[Federal Register Volume 71, Number 103 (Tuesday, May 30, 2006)]
[Rules and Regulations]
[Pages 30585-30589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-8204]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 292

[Docket No. RM05-36-001; Order No. 671-A]


Revised Regulations Governing Small Power Production and 
Cogeneration Facilities

Issued May 22, 2006.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final order; order on rehearing.

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SUMMARY: In this order on rehearing, the Federal Energy Regulatory 
Commission

[[Page 30586]]

(Commission) reaffirms its determinations and grants clarification in 
part of Order No. 671, which amended the Commission's regulations 
governing small power production and cogeneration facilities.

DATES: Effective Date: The final rule and order on rehearing will 
become effective June 29, 2006.

FOR FURTHER INFORMATION CONTACT:
Paul Singh (Technical Information), Office of Energy Markets 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.

    1. On February 2, 2006, the Federal Energy Regulatory Commission 
(Commission) issued Order No. 671,\1\ in which the Commission revised 
its regulations governing qualifying small power production and 
cogeneration facilities. Specifically, the Commission, among other 
things, eliminated certain exemptions from rate regulation that were 
previously available to qualifying facilities (QFs). Several parties 
have requested rehearing or clarification. For the reasons discussed 
below, we deny the requests for rehearing and grant clarification in 
part.
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    \1\ Revised Regulations Governing Small Power Production and 
Cogeneration Facilities, Order No. 671, 71 FR 7852 (February 15, 
2006), FERC Stats. & Regs. ] 31,203 (2006).
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Introduction

    2. Order No. 671 was issued in response to the Energy Policy Act of 
2005 (EPAct 2005),\2\ which modified in relevant part section 210 of 
the Public Utility Regulatory Policies Act of 1978 (PURPA). 
Specifically, Order No. 671 sought to: (1) Ensure 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) amend Form 556 \3\ 
to reflect the criteria for new qualifying cogeneration facilities; (3) 
eliminate ownership limitations for qualifying cogeneration and small 
power production facilities; and (4) amend the exemptions available to 
QFs from the requirements of the Federal Power Act (FPA) \4\ and the 
Public Utility Holding Company Act of 1935 (PUHCA 1935).\5\ ARIPPA,\6\ 
the National Rural Electric Cooperative Association (NRECA) and the 
Non-Utility QF Group have requested rehearing.
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    \2\ Energy Policy Act of 2005, Public Law No. 109-58, 119 Stat. 
594 (2005).
    \3\ 18 CFR 131.80.
    \4\ 16 U.S.C. 824 et seq.
    \5\ 15 U.S.C. 79; See Public Law No. 109-58, 1261-77, 119 Stat. 
594, 972-78 (2005).
    \6\ ARIPPA, formerly known as the Anthracite Region Independent 
Power Producers Association, states that it is a not-for-profit 
association comprising fourteen independent power producers in 
Pennsylvania that generate approximately 1,346 MW of electrical 
power buring coal mining refuse.
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Exemption of QFs From FPA Section 205/206 Authority

Background

    3. In Order No. 671, the Commission stated that in light of 
significant changes that have occurred in the industry since the first 
QF facilities were introduced and in light of changing electric markets 
and resulting market power issues that have arisen in recent years, it 
was no longer necessary or appropriate to completely exempt QFs from 
sections 205 and 206 of the FPA.\7\ However, the Commission clarified 
that QFs would continue to have an exemption from sections 205 and 206 
of the FPA when a sale is made pursuant to a state regulatory 
authority's implementation of PURPA. In addition, to avoid creating the 
hardship that removal of exemptions might cause for smaller QFs, the 
Commission provided that facilities 20 MW or smaller would remain 
exempt from sections 205 and 206 of the FPA.
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    \7\ 16 U.S.C. 824d, 824e.
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Requests for Rehearing

