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subparts C and D of this part. Any per (3) There are two comparative cost son who owns, controls, rents, leases or calculations--a general cost test and a operates a new powerplant that is sub- special cost test. Both take into conject to the prohibition may be subject sideration cash outlays for capital into sanctions provided by the Act or vestments, annual expenses, and the efthese regulations.

fect of depreciation and taxes on cash

flow. To demonstrate eligibility for a [54 FR 52893, Dec. 22, 1989)

permanent exemption, a petitioner $503.2 Prohibition.

must use the procedures specified in

the general cost test (paragraph (b) of Section 201 of the Act prohibits, un

this section). To demonstrate eligiless an exemption has been granted bility for a temporary exemption, the under subpart C or D of this part, any

petitioner may apply the procedures new electric powerplant from being specified in either the general cost test constructed or operated as a baseload

or the special cost test (paragraph (c) powerplant without the capability to

of this section). use coal or another alternate fuel as a

(b) Cost calculation-general cost test. primary energy source.

(1) A petitioner may be eligible for a (54 FR 52893, Dec. 22, 1989)

permanent exemption if he can dem

onstrate that the cost of using an al$503.3 (Reserved]

ternate fuel from the first year of oper

ation substantially exceeds the cost of Subpart B-General Requirements using imported petroleum. Unless the for Exemptions

best practicable cost estimates as pre

scribed below will not materially $503.4 Purpose and scope.

change during the first ten years of op

eration of the unit (given the best inThis subpart establishes the general

formation available at the time the perequirements necessary to qualify for

tition is filed), the petitioner must also either a temporary or permanent ex

demonstrate that the cost of using an emption under this part and sets out

alternate fuel beginning at any time the methodology for calculating the

within the first ten years of operation cost of using an alternate fuel and the

and using imported petroleum or natcost of using imported petroleum.

ural gas until such time (i.e., delayed $503.5 Contents of petition.

use of alternate fuel) would substan

tially exceed the cost of using only imBefore OFE will accept a petition for ported petroleum. either a temporary or permanent ex (2) The petitioner would only be eliemption under this part, the petition gible for a temporary exemption if the must include all of the evidence and in computed costs of delayed alternate formation required in this part and fuel use, commencing at the start of part 501 of this chapter.

the second through eleventh years of

operation, do not always substantially 8503.6 Cost calculations for new pow

exceed the cost of using only imported erplants and installations.

petroleum. The length of the tem(a) General. (1) This calculation com porary exemption would be the minpares the cost of using alternate fuel to imum period from the start of operthe cost of using imported petroleum. ation in which the cost of using alterIt must be performed for each alternate nate fuel substantially exceeds the cost fuel and/or alternate site that the peti of using imported petroleum. tioner is required to examine.

(3) To conduct the general cost test, (2) The cost of using an alternate fuel calculate the difference (DELTA) beas a primary energy source will be tween the cost of using an alternate deemed to substantially exceed the fuel (COST(ALTERNATE)) and the cost cost of using imported petroleum if the of using imported petroleum difference between the cost of using al- (COST(OIL)) using Equations 1 through ternate fuel and the cost of using im- 3 below and the comparison procedures ported oil is greater than zero.

in paragraph (b)(5) of this section.

BQ 1

DELTA • COST (ALTERNATE)

COST (OIL)

where COST(ALTERNATE) and cosT(OIL) are determined by:

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(4) The terms in Equations 2 and 3 are defined as follows: i=Year. i is a specified year either before

year 0 or after year 0. Year 0 is the year before the unit becomes operational. For example, in the third year before the unit becomes operational, i would equal -2, and in the third year following commencement of operations of the unit, i would equal +3. Years are represented by 52 week periods prior to or following the date on which the unit becomes operational. Outlays before the unit becomes operational are future valued to the year before the unit becomes operational (year 0), and outlays after the unit becomes operational are present valued to the year before the unit becomes operational. Year 0 must be the same for the

units being compared. g=The number of years prior to the year be

fore the unit becomes operational (year 0) that (1) a cash outlay is first made for capital investments, or (2) an investment tax credit is first used-whichever occurs

first. N=The useful life of the unit (see paragraph

(d)(5) of this section). Ix=Yearly cash outlay (in dollars) from the

year outlays first occur to the last year of the unit's useful life for capital investments. (See paragraph (d)(2) of this section for the items that must be included.)

