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The FEDERAL REGISTER along with the notice of the proposed prohibition.

(c) Technical capability. (1) In the case of electing and certifying powerplants, OFP will consider "technical capability” on a case-by-case basis in order to make the required finding. In the case of a certifying powerplant, the powerplant should present information to support the certification relevant to the considerations set forth below. OFP will consider the ability of the unit, from the point of fuel intake to physically sustain combustion of a given fuel and to maintain heat transfer.2

(2) OFP considers that a unit "had" the technical capability to use an alternate fuel if the unit was once able to burn that fuel (regardless of whether the unit was expressly designed to burn that fuel or whether it ever actually did burn it), but is no longer able to do so at the present due to temporary or permanent alterations to the unit itself.3

(3) A unit "has” the technical capability to use an alternate fuel if it can burn an alternate fuel, notwithstanding the fact that adjustments must be made to the unit beforehand or that pollution control equipment may be required to meet air quality requirements.

(d) Substantial physical modification. In the case of electing and certifying powerplants, OFP will make its determination on whether a physical modification to a unit is "substantial" on a case-by-case basis. In the case of certifying powerplants, OFP will consider the factors set forth below for the purpose of concurrence in the certification. OFP will consider physical modifications made to the unit as "substantial" where warranted by the magnitude and complexity of the engineering task or where the modification would impact severely upon operations at the site.5 OFP will not, however, assess physical modification on the basis of cost.

(e) Substantial reduction in rated capacity. In the case of electing and certifying powerplants, OFP will make this determination on the basis of the following factors. A certifying powerplant should present information to support its certification regarding these factors in order for OFP to make its review for concurrence.

(1) OFP regards a unit's derating of 25 percent or more, as a result of converting a unit from oil or gas to an alternate fuel, as substantial.

(2) OFP will presume that a derating of less than 10 percent, as a result of converting a unit from oil or gas to an alternate fuel, is not substantial unless

20FP will not ordinarily consider the nature or absence of appurtenances outside the unit. For example, OFP will examine the furnace configuration and ash removal capability but will not normally consider the need to install pollution control equipment as a measure of technical capability. Furthermore, OFP will not normally conclude that the absence of fuel handling equipment, such as conveyor belts, pulverizers, or unloading facilities, bears on the issue of a unit's "technical capability" to burn an alternate fuel.

3 For example, a unit which at one time burned solid coal but which could no longer do so because its coal firing ports and sluicing channels had been cemented over, would be classified as having "had" the technical capability to use coal. (The question of whether it again "could have” such capability without "substantial physical modification” is a separate and additional ques

unless convincing evidence to the contrary is submitted in rebuttal). Also a unit designed to burn oil may, depending upon the chemical characteristics, be a unit that "has" the technical capability to burn liquefied coal. The fact that certain adjustments may be necessary does not render this a "hypothetical” as opposed to a "real" capability. Even an oil fired unit converting from the use of #2 distillate to #6 residual oil may be required to adjust or replace burner nozzles and add soot blowers.

Generally, modification of a unit to burn coal or an alternate fuel will be considered insubstantial if significant alterations to the boiler, such as a change to the furnace configuration or a complete respacing of the tubes, are not required. Minor alterations such as replacement of burners or additions of soot blowers, and additions or alterations outside the boiler, shall not cause the modification to be substantial.

tion.)

A unit designed to burn natural gas shall be presumed to have the technical capability to burn a synthetic fuel such as medium Btu gas from coal (assuming such gas is available

convincing evidence to the contrary is the firm's ability or inability to fisubmitted in rebuttal. 6

nance the conversion including, but (3) OFP will assess units for which a not limited to, the following: derating is claimed of 10 percent or (1) The required coverage ratios on more, but less than 25 percent, on a the firm's debt and preferred stock; case-by-case.

