
----------------------------------------------------------------------------------------------------------------
FERC Form 556...................................  ..............  ..............  ..............  ..............
FERC Certification..............................              27               1               4             108
Self-Certification..............................             270               1              38          10,260
                                                 -----------------
    Subtotals...................................             297  ..............  ..............        * 10,368
FERC-516........................................  ..............  ..............  ..............  ..............
205 filings.....................................             100               1             183          18,300
Electric quarterly reports......................         \1\ 100               1             230          23,000
                                                         \2\ 100               3               6           1,800
Change of status................................             100               1               3             300
                                                 -----------------
    Subtotals...................................             100  ..............  ..............          43,400
----------------------------------------------------------------------------------------------------------------
* Off-setting changes to FERC-556; no change to current burden.
\1\ Initial.
\2\ Later.

    Total Annual Hours for Collection: (Reporting + recordkeeping (if
appropriate) = 43,400 hours (excludes the 10,368 hours for FERC-556).
    Information Collection Costs: Costs for FERC-516 = $15,190,000
$3,628,800. (The hourly rate includes attorney fees, engineering
consultation fees and administrative support.)
    Title: FERC Form 556 ``Cogeneration and Small Power Production''.
    Action: Proposed Collections.
    OMB Control No.: 1902-0075.
    Respondents: Business or other for profit.
    Frequency of Responses: On occasion.
    Necessity of the Information: This Final Rule adopts the
Congressional mandate found in section 1253(a) of EPAct 2005 to
implement the establishment of criteria for new qualifying cogeneration
facilities; and the elimination of ownership limitations. By amending
its regulations, the Commission is satisfying the statutory mandate and
also satisfying its continuing obligation to review its policies
encouraging cogeneration and small power production, energy
conservation, efficient use of facilities and resources by electric
utilities and equitable rates for energy customers. The information
collected under 18 CFR Parts 131 and 292 is used by the Commission to
determine whether an application for certification (Commission
certification or self-certification) meets the criteria for a
qualifying small power production facility or a qualifying cogeneration
facility under its regulations and eligible to receive the benefits
available to it under PURPA. The information collected under 18 CFR
part 35 is used by the Commission to carry out its statutory
responsibility to assure that electric rates are just and reasonable.
Sufficient detail must be obtained for the Commission to make informed
decisions concerning appropriate cost and rate levels and to aid
customers and other parties who may wish to challenge costs and rates.
A public utility must obtain Commission authorization for all rates and
charges for wholesale sales and transmission of electric energy in
interstate commerce. The Commission is authorized to investigate the
rates charged by public utilities for such sales and transmission. If,
after investigation, the Commission determines that the rates are
unjust and unreasonable or unduly discriminatory or preferential, the
Commission is authorized to determine and prescribe the just and
reasonable rates.
    Internal review: The Commission has reviewed the requirements
pertaining to qualifying small power production and cogeneration
facilities and determined the proposed requirements are necessary to
meet the statutory provisions of EPAct 2005, PURPA and the FPA.
    These requirements conform to the Commission's plan for efficient
information collection, communication and management within the energy
industry. The Commission has assured itself, by means of internal
review, that there is specific, objective support for the burden
estimates associated with the information requirements.
    Interested persons may obtain information on the reporting
requirements by contacting: Federal Energy Regulatory Commission, 888
First Street, NE., Washington, DC 20426 [Attention: Michael Miller,
Office of the Executive Director, Phone:<PHONE_NUMBER>, fax: (202)
273-0873, e-mail<EMAIL_ADDRESS>
V. Environmental Analysis

    118. The Commission is required to prepare an Environmental
Assessment or an Environmental Impact Statement for any action that may
have a significant adverse effect on the human environment.\28\ The
Commission has categorically excluded certain actions from this
requirement as not having a significant effect on the human
environment. As explained above, this Final Rule interprets amendments
made to PURPA by EPAct 2005, and clarifies the applicability of these
amendments to QFs; it does not substantially change the effect of the
legislation. Accordingly, no environmental consideration is
necessary.\29\
---------------------------------------------------------------------------

    \28\ Regulations Implementing the National Environmental Policy
Act, Order No. 486, 52 FR 47897 (Dec. 17, 1987) FERC Stats. & Regs.
Preambles 1986-1990 ] 30,783 (1987).
    \29\ 18 CFR 380.4(a)(2)(ii) (2005).
---------------------------------------------------------------------------

