[Federal Register Volume 63, Number 32 (Wednesday, February 18, 1998)]
[Notices]
[Pages 8173-8181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4014]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission
[Docket Nos. EL94-10-000 and QF86-177-001; Docket Nos. EL94-62-000 and 
QF85-102-005; Docket Nos. EL96-1-000 and QF86-722-003]


Order Granting Requests for Declaratory Order in Part and Denying 
Requests for Declaratory Order in Part, Denying Requests for Revocation 
of QF Status, and Announcing Policy Concerning the Regulatory 
Consequences and Remedies for Sales in Excess of Net Output

Issued February 11, 1998.
    Connecticut Valley Electric Company, Inc. v. Wheelabrator 
Claremont Company, L.P., Wheelabrator Environmental Systems Inc., 
Signal Environmental Systems, Inc., SES Claremont Company L.P., NH/
VT Energy Corp., and Wheelabrator New Hampshire Inc., Carolina Power 
& Light Company v. Stone Container Corporation; Niagara Mohawk Power 
Corporation v. Penntech Papers, Inc.

I. Introduction

    This order addresses three cases currently before the Commission: 
Connecticut Valley Electric Company, Inc. v. Wheelabrator Claremont 
Company, L.P., et al., Docket Nos. EL94-10-000 and QF86-177-001; 
Carolina Power & Light Company v. Stone Container Corp., Docket Nos. 
EL94-62-000 and QF85-102-005; and Niagara Mohawk Power Corporation v. 
Penntech Papers, Inc., Docket Nos. EL96-1-000 and QF86-722-003. The 
three cases raise the following issues: (1) Whether a qualifying 
facility (QF), under the Public Utility Regulatory Policies Act of 1979 
(PURPA) and the Commission's PURPA regulations, may sell its gross 
output, as opposed to its net output (gross output less station power 
needs and line loses to the point of interconnection), to the utility-
purchaser; and (2) if not, what are the regulatory consequences and 
remedies if a facility sells more output than is permissible?
    In this order the Commission:
    (1) Reiterates its 1991 determination that a QF may not sell in 
excess of its net output;
    (2) Announces a Commission policy regarding the regulatory 
consequences of past and future sales by QFs in excess of net output; 
and
    (3) Finds that revocation of QF status is not warranted in the 
three cases addressed in this order.

II. Summary

    The three cases arise because of a seeming conflict between a 
Commission regulation implementing PURPA and Commission precedent under 
PURPA. The Commission has a regulation called the ``simultaneous buy-
sell'' rule (18 C.F.R. Sec. 292.303(a)-(b) (1997)), which, the QFs 
argue, entities QF facilities to sell their gross output, and 
simultaneously buy station power needs from the utility-purchasers of 
QF power. A number of State regulatory authorities have drafted 
standard QF power sales contracts based on the apparent belief that the 
simultaneous buy-sell rule permits QFs to sell gross output to 
utilities and purchase back station power needs (often at a lower 
rate).
    The utility-purchasers of QF power point to Commission precedent in 
stating that QFs may only sell net output. They argue that under the 
Commission precedent, a QF may only sell its net output; a facility 
that sells more than its net output cannot satisfy the ownership 
requirements for QF status under sections 3(17) and (18) of the Federal 
Power Act (FPA) and section 292.206 of the Commission's regulations 
unless the incremental capacity is solely from cogeneration or small 
power production facilities. See Turners Falls Limited Partnership,, 55 
FERC para. 61,487 at 62,668 & n. 24 (1991) (Turners Falls).
    The initial issue raised by the three cases is whether the QFs and 
the State regulatory authorities correctly have interpreted the 
simultaneous buy-sell rule in light of Commission precedent. In 
addressing this initial issue one of the questions that arises is the 
period of time over which a facility's output should be calculated. 
This question arises because a generation facility's actual output 
varies over time due to a number of external factors including 
temperature, humidity, and fuel quality. The QFs have argued that the 
Commission should not measure actual net output on a continuous basis 
but should allow QF facilities to sell up to their net capacity at any 
time.\1\ This is because, if a QF buys back its station power needs, it 
is possible for the QF at times to sell more than its actual net output 
but still sell less than its certified net capacity. As a result, the 
period over which net output is measured will affect how much energy a 
QF may sell.
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    \1\ A QF's certified net capacity is the maximum net output of 
the facility which can be achieved safely and reliably under the 
most favorable conditions likely to occur over a period of several 
years.
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    The second issue raised is what are the regulatory consequences and 
remedies if the Commission finds that a facility has sold more output 
than is permissible. This issue involves whether such a facility should 
be decertified as a PURPA QF. In addition, it presents how the 
Commission should calculate the rate under the FPA during any period of 
non-compliance and whether such rates should be applicable to all of 
the facility's sales during the period of non-compliance or just the 
incremental amount of the sale above the permissible level. Finally, we 
must consider whether, and if so under what circumstances, to revoke or 
permit the continuing applicability of PURPA regulatory exemptions (see 
18 CFR Secs. 292.601, .692 (1997)) during the period of noncompliance. 
A related question is whether to reform QF contracts with utilities for 
the sale of output above permissible levels.
    Finally, there is an issue as to the effective date of any 
decision, first with respect to the three case-specific disputes before 
the Commission, and then with respect to any other QFs that may be 
selling in excess of permissible levels.
    In this order, we announce that, as a legal matter, a QF may not 
sell in excess

[[Page 8174]]

of its net output. However, because of a lack of clarity in the 
Commission's simultaneous buy-sell rule, the Commission will not revoke 
the QF status of any facility which made sales in excess of net output 
pursuant to a contract entered into on or before the date of issuance 
of Turner Falls. We pick this date because that decision removed any 
ambiguity concerning the effect of such sales on a facility's QF 
status. We also find that a facility's net output should be measured on 
an hour-by-hour basis. We announce a policy regarding the regulatory 
consequences of past and future sales in excess of net output. Finally, 
in applying the legal and policy determinations announced in this order 
to the three cases pending before the Commission, we find that QF 
revocation is not warranted in any of the pending cases.

III. Background of Pending Cases

    The three cases now before the Commission all involve allegations 
by a purchasing electric utility that a Commission-certified QF has 
made sales in excess of its net output and that, therefore, the QF no 
longer meets the ownership requirements for QF status contained in FPA 
section 3(17) (C) (ii) (for a qualifying small power production 
facility) and FPA section 3(18) (B) (ii) (for a qualifying cogeneration 
facility). Those sections of the FPA were added by PURPA. They provide 
that QFs 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).'' 
\2\
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    \2\ These sections are the basis of the Commission's QF 
ownership criteria codified in section 292.206 of the Commission's 
regulations. Section 292.206(a) specifies the Commission's general 
QF ownership rule:
    A cogeneration facility or small power production facility may 
not be owned by a person primarily engaged in the generation or sale 
of electric power (other than electric power solely from 
cogeneration facilities or small power production facilities).
    18 CFR Sec. 292.206(a) (1997).
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    The three QFs with cases now before us claim, notwithstanding 
Commission precedent on the subject discussed below, that the 
Commission's rules permit the sale of gross output. They cite to the 
``simultaneous buy-sell'' rule. Subsections 292.303(a) and (b) of our 
regulations provide as follows:

    Electric utility obligations under this subpart.
    (a) Obligation to purchase from qualifying facilities. Each 
electric utility shall purchase, in accordance with Sec. 292.304 
[\3\], any energy and capacity which is made available from a 
qualifying facility:
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    \3\ 18 CFR Sec. 292.304 (1997) provides for rates for QF sales 
to utilities.
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    (1) Directly to the electric utility; or
    (2) Indirectly to the electric utility in accordance with 
paragraph (d) of this section.
    (b) Obligation to sell to qualifying facilities. Each electric 
utility shall sell to any qualifying facility, in accordance with 
Sec. 292.305 [\4\], any energy and capacity requested by the 
qualifying facility.

