

[Federal Register: February 15, 2006 (Volume 71, Number 31)]
[Rules and Regulations]               
[Page 7852-7869]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15fe06-4]                         


[[Page 7852]]

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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, (202) 502-8576.
Samuel Higginbottom (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8561.
Eric D. Winterbauer (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8329.

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

[[Page 7853]]

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

[[Page 7854]]

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.

[[Page 7855]]

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

[[Page 7856]]

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

[[Page 7857]]

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

[[Page 7858]]

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

[[Page 7859]]

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

[[Page 7860]]

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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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

[[Page 7861]]

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

[[Page 7862]]

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

[[Page 7863]]

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.,

[[Page 7864]]

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

[[Page 7865]]

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

[[Page 7866]]

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: (202) 502-8415, fax: (202) 
273-0873, e-mail: michael.miller@ferc.gov.

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

[[Page 7867]]

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 (202) 502-8222 (e-
mail at FERCOnlinesupport@ferc.gov), or the Public Reference Room at 
(202) 502-8371, TTY (202) 502-8659 (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.
* * * * *

[[Page 7868]]

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 
fundamentally for industrial, commercial, or institutional purposes and 
not intended fundamentally for sale to an electric utility if at least 
50 percent of the aggregate of such output, on an annual basis, is used 
for industrial, commercial, residential or institutional purposes. In 
addition, applicants for facilities that do not meet this safe harbor 
standard may present evidence to the Commission that the facilities 
should nevertheless be certified given state laws applicable to sales 
of electric energy or unique technological, efficiency, economic, and 
variable thermal energy requirements.
    (4) For purposes of paragraphs (d)(1) and (d)(2) of this section, a 
new cogeneration facility of 5 MW or smaller will be presumed to 
satisfy the requirements of those paragraphs.
    (5) For purposes of paragraph (d)(1) of this section, where a 
thermal host existed prior to the development of a new cogeneration 
facility whose thermal output will supplant the thermal source 
previously in use by the thermal host, the thermal output of such new 
cogeneration facility will be presumed to satisfy the requirements of 
paragraph (d)(1).

0
6. Section 292.206 is removed.

0
7. In Sec.  292.207, paragraphs (a)(1)(iv), and (d)(1)(iii) are revised 
to read as follows:


Sec.  292.207  Procedures for obtaining qualifying status.

* * * * *
    (a) * * *
    (1) * * *
    (iv) Notices of self-certification or self-recertification, other 
than for new cogeneration facilities, will not be published in the 
Federal Register. Notices of self-certification or self-recertification 
of new cogeneration facilities will be published in the Federal 
Register; such self-certifications and self-recertifications should 
include a form of notice suitable for publication in the Federal 
Register.
* * * * *
    (d) * * *
    (1) * * *
    (iii) The Commission may, on its own motion or on the motion of any 
person, revoke the qualifying status of a self-certified or self-
recertified qualifying facility if it finds that the self-certified or 
self-recertified qualifying facility does not meet the applicable 
requirements for qualifying facilities.
* * * * *

0
8. In Sec.  292.601, paragraph (c) is revised to read as follows:


Sec.  292.601  Exemption of qualifying facilities from the Federal 
Power Act.

* * * * *
    (c) General rule. Any qualifying facility described in paragraph 
(a) of this section shall be exempt from all sections of the Federal 
Power Act, except:
    (1) Sections 205 and 206; however, sales of energy or capacity made 
by qualifying facilities 20 MW or smaller, or made pursuant to a 
contract executed on or before March 17, 2006 or made pursuant to a 
state regulatory authority's implementation of section 210 the Public 
Utility Regulatory Policies Act of 1978, 16 U.S.C. 824a-1, shall be 
exempt from scrutiny under sections 205 and 206;
    (2) Section 1-18, and 21-30;

[[Page 7869]]

    (3) Sections 202(c), 210, 211, 212, 213, 214, 220, 221 and 222;
    (4) Sections 305(c); and
    (5) Any necessary enforcement provision of part III of the Federal 
Power Act (including but not limited to sections 306, 307, 308, 309, 
314, 315, 316 and 316A) with regard to the sections listed in 
paragraphs (c)(1), (2), (3) and (4) of this section.

0
9. In Sec.  292.602, paragraphs (b) and (c) are revised to read as 
follows:


Sec.  292.602  Exemption of qualifying facilities from certain State 
law and regulation.

* * * * *
    (b) Exemption from the Public Utility Holding Company Act of 2005. 
A qualifying facility described in paragraph (a) of this section or a 
utility geothermal small power production facility shall not be 
considered to be an ``electric utility company'' as defined in section 
1262(5) of the Public Utility Holding Company Act of 2005, 42 U.S.C. 
16451(5).
    (c) Exemption from certain State laws and regulations.
    (1) Any qualifying facility shall be exempted (except as provided 
in paragraph (b)(2)) of this section from State laws or regulations 
respecting:
    (i) The rates of electric utilities; and
    (ii) The financial and organizational regulation of electric 
utilities.
    (2) A qualifying facility may not be exempted from State laws and 
regulations implementing subpart C.
    (3) Upon request of a state regulatory authority or nonregulated 
electric utility, the Commission may consider a limitation on the 
exemptions specified in paragraph (b)(1) of this section.
    (4) Upon request of any person, the Commission may determine 
whether a qualifying facility is exempt from a particular State law or 
regulation.