OM=Annual cash outlay in year i (in dollars)

for all operations and maintenance expenses except fuel (i.e., all non-capital and non-fuel cash outlays caused by putting the capital investments (I) into service). This may include labor, materials, insurance, taxes (except income taxes), etc. (See paragraph (d)(3) of this

section.) Si=Salvage value of capital investment (in

dollars) in year i. FL;=Annual cash outlay for delivered fuel

expenses (in dollars) in year i. (See paragraph (d)(3) of this section for FLi calculation instructions and appendix II of these regulations for the procedures to

determine fuel price.) k=The discount rate expressed as a fraction

(see paragraph (d)(4) of this section). ITC =Federal investment tax credit used in

year i resulting from capital investments

(see paragraph (d)(6) of this section). DPR:=Depreciation in year i resulting from

capital investments (see paragraph (d)(6)

of this section). ty=Marginal income tax rate in year i (see

paragraph (d)(6) of this section). IX;=Inflation index value for year i (see ap

pendix II to part 504 for method of com

putation). IXe=Inflation index value for the year e, the

year before the asset is placed in service. (5) The step-by-step procedure that follows shows the comparison that the petitioner must make.

(1) Compute the cost of using an al operation (with imported petroleum or ternate fuel (COST(ALTERNATE)) unit natural gas used in the years preceding throughout the useful life of the unit alternate fuel use). using Equations 2 and 3.

(vi) Compute the difference (DELTA) (ii) Compute the cost of using oil or between each of the ten natural gas (COST(OIL)) throughout COST(ALTERNATE)S calculated in the useful life of the unit using Equa paragraph (b)(5) (iv) and (v) of this sections 2 and 3.

tion and the COST(OIL) calculated in (iii) Using Equation 1, compute the

paragraph (b)(5)(ii) of this section. difference (DELTA) between COST

(vii) If all the DELTAs computed in (ALTERNATE) and COST (OIL). If the

paragraph (b)(5) (iii) and (vi) of this difference (DELTA) is less than or

section are greater than zero, the petiequal to zero, a petitioner is not eligi- tioner is eligible for a permanent exble for a permanent or temporary ex

emption. If one or more of the DELTAS emption using the general cost test and

is less than or equal to zero, he is eligineed not complete the remainder of the

ble for a temporary exemption for the general cost test calculation. However,

period beginning at the start of the he still may be eligible for a temporary

first year of operation and terminating exemption using the special cost test

at the beginning of the first year in (paragraph (c) of this section). If the

which a DELTA is zero or less. difference (DELTA) is greater than

(c) Cost calculations-special cost test. zero and if the best practicable cost estimates will not materially change

(1) A petitioner may be eligible for a

demduring the first ten years of operation

temporary exemption if he (given the best information available

onstrates that the cost of using an alat the time the petition is filed), the

ternate fuel will substantially exceed petitioner has completed the test and

the cost of using imported petroleum is eligible for a permanent exemption.

or (natural gas) over the period of the However, if the best practicable cost

proposed exemption. The period of the estimate will materially change during

proposed temporary exemption may

not exceed ten years. the first ten years, the petitioner must complete the remainder of the general The petitioner must demonstrate that cost test

the delayed use calculations the cost of using an alternate fuel subwhich follow.

stantially exceeds the cost of using im(iv) Recompute COST (ALTERNATE) ported petroleum for the first year of with Equations 2 and 3, assuming that operation, the first two years of operan alternate fuel is not used as the pri ation, and so forth, through the period mary energy source until the start of of the proposed exemption. OFE will the second year of operation and that limit the duration of a temporary eximported petroleum or natural gas is emption to the shortest time possible. used for the first year of operation. All (2) To conduct the test, calculate the cash outlays should reflect postponed difference (DELTA) between the cost of use of alternate fuel.

using an alternate fuel (COST (ALTER(v) Successively recompute COST NATE)) and the cost of using imported (ALTERNATE) with Equations 2 and 3, petroleum (COST (OIL)) using Equaassuming that the alternate fuel use is tions 4 and 5 below, Equation 3 (parapostponed until the start of the third graph (b)(3) of this section), and the year, fourth year, and so on, through comparison procedures in paragraph the beginning of the eleventh year of (c)(4) of this section.

EQ 4

DELTA - COST (ALTERNATE) - COST (OIL)

where COST(ALTERNATE) and COST(OIL) are determined by:

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Σ

(OM+PL)(1-ty)

Σ

(1+k)-1

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Capital investment (I) is calculated with Equation 3 (paragraph (b)(3) of this section).

(3) The terms in Equation 5 are the same as those in Equation 2 with the addition of P, the length of the proposed temporary exemption in years. (See paragraph (b)(4) of this section for other terms.)

(4) The step-by-step procedure that follows shows the comparisons which must be made.

(1) Using Equation 5, compute the cost of using an alternate fuel (COST(ALTERNATE)) assuming the length of the proposed exemption is one year.

(ii) Likewise, compute the cost of using imported petroleum or natural gas (COST(OIL)) assuming the length of the proposed exemption is one year.

(iii) Compute the difference (DELTA) between COST (ALTERNATE) and COST (OIL) using Equation 4.

(iv) Repeat the calculations made in (i), (ii), and (iii) above, assuming the length of the proposed exemption is two years, three years, four years, and so on, up through the period of the proposed exemption.