    \4\ 18 CFR Sec. 292.305 (1997) provides for rates for utility 
sales to QFs.
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    Below we discuss the particular facts and arguments raised in each 
of the cases.

A. Connecticut Valley Electric Company, Inc. v. Wheelabrator Claremont 
Company, L.P., et al. (Docket Nos. EL94-10-000 and QF86-177-001)

    Connecticut Valley Electric Company, Inc. (Connecticut Valley) 
filed a complaint against Wheelabrator Claremont Company, L.P. 
(Claremont).\5\ Claremont owns and operates a biomass-fueled small 
power production facility in Claremont, New Hampshire. The order 
granting certification of the facility as a QF noted that it had an 
electric power production capacity of 4.5 MW. See Signal Environmental 
Systems, Inc.--Claremont, 34 FERC para. 62,212 (1986). Claremont's 
partners are all wholly-owned subsidiaries of Wheelabrator 
Environmental Systems, Inc., the successor in interest to Signal 
Environmental Systems, Inc.
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    \5\ The complaint was also filed against affiliates of 
Claremont, as well as against Signal Environmental Systems, Inc. 
(the original applicant for QF status for the facility) and its 
affiliates.
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    The Claremont facility produces power for sale to Connecticut 
Valley using solid waste as an energy source. The facility began 
commercial operation in March 1987 and, pursuant to a Power Purchase 
Agreement approved by the New Hampshire Public Utilities Commission 
(New Hampshire Commission), has sold its entire output to Connecticut 
Valley. In addition, the Claremont facility has purchased sufficient 
electric energy from Connecticut Valley to serve its station power 
needs.
    In its complaint, Connecticut Valley alleges that Claremont has 
been selling its entire gross output to Connecticut Valley, while 
purchasing back station power needs. Connecticut Valley claims that 
Claremont cannot operate as a QF in the manner specified in the Power 
Purchase Agreement. Connecticut Valley claims that it became aware in 
May 1993, that Claremont's sale of the facility's gross output of 4.5 
MW to Connecticut Valley, rather than its net output of 3.9 MW, 
violated Commission precedent. For this reason, Connecticut Valley 
seeks revocation of the qualifying status of the Claremont facility, 
recision or reformation of the Power Purchase Agreement, a 
determination of the just and reasonable rates for what it claims is a 
wholesale power sale subject to this Commission's jurisdiction under 
the FPA, and refunds with interest. In the alternative, Connecticut 
Valley asks the Commission to reform the power sales contract to allow 
Claremont to sell only the net electrical output of the facility, and 
asks that Claremont be ordered to refund with interest all revenues it 
received for the sale of the incremental output between its net and 
gross output.\6\
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    \6\ Specifically, Connecticut Valley states that for the sale of 
the incremental output, Claremont should refund the difference 
between the avoided cost rate at which Claremont makes sales to 
Connecticut Valley, and the retail rate at which Claremont purchases 
station power.
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    Notice of Connecticut Valley's complaint was published in the 
Federal Register, 58 Fed. Reg. 64,301 (1993), with comments, protests, 
or motions to intervene due on or before January 5, 1994. Timely 
motions to intervene and notices of intervention were filed by Granite 
State Hydropower Association, Sullivan County Regional Refuse Disposal 
District and the Southern Windsor/Windham Counties Solid Waste 
Management District (collectively, the Districts), the New Hampshire 
Commission, National Independent Energy Producers, Southern California 
Edison Company, the Public Utilities Commission of the State of 
California, and the Center for Energy Efficiency and Renewable 
Technologies. An untimely motion to intervene was filed by the City of 
Vernon, California.
    In its answer, Claremont admits that it sells its entire (gross) 
output to Connecticut Valley. It states that this arrangement is 
required by the terms of the Power Purchase Agreement and was approved 
by the New Hampshire Commission in settlement of litigation.\7\ 
Claremont states that the simultaneous purchase and sale arrangement is 
fully consistent with this Commission's ``simultaneous buy-sell'' rule. 
Claremont points to the preamble to the Commission's rules implementing 
PURPA for the proposition that the

[[Page 8175]]

Commission intended to allow the sale of a QF's gross output when it 
promulgated the simultaneous buy-sell rule. Claremont claims that it is 
entitled to rely on the simultaneous buy-sell rule until it is amended 
or rescinded by the Commission. Claremont further claims that 
amendments to Commission regulations may not be retroactive.
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    \7\ On February 23, 1983, Claremont's predecessor in interest, 
Connecticut Valley and the staff of the New Hampshire Commission 
entered into a settlement agreement which in part provided that 
Connecticut Valley would ``purchase for twenty (20) years all energy 
and capacity of the [Facility] at a price of 9 cents per kilowatt 
hour. * * *'' (emphasis added). The settlement agreement (attached 
as Appendix 3 to the complaint) was approved by the New Hampshire 
Commission on March 2, 1983. The Power Purchase Agreement (attached 
as Appendix 4 to the complaint) subsequently was executed by the 
parties on December 12, 1984.
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    Claremont also claims that the arrangement is fully consistent with 
the New Hampshire Limited Electrical Energy Producers Act (LEEPA), 
which implements PURPA in New Hampshire, as well as the New Hampshire 
Commission's orders implementing PURPA and LEEPA.
    Claremont claims that it, as well as many other developers, relied 
on the Commission's simultaneous buy-sell rule in developing QF 
projects. Claremont states that substantial inequities would result if 
the Commission were to require Claremont to operate in a manner 
different from what had been planned when it contracted with 
Connecticut Valley. It notes that revocation of its QF status would 
harm the sanitary districts which supply fuel (solid waste) to the 
facility. It also notes that Connecticut Valley's petition, if granted, 
would have the effect of jeopardizing the QF status of other facilities 
in New Hampshire that, pursuant to other power sales contracts approved 
by the New Hampshire Commission, sell their gross output pursuant to 
simultaneous buy/sell provisions.

