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The terms in equation 1 are defined as follows:

W1 = Fraction of existing capital structure which is debt.

W-Fraction of existing capital structure which is preferred equity.

W. Fraction of existing capital structure which is common equity and retained earnings. R-Predicted nominal cost of long term debt expressed as a fraction.

R=Predicted nominal cost of preferred stock expressed as a fraction.

R=Predicted nominal cost of common stock expressed as a fraction.

INF=Percentage change in the GNP implicit

price deflator over the past 12 months expressed as a fraction.

f-Flotation cost of debt expressed as a fraction.

-Flotation cost of preferred stock expressed as a fraction.

L-Flotation cost of common stock expressed as a fraction.

t-Marginal federal income tax rate for the current year.

(b) Information on parameters used in Equation 1. (1) The parameters used in equation 1 will be the best practicable estimates. They will be obtained from the firm, accepted rating services (e.g., Standard & Poors, Moody's), government publications, accepted financial publications, annual financial reports and statements of firms, and investment bankers.

(2) The predicted nominal cost of debt (Ra) may be estimated by determining the current average yield on newly issued bondsindustrial or utility as appropriate which have the same rating as the firm's most recent debt issue.

(3) The predicted nominal cost of preferred stock (Rp) may be estimated by determining the current average yield on newly issued preferred stock-industrial or utility as appropriate which has the same rating as the firm's most recent preferred stock issue.

(4A) The predicted nominal cost of common stock (R) is computed with equation 2. Eq 2 R=R+B×Ŕm

where:

R-The risk free interest rate-the average of the most recent auction rates of U.S. Government 13-week Treasury Bills. B=The "beta" coefficient-the relationship between the excess return on common stock and the excess return on the S&P 500 composite index, and

R-The mean excess return on the S&P 500 composite index-the mean of the difference between the return on the S&P 500 composite index and the risk free interest rate for the years 1926-1976 as computed by Ibbotson and Sinquefield(1)— 9.2%

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et The error in month t.

PRCC=Closing market prices of the firm's common stock at the end of month t fully adjusted for splits and stock dividends. DIVRATE=The sum of the dividends paid in the fiscal year which contain month t. Vsp.t=The market value of "one share" of the S&P 500 composite index at the end of month t.

Dsp.t=The estimated monthly income received from holding "one share" of the S&P 500 in month t.

The regression analysis is done with sixty months of data. The first month (t=1) is sixty months before the month in which the firm's current fiscal year started. The last month (t=60) is the last month of the past fiscal year.

(5) Where the parameters specified above are not obtainable, alternate parameters that closely correspond to those above may be used. This may include substituting a bond yield for nominal cost of preferred stock where the former is not available. Where the capital structure does not consist of any debt, preferred equity, or common equity, an alternate methodology to predict the firm's real after-tax marginal cost of capital may be used.

Example of using alternate parameters that closely correspond to those above are:

(A) In the case of industrials, who do not typically issue preferred stock, the predicted nominal cost of preferred stock (Rp) can be estimated by determining the current average yield on newly issued industrial bonds which have the same rating as the firm's most recent debt issue.

(B) If necessary, the following assumptions can be made to determine the nominal cost of debt or preferred stock and their flotation costs.

(i) Where a company issued privately placed debt that was not rated, the rating,

applied to preferred stock could be used to determine the cost of debt and its flotation cost.

(ii) Where a company issued privately placed preferred stock that was not rated, the rating applied to debt could be used to determine the cost of preferred stock and its flotation costs.

(iii) In the case where all issues were privately placed, the current average yield on all newly issued debt or preferred could be used to determine the cost of debt or preferred respectively, and an average flotation cost, for debt or preferred, could be used.

(C) Evidence Requirements. Copies of this calculation with notations as to the source of the data must be submitted.