    4. ARIPPA argues against the imposition of rate regulation on QFs 
that are not owned by electric utilities. It argues that the rule 
change is a ``bait-and-switch,'' in that it would impose rate 
regulation on QF owners who had been induced to invest in and develop 
QFs by the exemption from the state and Federal rate regulation.
    5. ARIPPA points to the Commission's statement that ``a complete 
exemption is not necessary to encourage the development'' of 
cogeneration.\8\ It emphasizes the word ``development,'' noting that 
this might be a reasonable basis for a rule that newly-built QFs would 
not enjoy exemptions from rate regulation, but argues that the 
statement does not address the issue of the Commission's treatment of 
those who invested in such facilities in the past in reliance on the 
exemption from rate regulation. It argues that the Commission's 
statement that QF's had no reasonable expectation that the rules would 
not be amended is wrong. It argues that that was the inducement for 
developers to invest.
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    \8\ Id. at 6 (citing Order No. 671 at P 96).
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    6. ARIPPA argues that the Commission cites to no record for its 
assertion that non-QF sales by QFs could potentially have a significant 
market effect. It argues that the Commission did not cite to a single 
indication that one or more non-utility QFs under common ownership and 
control have achieved or could achieve market power. It argues that 
Commission's assertion is mere speculation.
    7. ARIPPA argues that the exception for QFs selling pursuant to a 
state avoided-cost regime is inconsistent with other parts of the 
existing rule. It argues that it is vague and that the uncertainty it 
will create will stymie future development, despite Congress' 
continuing charge to the Commission to continue to encourage 
development. It contends that it is unclear how much variance from a 
state avoided-cost regime is tolerable and how much crosses the line 
and would cause the QF to lose its exemption from Federal rate 
regulation. It questions whether investors will be willing to initiate 
development knowing that the process may be affected by such 
uncertainties. It also questions whether it is in the public interest 
for the Commission to set up what is sees as barriers and disincentives 
to settlement of disputes arising during contract negotiations between 
utilities and QFs.
    8. NRECA, on the other side, argues that all power sales by QFs 
owned by Commission-regulated public utilities should be subject to 
sections 205 and 206 even if the sales were made pursuant to a state's 
implementation of PURPA.\9\ It states that Order No. 671 continues to 
exempt from sections 205 and 206 any sales made pursuant to a state 
PURPA implementation plan, even

[[Page 30587]]

if the QF is owned by a public utility.\10\ It argues that there is no 
policy reason why such wholesale sales of power from QFs owned by 
public utilities should be exempt from Commission review under sections 
205 and 206, while all other wholesale sales by such public utilities 
(i.e., from resources other than QFs) are subject to such review.
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    \9\ NRECA Request for Rehearing at 5.
    \10\ Id. (citing Order No. 671 at P 99).
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    9. NRECA argues that all sales by QFs owned by public utilities 
should be subject to the Commission's rate authority, whether such 
sales are pursuant to an avoided cost rate or not. NRECA also states 
that the filing of avoided cost contracts with the Commission will 
enhance oversight and transparency, while not requiring filing creates 
a risk of market power abuse.
    10. NRECA further argues that all QFs that make non-PURPA sales 
should be subject to sections 205 and 206, no matter how small. It 
states that it is sensitive to the needs of smaller QFs, but that a QF 
as small as 5 MW could have a substantial impact upon a small 
distribution cooperative. NRECA states that small QFs that believe they 
are too small to handle public utility regulation may continue to make 
sales pursuant to a state PURPA implementation plan, and continue to be 
exempt from section 205 and 206 (unless they are owned by a public 
utility). NRECA adds that, on the other hand, if small QFs want the 
flexibility available to utilities with market-based rates and feel 
that they are large enough and sophisticated enough to sell at market-
based rates, they should be subject to sections 205 and 206, like any 
other public utility that sells power at market-based rates.
    11. NRECA argues that, under Order No. 671, if a large public 
utility owned a 20 MW QF, it could make power sales from that QF 
without any Commission review. It further argues that, if the facility 
were not a QF, the public utility would not be able to make such a sale 
without the Commission's express approval. It argues that this 
underscores the potential for market power abuse and affiliate 
transaction abuse that could occur if Order No. 671 is not changed.
    12. The Non-Utility QF Group argues that the Commission should 
increase the threshold for exemption from sections 205 and 206 of the 
FPA from 20 MW to 30 MW. First, it argues that the change would 
simplify Commission regulation by maintaining a consistent 30 MW 
threshold for all FPA exemptions as they apply to qualifying small 
power production facilities. Second, it argues that, in PURPA, Congress 
determined that 30 MW was a critical threshold for small power 
production facilities, and notes that Congress did not disturb that 
threshold in EPAct 2005. Thus, it argues, the Commission already has a 
ready statutory reference for a 30 MW threshold, while the 20 MW 
threshold is more arbitrary. Third, it argues that the total installed 
generation capacity for all qualifying cogeneration plants under 30 MW, 
combined with the total installed generation capacity of all qualifying 
small power production facilities under 30 MW, totals a mere 7,095.5 
MW.\11\ It argues that this represents less than 0.7 percent of the 
total installed generation capacity in the U.S. in 2004. It argues 
that, accordingly, exemptions for QFs less than 30 MW would not detract 
from the purposes of sections 205 and 206 of the FPA, and would serve 
both administrative efficiency and Congressional mandates to avoid 
utility-type regulation of entities having de minimis market presence.
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    \11\ Non-Utility QF Group Request for Rehearing at 4-5 (citing 
U.S. Department of Energy Annual Electric Generator Report (2004)).
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Commission Determination

