[Federal Register Volume 61, Number 153 (Wednesday, August 7, 1996)]
[Notices]
[Pages 41135-41138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20051]
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DEPARTMENT OF ENERGY
[Docket Nos. EL94-45-001 and QF88-84-006]
LG&E-Westmoreland Southampton; Order Granting Rehearing in Part
and Denying Rehearing in Part, and Announcing Policy Concerning Non-
Compliance With the Commission's QF Regulations
Issued July 31, 1996.
On August 9, 1994, LG&E-Westmoreland Southampton (Southampton)
filed a request for rehearing of the Commission's order issued in this
proceeding on July 7, 1994. LG&E-Westmoreland Southampton, 68 FERC
para. 61,034 (1994). In that order, the Commission denied the request
by Southampton, the owner of a topping-cycle cogeneration facility, for
waiver of the Commission's operating standard applicable to qualifying
cogeneration facilities, see 18 CFR Sec. 292.205 (1995), for calendar
year 1992.
We will deny rehearing to the extent Southampton asks us to upset
our decision to deny its request for waiver of section 205 of the
Federal Power Act (FPA) to excuse its non-compliance during calendar
year 1992 with the Commission's requirements for qualifying facility
(QF) status. We will grant rehearing to the extent Southampton asks us
to allow it to remain exempt during that year from the other
requirements of the FPA, as well as certain other federal and state
regulation. Because this is just one of several pending cases that
present the Commission with the question of how to regulate previously
certificated (or self-certificated) QFs that have been found to be in
non-compliance with the Commission's QF regulations during some past
period of operation, and in order to encourage respect for and
compliance with those regulations, we take this opportunity to announce
a policy of general application concerning the consequences of failing
to retain QF status.
Background
We discuss the background of this proceeding in detail in the
previous order. In brief, Southampton owns a 62.6 MW topping-cycle
cogeneration facility located in Franklin, Virginia that failed to meet
the Commission's operating standard for qualifying cogeneration
facilities during calendar years 1991 and 1992. Southampton previously
was granted limited waiver to excuse non-compliance for calendar year
1991. In this proceeding, Southampton requested an additional waiver to
excuse non-compliance for calendar year 1992. Southampton sought to
justify a second waiver on the fact that, among other things, the
facility was engaged in start-up and testing operations during a
portion of 1992, and that the third-party plant operator mistakenly
delivered (without Southampton's knowledge) steam produced in a non-
sequential manner to the thermal host.
The Commission, after balancing all relevant considerations, found
this explanation to be insufficient to justify a second waiver of its
QF requirements. The Commission found particularly troubling the fact
that Southampton, in justifying waiver for calendar year 1991,
previously represented to the Commission that it expected to comply
with all applicable QF requirements during calendar year 1992 and later
years. The Commission also found that the circumstances leading to
Southampton's second waiver request were not entirely outside of its
control: ``We believe that the Commission should not, through its
waiver authority, insulate a QF from the risks of non-performance due
to operator error or poor management.'' 68 FERC at 61,113.
Finally, the Commission noted that Southampton may have operated as
a public utility within the meaning of the Federal Power Act (FPA)
during the period of time in which it failed to comply with the
Commission's operating standard. For this reason, the Commission
directed Southampton to ``show cause why it should not be required to
file appropriate rate schedules with the Commission reflecting sales
for resale'' to its utility-purchaser. 68 FERC at 61,113 n.9.
Request for Rehearing and Responses
On rehearing, Southampton argues that the Commission should have
granted waiver for calendar year 1992.1
[[Page 41136]]
In support, Southampton states that the Commission may have
misunderstood the circumstances of its failure to satisfy the
Commission's operating standard for QF status. Southampton explains
that its non-compliance was due not to the actions of any of its own
employees, but rather those of an entirely separate corporate entity,
UC Operating Services. Southampton states that the third-party operator
of its facility during the time in question was an experienced operator
of generating facilities. For this reason, Southampton argues that it
was entitled to rely on UC Operating Services to operate the QF in
compliance with the Commission's technical requirements.
