Brazos Electric Power v. Federal E.R.C.

• Citation: 205 F.3d 235
• Decision Date: 29 February 2000
• Docket Number: No. 98-60568,98-60568
• Parties: (5th Cir. 2000) BRAZOS ELECTRIC POWER COOPERATIVE INCORPORATED, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION; Respondent
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 235

205 F.3d 235 (5th Cir. 2000)

BRAZOS ELECTRIC POWER COOPERATIVE INCORPORATED, Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION; Respondent

No. 98-60568

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

February 29, 2000

Petition for Review of Order of the Federal Energy Regulatory Commission

Before KING, Chief Judge, and REYNALDO G. GARZA and EMILIO M. GARZA, Circuit Judges.

KING, Chief Judge:

Petitioner Brazos Electric Power Cooperative, Inc. ("Brazos") seeks review of an order of the Federal Energy Regulatory Commission ("FERC," or "the Commission") denying Brazos' motion and petition to revoke the certification of Tenaska IV Texas Partners, Ltd. ("Tenaska") as a "qualifying cogeneration facility" under the Public Utilities Regulatory Policies Act of 1978. We deny the petition for review.

I.

Tenaska is a privately-held partnership engaged in the production of wholesale electric power. Tenaska developed and owns a cogeneration plant in Cleburne, Texas. A cogeneration plant is a facility which produces electric energy and either steam or some other form of useful energy which is used for commercial, industrial, heating, or cooling purposes. See 16 U.S.C. 796(18)(A). Brazos is an electric utility cooperative engaged in the generation and transmission of electric power. The utility is comprised of individual electric cooperatives in Texas and provides power to those cooperatives. Currently, Brazos is purchasing electricity from Tenaska pursuant to the facilities' Power Purchase Agreement. The Power Purchase Agreement was certified under a Texas statute that granted certification of such contracts only if the cogeneration facility met the requirements of the Public Utilities Regulatory Policies Act of 1978 ("PURPA"), 16 U.S.C. 823a et seq. Brazos seeks to undo the contract, arguing that Tenaska no longer meets PURPA's requirements.

A further understanding of the facts of this case requires some explanation of the statutes and regulations that control the relationship between a private producer such as Tenaska and public utility corporation such as Brazos. PURPA was enacted in response to the nation's fuel shortage, and its primary aim was to promote conservation of oil and natural gas in electricity generation. See FERC v. Mississippi, 456 U.S. 742, 745-46 (1982). To those ends, PURPA required FERC to promulgate rules encouraging the development of alternative generators of electricity, such as cogeneration facilities. See 16 U.S.C. 824a-3(a). The rationale behind encouraging cogeneration is that the production of electricity frequently results in the production of thermal energy as a byproduct; by using small amounts of additional fuel, cogenerators can produce large amounts of thermal energy to be used in other processes. Congress created regulatory benefits to provide economic encouragement to such nontraditional power producers. For example, qualifying cogenerators are exempt from wholesale rate regulation under all federal and state public utility statutes, see 18 C.F.R. 292.601, 292.602, and utilities can be compelled to interconnect with them, paying rates no greater than the utility's full avoided costs, see 18 C.F.R. 292.303, 292.308, 292.101(b). In this way, PURPA ensures the cogenerator a market for its electricity production and allows it to make a profit when it can produce power at an average cost lower than the utility's avoided cost.

Of relevance to the instant appeal are PURPA's guidelines for the certification of facilities as "qualifying cogeneration facilities," and FERC's rules prescribing the standards for that certification. The statute defines "cogeneration facility" as one that produces "(i) electric energy, and (ii) steam or forms of useful energy (such as heat) which are used for industrial, commercial, heating, or cooling purposes." 16 U.S.C. 796(18)(A). To determine which nontraditional power producers could receive benefits, PURPA created a category of "qualifying cogeneration facilities," or QFs, which includes any facility FERC determines has met the regulatory requirements. See 16 U.S.C. 796(18)(B)(i).

FERC's regulations prescribe operating, efficiency, and ownership standards for facilities seeking QF status. See 18 C.F.R. 292.205 (operating and efficiency standards); 18 C.F.R. 292.206 (ownership criteria). Relevant here is the requirement that electric utilities hold less than 50% of the equity interest in the cogeneration facility. See 18 C.F.R. 292.206. In addition, the cogeneration facility must "produce electric energy and forms of useful thermal energy (such as heat or steam), used for industrial, commercial, heating, or cooling purposes, through the sequential use of energy." 18 C.F.R. 292.202(c) (emphasis added).