B. Carolina Power & Light Company v. Stone Container Corporation 
(Docket Nos. EL94-62-000 and OF85-102-005)

    Carolina Power & Light Company (CP&L) filed a complaint and motion 
for revocation of QF status against Stone Container Corporation (Stone 
Container). Stone Container owns and operates a topping-cycle 
cogeneration facility located at Stone Container's linerboard mill and 
manufacturing plant in Florence, South Carolina. The facility contains 
one steam generator and one extraction/condensing steam turbine-
generator. The extracted steam is used in the linerboard manufacturing 
process. The primary fuel for the facility is pulverized coal, 
supplemented with wood waste.
    In its initial application for certification, Stone Container 
identified its net power capacity as 64.5 MW. Stone Container stated 
that the gross power production capacity of the facility was 68 MW and 
the auxiliary power requirements would be 3.5 MW. The Commission 
granted Stone Container's application for QF status. See Stone 
Container Corporation, 31 FERC para. 62,036 (1985). Subsequently, Stone 
Container sought recertification for a QF with an amended capacity 
(74.8 MW net capacity, 79 MW gross capacity, 4.2 MW auxiliary load). 
The Commission granted recertification. See Stone Container 
Corporation, 55 FERC
para. 62,205 (1991).
    The electricity generated by the Stone Container facility is sold 
to CP&L pursuant to a 20-year ``Electric Power Purchase Agreement'' 
that was executed on December 17, 1984, and was subsequently amended on 
March 9, 1989, and on October 14, 1992. (The Power Purchase Agreement 
and the amendments are attached to the complaint as Attachment 1.)
    Paragraph 10(b) of the original agreement gave Stone Container the 
option to switch to a ``buy-all/sell-all'' mode of operation. In the 
second amendment to the agreement, Stone Container exercised its option 
to switch to the buy-all/sell-all mode of operation.\8\
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    \8\ Regardless of the mode of operation, paragraph 33(e) 
provides that the maximum amount which can be sold to CP&L is 68 MW.
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    CP&L claims that the switch to the buy-all/sell-all mode of 
operation, ``[b]ecause of the configuration of the interconnection 
between CP&L and the Stone Container facility'' (Complaint at 4), has 
resulted in Stone Container's selling CP&L its gross output from the 
facility. CP&L states that the switch to the buy-all/sell-all operation 
has resulted in Stone Container's losing its QF status and becoming a 
public utility subject to this Commission's rate regulation under the 
FPA.
    Notice of CP&L's complaint and motion for revocation was published 
in the Federal Register, 59 Fed. Reg. 24,491 (1994), with comments, 
protests or motions to intervene due on or before June 2, 1994. Timely 
motions to intervene were filed by Westinghouse Electric Corporation, 
Gelco Corporation, Granite State Hydropower Association, and Claremont. 
Additionally, a number of late-filed letters containing additional 
comments were filed. Motions to strike some of the motions to intervene 
were filed, and answers to those motions were filed. Finally, motions 
to hold the matter in abeyance, as well as a motion to expedite, were 
filed.
    In its answer to CP&L's complaint and motion for revocation, Stone 
Container states that it never has sold power to CP&L in excess of the 
certified qualifying capacity of the facility. Stone Container states 
that it has thus always been in compliance with the requirements for QF 
status, as interpreted by the Commission in Turners Falls and related 
PURPA cases. Stone Container states that the essence of CP&L's 
complaint is that Stone Container has sold in excess of what Stone 
Container refers to as its ``actual net output.'' Stone Container urges 
that CP&L's interpretation of Turners Falls is illogical because it 
would attribute no meaning to the certified qualifying capacity of a 
facility.
    Stone Container further urges that its mode of operation since 1991 
has been consistent with this Commission's ``simultaneous buy-sell'' 
rule. It also states that CP&L's reference to the configuration of the 
interconnection is misguided, because CP&L is contractually entitled to 
control the configuration of the interconnection.
    Finally, Stone Container argues that if it has not complied with 
the Commission's QF regulations in any respect, the Commission should 
exercise its equitable powers to grant waiver of any such violation. In 
this regard, Stone Container points out that any waiver would be for a 
limited time (beginning with the date of commencement of the buy-all/
sell-all mode of operation). Stone Container alleges that CP&L should 
be equitably estopped from asserting that the facility has lost its QF 
status because CP&L proposed the simultaneously ``buy-all/sell-all'' 
provision in the contract (which Stone Container exercised) and 
understood what the mode of operation entailed. Stone Container further 
argues that any non-compliance with the Commission's regulations is the 
result of the Commission's departure from its PURPA regulations and 
precedents on which Stone Container reasonably relied.

C. Niagara Mohawk Power Corporation versus Penntech Papers, Inc. 
(Docket Nos. EL96-1-000 and OF86-722-003)

    Niagara Mohawk Power Corporation (Niagara Mohawk) filed a petition 
for declaratory order revoking the QF status of the cogeneration 
facility operated by Penntech Papers, Inc. (Penntech Papers).\9\ The 
Penntech Papers' facility is located in Johnsonburg, Pennsylvania. 
Extraction steam from the facility is used to supply the pulp and paper 
mill process requirements of Penntech Papers. The facility originally 
was certified as having 33.433 MW (net) capacity. See Penntech Papers, 
Inc., 36

[[Page 8176]]

