Revised Regulations Governing Small Power Production and Cogeneration Facilities, 7852-7869 [06-1194]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 71, Number 31 (Wednesday, February 15, 2006)]
[Rules and Regulations]
[Pages 7852-7869]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1194]



[[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. Acc