    13. We disagree that any original ``bargain'' has been reneged on, 
or that the Commission has engaged in what ARIPPA refers to as a ``bait 
and switch.'' The Commission granted very broad exemptions from the FPA 
(and state laws) in order to remove the disincentive of utility-type 
regulation from QFs. Exemptions from FPA sections 205 and 206 rate 
regulation were necessary to encourage the development of QFs. However, 
at that time the Commission had no way to predict how markets would 
develop in the decades to follow. When the Commission first granted the 
exemptions from sections 205 and 206 of the FPA in 1980, there was no 
market for electric energy produced by non-traditional generators and 
thus such generators were rare. However, prompted originally by PURPA, 
markets for electric energy produced by non-traditional generators have 
developed. Now that these markets are in existence and provide a forum 
for sales of electric energy produced by non-traditional generators, 
the same level of encouragement for QFs is no longer necessary; access 
to these markets provides encouragement. Accordingly, it is no longer 
necessary to completely exempt QFs from sections 205 and 206 of the FPA 
in order to encourage development of QFs.
    14. Moreover, given these changes to energy markets, there will be 
times when Commission oversight of QF sales is appropriate and 
necessary under section 205 and 206 of the FPA. The passage and 
implementation of EPAct 2005 has provided us an opportunity to now 
provide for such oversight.
    15. We remain unpersuaded that eliminating exemptions will upset 
the legitimate expectations of QF owners, lenders and investors. As we 
stated in Order No. 671, the exemptions previously granted were always 
subject to revision and QFs had no justifiable expectations that, no 
matter the changes in circumstances, changes in the regulatory regime 
would not occur. In addition, the Commission has already taken 
significant steps to ease any adverse impact. Specifically, the 
Commission recognized that expectations reflected in current contracts 
should be protected, and did so by grandfathering the exemption from 
sections 205 and 206 of the FPA for existing contracts.\12\ However, on 
a prospective basis, the need for oversight of QF sales is a compelling 
reason to subject new contracts to rate regulation under section 205 
and 206 of the FPA.
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    \12\ Order No. 671 at P 97.
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    16. ARIPPA's argument that Order No. 671's changes to the 
exemptions from sections 205 and 206 of the FPA will discourage future 
development of non-traditional generation is misplaced. The large 
number of non-QF independent generators that have developed in recent 
years, addressed in the many orders granting them market-based rate 
authority under section 205 of the FPA, indicate that the exemptions 
from sections 205 and 206 are not necessary to promote non-traditional 
generation.
    17. We find unpersuasive the arguments made by NRECA that even 
sales made by utility-owned QFs that are subject to a state's PURPA 
implementation plan should nevertheless be subject to section 205 and 
206 regulation. Our goal in part was and is to close the gap that had 
developed in the regulatory regime that allowed some QF sales to avoid 
any rate regulation.\13\ We believe that having QF sales regulated at 
the state level is sufficient, and will allow us to close the 
regulatory gap while not dramatically or inappropriately increasing the 
regulatory burden on QFs.
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    \13\ Id. at P 95-96.
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    18. Likewise, we find unpersuasive the arguments of the Non-Utility 
QF Group and NRECA to change the threshold for section 205/206 
exemptions. The Non-Utility QF Group argues that the threshold should 
be increased to 30 MW; NRECA argues that all non-PURPA sales should be 
regulated no matter how small the QF.

