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(f) Emergency use. A petition for an make the demonstration required by emergency exemption may be submit- this section: ted in addition to a petition for a (1) A copy of the contract between scheduled equipment outage. Eligibil- petitioner and the international pipeity and evidentiary requirements of line with the applicable sections uneach exemption must be satisfied. If derlined; granted, separate reporting require- (2) A certification from the natural ments will be required for each exemp- gas supplier of the pipeline that the tion.

natural gas would revert to Canada

upon cancellation of the contract; 8 504.63 Installations served by certain in

(3) A certification by the pipeline ternational pipelines.

that it serves high priority users and a (a) Eligibility. Section 312(j) of the description of those users; Act provides for a permanent exemp- (4) An explanation of the substantial tion for the use of natural gas by financial penalty that would be inmajor fuel burning installations served curred; by certain international pipelines. To (5) An explanation of why force maqualify for this exemption a petitioner jeure would not apply to the contract must demonstrate to the satisfaction cancellation; of ERA that:

(6) A description of petitioner's at(1) Petitioner's primary source of tempt to transfer its contract as denatural gas is under a contract with a scribed in section 731 of the Act; pipeline between the United States (7) A determination from the Federand Canada;

al Energy Regulatory Commission (2) The contract was signed before that the revenues from the transporApril 21, 1977;

tation and sale of natural gas under (3) The natural gas would revert to petitioner's contract are essential to Canada if petitioner is not granted an the economic vitality of the pipeline; exemption;

(8) Conservation measures, as re(4) The pipeline serves high priority

quired under $ 504.18; and users as defined in paragraph (b) (9) Petroleum and natural gas conbelow;

sumption, as required under $ 504.19. (5) Petitioner would suffer substantial financial penalty if the contract 8 504.64 Product or process requirements. were cancelled and there is no availa- [Reserved] ble relief from the penalty; and

(6) The revenues from the transpor- APPENDIX I-PROCEDURES FOR THE COMtation and sale of natural gas under PUTATION OF THE REAL COST OF CAPIpetitioner's contract are essential to TAL the economic vitality of the pipeline.

(a) The discount rate for use in determin(b) For purposes of this section the

ing if it is financially feasible to convert a term “high priority user" means any

facility from oil or gas to alternate fuel is residential user of natural gas or any the firm's real after-tax weighted average commercial user whose consumption marginal cost of capital. This appendix outof natural gas on a peak day is less lines the procedure used to compute it. than 50 MCF.

(b) The firm's real after-tax weighted (c) Evidence required in support of average marginal cost of capital (K) is comthe petition. A petition must include

puted with equation 1. the following information in order to

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We

The terms in equation 1 are defined as follows: Wo=Fraction of existing capital structure

which is debt. Wo=Fraction of existing capital structure which is preferred equity.

Fraction of existing capital structure which is common equity and retained

earnings. Rd Predicted nominal cost of long term

debt expressed as a fraction. R. 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 im

plicit price deflator over the past 12

months expressed as a fraction. fa Flotation cost of debt expressed as a

fraction. f, Flotation cost of preferrd stock ex

pressed as a fraction. fe Flotation cost of common stock ex

pressed as a fraction. t Marginal federal income tax rate for

the current year. (c) Information on parameters used in Equation 1.

(1) The parameters will be obtained from the firm, accepted rating services (e.g., Standard & Poor's, Moody's), government publications, accepted financial publications, annual financial reports and statements of firms, and investment bankers.

(2) The predicted nominal cost of long term debt (Ro) is 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 (R.) is 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 Re = R + B x Rm where: RE

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 relation

ship between the excess return on common stock and the excess return on the S&P 500 composite index, and

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 19261976 as computed by Ibbotson and Sinquefield 49.2% (B) The “beta” coefficient is computed with regression analysis techniques. The regression equation is Equation 3.

Rm

EQ 3 (Re' – Rp') = A + B (Rm – R/') + et where:

t

Re

PRCCT

+ (DIVRATE/12)

PRCCE-1

PRCCt-1

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es=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. Vspe=The market value of “one share” of

the S&P 500 composite index at the end

of month t. Dspe=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.

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

(A) In the case of industrials, which do not typically issue preferred stock, the predicted nominal cost of preferred stock (R.)

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.

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where:

(1) Except for the case described in D'=The average annual yield on three paragraph (c)(2) of this section, the oil

month U.S. Treasury bills reported in or gas which would otherwise be conthe Survey of Current Business auc

sumed must be calculated as follows: tioned in month t-which is reported

(i) You may include the oil or gas using the bank discount method.

that would be consumed by facilities N=Number of to maturity.

that are or would be too small to be

covered by the FUA regulations. In PART 505—NEW MAJOR FUEL

the case of new small industrial units, BURNING INSTALLATIONS

you must demonstrate that it would be

reasonable to construct units of that 8 505.27 Cogeneration.

size. (a) Eligibility. Section 212(c) of the (ii) You may include the oil or gas Act provides for a permanent exemp- that would be consumed by units in tion for cogeneration. To qualify you place (existing or exempt) covered by must demonstrate to the satisfaction FUA if they are less than 40 years old of ERA at least the following mini- in the case of a field-erected unit or mum criteria:

less than 20 years old in the case of a (1) The oil or gas to be consumed by package unit. In the case of existing the cogeneration facility will be less units, you may not include units that than that which would otherwise be have burned an alternate fuel or are consumed in the absence of the cogen- capable of burning an alternate fuel, eration facility where the calculation and, you may only include units deof savings is in accordance with para- scribed by this paragraph if they will graph (c) of this section;

be retired or shut down if this exemp(2) It would be in the public interest tion is granted. to grant an exemption to the cogener- (iii) You may include the oil or gas ation facility because of special cir- that would be consumed by units not cumstances such as technical innova- yet constructed that would be covered tion or maintaining industry in urban by the FUA regulations if you can areas.