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\1\ Also on August 9, 1994, when it filed its rehearing request,
Southampton filed a motion to treat its request for rehearing as if
it had been filed on time, i.e., on August 8, 1994. Southampton
explains that, due to ``photocopying equipment malfunctions,'' its
courier did not arrive at the Commission to file its rehearing until
5:02 p.m. on August 8, 1994, after the close of business. On August
23, 1994, Virginia Electric & Power Company (Virginia Power), the
utility-purchaser of Southampton-generated power, filed an answer in
opposition to Southampton's motion.
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Southampton argues that in the past the Commission has granted
waiver of its technical QF requirements except where there has been a
willful or knowing violation of the Commission's QF standards.
Southampton argues that here there was no such willful or knowing
violation. Southampton also points out that both the Commission and
Virginia Power would have remained unaware of the failure to comply
with the operating standard absent Southampton's application for
waiver; Southampton argues that this fact should have been considered
in its favor.
In the alternative, Southampton asks the Commission to grant it a
conditional waiver. Specifically, Southampton asks that it be allowed
to refund to Virginia Power the difference between the avoided cost
rates it charged during the period of non-compliance and the cost-based
rates which otherwise would have been permitted under the FPA.
Southampton argues that such a refund represents an appropriate remedy
for its non-compliance and that there is no compelling reason to
compound its ``punishment'' by also withholding the regulatory
exemptions--from most sections of the FPA, from the Public Utility
Holding Company Act (PUHCA) and from certain state laws and regulations
(pertaining to electric utility rates and financial and organizational
regulation)--otherwise available to QFs under the Commission's
regulations, see 18 CFR Secs. 292.601, 292.602 (1995). Southampton
expresses particular concern with the possible loss of its PUHCA
exemption, explaining that such a loss may undermine the ability of
affiliates of its owners to remain in compliance with the QF ownership
requirements, see 18 CFR Sec. 292.206 (1995).
On August 24, 1994, Virginia Power filed a response to
Southampton's request for rehearing, as well as a motion for leave to
respond to the request for rehearing. Virginia Power argues, among
other things, that the Commission did not apply a new policy in denying
Southampton's request for waiver. Virginia Power also argues that the
requested ``conditional'' waiver is based on speculative claims as to
the dire consequences of an outright denial of waiver, and should not
be granted to the economic detriment of Virginia Power's ratepayers.
On September 8, 1994, Westmoreland Coal Company, Westmoreland
Energy, Inc. and Westmoreland-Franklin, Inc. (together, the
Westmoreland Companies) filed a pleading in support of Southampton's
request for rehearing or conditional waiver. The three Westmoreland
entities state that they have an indirect partnership interest in
Southampton and, accordingly, could be subjected to a host of federal
and state regulations and liabilities for a past period of non-
compliance if waiver is denied.
On October 18, 1994 and on October 24, 1994, respectively, the
Electric Generation Association (EGA) and the National Independent
Energy Producers (NIEP) filed letters in this proceeding in support of
the alternative request for conditional waiver.
On November 7, 1994, the California Public Utilities Commission
(California Commission) filed a letter in response to the letters of
EGA and NIEP. The California Commission argues, among other things,
that the only remedy for QF non-compliance that would fairly protect
ratepayers is to require the non-complying QF to refund with interest
the difference between the avoided cost rate paid by the utility to the
non-complying QF and the market rate that the utility would have paid
for the energy had it not been required to purchase power from the QF
during the period of the QF's non-compliance. The California Commission
states that a cost-based rate for the period of non-compliance that
exceeds what the utility would have paid had it been able to respond to
competitive market opportunities would not be reasonable to utility
ratepayers.
Finally, on December 21, 1995, Southampton filed a motion for
settlement conference. Southampton states that it believes that the
arguments set forth in its request for rehearing are compelling. It
nevertheless suggests that the convening of a settlement conference, at
which it is prepared to present a proposal ``which it believes would
accommodate the interests of all concerned, including Virginia Power,
its ratepayers and the public'' (Motion at 4), would speed Commission
resolution of this case.
Discussion
Under the circumstances presented herein, we will accept
Southampton's request for rehearing as if it had been timely filed on
August 8, 1994. In addition, we will consider all supplemental
pleadings and letters filed in this proceeding (which we have added to
the public record in these proceedings), in order to complete the
arguments of the parties and to assist in our resolution of the issues
presented.