FERC has explained that "the ultimate determination of usefulness will be made in the marketplace." See Electrodyne Research Corp., 32 FERC 61,102, 61,278 (1985). It therefore applies one of three economic tests in determining whether a thermal output is useful for purposes of QF certification. First, if a cogenerator proposes to use its thermal energy in a common industrial or commercial process, that energy is considered presumptively useful. See id. at 61,279. A process, or thermal application, will be deemed "common" after the Commission has received a satisfactory number of QF applications proposing the same use for the thermal output. See Kamine/Besicorp Allegany, L.P., 63 FERC 61,320, 63,158 (1993). The Commission reasons that, if a thermal application is a common one, the technology involved must be established and there must be a market for the application's end-product. See Arroyo Energy, L.P. (Arroyo II), 63 FERC 61,198, 62,545 (1993); Polk Power Partners, L.P., etal., 61 FERC 61,300, 62,128 (1992). As such, when a facility's proposed use of thermal energy is common in the industry, FERC presumes the energy used in that application is useful and performs no further analysis regarding the economics of the thermal application. See Bayside Cogeneration, L.P. (Bayside II), 67 FERC. 61,290, 62,006 (1994).

When the facility proposes an uncommon application, i.e., one that involves a new technology or creates an end-product without an established market, FERC's analysis is different. See Electrodyne, 32 FERC at 61,278. It employs separate analyses depending on whether the purchaser of the thermal energy - the "thermal host" - is an entity unaffiliated or affiliated with the cogenerator. If an independent entity, unaffiliated with the cogenerator, purchases the thermal energy, FERC considers the energy useful because it assumes no entity would purchase the thermal output, or the end-product produced with the aid of the thermal output, unless it served some legitimate purpose. See Liquid Carbonic Industries Corp. v. FERC, 29 F.3d 697, 700 (D.C. Cir. 1994). In other words, purchase by the thermal host establishes that there is an arm's-length market for the output. See Kamine, 63 FERC at 63,158; Electrodyne, 32 FERC at 61,279. FERC, therefore, deems the thermal energy useful and performs no further analysis regarding the economics of the thermal application. See LaJet Energy Co., 44 FERC 61,288, 61,194 (1988); Electrodyne, 32 FERC at 61,279.

If the use of thermal energy is uncommon and the thermal host is the cogenerator itself, or its affiliate, only then will FERC inquire into the economic viability of the thermal use. See Electrodyne, 32 FERC at 61,279. Specifically, the cogenerator is required to provide evidence that "the output would be economically justified in an independent business setting." Id. at 61,278. That is, the cogenerator must show that the thermal use is itself profitable without subsidy from the sale of electricity. FERC imposed this requirement on affiliated thermal hosts to prevent cogenerators whose thermal outputs have no established market from pawning off their thermal energy for an impractical purpose, while retaining their QF status and concomitant right to sell power at avoided cost rates. See id.

FERC's certification process occurs prior to the construction of the facility, and QF status is granted or denied based on the representations in a facility's application. The regulations provide, however, that FERC may revoke the QF status of a previously-certified facility if the facility, when operational, fails to comply with any of the statements in its application. See 18 C.F.R. 292.207(d)(1).

Brazos challenges Tenaska's certification as a QF. Tenaska and Brazos entered their Power Purchase Agreement ("PPA") in 1993, which obligated Brazos to purchase electric power from Tenaska for twenty-three years, with a seventeen-year rollover, at prices fixed in the PPA. This was not a situation where Brazos was compelled under PURPA to purchase electricity from a QF. Rather, both parties were equally interested in Tenaska's becoming certified as a QF. Tenaska wanted to qualify for PURPA benefits. Brazos wanted the best rates. According to Philip Segrest, Brazos' attorney at the time, the only power sources in Texas were public utilities and QFs. As a QF, Tenaska would only be able to charge rates up to Brazos' avoided costs. The public utilities, however, were currently charging rates above Brazos' avoided costs. Thus, because Tenaska's rates were favorable and because the option of building its own plant was impractical, Brazos "insist[ed] that the PPA be certified by the [Public Utility Commission of Texas] pursuant to PURA [the Public Utility Regulatory Act] ...." Affidavit of Philip Segrest. Under PURA, certification of power purchase agreements was permitted only if the power was being purchased from a QF, as that term was defined in PURPA. See TEX. REV. CIV. STAT. ANN. art. 1446c (West Supp. 1994) (repealed 1995).

Therefore, on October 20, 1994, Tenaska applied to FERC for QF certification, obviously with Brazos' blessing. According to its application, Tenaska intended to sell its electrical...