FERC para. 62,073 (1986). Subsequently, Penntech Papers sought 
recertification to reflect, among other things, an increase in 
generating capacity. The Commission granted recertification to reflect 
the increase in capacity, except to the extent that Penntech Papers 
proposed to sell its entire capacity (52 MW) to Niagara Mohawk and 
purchase its entire auxiliary load (5.1 MW) from West Penn Power 
Company. See Penntech Papers, Inc., 48 FERC para. 61,120 (1989).\10\
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    \9\ The Penntech Papers facility is now owned by Williamette 
Industries, Inc. (Willamette), which purchased the Penntech Papers 
plant and assumed the rights and obligations under the Power 
Purchase Agreement with Niagara Mohawk. While Penntech Papers is now 
an operating division of Williamette, we will refer to Penntech 
Papers as the facility owner in this order.
    \10\ On February 8, 1993, Penntech Papers filed a notice of 
self-recertification to reflect its ``as built'' description of the 
facility. In its notice of self-recertification, Penntech Papers 
stated that the maximum rated output of the facility would be 57,800 
kW/hr. and that average power generation, net of station power needs 
was expected to be 45,000 kW/hr. (or 394,200 MWH per year).
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    Power from the Penntech Papers facility is transmitted over a 7-
mile 115 kV line to the Ridgeway substation of Pennsylvania Electric 
Company (Penelec). The power is then wheeled by Penelec to Niagara 
Mohawk. Because Niagara Mohawk informed Penntech Papers that it would 
not ``dynamically'' schedule deliveries from Penntech Paper's 
facility,\11\ but would require that actual deliveries from the 
facility equal Penntech Papers' previously scheduled deliveries with 
Niagara Mohawk on an hour-by-hour basis, the transmission agreement 
provides that Penelec will purchase from Penntech Papers inadvertent 
excess generation produced by the facility. The transmission agreement 
also provides that Penelec will sell Penntech Papers ``make-up'' power 
for delivery to Niagara Mohawk at times of inadvertent shortfalls or 
reductions in facility output.
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    \11\ Dynamic scheduling provides the metering, telemetering, 
computer software, hardware, communications, engineering and 
administration required to allow remote generators to follow closely 
the moment-to-moment variations of a local load. In effect, dynamic 
scheduling electronically moves load out of the control area in 
which it is physically located and into another control area. See 
Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recovery 
of Stranded Costs by Public Utilities and Transmitting Utilities, 
Order No. 888, 61 Fed. Reg. 21,540 (1996), FERC Stats. & Regs. para. 
31,036 at 31,709-10 (1996), order on reh'g, Order No. 888-A, 62 Fed. 
Reg. 12,274 (1997), FERC Stats. & Regs. para. 31,048 at 30,235-36 
(1997), order on reh'g, Order No. 888-B, 81 FERC para. 61,248 (1997) 
(Open Access Rule).
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    According to Niagara Mohawk, this provision for the purchase and 
resale of make-up power by Penntech Papers means that Penntech Papers 
is selling Niagara Mohawk power from sources other than cogeneration or 
small power production facilities, and thus cannot satisfy the 
ownership requirements for QF status under the holding of Turners 
Falls.
    Notice of Niagara Mohawk's petition for declaratory order revoking 
QF status was published in the Federal Register, 60 Fed. Reg. 53,917 
(1995), with comments, protests or motions to intervene due on or 
before November 17, 1995.
    A notice of intervention was filed by the New York Public Service 
Commission. Timely motions to intervene were filed by Penelec and by 
Willamette, on behalf of Penntech Papers.
    In its answer to Niagara Mohawk's petition,\12\ Penntech Papers 
states that Niagara Mohawk's petition rests on significant mistakes of 
fact. Penntech Papers argues that Niagara Mohawk's petition represents 
an effort to abrogate its contract with Penntech Papers as part of its 
ongoing effort to renegotiate contracts with the many QFs from which it 
purchases.
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    \12\ The answer was filed by Willamette on behalf of Penntech 
Papers.
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    Penntech Papers states that it has adhered to the Commission's 
directive in its recertification order (48 FERC at 61,424) that it may 
not sell the gross output of its facility. Penntech Papers states that 
the cogeneration facility is an integral part of its paper mill, and 
not a ``PURPA machine.'' Penntech Papers states that it uses a portion 
of the output from its generating turbine to serve auxiliary loads 
(station power), uses another portion to serve loads associated with 
its paper mill, and sells the remainder to Niagara Mohawk at a rate of 
6 cents per kilowatt hour. Penntech Papers states (at 8) that ``[f] or 
[Niagara Mohawk's] convenience, the portion of the net cogeneration 
output that is sold to [Niagara Mohawk] is `scheduled' through Penelec, 
the transmitting utility.'' In addition, under the terms of the 
transmission and scheduling agreement with Penelec, Penntech Papers is 
required to pay Penelec, as line losses, three percent of the power it 
delivers to Penelec.
    Penntech Papers states that although its net output undeniably 
exceeds the amount of power sold to Niagara Mohawk, the de minimis 
amount of ``inadvertent'' power advanced by Penelec to Penntech Papers 
(amounting to less than 1.96 percent of the scheduled sales to Niagara 
Mohawk in 1993 and 0.69 percent of the scheduled sales to Niagara 
Mohawk in 1994) is done to balance the power output schedule with the 
amount of power wheeled and is advanced at the insistence, and for the 
benefit, of Niagara Mohawk. Penntech Papers argues that the inadvertent 
power sales to Niagara Mohawk should not be a basis to decertify 
Penntech Papers' QF status. Penntech Papers states that this Commission 
has approved the transmission agreement under which Penelec advances 
power to Penntech Papers for inadvertent energy differentials. Penntech 
Papers further states that there would be no inadvertent energy 
differentials had Niagara Mohawk accepted dynamic scheduling.\13\
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    \13\ There is no requirement in our PURPA or open access 
regulations that an electric utility purchasing a QF's power do so 
under a dynamic scheduling arrangement.
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    Penntech Papers further states that the power purchase agreement 
between Penntech Papers and Niagara Mohawk specifically recognizes that 
Penntech Papers' deliveries to Penelec would not exactly match the 
scheduled deliveries, and that Penelec would provide make-up power. 
Penntech Papers argues that it receives no benefit, and indeed loses 
money, from the make-up arrangement. Penntech Papers further argues 
that the provision for the sale of inadvertent excess generation and 
purchase of make-up power tends to even out over time, so that there is 
no continuing sale of power produced by a facility other than a QF.

IV. Discussion

A. Procedural Matters

    Pursuant to Rule 214 of the Commission's Rules of Practice and 
Procedure, 18 CFR Sec. 385.214 (1997), the notices of intervention and 
the timely, unopposed motions to intervene serve to make the entities 
which filed them parties to the proceedings in which they intervened. 
Further, we find good cause to grant all of the untimely or opposed 
motions to intervene, and will consider all supplemental pleadings, in 
light of the interests they raise and in order to complete all of the 
arguments of the parties.

B. Statutory and Regulatory Framework

1. Statute and Regulations
    As noted above, in FPA sections 3(17)(C)(ii) and 3(18)(b)(ii) 
Congress provided that QFs must be:
    [O]wned 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) * * *.

16 U.S.C. Secs. 796(17)(C)(ii) and (18)(B)(ii) (1994). Section 
292.206(a) of the Commission's regulations, 18 CFR Sec. 292.206(a) 
(1997), tracks the statutory language almost verbatim. The current 
cases present the question of whether the sale of more than net output 
violates

[[Page 8177]]

the statutory and regulatory criteria for QF status.
2. Commission Precedent Concerning OF Output
    In 1981, the year after the Commission promulgated its QF 
regulations, the Commission, in Occidental Geothermal, Inc., 17 FERC 
para. 61,231 (1981) (Occidental), first addressed an issue relevant to 
the one now before us when it was required to address the ``power 
production capacity'' of a facility. The Commission determined that the 
power production capacity of a facility is:

    [T]he maximum net output of the facility which can be safely and 
reliably achieved under the most favorable operating conditions 
likely to occur over a period of years. The net output of the 
facility is its send out after subtraction of power used to operate 
auxiliary equipment in the facility necessary for power generation 
(such as pumps, blowers, fuel preparation machinery, and exciters) 
and for other essential electricity uses in the facility from the 
gross generator output.