Southampton's Request for Rehearing
As an initial matter, we will deny Southampton's request for
rehearing to the extent we decline to upset our prior decision to deny
its request for waiver for calendar year 1992. Southampton has not
presented any arguments on rehearing that suggest to our satisfaction
that our balancing of relevant factors improperly tilted in favor of a
denial of waiver.
We are not persuaded by Southampton's argument on rehearing that
the waiver decision should be motivated by whether the operators of its
facility were its own employees or those employed by ``an experienced''
third-party contractor. In either event, the QF owner cannot abdicate
its ongoing obligation to ensure compliance with the Commission's QF
requirements. This is especially true where, as here, the QF owner
already has received a Commission waiver to excuse non-compliance
during a previous period of non-compliance (here, calendar year 1991).
In light of Southampton's representation to the Commission, in support
of waiver for calendar year 1991, that it expected to be back in
compliance for calendar year 1992 and later periods, we believe that
Southampton had a responsibility--which it failed to exercise--to be
especially vigilant in ensuring QF compliance. In these circumstances,
we believe it is no excuse for Southampton to claim that its non-
compliance was neither willing nor knowing; it should have taken
appropriate steps in these circumstances to understand the operation of
its facility at all relevant times to ensure compliance.
We will, however, grant rehearing to the extent that we will grant
Southampton's request that it retain most of the exemptions from
federal and state regulation otherwise available to
[[Page 41137]]
QFs under the Commission's regulations. The one exemption we will deny
is the obligation that Southampton file for Commission review, under
section 205 of the FPA, the rates it charged Virginia Power during
calendar year 1992 for wholesale power sales in interstate commerce.
We base this latter decision on a general policy we now announce to
guide our resolution of all pending and future cases of QF non-
compliance. We believe it is important at this time to explain the
consequences of a denial of QF status. We take this action at this
juncture to encourage QFs to be as vigilant as possible in promptly
detecting possible non-compliance and in alerting the Commission as to
possible non-compliance. Our concern is that if we do not articulate a
clear policy as to the consequences of unexcused non-compliance, QFs
will not exercise such vigilance.
Below, we explain this general policy. We then apply it to the
circumstances of this particular case.
General Policy With Respect to Non-Compliance With the Commission's QF
Regulations
Rate Review
As to the rates for power sales during a period of non-compliance
with the Commission's QF requirements, we believe it is appropriate to
distinguish between the following circumstances: (1) where the parties
contemplated in the power sales agreement that QF status would be
maintained during the entire term of the agreement; and (2) where the
parties contemplated in the power sales agreement that QF compliance
might not be maintained during the entire term of the agreement, e.g.,
by negotiating an alternative non-compliance rate. In the former (more
common) circumstance, we believe that the just and reasonable rate for
such sales should be no higher than the price the buyer would have paid
for energy had it not been required to purchase from the QF under our
mandatory purchase requirements and instead had made an economic
decision to purchase power from the QF in the hour. This places the
buyer in the same position it would have faced had it known that it was
not required to purchase the QF's power. Accordingly, with one
exception, we will use the utility buyer's economy energy (incremental)
cost during the period of non-compliance. 2 The one exception will
be where the QF contract rate was less than the utility buyer's economy
energy cost. 3
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\2\ We believe that in the majority of cases any attempt to
replicate actual market conditions during past periods would be a
difficult and time consuming procedure. Moreover, data about the
actual economic decisions of the buyer can be found in its dispatch
logs. Except for its must run generating units and mandatory
purchases including QF purchases, a utility will evaluate its
economic options in each hour (energy purchases and generating unit
running costs) and select a combination of resources sufficient to
meet its load at the lowest overall cost. To set a rate for sales
made during a period of non-compliance, we will adopt the highest
cost option actually selected by the buyer in the hour, e.g., the
most expensive energy purchase or unit running cost. This is because
the highest cost option represents the utility's incremental cost in
that hour. Such costs represent a reasonable proxy for the market
rate the buyer would have paid during the period of non-compliance.