[[Page 30588]]

In Order No. 671, we attempted to strike a balance by ensuring that QF 
sales are regulated by either the states or the Commission while at the 
same time easing the burden on the smallest facilities.\14\ In the 
NOPR, the Commission originally suggested that the exemptions should 
remain in effect for QFs under 5 MW. Most commenters supported the 
exemption for QFs under 5 MW, while some suggested a higher figure.\15\ 
In response to those comments, the Commission raised the threshold to 
20 MW.\16\ The 20 MW threshold strikes a reasonable balance by 
protecting the smallest facilities while ensuring that sales by larger 
QFs are subject to Commission oversight.\17\ The arguments presented by 
the Non-Utility QF Group are simply not compelling enough to persuade 
us to raise the threshold further. In addition, we reject arguments by 
NRECA to make all non-PURPA sales subject to rate regulation, no matter 
how small the QF. We believe that an exemption from regulation is still 
appropriate to ease the regulatory burden for the smallest QFs.
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    \14\ Id. at P 98.
    \15\ Id. at P 87.
    \16\ Id. at P 98.
    \17\ The 20 MW threshold adopted in Order No. 671 is also 
consistent with the 20 MW size limit for small generating facilities 
found in Order No. 2006. Standardization of Small Generator 
Interconnection Agreements and Procedures, Order No. 2006, 70 FR 
34100 (June 13, 2005), FERC Stats. & Regs. ] 31,180 at P 75 (2005), 
order on reh'g, Order No. 2006-A, 70 FR 71760 (November 30, 2005), 
FERC Stats. & Regs. ] 31,196 (2005).
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Self-Certification

Background

    19. In Opinion No. 671, the Commission retained the option to self-
certify for new cogeneration facilities. The Commission also stated 
that self-certifications and self-recertifications of new cogeneration 
facilities would now be noticed in the Federal Register, in order to 
enhance the visibility of self-certifications for interested parties. 
The Commission further stated that a facility should not be able to 
claim QF status without having made any filing with the Commission. 
Accordingly, the Commission amended its regulations to expressly 
require that a facility claiming QF status must file either a notice of 
self-certification or an application for Commission certification.\18\
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    \18\ Id. at P 78-83.
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Requests for Rehearing

    20. NRECA argues that the Commission should not permit new 
cogeneration facilities to self-certify. It states that the 
``fundamental use'' and ``presumptively useful'' standards are 
subjective and that there are no guidelines established yet on how the 
standard will be applied. It contends that, although the Commission has 
stated that these factors will require a case-by-case review, self-
certification will be meaningless if the Commission accepts a new 
cogeneration facility's unsupported representation in a self-
certification that it satisfies subjective standards. It argues that, 
consequently, new cogeneration facilities should at the present time be 
required to submit an application and obtain a Commission determination 
as to its QF status.\19\
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    \19\ NRECA Request for Rehearing at 8.
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    21. NRECA further argues that the Commission's proposal in Order 
No. 671 to notice self-certifications and self-recertifications in the 
Federal Register is insufficient to ensure that new cogeneration 
facilities satisfy the new standards for QF status, given the 
inherently subjective and case-by-case nature of the application of 
such new standards. It contends that, because QFs frequently file self-
certifications before they have approached an electric utility for 
interconnection or power sales, electric utilities would be compelled 
to monitor every self-certification filing in order to determine 
whether the QF is planning to locate in the electric utility's service 
territory. It further argues that, until the new standards are better 
developed, it will be unclear on what basis an electric utility could 
challenge a QF's qualifying status. It contends that only electric 
utilities with significant litigation resources will be in position to 
protect themselves from inappropriate self-certifications, and that 
small cooperatives will be at a disadvantage.