17 FERC at 61,445.\14\
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    \14\ In Malacha Power Project, Inc., 41 FERC para. 61,350 
(1987), the Commission clarified that line losses to the point of 
interconnection with the grid also are subtracted from gross 
generator output to determine the power production capacity.
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    While, in hindsight, it seems clear that the Commission in 
Occidental did not intend to permit a QF to sell in excess of its net 
output (i.e. its power production capacity), the issue in that case was 
more limited; whether the proposed facility would exceed the 80 MW 
limit for qualifying small power production facilities set forth in 
section 292.204(a).\15\
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    \15\ The current version of the regulation was amended to 
reflect the Solar, Wind, Waste, and Geothermal Power Production 
Incentives Act of 1990. Those changes are not relevant to the issues 
before us in these proceedings.
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    Four years later, in 1985, the Commission again had occasion to 
address qualifying facility output issues. In Power Developers, Inc., 
32 FERC para. 61,101 at 61,276 (1985), reh'g denied, 34 FERC para. 
61,136 (1986) (Power Developers),\16\ the application raised the issue 
of whether ``the qualifying capacity of the facility [is] gross or net 
electric power production capability?'' 32 FERC at 61,275.
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    \16\ See also Penntech Papers, Inc., 48 FERC para. 61,120 
(1989).
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    The Commission answered net. The Commission stated that were a QF 
to sell its gross output to a utility at the utility's avoided cost and 
purchase power for internal use from the utility, it would, in essence, 
be selling more power than the facility, standing alone, is capable of 
delivering. In other words, the QF would be receiving avoided cost 
prices for an amount of power that it does not enable the purchasing 
utility to avoid generating. 32 FERC at 61,276. The Commission stated 
that such a result would be inconsistent with the requirement of PURPA 
and the Commission's implementing regulations that utilities (and their 
ratepayers) be in the same financial position as if they had not 
purchased QF power. Id. (citing Order No. 69, FERC Stats. & Regs., 
Regulations Preambles 1977-1981 para. 30,128 at 30,871). However, even 
though the Commission in Power Developers found implicit in its 
Occidental discussion that QF sales are limited to net output, the 
Commission still did not reach the specific question of whether a QF 
that sold in excess of net output would be found to violate the 
``primarily engaged'' ownership limitation in the statute and our 
regulations.
    Finally, in 1991, the Commission addressed this issue in its order 
in Turners Falls. In that order, the Commission stated, for the first 
time, that the prohibition against a QF's selling in excess of its net 
output was based not only on policy considerations, but also on the 
statutory requirement that a QF be ``owned by a person not a primarily 
engaged in the sale of electric power (other that electric power solely 
from cogeneration facilities or small power production facilities).'' 
16 U.S.C. Secs. 796(17)(C)(ii)-(18)(B)(ii) (1994). In Turners Falls, 
the Commission found, based on its review of the language and 
legislative history of PURPA and the policies underlying enactment of 
PURPA and issuance of the Commission's implementing regulations, that a 
QF which sought to sell the incremental power in excess of its net 
output as non-qualifying power, would cease to be a QF, because it no 
longer would meet the statutory and regulatory restriction regarding 
utility ownership of QFs. 55 FERC at 62,667.
    Before addressing the merits of the individual petitions filed with 
the Commission in the above-referenced proceedings, we will address the 
general legal and policy issues raised by these ``net/gross'' cases.

C. QF Output Issues

1. Can a QF Sell in Excess of Net Output?
    We agree with the parties that it is not clear, on the face of the 
``simultaneous buy-sell'' rule, that a QF is limited to selling its net 
output. Section 292.303(a) provides that ``[e]ach electric utility 
shall purchase * * * any energy and capacity which is made available 
from a qualifying facility.'' (emphasis added). Similarly, section 
292.303(b) provides that ``[e]ach electric utility shall sell to any 
qualifying facility * * * any energy and capacity requested by the 
qualifying facility.'' (emphasis added). In addition, the Commission's 
statements leading up to its promulgation of the ``simultaneous buy-
sell rule also were not absolutely clear as to whether the Commission 
intended that a QF be able to sell gross output at avoided cost while 
purchasing station power at the purchasing utility's retail
    The Commission first addressed the ``simultaneous buy-sell'' rule 
in its PURPA notice of proposed rulemaking. In the NOPR, the Commission 
discussed the situation ``in which a cogenerator or small power 
producer desires to sell all of its output to a utility and purchase 
all of its needs from the utility simultaneously.'' Small Power 
Production and Cogeneration Rates and Exemptions, FERC Stats. & Regs., 
Proposed Regulations 1977-81 para. 32,039 at 32,466 (1979). The 
Commission stated that this rule was necessary to encourage QFs only to 
the extent it applies to ``new'' Capacity. However, because the 
discussion applied to both small power production facilities (which 
normally have no ongoing need to purchase from a utility other than 
station power) and to cogenerators (which often have a need to purchase 
power for industrial purposes other than generation), the discussion 
was ambiguous about the permissibility of selling all output and 
simultaneously buying back station power. See also Staff Paper 
Discussing Responsibilities to Establish Rules Regarding Rates, and 
Exemptions for Qualifying Cogeneration and Small Power Production 
Facilities Pursuant to Section 210 of the Public Utility Regulatory 
Policies Act of 1978, 44 Fed. Reg. 38863, 38870 (July 3, 1979).
    In Order No. 69, adopting regulations for the implementation of 
PURPA, the Commission indicated that the ``simultaneous buy-sell'' rule 
would be applicable to both qualifying small power production 
facilities and qualifying cogenerators, and again noted that avoided 
cost rates would normally only be available for new capacity. FERC 
Stats. & Regs., Regulations Preambles 1977-1981 para. 30,128 at 30,877. 
As with its NOPR statements, the Commission's discussion was not clear 
about the permissibility of selling ``all'' output and buying back 
station power needs.
    Moreover, it appears that several State regulatory authorities 
implemented PURPA based on a plausible interpretation that the 
``simultaneous buy-sell'' rule permitted the sale of a

[[Page 8178]]

QF's gross output. For example, the New Hampshire Commission's standard 
QF sales contract contains a provision that allows for the sale of 
gross output and the buy back of auxiliary (station) power. From the QF 
filings we have received, it is apparent that there are other QF sales 
contracts, approved by other State regulatory authorities, that contain 
similar provisions.
    However, as discussed above, this ambiguity was clarified to a 
significant degree in 1985 in Power Developers. There, the Commission 
made clear that a QF may not sell more than its net output at avoided 
cost rates. Finally, in 1991, in Turner Falls, the Commission removed 
any remaining ambiguity about whether the ``simultaneous buy-sell'' 
rule permitted a sale in excess of net output. The Commission clearly 
stated that a sale in excess of net output would deprive a facility of 
its QF status, unless the incremental sale was of power solely from 
cogeneration or small power production facilities.\17\ See supra 13-14 
(discussing orders). Accordingly, in these cases, the Commission 
removed any ambiguity and all industry participants were put on notice 
that the ``simultaneous buy-sell'' rule was not intended to permit a QF 
to sell its gross output to a utility at avoided cost rates, while 
buying back station power at a lower retail rate.
---------------------------------------------------------------------------

    \17\ The Commission in Turners Falls was not faced with a 
factual situation where a QF sought to sell more than its net output 
and the additional power was ``solely from cogeneration or small 
power production facilities.'' Neither is the Commission faced with 
that situation in the instant cases.
---------------------------------------------------------------------------

    As a result, we disagree with the QFs' reading of the 
``simultaneous buy-sell'' rule. It is clear to us that a QF facility 
can only sell energy and capacity from its facility which is actually 
available, and that, given our interpretation of what a QF is able to 
sell from its facility, this capacity is limited to the net output of 
the QF. Thus, the requirement of section 292.303(a), that an electric 
utility purchase any energy and capacity made available from a QF, is 
limited to the energy and capacity a QF actually has available, which 
is its net energy and capacity.
    The Commission, in promulgating the simultaneous buy-sell rule, did 
not indicate otherwise. Indeed, the rationale behind the rule, as 
indicated in the preamble to Order No. 69, was as follows:

    The effect of this proposed rule was to separate the production 
aspect of a qualifying facility from its consumption function. Under 
this approach, the electrical output of a facility is viewed 
independently of its electrical needs. Thus, if a cogeneration 
facility produces five megawatts, and consumes three megawatts, it 
is treated the same as another qualifying facility that produces 
five megawatts, and that is located next to a factory that uses 
three megawatts.\18\

