tion must include all of the evidence and information required in this part and Part 501.

§ 503.6 Cost calculations for new powerplants and installations.

(a) General. (1) This calculation compares the cost of using alternate fuel to the cost of using imported petroleum. It must be performed for each alternate fuel and/or alternate site that the petitioner is required to examine.

(2) The cost of using an alternate fuel (see the definition in § 500.2) as a primary energy source will be deemed to substantially exceed the cost of using imported petroleum if the difference between the cost of using alternate fuel and the cost of using imported oil is greater than zero.

(3) There are two comparative cost calculations-a general cost test and a special cost test. Both take into consideration cash outlays for capital investments, annual expenses, and the effect of depreciation and taxes on cash flow. To demonstrate eligibility for a permanent exemption, a petitioner must use the proecedures specified in the general cost test (paragraph (b) of this section). To demonstrate eligibility for a temporary exemption, the petitioner may apply the procedures specified in either the general cost test or the special cost test (paragraph (c) of this section).

(4) The general cost test differs from the special cost test with respect to: (i) The time period over which costs are calculated, and (ii) the types of fuelconsuming equipment being considered. For the general cost test, the petitioner must compare the cost of using an alternate fuel in an alternate fuel capable unit with the cost of using imported petroleum or natural gas in an oil/natural gas capable unit over the lifetime of these facilities. For the special cost test, the petitioner

must compare the cost of using alternate fuel against that of using imported petroleum/natural gas in an alternate fuel capable unit over the period of the desired temporary exemption.

(b) Cost calculation-general cost test. (1) A petitioner may be eligible for a permanent exemption if he can demonstrate that the cost of using an alternate fuel from the first year of operation substantially exceeds the cost of using imported petroleum. Unless the cost estimates as prescribed below will not materially change during the first ten years of operation of the unit (given the best information available at the time the petition is filed), the petitioner must also demonstrate that the cost of using an alternate fuel beginning at any time within the first ten years of operation and using imported petroleum or natural gas until such time (i.e., delayed use of alternate fuel) would substantially exceed the cost of using only imported petroleum.

(2) The petitioner would only be eligible for a temporary exemption if the computed costs of delayed alternate fuel use, commencing at the start of the second through eleventh years of operation, do not always substantially exceed the cost of using only imported petroleum. The length of the temporary exemption would be the minimum period from the start of operation in which the cost of using alternate fuel substantially exceeds the cost of using imported petroleum.

(3) To conduct the general cost test, calculate, the difference (DELTA) between the cost of using an alternate fuel (COST(ALTERNATE)) and the cost of using imported petroleum (COST(OIL)) using Equations 1 through 3 below and the comparison procedures in paragraph (b)(5) of this section.

EQ 1

COST (OIL)

(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

before 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 usedwhichever occurs first.

N=The useful life of the unit (see paragraph (d)(5) of this section).

I, 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.)

OM1 = 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.)

S 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 FL, 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). ITC1 = Federal investment tax credit used in year i resulting from capital investments (see paragraph (d)(6) of this section). DPR1 = Depreciation in year i resulting from capital investments (see paragraph (d)(6) of this section).

t1 = Marginal income tax rate in year i (see paragraph (d)(6) of this section). IX, Inflation index value for year i (see Table II-1 in Appendix II).

IX. 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. It outlines the equipment, fuel, and time compari

sons.

(i) Compute the cost of using an alternate fuel (COST (ALTERNATE)) in an alternate fuel-capable unit throughout the useful life of the unit using Equations 2 and 3.

(ii) Compute the cost of using oil or natural gas (COST (OIL)) in an oil or natural gas-fired unit throughout the useful life of the unit using Equations 2 and 3.

(iii) Using Equation 1, compute the difference (DELTA) between COST (ALTERNATE) and COST (OIL). If the difference (DELTA) is less than or equal to zero, a petitioner is not eligible for a permanent or temporary exemption using the general cost test and need not complete the remainder of the general cost test calculation. However, he still may be eligible for a temporary exemption using the special cost test (paragraph (c) of this section). If the difference (DELTA) is greater than zero and if the cost estimates will not materially change during the first ten years of operation (given the best information available at the time the petition is filed), the petitioner has completed the test and is eligibile for a permanent exemption. However, if the costs will change during the first ten years, the petitioner must complete the remainder of the general cost test-the delayed use calculations which follow.

(iv) Recompute COST(ALTER NATE) with Equations 2 and 3, assuming that an alternate fuel is not used as the primary energy source until the start of the second year of operation and that imported petroleum or natural gas is used for the first year of operation. All cash outlays should reflect postponed use of alternate fuel. (v) Successively

recompute COST(ALTERNATE) with Equations 2 and 3, assuming that the alternate fuel use is postponed until the start of the third year, fourth year, and so on,

through the beginning of the eleventh year of operation (with imported petroleum or natural gas used in the years preceding alternate fuel use).

