American Elec. Power Service Corp. v. Federal Energy Regulatory Commission, 80-1789

Decision Date23 April 1982
Docket NumberNo. 80-1789,80-1789
Citation219 U.S.App.D.C. 1,675 F.2d 1226
Parties, 45 P.U.R.4th 364 AMERICAN ELECTRIC POWER SERVICE CORPORATION, et al., Petitioners, v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent, Elizabethtown Gas Company, American Paper Institute, Inc., Brooklyn Union GasCo., Occidental Geothermal, Inc., Intervenors.
CourtU.S. Court of Appeals — District of Columbia Circuit

Edward Berlin, Washington, D. C., with whom Roger Strelow, Thomas M. Lemberg and Robert S. Taylor, Washington, D. C., were on the brief for petitioners.

John A. Cameron, Jr., Atty., Federal Energy Regulatory Commission, Washington, D. C., with whom Jerome Nelson, Acting Gen. Counsel, Jerome M. Feit, Deputy Sol., A. Karen Hill and Glenn J. Berger, Attys., Federal Energy Regulatory Commission, Washington, D. C., were on the brief for respondent.

John T. Miller, Jr., Washington, D. C., was on the brief for intervenor, Elizabethtown Gas Company.

Rigdon H. Boykin, New York City, was on the brief for intervenor, American Paper Institute, Inc.

James E. Rogers, Jr., Washington, D. C., and Jeffrey D. Watkiss were on the brief for intervenor, Occidental Geothermal, Inc.

James Patrick Slattery, Brooklyn, N. Y., entered an appearance for intervenor, Brooklyn Union Gas Co.

Kathryn A. Oberly and Susan V. Cook, Attys., U. S. Dept. of Justice, Washington, D. C., were on the brief for amicus curiae, United States, urging that the Commission's order be upheld.

Robert H. Loeffler, Alan Cope Johnston and Henry D. Levine, Washington, D. C., were on the brief for amici curiae, Great Western Malting Co., et al. urging that the Commission's order be upheld.

Philip R. Mann, Solana Beach, Cal., was on the brief for amicus curiae, California Manufacturers Association, urging denial of the petition for review.

Before SPOTTSWOOD W. ROBINSON, III, Chief Judge, WILKEY and GINSBURG, Circuit Judges.

Opinion for the Court filed by Circuit Judge WILKEY.

WILKEY, Circuit Judge:

This appeal involves those provisions of the Public Utility Regulatory Policies Act of 1978 (PURPA) which deal with cogeneration and small power production, 1 and the rules promulgated by the Federal Regulatory Energy Commission ("FERC" or "Commission") to implement these provisions. 2 Petitioners, who are public utilities, challenge FERC on four specific issues. They are: (1) FERC's "full avoided cost" rule; (2) FERC's "simultaneous transaction" rule; (3) FERC's grant of blanket authority to cogenerators to "interconnect" with electric utilities without meeting the requirements of sections 210 3 and 212 4 of the Federal Power Act; and (4) FERC's failure to adopt "fuel use" criteria in determining what cogeneration facilities are "qualifying" facilities eligible for the benefits of PURPA.

We uphold FERC's actions with respect to the simultaneous transaction rule and fuel use. However, we find for the petitioners on the matters of the full avoided cost rule and interconnection, and vacate FERC's rules there.

I. BACKGROUND

Cogeneration is the combined production of electrical power and useful thermal energy, such as heat or steam. Cogeneration usually refers to the use of heat that would otherwise be wasted after electricity is generated ("topping cycle"); the term also applies to systems that generate electricity Small power production facilities, on the other hand, for the purposes of this case are those which use biomass, waste, geothermal resources, or renewable resources (including wind, solar energy, and water) to produce electric power. They may have a power production capacity no greater than 80 megawatts. 6

from heat left over from an industrial process ("bottoming cycle"). Because both heat and electricity are created in a single process, about half as much fuel is used to produce electricity and heat as would be needed to produce the two separately. While cogeneration is not a new concept, its popularity had declined steadily since the turn of the century as energy from central station power plants became relatively inexpensive. With the rise in utility rates in recent years, however, it became apparent that cogeneration might again become economical on a broad scale. 5

The cogeneration and small power production provisions of PURPA were one part of a vast complex of five major statutes enacted in 1978, known jointly as the National Energy Act. 7 The provisions sought to encourage both sources of energy production.