(2) The firm's investment program; (4) In assessing whether a unit's de and rating is not substantial, OFP will con (3) The financial impact of the consider the impact of a reduction in rated version, including other conversions capacity of the unit taking into consid which are or may be undertaken voluneration all necessary appurtenances tarily by the proposed order recipient such as air pollution control equipment or imposed upon the recipient's system required to burn an alternate fuel in by the Act, and including pending or compliance with environmental re planned construction or reconstruction quirements expected to be applicable of alternate-fuel-fired plants and at the date the prohibitions contained plants exempt from FUA prohibitions.? in the final prohibition order become

Where helpful in clarifying the longeffective. However, the potential order

term financial feasibility of a converrecipient may raise in rebuttal the im sion, DOE may analyze the economic pact of derating on the site at which benefits anticipated from operation of the unit is located and on the system

the converted unit or units using coal as well as on the unit itself, if under

or other alternate fuel relative to those paragraph (e)(2), or case-by-case, if

from continued operation using petrounder paragraph (e)(3) of this section.

leum or natural gas. (f) Financial feasibility. In the case of (Approved by the Office of Management and certifying and electing powerplants, Budget under control number 1903-0077) OFP will make this finding based on

(Energy Supply and Environmental Coordithe following considerations. A certi

nation Act of 1974, Pub. L. 93-319, as amended fying powerplant should present infor by Pub. L. 94–163, Pub. L. 95-70, and 15 U.S.C. mation to support its certification rel 719 et seq.; Department of Energy Organizaevant to these considerations in order tion Act, Pub. L. 95-91, 91 Stat. 565 (42 U.S.C. for OFP to make its review for concur

7101 et seq.); Powerplant and Industrial Fuel rence. Conversion of a unit to burn coal

Use Act of 1978, Pub. L. 95-620, 92 Stat. 3269 or an alternate fuel shall be deemed fi

(42 U.S.C. 8301 et seq.); Omnibus Budget Rec

onciliation Act of 1981 (Pub. L. 97–35); E.O. nancially feasible if the firm has the

12009, 42 FR 46267, Sept. 15, 1977) actual ability to obtain sufficient cap

[45 FR 53692, Aug. 12, 1980, as amended at 47 ital to finance the conversion, includ

FR 17044, Apr. 21, 1982; 47 FR 50849, Nov. 10, ing all necessary land, coal and ash

1982] handling equipment, pollution control equipment, and all other necessary ex 8504.7 Prohibition against excessive penditures, without violating legal re use of petroleum or natural gas in strictions on its ability to raise debt or

mixtures-electing powerplants. equity capital, unreasonably diluting (a) In the case of electing powershareholder equity, or unreasonably plants, if OFP finds that it is techadversely affecting its credit rating. nically and financially feasible for a OFP will consider any economic or fi unit to use a mixture of petroleum or nancial factors presented by the pro natural gas and an alternate fuel as its posed order recipient in determining primary energy source, OFP may pro

hibit, by order, the use in that unit of 6 For example, units that are the subject of a prohibition order will not have installed 70FP will not require the proposed order any operating air pollution control equip recipient to cancel or defer construction or ment sufficient to burn coal in compliance reconstruction of any alternate-fuel-fired fawith applicable environmental equipments. cility, or any facility exempt from the prohiThe installation and use of air pollution con bitions of the Act, for which a decision to fltrol equipment alone can, in many cases, nance such facility has been made by the approduce a derating. Moreover, the shift to propriate company official before the publicoal itself will, because of differences in en cation of the prohibition order. The proposed ergy density and fuel flow characteristics, order recipient may choose to cancel or defer typically involve some derating.

any such facility.

bility.

petroleum or natural gas, or both, in and any concomitant reduction in amounts exceeding the minimum rated capacity are not relevant factors. amount necessary to maintain reli So long as a unit as proposed to be ability of operation consistent with modified would be technically capable maintaining reasonable fuel efficiency of using the mixture as a primary enof the mixture.