To the extent an investigation is necessary, it would be limited to
determining the purchaser's actual energy costs during the period of
non-compliance.
\3\ To the extent the contract rate was less than the economy
energy costs over all the hours of the period of noncompliance, the
just and reasonable rate will be the contract rate. Any other result
would penalize ratepayers due to the facility's non-compliance with
QF requirements. Such a perverse result would not comply with the
requirements of section 210(b) of the Public Utility Regulatory
Policies Act of 1978 (PURPA), 16 U.S.C. 824a-3(b) (1994).
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As the Commission explained in Medina Power Company, 72 FERC para.
61,224 at 62,038-39 (1995), there is no reason to presume that the
utility-purchaser would have agreed to purchase QF power at an avoided
cost rate if, freed of the perceived obligation to purchase QF-
generated power under PURPA, it could have purchased equivalent amounts
of power from alternative sources at lower prices. An economy energy
rate, in our judgment, places the utility-purchaser (and its
ratepayers) in no worse a position than if it had known at the time of
purchase that its ``QF'' supplier would be adjudged to be out of
compliance with the Commission's QF requirements. Similarly, such a
rate places the ``QF'' in the same position as if it had known at the
relevant time that it would not be eligible for QF status during a
particular period of non-compliance and would not be entitled to compel
a purchase at the purchasing utility's avoided cost.
We agree with the California Commission that a fully allocated
cost-based rate is not appropriate during the period of non-compliance
when the parties were operating under the assumption that the seller
would remain a QF during the entire term of their power purchase
agreement (and thus did not contractually provide for an alternative
non-compliance rate).
Further, a QF should not be able to charge a fully allocated cost-
based rate if it represented to the Commission and to the utility-
purchaser that it would operate in accord with the Commission's QF
requirements. Such an opportunity, if successful, would act only to
undermine compliance with the Commission's QF requirements. While the
Commission is subject to the PURPA directive to ``encourage''
cogeneration and small power production, 16 U.S.C. 824a-3(a), it also
is obligated to ensure that the rate charged by the QF ``shall be just
and reasonable to the electric consumers of the electric utility and in
the public interest'' and does not ``exceed[] the incremental cost to
the electric utility of alternative electric energy.'' 4 16 U.S.C.
824a-3(b) (1994).
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\4\ As noted, the utility-purchaser's economy energy costs
during the period of non-compliance are, in effect, a measure of the
utility's ``incremental costs.''
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Finally, an economy energy rate is a market-driven (as opposed to
fully allocated cost-based) rate that is more likely to reflect market
conditions at the time of non-compliance than would the ``old'' avoided
cost rate. Accordingly, an economy energy rate will better protect
electric utility purchasers from uneconomic mandatory purchases from
non-complying QFs.
We recognize that a substitute rate based on the purchasing
utility's economy energy costs may not be appropriate in situations in
which the parties in their contract have contemplated the possibility
of non-compliance with the Commission's QF regulations. We are aware of
QF power purchase contracts that do not require the seller to remain a
QF throughout the term of the power purchase agreement and contemplate
continued power sales during periods of non-compliance at a negotiated
default rate. See Medina Power Company (Medina), 71 FERC para. 61,264,
reh'g denied, 72 FERC para. 61,224 (1995) (instituting a hearing to
determine the reasonableness of the seller's rates on a cost basis,
where the seller never has complied with the Commission's QF
regulations).
We believe that it is appropriate to continue to consider cases
like the Medina case, in which the parties contractually provided for
continuing service during periods of QF non-compliance at a different
rate, on a case-by-case basis. 5
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\5\ In such cases, the ``QF'' should file its proposed rate,
with appropriate support, with the Commission.
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Regulatory Exemptions
Turning to the continuing availability of the regulatory
exemptions, see 18 C.F.R. Secs. 292.601, 292.602 (1995), we agree with
Southampton that, as a general matter, there is no compelling reason to
eliminate all of the exemptions from federal and state
[[Page 41138]]
regulation otherwise applicable to QFs, assuming the non-compliance was
not marked by long duration or frequent recurrence. We believe that the
prospect of a lower, substitute economy energy rate during a period of
non-compliance (in conjunction with whatever contractual remedies are
appropriate for non-compliance), or the possibility of case-specific
scrutiny to determine a just and reasonable rate where the parties'
contract provides for a non-compliance default rate, should provide
ample incentive for QFs to retain their QF status. Similarly, these
rate remedies also should provide ample incentive for QFs, to the
extent uncertain as to their continuing compliance, to take the
initiative to seek Commission guidance as soon as possible.