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(a) Introduction. This appendix provides the equations and parameters needed to specify the price of the delivered fuels to be used in the cost calculations associated with parts 503 and 504 of these regulations. The delivered price of the fuel to be used to calculate delivered fuel expenses must reflect (1) the price of each fuel at the time of the petition, and (2) the effects of future real price increases for each fuel. The delivered price of an alternate fuel used to calculate delivered fuel expenses must reflect the petitioner's delivered price of the alternate fuel and the effects of real increases in the price of that alternate fuel. Paragraphs (b), (c) and (d) below provide the procedure to: (1) Calculate fuel price and inflation indices; (2) account for projected real increases in fuel prices when planning to burn one or more than one fuel; and (3) account for projected real increases in the price of the alternate fuel. Table II-1 of this appendix (See paragraph

(b)) contains example fuel price and inflation indices based on the latest data appearing in the Energy Information Administration's (EIA) Annual Energy Outlook (AEO).

The fuel price and inflation indices will change yearly with the publication of the AEO. Revisions shall become effective after final publication. However, the relevant set of parameters for a specific petition for exemption will be the set in effect at the time the petition is submitted or the set in effect at the time a decision is rendered, whichever is more favorable to the petitioner.

(b) Computation of Fuel Price and Inflation Indices.

(1) the Petitioner is responsible for computing the annual fuel price and inflation indices by using Equation II-1 and Equation II2, respectively. The petitioner may compute the fuel price index specified in Equation II1 or use his own price index. However, if he uses his own price index, the source or the derivation of the index must be fully documented and be contained in the evidential summary. EQ II-2 is:

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IX, The inflation index in year i.

GX, The NIPA GNP price deflator for year i.

GX-The NIPA GNP price deflator for the base year.

(2) The parameters to be used in EQ II-1 are the Base Case fuel price projections found in EIA's current AEO.

(3) When computing annual inflation indices, the petitioner is to use the Base Case National Macroeconomic Indicators (NIPA GNP Price Deflator) contained in EIA's current AEO. If necessary, the petitioner must rebase the projection to the same year used for the fuel price projections. For example, in 1989 AEO projects the price deflator in 1982 dollars; this must be rebased to the year in which the petition is filed. The methodology used to rebase the inflation indices must follow standard statistical procedures and must be fully documented within the petition. This index will remain frozen at the last year of the AEO's projection for the remainder of the unit'(s) useful life.

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(4) Table II-1 is provided as an example of the application of equations II-1 and II-2. This table contains annual fuel price indices for distillate oil, residual oil, natural gas,

Year

and coal. It also contains annual inflation indices. These values were computed from information contained in Table A3 and Table All of EIA's AEO, 1989.

TABLE II-1: PRICE AND INFLATION INDICES FOR USE IN THE COST CALCULATIONS

Distillate (DPX)

Residual (RPX) Natural gas (GPX)

Coal (CPX)

Inflation (IX)

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(2) When planning to use more than one fuel in the proposed unit(s), the petitioner must use Equation II-1 and Equation II-3 to calculate the annual fuel price of each fuel to be used. The petitioner then must estimate the proportion of each fuel to be burned annually over the useful life of the unit(s). With these proportions and the respective annual fuel prices for each fuel, the petitioner must compute an annual weighted average fuel price. The methodology used to calculate the weighted average fuel price must follow standard statistical procedures and be fully documented within the petition.

(d) Fuel Price Computation-Alternate Fuel. The delivered price of alternate fuel (PFA) must reflect the real escalation rate of alternate fuel and must be computed with Equation II-4.

Equation II-4 is:

PFA APFxapx; where:

PFA The price of the alternate fuel in year i.

APF The current market price of the alternate fuel f.o.b. the facility). APX-The alternate fuel price index value for year i, computed with Equation II-1. In most cases the alternate fuel will be coal. The petitioner must use Equation II-1 (paragraph (b)) to compute the escalation rate (APX). If an alternate fuel other than coal is proposed the source or the derivation of the index must be fully documented and be contained in the evidential summary. [54 FR 52896, Dec. 22, 1989]

PART 508 [RESERVED]

PART 516 [RESERVED]

ADMINISTRATION)

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$580.02 Definitions.