Commission Determination

    22. We deny rehearing. We find the processes and safeguards 
included in Order No. 671 to be sufficient. As we noted in Order No. 
671, the Commission has the authority to review a self-
certification.\20\ With this authority, the Commission is able to 
review the self-certifications of new cogeneration facilities to ensure 
their compliance with the new standards. NRECA argues that, for the 
first self-certifications, there will be no prior cases that provide 
guidelines on how to satisfy the standards. We think EPAct 2005's 
statutory language and the newly-adopted regulations provide a 
sufficient starting point, and we also expect such case law to develop 
quickly so that QFs and electric utilities will have further guidance 
on what is necessary to meet the new standards.
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    \20\ Order No. 671 at P 78.
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    23. In addition, we disagree with NRECA's argument that publication 
of notice in the Federal Register will not help to ensure that 
prospective QFs comply with the new standards. Publication of such 
notices will enhance the visibility of self-certifications and self-
recertifications for interested parties. We expect that such visibility 
will allow attempted self-certifications and self-recertifications of 
new cogeneration facilities that fail to meet the new standards set 
forth in Order No. 671 to be spotted quickly, and so help to ensure 
that such facilities satisfy the new standards in Order No. 671.

PUHCA Clarification

Background

    24. In Order No. 671, the Commission stated that it interprets 
PURPA to permit it to exempt QFs from the Public Utility Holding 
Company Act of 2005 (PUHCA 2005) \21\ in 18 CFR 292.602. The Commission 
stated that, accordingly, revised 18 CFR 292.602 would now provide that 
a QF shall not be considered an ``electric utility company'' as defined 
by PUHCA 2005. We also stated in Order No. 671 that, consistent with 
recent actions on FPA section 203,\22\ QFs would be considered 
``electric utility companies'' for purposes of section 203(a)(2) of the 
FPA.\23\
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    \21\ Public Law No. 109-58, 1261-77, 119 Stat. 594, 972-78 
(2005).
    \22\ 16 U.S.C. 824b.
    \23\ Order No. 671 at P 102.
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Requests for Rehearing

    25. The Non-Utility QF Group argues that there is a tension between 
Order No. 671 and Order No. 669 \24\ in how the two orders relate to 
transactions involving entities that only own QFs and exempt wholesale 
generators (EWGs) for purposes of section 203(a)(2) of the FPA. It 
states that, in Order No. 669, the Commission explained that, 
regardless of their status under PUHCA 2005, QFs (and EWGs) will be 
regarded as ``electric utility companies'' for purposes of section 
203(a)(2), which addresses the acquisition of securities by ``holding 
companies'' as defined in PUHCA 2005.\25\ It notes that the Commission 
also stated that, while most QFs themselves remain exempt from section 
203, holding companies will

[[Page 30589]]