VI. Regulatory Flexibility Act Analysis

    119. The Regulatory Flexibility Act of 1980 (RFA) \30\ generally
requires a description and analysis of final rules that will have
significant economic impact on a substantial number of small entities.
In the NOPR, we stated that many, if not most, QFs to which this rule
would apply do not fall within the definition of small entities, citing
the RFA's definition that a small entity is ``a business that is
independently owned and not dominant in its field of operation.'' \31\
The Non-Utility QF Group, however, argues that the Commission's
proposals will impact small entities. It argues that it is likely

that a majority of QFs are owned in whole, or at least up to 50
percent, by small entities. It argues that under Small Business
Administration (SBA) standards, an electric production firm is
considered ``small'' if its output does not exceed 4 million MWh per
year. It also argues that the forms and applications that will be
required due to the modification of exemptions, including section 203
applications, section 205 tariffs, electronic quarterly reports and
triennial market power reports, will cause a significant impact on a
substantial number of small entities.
---------------------------------------------------------------------------

    \30\ 5 U.S.C. 601-12 (2000).
    \31\ 15 U.S.C. 632 (2000).
---------------------------------------------------------------------------

    120. First, we note that certain rules are exempt from the RFA's
requirements; exempt rules include interpretive rules, general
statements of policy, or rules of agency organization procedure and
practice. Interpretive rules ``generally interpret the intent expressed
by Congress, where an agency does not insert its own judgments or
interpretations in interpreting a rule and simply regurgitates
statutory language.'' This Final Rule to a large extent is an
interpretive rule; Congress directed the Commission in section 1253 of
EPAct to revise our regulations governing new cogeneration facilities,
and we have responded by following our statutory mandate.
    121. Moreover, many QFs, although certainly not all, would not be
considered ``small,'' even under the SBA's standards. Also, while there
will be QFs that are small and that will be affected by the Final Rule,
we also have included numerous provisions in the Final Rule designed to
reduce the Final Rule's impact on such small entities. First, in
response to commenters, the Final Rule provides that facilities 20 MW
or smaller shall remain exempt from sections 205 and 206 of the Federal
Power Act (this is an increase from five MW or smaller as proposed in
the NOPR). The Final Rule further provides that sales that occur
pursuant to existing contracts will continue to be exempt from section
205 of the FPA. In addition, the Final Rule also provides a rebuttable
presumption that new cogeneration facilities that are 5 MW or smaller
satisfy both the requirement that the thermal output of a new
cogeneration facility is used in a productive and beneficial manner and
the requirement that the electrical, thermal, chemical, and mechanical
output of a new cogeneration facility is used fundamentally for
industrial, commercial, residential or institutional purposes. The
Final Rule also provides that a qualifying facility shall retain its
exemption from sections 205 and 206 of the Federal Power Act when its
power sales are made pursuant to a state regulatory authority's
implementation of PURPA. This will mean that many QF power sales will
continue to be exempt from sections 205 and 206 of the Federal Power
Act.
    122. The Final Rule also interprets PURPA to permit the Commission
to exempt QFs from the newly enacted Public Utility Holding Company Act
of 2005, and, accordingly, exempts QFs from that statute. In addition,
to the extent the proposed regulations remove now-unnecessary
regulations such as ownership limitations for qualifying cogeneration
and small power production facilities, the proposed regulations will be
beneficial to QFs.

VII. Document Availability

    123. In addition to publishing the full text of this document in
the Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
Internet through the Commission's Home Page (http://www.ferc.gov) and

in the Commission's Public Reference Room during normal business hours
(8:30 a.m. to 5 p.m. eastern time) at 888 First Street, NE., Room 2A,
Washington, DC 20426
    124. From the Commission's Home Page on the Internet, this
information is available in the Commission's document management
system, eLibrary. The full text of this document is available on
eLibrary in PDF and Microsoft Word format for viewing, printing, and/or
downloading. To access this document in eLibrary, type the docket
number excluding the last three digits of this document in the docket
number field.
    125. User assistance is available for eLibrary and the Commission's
Web site during normal business hours. For assistance, please contact
FERC Online Support at 1-866-208-3676 (toll free) or<PHONE_NUMBER> (e-
mail at FERCOnlinesupport@ferc.gov), or the Public Reference Room at
(202) 502-8371, TTY<PHONE_NUMBER> (E-Mail the Public Reference Room at
public.referenceroom@ferc.gov).

VIII. Effective Date

    126. These regulations are effective March 17, 2006.
    The Commission has determined, with the concurrence of the
Administrator of the Office of Information and Regulatory Affairs of
OMB, that this rule is not a ``major rule'' as defined in Section 351
of the Small Business Regulatory Enforcement Fairness Act of 1996.

List of Subjects in 18 CFR Part 131 and 292

    Electric power, Electric power plants, Electric utilities, Natural
gas, Reporting and recordkeeping requirements.

    By the Commission.
Magalie R. Salas,
Secretary.

0
In consideration of the foregoing, the Commission amends parts 131 and
292, chapter I, title 18, Code of Federal Regulations, as follows:

PART 131--FORMS

0
1. The authority citation for part 131 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42
U.S.C. 7101-7352.