demonstrate that each unit would be (b) Specifications of the cogenera- entitled to an exemption. tion facility. (1) A person proposing to (iv) You may include the oil or gas construct a cogeneration facility may

that would be consumed by powerapply for an exemption under this sec- plants to generate electricity supplied tion if the amount of net electricity to the grid to the extent that such that is either sold or exchanged is less electricity, if you cogenerate, will no than 50 percent. If the amount is 50 longer be supplied by the grid. The oil percent or more, see $ 503.37 (Power- or gas portion must be based on a 10 plants). Net electricity excludes sales year forecast that includes new conor exchanges among owners of the co- struction and retirement of plants generation facility.

within those 10 years. (2) Electricity generated by the pro- (2) In the case of a cogeneration faposed cogeneration facility must con- cility that would consist of an existing stitute more than 10 percent of the unit or an exempted unit and a new useful energy output of the facility unit, you must calculate the amount and less than 90 percent of the useful of oil or gas that would otherwise be energy output.

consumed as the sum of: (c) Calculation of oil and gas sav- (i) The five-year annual average oil ings. There is an oil and gas savings if or gas consumption of the existing or the oil or gas to be consumed by the exempted unit; and cogeneration facility will be less than (ii) The amount that would be conthat which would otherwise be con- sumed in units described in parasumed in the absence of the cogenera- graphs (c)(1)(i)(iv) of this section that tion facility. The calculation of the oil would now be satisfied by the new coand gas which would otherwise be con- generation facility. sumed must be in accordance with (d) Evidence required in support of a paragraphs (c) (1) and (2) of this sec- petition. You must include at least the tion.

following evidence in order to make

the demonstration required by this section:

(1) An engineering description of the cogeneration system, including proposed output and uses thereof, with sufficient detail to ensure that the facility qualifies as a cogeneration facility;

(2) A detailed oil and natural gas savings calculation identifying the projected oil or natural gas consumption of the cogeneration facility and the oil or natural gas that would otherwise be used;

(3) Identification of the FUA status of the proposed and displaced units with respect to coverage and designation as new, existing, or exempted, age of units, and alternate fuel capability of units;

(4) Identification of all persons and their roles in the proposed cogeneration facility;

(5) Where a demonstration is required that the units would be entitled to an exemption, submission of all evidence required by the regulations with respect to the applicable exemptions, including the alternate site showings; and

(6) In the case of paragraph (a)(2) of this section, an explanation of the public interest factors you believe should be considered by ERA.

(e) Exercise of discretion by ERA. ERA may refuse to grant this exemption to you if it determines that such grant would not be in the public interest or in accordance with the purposes of the Act, notwithstanding the fact that the evidence you have furnished to ERA in your exemption petition substantiates that your facility would otherwise be eligible to receive the exemption. (Dept. of Energy Organization Act, Pub. L. 95-91, 91 Stat. 565 (42 U.S.C. 7101 et seq.); Powerplant and Industrial Fuel Use Act of 1978, Pub. L. 95-620, 92 Stat. 3289 (42 U.S.C. 8301 et seq.); E.O. 12009, 42 FR 4267) (44 FR 28998, May 17, 1979)

tion for cogeneration. To qualify you must demonstrate to the satisfaction of ERA at least the following minimum criteria:

(1) The oil or gas to be consumed by the cogeneration facility will be less than that which would otherwise be consumed in the absence of the cogeneration facility where the calculation of savings is in accordance with paragraph (c) of this section;

(2) It would be in the public interest to grant an exemption to the cogeneration facility because of special circumstances such as technical innovation or maintaining industry in urban areas.

(b) Specifications of the cogeneration facility. (1) A person proposing to operate a cogeneration facility may apply for an exemption under this section if the amount of net electricity that is either sold or exchanged is less than 50 percent. If the amount is 50 percent or more, see $ 504.35 (Powerplants). Net electricity excludes sales or exchanges among owners of the cogeneration facility.

(2) Electricity generated by the cogeneration facility must constitute more than 10 percent of the useful energy output of the facility and less than 90 percent of the useful energy output.

(c) Calculation of oil and gas savings. There is an oil and gas savings if the oil or gas to be consumed by the cogeneration facility will be less than that which would otherwise be consumed in the absence of the cogeneration facility. The calculation of the oil and gas which would otherwise be consumed must be in accordance with paragraphs (c) (1) and (2) of this section.

(1) Except for the case described in paragaphs (c)(2) of this section, the oil or gas which would otherwise be consumed must be calculated as follows:

(i) You may include the oil or gas that would be consumed by facilities that are or would be too small to be covered by the FUA regulations. In the case of new small industrial units, you must demonstrate that it would be reasonable to construct units of that size.

(ii) You may include the oil or gas that would be consumed by units in

PART 506—EXISTING MAJOR FUEL

BURNING INSTALLATIONS

8 506.35 Cogeneration.

(a) Eligibility. Section 312(c) of the Act provides for a permanent exemp

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