(v) A petitioner is eligible for a temporary exemption for the period beginning at the start of the first year of operation and terminating at the beginning of the first year in which a DELTA is zero or less.

(d) Information on parameters used in the calculations. (1) All estimated expenditures, except fuel, shall be expressed in real terms (unadjusted for inflation) by using the prices in effect

(1+4)*

i-l

at the time the petition is submitted. Instructions for fuel price calculations are contained in appendix II.

(2) Capital investment yearly cash outlays (11) must include all items that are capital investments for Federal income tax purposes. All purchased equipment that has a useful life greater than one year, capitalized engineering costs, land, construction, environmental offsets, fuel inventory, transmission facilities, piping, etc., that are necessary for the operation of the unit must be included. However, an item must only be included if a cash outlay is required after the decision has been made to build the unit; sunk costs must not be included (e.g., if the firm owns the land, its purchase price may not be included).

NOTE: The guidelines for the fuel inventory for powerplants not using natural gas shall be: (a) All powerplants with only steam driven turbines-78 days, (b) all powerplants with only combustion turbines—142 days, (c) all powerplants with combined cycles—both steam driven turbines and combustion turbines--142 days. The guidelines for the fuel inventory for installations not using natural gas shall be the greater of: (1) 21 days fuel supply, or (2) sufficient fuel to fill sixty (60) percent of the storage volume. The guidelines for the fuel inventory for all facilities using natural gas shall be zero unless the gas supply is interruptible in which case an appropriate inventory of back-up fuel must be included. Other inventory levels may be used if they are more appropriate than these guidelines; however, the source or derivation of these levels must be discussed in the evidential summary.

(3)(i) The annual cash outlays for op- index (IX) is shown in appendix II to erations and maintenance expense part 504. OFE will modify these speci(OM;) and fuel expense (FL) for a pow fied rates from time to time as reerplant may be computed by one of the quired by changed conditions after pubfollowing three methods; however, the lic notice and an opportunity to comone chosen must be consistently ap ment. However, the relevant set of plied throughout the analysis.

specified rates for a specific petition (A) Assume the energy produced by for exemption will be the set in effect the powerplant equals seventy (70) per at the time the petition is submitted or cent of design capacity times 8760 the set in effect at the time a decision hours for each year during the life of is rendered, whichever set is more fathe powerplant, and compute cash out vorable to the petitioner. lays for operations, maintenance, and (5)(i) The guidelines for the useful fuel expenses for the powerplant.

life (N) of all powerplants except nu(B) Economically dispatch the new pow clear will be thirty-five (35) years. The erplant. The cash outlays for oper

guidelines for the useful life of a nuations, maintenance, and fuel expenses

clear powerplant will be forty (40) of all powerplants being dispatched

years. The guidelines for the useful life (where oil and natural gas are priced of major fuel burning installations will according to the procedures of appen be forty (40) years. Other useful life dix II) are the corresponding expenses projections may be used if they are for the purpose of the cost calculation.

more appropriate than these guideThe dispatch analysis area must be

lines; however, the source or derivation that area with which the firm cur

of these projections must be contained rently dispatches, anticipates dis

in the evidential summary. The sumpatching, and will be interconnected. It

mary should include a discussion of enmust also include all anticipated ex gineering, economic historical or other changes of energy with other utilities evidence. or powerpools. The outlays for oper

(ii) If the units being compared have ations, maintenance, and fuel may also

different useful lives, the petitioner be estimated using a methodology that

will have to modify his calculation so incorporates the benefits of economi

that the two cash flows being compared cally dispatching units and provides

have the length of the shorter useful consistent treatment in the alternate

life. To do this, (A) use the shorter of fuel and oil or natural gas cases being

the two useful lives in Equations 2 and compared.

5 for both units, and (B) multiply cap(C) Use a dispatch analysis to project ital investment (I) of the unit with the the energy produced by the powerplant longer life (computed with Equation 3) for a representative (not atypical) year

by the following adjustment factor (A): of operation when consuming an alternate fuel. Compute the cash outlays for

Σ

(1+x)=1 operations, maintenance, and fuel expenses for the powerplant based upon EQ 6 the level of energy production estimated for the representative year. The

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R

(1+k)-1 dispatch analysis and fuel expenses for the cost calculation must include oil where: and natural gas priced according to the R=The useful life of the facility with the procedures of appendix II.1

longer life. (ii) When computing the annual cash Q=The useful life of the facility with the outlays for operations and mainte

shorter life. nance expense (OMI) and fuel expense

k=The discount rate (see paragraph (d)(4)

above). (FL) for an installation, specify the firing rates and the length of time each (6) All Federal investment tax credits firing rate will be maintained.

(ITC) and depreciation (PRA) values are (4) The discount rate (k) for analyses those used for Federal income tax puris 2.9 percent or that which is com- poses and must be applied consistently puted as specified in appendix I. The throughout the analysis and in a manmethod of computing the inflation ner consistent with the Federal tax

Σ.

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