    \18\ Order No. 69, Small Power Production and Cogeneration 
Facilities, Regulations Implementing Section 210 of the Public 
Utility Regulatory Policies Act of 1978, FERC Stats. & Regs., 
Regulations Preambles, 1977-1981, para. 30,128 at 30,877 (1980) 
(emphasis added).
---------------------------------------------------------------------------

    In this example, the Commission clearly was considering the case of 
a cogeneration facility where the factory associated with the 
cogeneration facility consumed power generated by the facility for 
industrial purposes. That the example was a cogeneration facility is 
meaningful because a cogeneration facility, unlike a small power 
producer, can have electric power needs other than for station power. 
When a cogeneration QF supplies its industrial host's electrical needs 
itself, it displaces power on the system that otherwise would have been 
supplied by the purchasing utility. This is not true when a cogenerator 
or small power producer supplies its own station power; the supplying 
of station power by a QF does not displace power which would have 
otherwise been supplied by the purchasing utility.\19\ While a 
qualifying cogeneration facility may sell its entire net output and buy 
back power from its purchasing utility for non-electric generation uses 
(for example, manufacturing uses) by the thermal host,\20\ a QF, 
whether a cogeneration facility or small power production facility, may 
not sell its gross output to its purchasing utility and buy back 
auxiliary (internal station) power.
---------------------------------------------------------------------------

    \19\ The Commission, in its brief to the United States Court of 
Appeals for the District of Columbia Circuit defending Order No. 69, 
also illustrated the validity of its simultaneous buy-sell rule with 
reference to a cogeneration example. American Electric Power Service 
Corporation, et al. v. FERC, Docket No. 80-1789, May 15, 1981 brief 
at 52. The Commission, in its brief, also recognized the 
significance of displacement. Brief at 58. The court, in upholding 
the simultaneous buy-sell rule, likewise pointed to the cogeneration 
example as justifying the simultaneous buy-sell rule. See American 
Electric Power Service Corporation v. FERC, 675 F. 2d. 1226, 1237 
(D.C. Cir. 1982), rev'd on other grounds sub nom. American Paper 
Institute v. American Electric Power Service Corporation, 461 U.S. 
402 (1983).
    \20\ See Union Carbide Corporation, 48 FERC para. 61,130, reh'g 
denied, 49 FERC para. 61,209 (1989).
---------------------------------------------------------------------------

    Indeed, while the Commission did not address whether a QF would 
lose its qualifying status if it sold in excess of net output in Power 
Developers, the Commission in 1985 did address the meaning of section 
292.303(a) (part of the simultaneous buy-sell rule). The Commission 
stated:

    Our regulations do not contemplate a qualifying facility selling 
its gross output to a utility.
    Although section 292.303(a) states that electric utilities are 
required to purchase ``any'' energy and capacity which is made 
available from a qualifying facility, the Commission has interpreted 
the capacity of a qualifying facility for purposes of obtaining 
qualifying status to be its net power production output, rather than 
its gross output.

32 FERC at 61,276.
    Accordingly, we reiterate our earlier findings that a QF can only 
sell its net output, and that the sale of any other power will result 
in the loss of QF status, unless that power is ``solely from 
cogeneration or small power production facilities.''
2. What Date is Appropriate for Applying the Net Output Rule for 
Purposes of QF Status?
    As noted above, we understand that many QFs and purchasing 
utilities have entered into contracts which require, or permit, the 
simultaneous sale of gross output and the purchase back of auxiliary 
(internal station) power. While there may have been some ambiguity when 
our PURPA regulations became effective, with the issuance of Turners 
Falls, the Commission clearly enunciated that a sale of a QF's output 
in excess of net output would result in the loss of a facility's QF 
status.\21\ Our interpretation of the statutory ownership requirements 
in Turners Falls represented ``an issue of first impression.'' \22\ 
Moreover, the decision in Turners Falls rested not on the plain meaning 
of the statutory language involved,\23\ but on an interpretation of the 
statute based on policy grounds. For these reasons, we believe that it 
would be unfair to revoke the QF certification of any facility which is 
selling its gross output to a utility-purchaser, and buying back 
auxiliary power and/or line losses to the point of interconnection, 
based on a QF contract entered into on or before the date of issuance 
of Turners Falls, that is on or before June 25, 1991.
---------------------------------------------------------------------------

    \21\ As noted, the exception is if the incremental output sold, 
i.e., above net output, is solely from cogeneration or small power 
production facilities.
    \22\ 55 FERC at 62,667; see also id. at 62,672.
    \23\ The Commission stated in Turners Falls that ``because both 
the statute and the legislative history are unclear, we find it 
appropriate to consider the policy reasons of interpreting the 
statute as requested by Turners Falls.'' Id. at 62,669.
---------------------------------------------------------------------------

    We believe that this policy is consistent with our policy against 
invalidating contracts for which a PURPA-based challenge was not timely 
raised--that is, before the contracts were executed.\24\ In our 
judgment, it would

[[Page 8179]]

not be consistent with Congress' directive to encourage cogeneration 
and small power production to upset the settled expectations of parties 
to, and to invalidate any of their obligations and responsibilities 
under, such executed PURPA sales contracts.
---------------------------------------------------------------------------

    \24\ See New York State Electric & Gas Corporation, 71 FERC 
para. 61,027 at 61,117, order denying reconsideration, 72 FERC para. 
61,067 (1995), appeal dismissed, New York State Electric & Gas 
Corporation v. FERC, 117 F.3d 1473 (D.C. Cir. 1997); Connecticut 
Light & Power Company, 70 FERC para. 61,012, order denying 
reconsideration, 71 FERC para. 61,035 at 61,153-54 (1995) (confusion 
regarding meaning of Commission's regulations made application of 
new policy to preexisting QF contracts inappropriate), appeal 
dismissed sub nom. Niagara Mohawk Power Corporation v. FERC, 117 
F.3d 1485 (D.C. Cir. 1997); Southern California Edison Company and 
San Diego Gas & Electric Company, 70 FERC para. 61,215 at 61,178, 
reconsideration denied, 71 FERC para. 61,269 at 62,079 (1995).
---------------------------------------------------------------------------