0
2. In Sec.  131.80, part A1a. through 1c. is revised part C.15, and a
new undesignated center heading For New Congeneration Facilities
immediately before part C.15 are added to read as follows:

Sec.  131.80  FERC Form No. 556, Certification of qualifying facility
status for an existing or a proposed small power production or
cogeneration facility.

* * * * *
Part A--General Information To Be Submitted by All Applicants
    1a. Full name:
    Docket Number assigned to the immediately preceding submittal filed
with the Commission in connection with the instant facility, if any: QF
--------
    Purpose of instant filing (self-certification or self-
recertification [Section 292.207(a)(1)], or application for Commission
certification or recertification [Sections 292.207(b) and (d)(2)]):
    1b. Full address of applicant:
    1c. Indicate the owner(s) of the facility (including the percentage
of ownership held by any electric utility or electric utility holding
company, or by any persons owned by either) and the operator of the
facility. Additionally, state whether or not any of the non-electric
utility owners or their upstream owners are engaged in the generation
or sale of electric power, or have any ownership or operating interest
in any electric facilities other than qualifying facilities. In order
to facilitate review of the application, the applicant may also provide
an ownership chart identifying the upstream ownership of the facility.
Such chart should indicate ownership percentages where appropriate.
* * * * *

Part C--Description of the Cogeneration Facility
* * * * *
For New Cogeneration Facilities
    15. For any cogeneration facility that was either not certified as
a qualifying cogeneration facility on or before August 8, 2005, or that
had not filed a notice of self-certification, self-recertification or
an application for Commission certification under Sec.  292.207 of this
chapter prior to February 2, 2006, also show:
    (i) The thermal energy output of the cogeneration facility is used
in a productive and beneficial manner; and
    (ii) The electrical, thermal, chemical and mechanical output of the
cogeneration facility is used fundamentally for industrial, commercial,
residential or institutional purposes and is not intended fundamentally
for sale to an electric utility, taking into account technological,
efficiency, economic, and variable thermal energy requirements, as well
as state laws applicable to sales of electric energy from a qualifying
facility to its host facility.

PART 292--REGULATIONS UNDER SECTIONS 201 AND 210 OF THE PUBLIC
UTILTY REGULATORY POLICIES ACT OF 1978 WITH REGARD TO SMALL POWER
PRODUCTION AND COGENERATION

0
3. The authority citation for part 292 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r; 2601-2645, 31 U.S.C. 9701; 42
U.S.C. 7101-7352.

0
4. In Sec.  292.203, paragraphs (a) and (b) are revised to read as
follows:

Sec.  292.203  General requirements for qualification.

    (a) Small power production facilities. Except as provided in
paragraph (c) of this section, a small power production facility is a
qualifying facility if it:
    (1) Meets the maximum size criteria specified in Sec.  292.204(a);
    (2) Meets the fuel use criteria specified in Sec.  292.204(b); and
    (3) Has filed with the Commission a notice of self-certification,
pursuant to Sec.  292.207(a); or has filed with the Commission an
application for Commission certification, pursuant to Sec.
292.207(b)(1), that has been granted.
    (b) Cogeneration facilities. A cogeneration facility, including any
diesel and dual-fuel cogeneration facility, is a qualifying facility if
it:
    (1) Meets any applicable operating and efficiency standards
specified in Sec.  292.205(a) and (b); and
    (2) Has filed with the Commission a notice of self-certification,
pursuant to Sec.  292.207(a); or has filed with the Commission an
application for Commission certification, pursuant to Sec.
292.207(b)(1), that has been granted.
* * * * *

0
5. In Sec.  292.205, paragraph (d) is added to read as follows:

Sec.  292.205  Criteria for qualifying cogeneration facilities.

* * * * *
    (d) Criteria for new cogeneration facilities. Notwithstanding
paragraphs (a) and (b) of this section, any cogeneration facility that
was either not certified as a qualifying cogeneration facility on or
before August 8, 2005, or that had not filed a notice of self-
certification, self-recertification or an application for Commission
certification or Commission recertification as a qualifying
cogeneration facility under Sec.  292.207 of this chapter prior to
February 2, 2006, and which is seeking to sell electric energy pursuant
to section 210 of the Public Utility Regulatory Policies Act of 1978,
16 U.S.C. 824a-1, must also show:
    (1) The thermal energy output of the cogeneration facility is used
in a productive and beneficial manner; and
    (2) The electrical, thermal, chemical and mechanical output of the
cogeneration facility is used fundamentally for industrial, commercial,
residential or institutional purposes and is not intended fundamentally
for sale to an electric utility, taking into account technological,
efficiency, economic, and variable thermal energy requirements, as well
as state laws applicable to sales of electric energy from a qualifying
facility to its host facility.
    (3) Fundamental use test. For the purposes of satisfying paragraph
(d)(2) of this section, the electrical, thermal, chemical and
mechanical output of the cogeneration facility will be considered used