require Commission approval pursuant to section 203 in order to acquire 
an interest in a QF or an EWG.\26\ Finally, it notes that the 
Commission in Order No. 669 stated that this would hold true even if 
the holding company were a holding company solely by reason of its 
ownership interest in QFs, EWGs and foreign utility companies (FUCOs).
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    \24\ Transactions Subject to FPA Section 203, Order No. 669, 70 
FR 58636 (October 7, 2005), FERC Stats. & Regs. ] 31,200 (2005), 
order on reh'g, Order No. 669-A, 71 FR 28,422 (May 16, 2006), FERC 
Stats. & Regs. ] 31,214 (2006).
    \25\ See Non-Utility QF Group Request for Rehearing at 5.
    \26\ Id. (citing Order No. 669 at P 59-60 and 70).
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    26. The Non-Utility QF Group states that, while it understands why 
the Commission would want some review of acquisitions of large QFs by 
holding companies having real generation or transmission market power, 
it disagrees with the Commission's suggestion in Order No. 669 that 
holding companies otherwise exempted by Congress from PUHCA 2005, i.e., 
owners only of QFs, EWGs and FUCOs, should be subject to section 203 
requirements. It argues that this assertion represents a potential 
dramatic increase in regulatory oversight over independent companies 
that own precisely the types of smaller, non-traditional generating 
plants that Congress has long sought to encourage. It argues that it is 
``silly'' to require every 500 KW landfill gas or hydroelectric plant 
to be subject to section 203 just because it is being acquired by the 
owner of another small QF.
    27. The Non-Utility QF Group argues that a better balance is 
provided by Order No. 671. It argues that, by exempting QFs from PUHCA 
2005's definition of ``electric utility company,'' a QF would not be an 
``electric utility company'' under PUHCA 2005, and therefore its 
upstream 10 percent owners would not be ``holding companies'' under 
PUHCA 2005--and therefore would not be ``holding companies'' for 
purposes of section 203(a)(2) of the FPA.\27\
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    \27\ Id. at 6 (citing Order No. 671 at P 92-94).
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Commission Determination

    28. The Non-Utility QF Group is correct that there was an 
inconsistency in the treatment of QFs with regards to their status 
under PUHCA 2005. However, the Commission has corrected this 
inconsistency in its order on rehearing of Order No. 667,\28\ the final 
rule which amended the Commission's regulations to implement the repeal 
of PUHCA 1935 and the enactment of PUHCA 2005. In that order on 
rehearing, the Commission clarified that QFs will not be excluded from 
the definition of ``electric utility company'' but added that the 
Commission intends nevertheless to exempt QFs from PUHCA 2005 and most 
FPA requirements pursuant to the Commission's PURPA authority to grant 
such exemptions.\29\ Accordingly, we will on rehearing here revise 18 
CFR 292.602 to remove the statement that a QF is not an ``electric 
utility company'' within the meaning of PUHCA 2005, and to provide an 
exemption from PUHCA 2005. As to FPA section 203, the definition of 
``electric utility company'' in that context was addressed in Order No. 
669-A.\30\
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    \28\ Repeal of the Public Utility Holding Company Act of 1935 
and Enactment of the Public Utility Holding Company Act of 2005, 
Order No. 667, 70 FR 75,592 (December 20, 2005), FERC Stats. & Regs. 
] 31,197 (2005), order on reh'g, Order No. 667-A, 71 FR 28,446 (May 
16, 2006), FERC Stats. & Regs. ] 31,213 (2006).
    \29\ See Order No. 667 at P 14 n. 31.
    \30\ Order No. 669-A at P 41-54.
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    The Commission orders:
    Rehearing is hereby denied and clarification is hereby granted in 
part, as discussed in the body of this order.

List of Subjects in 18 CFR Part 292

    Electric Power Plants, Electric utilities, Natural gas, Reporting 
and recordkeeping requirements.

    By the Commission.
Magalie R. Salas,
Secretary.

0
In consideration of the foregoing, under the authority of EPAct 2005, 
the Commission is amending part 292 in Chapter I of Title 18 of the 
Code of Federal Regulations, as set forth below:

PART 292--[AMENDED]

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

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


0
2. In Sec.  292.602, paragraph (b) is revised to read as follows.


Sec.  292.602  Exemption of qualifying facilities from the Public 
Utility Holding Company Act of 2005 and certain State law and 
regulation.

* * * * *
    (b) Exemption from the Public Utility Holding Company Act of 2005. 
A qualifying facility described in paragraph (a) of this section or a 
utility geothermal small power production facility shall be exempt from 
the Public Utility Holding Company Act of 2005, 42 U.S.C. 16,451-63.
* * * * *
 [FR Doc. E6-8204 Filed 5-26-06; 8:45 am]
BILLING CODE 6717-01-P