    However, we see no legitimate basis to excuse a facility that, 
subsequent to the date of issuance of Turners Falls, either entered 
into a contract to sell more than its net output, or executed an 
amendment to a pre-Turners Falls contract that increased output, unless 
that amendment was pursuant to a provision in the pre-Turners Falls 
contract that specifically authorized such amendment. We will, 
therefore, revoke the QF status of any facility which sells in excess 
of its net output pursuant to a contract entered into after the date of 
issuance of Turners Falls, unless the additional amount sold is solely 
from cogeneration or small power production facilities.
3. How Is Net Output To Be Calculated?
    In order to determine if a facility has sold in excess of its net 
output, it is necessary to define how to measure net output. The 
utility-purchasers in the instant proceedings urge that net output be 
calculated as actual net production on an hour-by-basis. On the other 
hand, the QFs urge that net capacity be the measure of the limitation 
on a QF's sale. They argue that while QFs may not sell in excess of 
their certified net capacity, they should be able to sell in excess of 
actual net production at any moment in time. The QFs state that this is 
what theTurners Falls decision requires.
    The QFs are only partially correct. Turners Falls does stand for 
the proposition that the Commission will not certify a QF to sell in 
excess of its net capacity and that the sale above net capacity would 
result in the loss of QF status. Turners Falls, however, also contains 
additional language concerning ``the sale of incremental output.'' 55 
FERC at 62,672. While Turners Falls clearly states that QFs are limited 
to selling net capacity, the order does not directly address the sale 
of what has been referred to in the instant proceedings as ``actual net 
production.'' We understand that purchasing utilities could reasonably 
read Turners Falls and its reference to ``the sale of incremental 
output'' to limit the sales by QFs to actual net production.
    We find that the utilities' interpretation of the calculations more 
closely comports with Commission precedent and policy. In Turners 
Falls, the Commission interpreted PURPA to limit the certification of a 
QF to its net capacity. In interpreting PURPA, the Commission found 
that the plain language of the statute was not clear, and that the 
statutory history on the language involved was not clear, but that the 
policy underlying PURPA was dispositive. The policy which the 
Commission looked to was that PURPA was intended to be a ``program 
providing for increased efficiency in the use of facilities and 
resources.'' (55 FERC at 62,670, quoting section 2 of PURPA). The 
Commission found that the economic distortion inherent in the sale of 
the incremental output, i.e., the difference between a facility's net 
and gross output, would be inconsistent with the intent of PURPA. The 
Commission further found that if it were to permit Turners Falls to 
sell the incremental output, Turners Falls would derive an undue 
benefit from its qualifying status. Id. As a result, while the 
Commission in Turners Falls was directly addressing how much capacity 
it would certify (net capacity), it based the certification decision on 
its finding that PURPA does not permit a sale in excess of net output. 
The utilities' proposal that compliance with the net/gross rule be 
measured by monitoring actual net output on an hour-by-hour basis more 
accurately measures compliance with this PURPA limitation than the QFs' 
proposal that compliance be measured on an annual basis.
    Moreover, measuring compliance with the net/gross rule on an hour-
by-hour basis is consistent with Commission precedent on measurement of 
a facility's net capacity. In American Ref-Fuel of Bergen County, 54 
FERC para. 61,287 (1991) (Ref-Fuel), the Commission used a ``rolling 
one-hour period'' for measuring the size limitation (80 MW) applicable 
to qualifying small power production facilities. In that case, Ref-Fuel 
argued that because of the substantial variation in the heat content of 
solid waste, the net output of the facility would often exceed 80 MW, 
but that it would be able to compensate for the substantial variation 
in the heat content of the fuel source with an automatic control system 
to restore net generation to 80 MW when it exceeded 80 MW. Ref-Fuel 
stated it could maintain the 80 MW net output level on average over a 
60 minute time span measured at any point in time--the ``rolling one-
hour period.'' The Commission agreed to the rolling one-hour period, 
stating that:

    Generation output fluctuates instantaneously and accordingly 
must be adjusted many times each hour to follow system load changes. 
System load or consumer demand typically is determined by averaging 
energy use over a period of time of 15 to 60 minutes.

54 FERC at 61,817. The Commission noted that Form No. 1 requires 
utilities to compute the net peak demand (output) on generating units 
by using a 60-minute measurement period and that customer demand meters 
typically employ measurement periods of 15, 30, or 60 minutes. Id. at 
61,817 n.5. The Commission further noted that a 60-minute time interval 
for measuring power output or peak load is common in the industry. 54 
FERC at 61,817. The Commission recognized that a facility's generation 
output varies constantly and that net output in excess of 80 MW does 
not automatically violate the size limitation requirement of the 
statute (citing Occidental Geothermal, Inc., 17 FERC para. 61,231 at 
61,445 (1981)).
    Finally the Commission recognized that use of a rolling one-hour 
period does not offer any potential for manipulation of the maximum 
size limitation. This is because the facility, if it exceeds the 80 MW 
net production limitation at one moment, would have to adjust net 
production below 80 MW during part of the hour to account for the 
excess generation.
    We believe that the rationale for using a rolling one-hour period 
for measuring the net production of a facility for size limitation 
purposes is equally applicable to measuring net production for 
compliance with the net/gross output rule. Contrary to the QFs' 
arguments, use of a one-hour period does not make the certified 
capacity of a facility meaningless,\25\ and indeed is consistent with 
this Commission's measurement of certified capacity. We conclude that a 
facility's net output should be measured on a rolling-one hour period 
for purposes of determining whether the facility makes sales in excess 
of its net output. In other words, a facility cannot sell each hour 
more than its net output for the hour.
---------------------------------------------------------------------------

    \25\ The certified capacity of a QF, i.e., its net capacity, is 
the maximum net output that the facility can safely and reliably 
achieve at the point of interconnection under the most favorable 
operating conditions likely to occur over a period of several years.

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[[Page 8180]]

4. How Does Transmission of QF Power by a Third Party Utility Affect 
Net Output?
    The Penntech Papers case raises an issue concerning the measurement 
of net output in situations where QF power is transmitted by a third 
party to the purchasing utility. We have addressed this matter in our 
Open Access Rule. In Order No. 888-A, the Commission explained that:

    A QF arrangement for the receipt of Real Power Loss Service or 
ancillary services from the transmission provider or a third party 
for the purpose of completing a transmission transaction is not a 
sale-for-resale of power by a QF transmission customer that would 
violate our QF rules.\26\

    \26\ FERC Stats. & Regs. para. 31,048 at 30,237.
---------------------------------------------------------------------------

    In Order No. 888-B, the Commission recently clarified the matter as 
follows:

    [W]hile a QF can never sell more power than its net output at 
its point of interconnection with the grid, its location in relation 
to its purchaser (and thus its losses) may be relevant in the 
calculation of the avoided cost which it is entitled for the power 
it does deliver to its electric utility purchaser. However * * * the 
receipt of Real Power Loss Service or ancillary services is not a 
sale-for-resale of power. Rather, they are part of the costs of 
transmission which the QF must bear, in the absence of an agreement 
to share such costs with the transmitting utility.\27\

    \27\ Order 888-B, slip op. at 43-44.
---------------------------------------------------------------------------

    In conclusion, the purchase of line loss service for losses beyond 
the point of interconnection or an ancillary service by a QF from a 
third party does not result in the QF's engaging in a sale-for-resale 
of power produced by a facility other than a QF, which would result in 
loss of QF status.