ergy source under $504.6(c), this certifi(b) In making the technical feasi cation requirement shall be deemed bility finding required by former sec met. The criteria for certification of fition 301 (b) and (c) of the Act and para nancial feasibility are found at graph (a) of this section, OFP may $504.6(f). In addition, the powerplant's weigh "physical modification" or "de owner or operator must submit a prohirating of the unit,” but these consider- bition compliance schedule, which ations, by themselves, will not control meets the requirements of 8504.5(d). the technical feasibility finding. A (b) If OFP concurs with the certifitechnical feasibility finding might be cation, a prohibition order against ti made notwithstanding the need for unit's excessive use of petroleum or substantial physical modification. The natural gas in the mixture will be economic consequences of a substantial issued following the procedure outlined physical modification are taken into in $501.52 of these regulations. account in determining financial feasi (c) The petitioner may seek to amend

its certification in order to take into (Energy Supply and Environmental Coordi

account changes in relevant facts and nation Act of 1974, Pub. L. 93–319, as amended circumstances by following the proceby Pub. L. 94-163, Pub. L. 95–70, and 15 U.S.C. dure contained in $501.52(d). 719 et seq.; Department of Energy Organization Act, Pub. L. 95–91, 91 Stat. 565 (42 U.S.C.

NOTE: The authority of OFP implemented 7101 et seq.); Powerplant and Industrial Fuel

under this section should not be confused Use Act of 1978, Pub. L. 95-620, 92 Stat. 3269

with the other two fuel mixture provisions of (42 U.S.C. 8301 et seq.); Omnibus Budget Rec

these regulations. One is the general requireonciliation Act of 1981 (Pub. L. 97-35); E.O.

ment that petitioners for permanent exemp12009, 42 FR 46267, Sept. 15, 1977)

tions demonstrate that the use of a mixture

of natural gas or petroleum and an alternate (47 FR 17045, Apr. 21, 1982, and 47 FR 50850,

fuel is not economically or technically feaNov. 10, 1982)

sible (See $504.15). The second is the perma

nent fuel mixtures exemption itself (See $504.8 Prohibitions against excessive

$504.56). use of petroleum or natural gas in mixtures-certifying powerplants.

(Approved by the Office of Management and

Budget under control number 1903-0077) (a) In the case of certifying powerplants, OFP may prohibit the use of pe

(Department of Energy Organization Act,

Pub. L. 95–91 (42 U.S.C. 7101 et seq.); Energy troleum or natural gas in such power

Supply and Environmental Coordination Act plant in amounts exceeding the min

of 1974, Pub. L. 93-319, as amended by Pub. L. imum amount necessary to maintain

94–163, Pub. L. 95–70, and Pub. L. 95-620 (15 reliability of operation consistent with U.S.C. 719 et seq.); Powerplant and Industrial maintaining the reasonable fuel effi Fuel Use Act of 1978, Pub. L. 95-620, as ciency of the mixture. This authority amended by Pub. L. 97–35 (42 U.S.C. 8301 et is contained in section 301(c) of the seq.); Omnibus Budget Reconciliation Act of Act, as amended. The owner or oper

1981, Pub. L. 97-35) ator of the powerplant may certify at [47 FR 17045, Apr. 21, 1982) any time to OFP that it is technically capable and financially feasible for the $504.9 Environmental requirements unit to use a mixture of petroleum or

for certifying powerplants. natural gas and coal or another alter Under $8501.52, 504.5 and 504.6 of these nate fuel as a primary energy source. regulations, OFP may prohibit, in acIn assessing whether the unit is tech cordance with section 301 and section nically capable of using a mixture of 303 (a) or (b) of FUA, as amended, the petroleum or natural gas and coal or use of natural gas or petroleum, or another alternate fuel as a primary en- both, as a primary energy source in ergy source, for purposes of this sec- any certifying powerplant. Under section, the extent of any physical modi- tions 301(c) and 303(a) of FUA, as fication necessary to convert the unit amended, and 88 501.52, 504.6, and 504.8 of

these regulations, OFP may prohibit he does not have any conflict of interthe excessive use of natural gas or pe est, financial or otherwise, in the outtroleum in a mixture with an alternate come of either the environmental procfuel as a primary energy source in a ess or the prohibition order proceeding. certifying powerplant.