(a) Terms defined in section 2 of the Natural Gas Policy Act of 1978 shall have the same meaning, as applicable, for purposes of this part, unless further defined in paragraph (b) of this section.

(b) The following definitions are applicable to this part:

(1) Commercial establishment means any establishment, (including institutions and local, state and federal government agencies) engaged primarily in the sale of goods or services, where natural gas is used for purposes other than those involving manufacturing or electric power generation.

(2) Essential agricultural use means any use of natural gas:

(i) For agricultural production, natural fiber production, natural fiber processing, food processing, food quality maintenance, irrigation pumping, crop drying; or

(ii) As a process fuel or feedstock in the production of fertilizer, agricultural chemicals, animal feed, or food which the Secretary of Agriculture determines is necessary for full food and fiber production.

(3) Essential agricultural user means any person who uses natural gas for an essential agricultural use as defined in paragraph (b)(2) of this section.

(4) Hospital means a facility whose primary function is delivering medical care to patients who remain at the facility, including nursing and convalescent homes. Outpatient clinics or doctors' offices are not included in this definition.

(5) High-priority use means any use of natural gas by a high-priority user as defined in paragraph (a)(6) of this section.

(6) High-priority user means, in no specific order, any person who uses natural gas:

(i) In a residence, or

(ii) In a commercial establishment in amounts of less than 50 Mcf on a peak day; or

(iii) In any school or hospital; or

(iv) For minimum plant protection when operations are shut down, for police protection, for fire protection, in a sanitation facility, in a correctional facility, or for emergency situations pursuant to 18 CFR 2.78(a)(4).

(7) Interstate pipeline means any person engaged in natural gas transportation subject to the jurisdiction of the Federal Energy Regulatory Commission under the Natural Gas Act.

(8) Residence means a dwelling using natural gas predominately for residential purposes such as space heating, air conditioning, hot water heating, cooking, clothes drying, and other residential uses, and includes apartment buildings and other multi-unit residential buildings.

(9) School means a facility, the primary function of which is to deliver instruction to regularly enrolled students in attendance at such facility. Facilities used for both educational and non-educational activities are not included under this definition unless the latter are merely incidental to the delivery of instruction.

$580.03 Curtailment priorities.

(a) Notwithstanding any provision of law other than section 401(b) of the Natural Gas Policy Act of 1978, or any other rule, regulation, or order of the Department of Energy, the Federal Energy Regulatory Commission or their predecessor agencies, and to the maximum extent practicable, no curtailment plan of an interstate pipeline may provide for curtailment of deliveries of natural gas for any essential agricultural use, unless:

(1) Such curtailment does not reduce the quantity of natural gas delivered for such use below the use requirement certified by the Secretary of Agriculture under section 401(c) of the Natural Gas Policy Act of 1978 in order to meet the requirements of full food and fiber production; or

(2) Such curtailment is necessary in order to meet the requirements of high-priority users; or

(3) The Federal Energy Regulatory Commission, in consultation with the Secretary of Agriculture, determines, by rule or order issued pursuant to section 401(b) of the Natural Gas Policy Act of 1978, that use of a fuel (other than natural gas) is economically practicable and that the fuel is reasonably available as an alternative for such essential agricultural use.

(b) Any essential agricultural user who also qualifies as a high-priority user shall be a high-priority user for purposes of paragraph (a) of this section.

(c) The specific relative order of priority for all uses and users of natural gas, including high-priority and essential agricultural uses and users, shall remain as reflected in effective curtailment plans of interstate pipelines filed with the Federal Energy Regulatory Commission to the extent that the relative order of priorities does not conflict with paragraph (a) of this section. (d) Nothing in this rule shall prohibit the injection of natural gas into storage by interstate pipelines or deliveries to its customers for their injection into storage unless it is demonstrated to the Federal Energy Regulatory Commission that these injections or deliveries are not reasonably necessary to meet the requirements of high-priority users or essential agricultural uses.

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