This approach is entirely consistent with the explicit language of
PURPA which provides in section 210 that the Commission has the
authority to grant such exemptions ``in whole or part.'' 16 U.S.C.
Sec. 824a-3(e) (1994). The same section provides that the Commission
may grant exemptions from ``any combination of'' FPA, PUHCA and state
regulation ``if the Commission determines such exemption is necessary
to encourage cogeneration and small power production.'' Id. (emphasis
added).
Accordingly, in all cases in which a QF failed to comply with our
QF regulations during some past period of time, fails to receive a
waiver to excuse such non-compliance, and is now back in compliance, we
will continue to grant all of the exemptions otherwise applicable to
QFs except for the FPA section 205 exemption. 6 As explained
above, such QFs must commit to FPA section 205 rate regulation for the
period of non-compliance.
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\6\ We will issue orders in the near future that apply this
policy to pending cases raising the non-compliance issues. Of
course, we retain the discretion to resolve any individual cases on
any peculiar facts presented, such as those resolved through
negotiated settlement.
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For pending cases as well as future cases, we will grant all of the
regulatory exemptions (other than FPA rate review) unless the non-
compliance is marked by long duration or frequent recurrence. In
circumstances where the QF has engaged in more than one period of non-
compliance, the QF will assume a heavy burden in demonstrating that the
non-compliance merits a second waiver.
Determination of Southampton's Rates
Applying this policy to Southampton's circumstances, we will grant
its request for continued exemption during calendar year 1992 from
regulation under PUHCA and state utility laws and most sections of the
FPA, consistent with 18 C.F.R. Secs. 292.601, 292.602 (1995). However,
as explained above, the extension of QF regulatory exemptions is
subject to Southampton's obligation to submit for Commission rate
review, under section 205 of the FPA, the rates it charged to Virginia
Power during calendar year 1992. It also must refund to Virginia Power
the difference between the contract rate during that year and the
Commission-approved rate, with interest calculated pursuant to the
Commission's regulations, see 18 C.F.R. Sec. 35.19a (1995).
We have decided above that the just and reasonable rate for
wholesale power service provided during each hour of the period of non-
compliance (1992) should be no higher than what Virginia Power would
have paid for energy had it made an economic decision to purchase power
from Southampton in these hours. 7 For this reason, we direct
Virginia Power to compile data from its dispatch logs showing the
highest cost option actually selected by Virginia Power in the hour,
e.g., the most expensive energy purchase or unit running cost 8
for each hour during 1992 and to submit a report of such costs to us
within 45 days of the date of this order. To avoid questions about the
source of such cost data, we direct personnel from both Southampton and
Virginia Power to compile the data jointly from Virginia Power's system
dispatch logs. We strongly encourage the parties to reach agreement as
to this remaining rate issue. After we receive the required report, we
will determine whether further proceedings are necessary.
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\7\ See supra at 6 & n. 2.
\8\ The highest cost in the hour is the incremental cost for
that hour.
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In light of these procedures, we see no need to undertake
additional ``settlement judge'' procedures as recommended by
Southampton.
The Commission Orders
(A) Southampton's request for rehearing is hereby accepted as if it
were timely filed.
(B) Southampton's request for rehearing is hereby granted in part
and denied in part, as discussed in the body of this order.
(C) Virginia Power is hereby directed to file with the Commission,
within 45 days of the date of this order, a report compiling its hourly
economy energy costs for 1992, as discussed in the body of this order.
(D) The Secretary is hereby directed to publish a copy of this
order in the Federal Register.
By the Commission.
Lois D. Cashell,
Secretary.
[FR Doc. 96-20051 Filed 8-6-96; 8:45 am]
BILLING CODE 6717-01-P