    Note: The following Appendix will not be published in the Code 
of Federal Regulations.

Appendix: List of Petitioners Requesting Clarification or Submitting 
Comments

American Chemistry Council
American Electric Power Service Corporation jointly with AEP Texas 
North Company, AEP Texas Central Company, Appalachian Power Company, 
Columbus Southern Power Company, Indiana Michigan Power Company, 
Kentucky Power Company, Kingsport Power Company, Ohio Power Company, 
Public Service Company of Oklahoma, Southwestern Electric Power 
Company, and Wheeling Power Company (collectively, AEP)
American Forest & Paper Association (American Forest & Paper)
American Public Power Association (APPA)
American Wind Energy Association (AWEA)
ARIPPA
California Electricity Oversight Board (CEOB)
Calpine Corporation (Calpine)
CE Generation, LLC (CE Generation)
Cinergy Solutions, Inc. (Cinergy)
Cogeneration Association California jointly with Energy Producers 
and Users Coalition, Cogeneration Coalition of Washington, and 
Nevada Independent Energy Coalition (collectively, QF Parties)
Cogentrix Energy, inc. (Cogentrix) jointly with Goldman Sachs Group, 
Inc. (Goldman Sachs) (collectively, Independent Sellers)
Constellation Energy Group, Inc. (Constellation)
Council of Industrial Boiler Owners (CIBO)
Delta Power Company, LLC (Delta Power) jointly with Juniper 
Generation, LLC (Juniper), and California Cogeneration Council 
(California Cogen)
Department of Housing and Urban Development
Dow Chemical Company (Dow)
Edison Electric Institute (EEI)
Edison Mission Energy jointly with Edison Mission Marketing & 
Trading, Inc., Midwest Generation EME, LLC (collectively, Edison 
Mission Energy) (intervention only)
Electric Power Supply Association (EPSA)
Electricity Consumers Resource Council (ELCON) jointly with American 
Iron and Steel Institute (AISI) (collectively, Industrial Consumers)
Enel North America, Inc. (Enel)
Entergy Services, Inc. jointly with Entergy Arkansas, Inc.; Entergy 
Gulf States, Inc.; Entergy Louisiana, Inc.; Entergy Mississippi, 
Inc.; and Entergy New Orleans, Inc. (collectively, Entergy)
Environmental Protection Agency
The Fertilizer Institute (Fertilizer Institute)
Florida Industrial Cogeneration Association (Florida Industrial 
Cogeneration)
GE Energy Financial Services (GE)
Granite State Hydropower Association, Inc. (Granite State 
Hydropower)
Illinois Landfill Gas Coalition (Illinois Landfill Gas)
Indeck Energy Services, Inc. (Indeck)
Kentucky Public Service Commission (Kentucky Commission)
Marina Energy, LLC (Marina Energy)
National Association of Regulatory Utility Commissioners (NARUC)
National Rural Electric Cooperative Association (NRECA)
New York State Electric & Gas Corporation (NYSEG) jointly with 
Rochester Gas and Electric Corporation (Rochester G&E)
Non-Utility QF Group
North Carolina Eastern Municipal Power Agency (NCEMPA)
Occidental Chemical Corporation (Occidental)
Oklahoma Corporation Commission (Oklahoma Commission)
Oklahoma Gas and Electric Company (OG&E)
Pacific Gas and Electric Company (PG&E)
Primary Energy Ventures LLC (Primary Energy)
Process Gas Consumers Group Electricity Committee (Electricity 
Committee)
Progress Energy, Inc. (Progress Energy)
Public Service Company of New Mexico (PSNM) jointly with Texas-New 
Mexico Power Company (TNP)
Public Service Electric and Gas Company jointly with PSEG Power LLC, 
PSEG Energy Resources & Trade LLC, and PSEG Global L.L.C. 
(collectively, PSEG)
Public Utility Commission of Ohio (Ohio Commission)
Ridgewood Renewable Power, LLC (Ridgewood)
Solar Turbines Incorporated (Solar Turbines)
Southern California Edison Company (SoCal Edison)
Transmission Access Policy Study Group (TAPS)
U.S. Combined Heat and Power Association (USCHPA)
U.S. Environmental Protection Agency (EPA)
Xcel Energy Services Inc. (Xcel)
York County Solid Waste and Refuse Authority (York County)

[FR Doc. 06-1194 Filed 2-14-06; 8:45 am]

BILLING CODE 6717-01-P