D. Regulatory Consequences and Remedies for Sales in Excess of Net 
Output

    Any facility which has sold in excess of its net output, pursuant 
to a contract entered into after the date of issuance of Turners Falls, 
unless the incremental output is solely from cogeneration or small 
power production facilities, must file rates pursuant to section 205 of 
the FPA within 60 days of the date of publication of this order in the 
Federal Register. In that filing, the facility must indicate whether it 
intends to continue to make sales in excess of net output.\28\ For 
facilities which state that they will discontinue the sale of output in 
excess of net output as of the date of their filing, the rate for the 
prior sale of any output above net output will be determined using the 
methodology announced in LG&E-Westmoreland Southhampton, 76 FERC para. 
61,116 (1996) (LG&E), reh'g pending.\29\ The rate for all amounts sold 
up to the facility's net output should be the contract rate reflected 
in the parties' agreement, assuming such rate is no higher than the 
applicable avoided cost rate established by the State regulatory 
authority or nonregulated electric utility. Facilities making section 
205 filings that reflect the cessation of power sales in excess of net 
output may ask for all other exemptions granted QFs, and we will grant 
such exemptions pursuant to the policy announced in LG&E.
---------------------------------------------------------------------------

    \28\ If the facility decides to sell only its net output, it 
could regain QF status on a prospective basis from the date it 
begins to sell only net output. However, whether its temporary loss 
of QF status would jeopardize its power sales arrangement is a 
matter of contract that may vary depending on the particulars of the 
power sales agreement.
    \29\ In LG&E, the Commission ordered a QF which failed to 
satisfy the Commission's technical requirements for QF status during 
a past period of non-compliance to file rates pursuant to section 
205 of the FPA at a rate no higher than what the utility-purchaser 
would have paid for energy had it made an economic decision to 
purchase from the non-complying QF. In the case of a first-time 
failure to maintain QF status, the Commission explained that it 
would grant all other exemptions from regulation otherwise available 
to QFs.
---------------------------------------------------------------------------

    For any facility that indicates in its section 205 filing that it 
will continue to sell power in excess of its net output, pursuant to 
its current contract, we will not differentiate between past and future 
sales, or allow different rates for sales up to or in excess of net 
output. Rather, the former QF will be required to cost justify its 
rates for past and future periods.\30\
---------------------------------------------------------------------------

    \30\ Of course, the former QF could seek market-based rate 
authority for sales pursuant to new, non-QF contracts.
---------------------------------------------------------------------------

E. Application of Policy to Pending Cases

1. Connecticut Valley Electric Company, Inc. v. Wheelabrator Claremont 
Company, L.P., et al.
    Claremont, a small power production facility, is selling its gross 
capacity to Connecticut Valley and buying back auxiliary power, This 
sale clearly violates the prohibition on the QF sale of amounts in 
excess of net output enunciated in Turner Falls and earlier cases, and 
would result in the loss of QF status were it taking place pursuant to 
a sales contract entered into after the date (June 25, 1991) of 
issuance of Turner Falls. Here, however, the sale takes place pursuant 
to a contract, executed on December 12, 1984.
    Pursuant to the policy articulated above in this order, we will not 
enforce the net/gross policy against Claremont during the term of its 
power purchase agreement with Connecticut Valley, assuming the contract 
has not been amended to increase output after the date (June 25, 1991) 
of issuance of Turners Falls, unless that amendment was pursuant to a 
provision in the pre-Turners Falls contract that specifically 
authorized such amendment. Based upon this assumption, we will, 
therefore, not revoke the QF status of the Claremont facility or take 
other remedial action.
2. Carolina Power & Light Company v. Stone Container Corporation
    The sale of QF power by Stone Container is not as clear. Stone 
Container represents that it has at all times limited its sale to no 
more than its ``actual net output.'' The allegation by CP&L is that 
Stone Container, pursuant to a contract option contained in a contract 
entered into prior to the date of issuance of Turners Falls, but 
exercised after the date of issuance of Turners Falls, is at times 
selling in excess of actual net output.
    Because Stone Container is operating pursuant to a contract 
executed prior to the date of issuance of Turners Falls, its sales will 
not result in the loss of QF status, even if it at times has sold in 
excess of its net output. While its contract was amended, after the 
date of issuance of Turners Falls, to take advantage of the option to 
switch to the ``buy-all/sell-all'' mode of operation, the exercise of 
the option took place pursuant to the original contract. The right to 
the ``buy-all/sell-all'' mode of operation was contained in the 
original, pre-Turners Falls contract. Depriving Stone Container of QF 
status in these circumstances would not be consistent with maintaining 
the parties' expectations when the contract was signed. Moreover, CP&L, 
to the extent it encouraged the switch (as represented by Stone 
Container), should not now be heard to claim that the mode of operation 
which it encouraged deprives the facility of its QF status. The time 
for CP&L to have objected to the ``buy-all/sell-all'' contractual 
provision was prior to its execution, and not long after its 
implementation.\31\
---------------------------------------------------------------------------

    \31\ See supra note 24 and cases cited therein.
---------------------------------------------------------------------------

    We therefore conclude that under the policy announced in this 
order, this sale does not result in the loss of Stone Container's QF 
status, and we will not revoke the QF status of the Stone Container 
facility or take other remedial action, assuming that the contract has 
not been further amended to increase output after the date (June 25, 
1991) of issuance of Turners Falls, unless that amendment was pursuant 
to a provision in the pre-Turners Falls contract that specifically 
authorized such amendment.

[[Page 8181]]

3. Niagara Mohawk Power Corporation v. Penntech Papers, Inc.
    Niagara Mohawk argues that the Penntech Papers' purchase of power 
from Penelec, both of ``make-up'' power under a provision of Penntech 
Papers' transmission contract which Penelec, and line losses during 
transmission pursuant to the same contract, causes Penntech Papers to 
sell to Niagara Mohawk power from a facility other than a QF.
    In Order No. 888, the Commission determined that ``energy imbalance 
service'' is one of six ancillary services which with must be provided 
under an open access transmission tariff.\32\ The description of 
``energy imbalance service'' and the service provided by Penelec to 
Penntech Papers to correct inadvertent imbalances indicate that they 
are the same service. As this is an ancillary service as defined in 
Order Nos. 888 and 888-A, it does not constitute a sale-for-resale and 
does not affect Penntech Papers' QF status. Likewise, the purchase of 
line loss service by Penntech Papers for transmission service provided 
past the point of interconnection with Penelec does not affect its QF 
status. We will, therefore, not revoke Penntech Papers' QF status or 
take other remedial action.
---------------------------------------------------------------------------

    \32\ FERC Stats. & Regs. para.31,036 at 31, 703-04; see also 
Order No. 888-A, FERC Stats. & Regs para.31,048 at 30,229-34.
---------------------------------------------------------------------------

    The Commission orders:
    (A) The petitions for declaratory order are hereby granted in part 
and denied in part, as discussed in the body of this order.
    (B) The motion of Connecticut Valley filed in Docket Nos. EL94-10-
000 and QF86-177-001 to revoke the QF status of Claremont is hereby 
denied.
    (C) The motion of CP&L filed in Docket Nos. EL94-62-000 and QF85-
102-005 to revoke the QF status of Stone Container is hereby denied.
    (D) The motion of Niagara Mohawk filed in Docket Nos. EL96-1-000 
and QF86-722-003 to revoke the QF status of Penntech Papers is hereby 
denied.
    (E) Any facility which by virtue of this order is required to file 
rates pursuant to section 205 of the FPA shall make such a filing 
within 60 days of the date of publication of this order in the Federal 
Register, as discussed in the body of this order.
    (F) The Secretary is hereby directed to arrange for publication of 
this order in the Federal Register as soon as possible.

    By the Commission.
Linwood A. Watson, Jr.,
Acting Secretary.
[FR Doc. 98-4014 Filed 2-17-98; 8:45 am]
BILLING CODE 6717-01-M