Prior to the enactment of PURPA, a cogenerator or small power producer seeking to establish interconnected operation with a utility faced three major obstacles. First, utilities were often unwilling to purchase the other producers' electric output at all or were unwilling to pay an appropriate rate. Second, some utilities charged discriminatorily high rates for backup service to cogenerators and small power producers. Third, a cogenerator or small power producer which provided electricity to a utility ran the risk of being considered a public utility and subjected to extensive state and federal regulations. 8

Congress 9 designed section 210 of PURPA 10 to remove these institutional barriers to the development of small power production and cogeneration. Under section 210, each electric utility is required to offer to purchase available electric energy from cogeneration and small power production facilities which obtain qualifying status under section 201 11; the utility is also obliged to After giving notice and soliciting comments FERC issued its rules regarding cogeneration rates and exemptions on 19 February 1980. 15 On 15 March 1980 it issued its rules with respect to what cogenerators would be considered "qualifying facilities." 16 Petitioners challenge four facets of these rules.

                provide backup power and other services to such facilities on a nondiscriminatory basis.  Section 210 further directs the Commission to "prescribe, and from time to time thereafter revise, such rules as it determines necessary to encourage cogeneration and small power production ...." 12  These rules are to implement the statutory requirement that electric utilities offer to sell electric energy to cogeneration and small power production facilities and to purchase electric energy generated at these facilities.  Qualifying small power producers and qualifying cogeneration facilities may be exempted in whole or part by Commission rule from the Federal Power Act, the Public Utility Holding Company Act, 13 and state laws and regulations respecting rates and the financial or organizational regulation of electric utilities, if the Commission determines such exemption is necessary to encourage cogeneration and small power production.  14
                

First, FERC would order the states to set rates for purchases of power from qualifying cogenerators at a level that always (for facilities built after the enactment of the statute) equals the utilities' full "avoided" cost. 17 "Avoided" cost refers to the incremental cost the utility would bear if it were required itself to supply the electricity produced by the cogenerator. 18

Second, FERC would require utilities, at the cogenerator's option, to engage in a "simultaneous purchase and sale" by which the utility is deemed to have purchased all the cogenerated power, even that used by the cogenerator for itself, and to have sold to the cogenerator the power the cogenerator uses internally. 19

Third, the Commission by rule 20 made a blanket grant of authority to cogenerators to interconnect with utilities without meeting the substantive and procedural requirements of the Federal Power Act's sections 210 21 and 212, 22 which were added to and amended by sections 202 23 and 204 24 of PURPA.

Fourth, the Commission would not include criteria relating directly to "fuel use" in its rules with respect to what cogenerators are to be deemed "qualifying facilities." 25

We shall consider each of these issues in turn.

II. ANALYSIS
A. Full Avoided Cost 26

Section 210, "Cogeneration and small power production," of PURPA reads in relevant part:

(b) RATES FOR PURCHASES BY ELECTRIC UTILITIES

The rules prescribed (by FERC) ... shall ensure that, in requiring any electric utility to offer to purchase electric energy from any qualifying cogeneration facility or qualifying small power production facility, the rates for such purpose-

(1) shall be just and reasonable to the electric consumers of the electric utility and in the public interest, and

(2) shall not discriminate against qualifying cogenerators or qualifying small power producers.

No such rule prescribed ... shall provide for a rate which exceeds the incremental cost to the electric utility of alternative electric energy. 27

Sections 292.304(b)(2) and (b)(4) of FERC's rules require utilities to purchase electricity from qualifying facilities at a rate that "equals" each utility's full avoided cost. 28 By requiring the utility to pay the cogenerator exactly what it would have cost the utility to produce the power itself or buy from another source, these rules foreclose the states, unless they apply for and receive a waiver from FERC, from ordering the sharing of any of the benefits of the transaction with the other customers of the utility.

The question before us is whether this result is consistent with the statutory mandate that the rates set by the Commission must, in addition to not discriminating against cogenerators, also be "just and reasonable to the electric consumers of the electric utility" and "in the public interest." We hold that FERC has not adequately justified its adoption of the full avoided cost standard. Therefore the FERC rule is vacated and the matter remanded to the Commission.

Congress could have required the Commission to set rates at full avoided cost.

However, Congress did not do so. Instead it specified the three other...

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