The agreement shall outline the re(a) NEPA compliance. Except as pro sponsibilities of each party and his revided in paragraph (c) of this section, lationship to the other two parties rewhere the owner or operator of a pow garding the work to be done or supererplant seeks to obtain an OFP prohi vised. OFP shall approve the informabition order through the certification tion to be developed and supervise the procedure, and did not hold either a gathering, analysis and presentation of proposed prohibition order under the information. In addition, OFP will former section 301 of FUA or pending have the authority to approve and order under section 2 of ESECA, it will modify any statement, analysis, and be responsible for the costs of pre conclusion contained in the third party paring any necessary Environmental prepared environmental documents. Assessment (EA) or Environmental Im

(c) Financial hardship. Whenever the pact Statement (EIS) arising from

bona fide estimate of the costs associOFP's obligation to comply with

ated with NEPA compliance, if borne NEPA. The powerplant owner or oper

by the powerplant owner or operator, ator shall enter into a contract with an

would make the conversion financially independent party selected by OFP,

infeasible, OFP may waive the requirewho is qualified to conduct an environ

ment set forth in paragraphs (a) and (b) mental review and prepare an EA or

of this section and perform the necEIS, as appropriate, and who does not

essary environmental review. have a financial or other interest in the outcome of the proceedings, under (Approved by the Office of Management and the supervision of OFP. The NEPA Budget under control number 1903-0077) process must be completed and ap

(Department of Energy Organization Act, proved before OFP will issue a final Pub. L. 95-91 (42 U.S.C. 7101 et seq.); Energy prohibition order based on the certifi Supply and Environmental Coordination Act cation.

of 1974, Pub. L. 93-319, as amended by Pub. L. (b) Environmental review procedure. 94–163, Pub. L. 95–70, and Pub. L. 95-620 (15 Except as provided in paragraph (c) of

U.S.C. 719 et seq.); Powerplant and Industrial this section, environmental documents,

Fuel Use Act of 1978, Pub. L. 95-620, as

amended by Pub. L. 97–35 (42 U.S.C. 8301 et including the EA and EIS, where nec

seq.); Omnibus Budget Reconciliation Act of essary, will be prepared utilizing the

1981, Pub. L. 97–35) process set forth above. OFP, the powerplant owner or operator and the inde [47 FR 17046, Apr. 21, 1982) pendent third party shall enter into an agreement for the owner or operator to

APPENDIX I TO PART 504-PROCEDURES

FOR THE COMPUTATION OF THE REAL engage and pay directly for the seryices of the qualified third party to pre

COST OF CAPITAL pare the necessary documents. The

(a) The firm's real after-tax weighted averthird party will execute an OFP pre age marginal cost of capital (K) is computed pared disclosure document stating that with equation 1.

[blocks in formation]

INF

INF

1-fp

1-f

(B) The "beta" coefficient is computed with regression analysis techniques. The regression equation is Equation 3.

(Rot-Rft)= A+B(Rmt-Ret)+et

Eq. 3

where

R.'

PRCC, - PRCC-1 +(DIVRATE/12)

PRCC-1
Rp t=The risk free interest rate in month

the average of the yields on 13-week

treasury bills auctioned in month t.(2) A=A constant which should not be signifi

cantly different than zero.

- V sp.t-1

+D spil

V

The terms in equation 1 are defined as fol-
lows:
Wa=Fraction of existing capital structure

which is debt.
Wo=Fraction of existing capital structure

which is preferred equity. We=Fraction of existing capital structure

which is common equity and retained

earnings. Rq=Predicted nominal cost of long term debt

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

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

expressed as a fraction. INF=Percentage change in the GNP implicit

price deflator over the past 12 months ex

pressed as a fraction. fa=Flotation cost of debt expressed as a frac

tion. fp=Flotation cost of preferred stock ex

pressed as a fraction. fe=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 bonds industrial 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 (Ro) 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.

(4)(A) The predicted nominal cost of common stock (Re) is computed with equation 2. Eq 2 ROER+BXŘm 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 Řm=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%

sp,t Rm'

and Vs

sp,t1 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 divi

dends. 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 re

ceived 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,

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