(vi) Compute the difference (DELTA) between each of the ten COST(ALTERNATE)s calculated in (iv) and (v) above and the COST(OIL) calculated in (ii) above.

(vii) If all the DELTAS computed in (iii) and (vi) above are greater than zero, the petitioner is eligible for a permanent exemption. If one or more of the DELTAS is less than or equal to zero, he 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.

(c) Cost calculations-special cost test. (1) A petitioner may be eligible for a temporary exemption if he demonstrates that the cost of using an alternate fuel in an alternate fuel capable unit will substantially exceed the cost of using imported petroleum or natural gas in an alternate fuel capable unit over the period of the proposed exemption. The period of the proposed temporary exemption may not exceed ten years. The petitioner must demonstrate that the cost of using an alternate fuel substantially exceeds the cost of using imported petroleum for the first year of operation, the first two years of operation, and so forth, through the period of the proposed exemption. ERA will limit the duration of a temporary exemption to the shortest time possible.

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.

(i) Using Equation 5, compute the cost of using an alternate fuel (COST(ALTERNATE)) in an alternate fuel-capable unit assuming the length of the proposed exemption in years is one year.

(ii) Likewise, compute the cost of using oil or natural gas (COST(OIL)) in an alternate fuel and imported petroleum or natural gas-capable unit 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

at the time the petition is submitted. Instructions for fuel price calculations are contained in Appendix II. 1

(2) Capital investment yearly cash outlays (I), 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 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 where whatever amount is chosen is equivalent in terms of number of days supply for both the base case and the alternate fuel case being compared. 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. The petitioner may utilize alternative fuel inventories by demonstrating through engineering or proc

1Note: Appendix II, published as part of the original document at 45 FR 84975, Dec. 24, 1980, appears at the end of § 504.12 of this title.

ess requirements evidence that another level of inventory is appropriate. However, the petitioner must use equivalent fuel supply inventories as described above. Fuel supplies must be computed using annual fuel consumption rates.

(3)(i) The annual cash outlays for operations and maintenance expense (OM) and fuel expense (FL) for a powerplant may be computed by one of the following three methods; however, the one chosen must be consistently applied throughout the analysis.

(A) Assume the energy produced by the powerplant equals seventy (70) percent of design capacity times 8760 hours for each year during the life of the powerplant, and compute cash outlays for operations, maintenance, and fuel expenses for the powerplant.

(B) Economically dispatch the new powerplant. The cash outlays for operations, maintenance, and fuel expenses of all powerplants being dispatched (where oil and natural gas are priced according to the procedures of Appendix II) are the corresponding expenses for the purpose of the cost calculation. The dispatch analysis area must be that area with which the firm currently dispatches, anticipates dispatching, and will be interconnected. It must also include all anticipated exchanges of energy with other utilities or powerpools. The outlays for operations, maintenance, and fuel may also be estimated using a methodology that incorporates the benefits of economically dispatching units and provides consistent treatment in the alternate fuel and oil or natural gas cases being compared.

(C) Use a dispatch analysis to project the energy produced by the powerplant for a representative (not atypical) year of operation when consuming an alternate fuel. Compute the cash outlays for operations, maintenance, and fuel expenses for the powerplant based upon the level of energy production estimated for the representative year. The dispatch analysis and fuel expenses for the cost calculation must include oil and natural gas priced according to the procedures of Appendix II.1

See footnote 1 to § 503.6(d)(1).

(ii) When computing the annual cash outlays for operations and maintenance expense (OM,) and fuel expense (FL) for an installation, specify the firing rates and the length of time each firing rate will be maintained.

(4) The discount rate (k) for analyses of powerplants is 2.9 percent or that which is computed as specified in Appendix I (45 FR 53711-2, Aug. 12, 1980). The discount rate (k) for analyses of installations is 7.7 percent or that which is computed as specified in Appendix I. The inflation index (IX) is shown in Table II-1 of Appendix II.1 ERA will modify these specified rates from time to time as required by changed conditions after public notice and an opportunity to comment. However, the relevant set of specified rates 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 set is more favorable to the petitioner.

(5)(i) The useful life (N) of all powerplants except nuclear will be thirty-five (35) years. The useful life of a nuclear powerplant will be forty (40) years. The useful life of major fuel burning installations will be forty (40) years. The petitioner or ERA may utilize alternative useful life projections based upon a demonstration that such projections are more appropriate for the particular facility. Such a demonstration must consist of suitable engineering evidence, historical information, or other relevant factors applicable only to the physical life of the facility.

(ii) If the units being compared have different useful lives, the petitioner will have to modify his calculation so that the two cash flows being compared have the length of the shorter useful life. To do this, (A) use the shorter of the two useful lives in Equations 2 and 5 for both units, and (B) multiply capital investment (I) of the unit with the longer life (computed with Equation 3) by the following adjustment factor (A):