(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 proposed exemption becomes effective or, in the case of a financial feasibility finding, the year before alternate fuel use would begin. For example, in the third year before the proposed exemption becomes effective (or the unit would begin using alternate fuel, in the case of a financial feasibility finding), i would equal -2, and in the third year following commencement of the proposed exemption (or commencement of alternate fuel use), i would equal +3. Years are represented by 52 week periods prior to or following the date on which the proposed exemption would begin (or on which alternate fuel use would begin). Outlays before the proposed exemption becomes effective are future valued to the year before the proposed exemption becomes effective (year 0), and outlays after the proposed exemption becomes effective are present valued to the year before the proposed exemption becomes effective. g=The number of years prior to the year

before the proposed exemption becomes effective (year 0) that (1) a cash outlay is first made for capital investments, (2) an investment tax credit is first used, or (3) replacement energy is required while the facility would be shut down for conversion-whichever occurs first. Years 0 and g must be the same for both the proposed conversion and no-conversion

cases.

N=The remaining useful life of the unit (see paragraph (d)(6) of this section).

ID=Capital investment required to recover "lost" capacity. "Lost" capacity is the design capacity of or maximum sustained energy per unit of time that could be produced by a powerplant, or the maximum sustained energy per unit of time that could be produced by an installation, lost due to derating (see Equation 6, paragraph (d)(3) of this section). If a replacement facility is being evaluated, ID is the capital cost associated with an alternate fuel-fired replacement facility.

I1=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). This may include labor, materials, insurance, taxes (except income taxes), etc. (See paragraph (d)(4) of this section.) Operations and maintenance expenses for "replacement energy" may be accounted for here. "Replacement energy" is that energy which substitutes for the output of a unit during the period of conversion to alternate fuel

use.

S Salvage value of capital investment (in dollars) in year i.

FL, Annual cash outlay for delivered fuel expenses (in dollars) in year i. Expenses for fuel to generate "replacement energy" above may be accounted for here. (See paragraph (d)(4) 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)(5) of this section).

ITC1 = Federal investment tax credit used in year i resulting from capital investments (see paragraph (d)(7) of this section). DPR1 = Depreciation in year i resulting from capital investments (see paragraph (d)(7) of this section).

t1 = Marginal income tax rate in year i (see paragraph (d)(7) of this section).

IX1 = 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 comparisons.

(i) Compute the cost of using an alternate fuel (COST(ALTERNATE)) throughout the remaining useful life of the unit using Equations 2, 3, and 6. (ii) Compute the cost of using oil or natural gas (COST(OIL)) throughout the remaining 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 of the unit with alternate fuel (given the best information available at the time the petition is filed), the petitioner has completed the test and is eligible 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.

should reflect postponed use of alternate fuel. (v)

Successively

recompute COST(ALTERNATE) with Equations 2, 3, and 6, 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 after the proposed exemption would be effective (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 paragraph (b)(5) (iv) and (v) of this section and the COST(OIL) calculated in paragraph (b)(5)(ii) of this section.

(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 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 will substantially exceed the cost of using imported petroleum (or natural gas) 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 a period of one year, two years, three years, 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)) 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 paragraphs (c)(4) (i), (ii), and (iii) of this section 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 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 (uninflated) terms by using the prices in effect at the time

the petition is submitted. Instructions for fuel price calculations are contained in Appendix II to this section.

(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 conversion 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 convert (or not to convert) 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 the number of days supply for both the base case and the alternate fuel case being compared. The fuel inventory of 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. Include the salvage value of any fuel in inventory

(ii) M, ID, ITCD, SD1, and DPRDi, are the useful life, yearly investment cash outlays, investment tax credits, salvage values, and depreciation, respectively, resulting from the purchase of equipment required to recover the design capacity or maximum sustained energy per unit of time that could be produced, lost due to derating. All definitions and information which apply to N, I, ITC1, S1, and DPR, (see paragraph (b)(4) of this section), also apply to M, ID¡, ITCD¡, SD1, and DPRD1, respectively, except that M, ID1, ITCD1, SD, and DPRD1, are limited to equipment required to recover the loss due to derating. All other terms are as in Equation 3 (paragraph (b)(3) of this section). In the case of a replacement facility, if appropriate, ID is the capital cost associated with that alternate fuel-fired replacement facility.

(iii) If an election is made not to recover the loss due to derating (for the purpose of this calculation), ID equals

zero.

(4)(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; how

ever, 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 remaining useful life of the powerplant, and compute cash outlays for operations, maintenance, and fuel expenses for the powerplant.

(B) Economically dispatch the powerplant in which conversion to alternate fuel is being considered and, if appropriate, the additional powerplant required due to derating or replacement. 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 to this section) are the corresponding expenses for the purpose of the cost calculation. The dispatch analysis area 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. If the design capacity lost due to derating or replacement is recovered, as discussed in paragraph (d)(3) of this section, the petitioner must employ this method (or that described in paragraph (d)(4)(i)(C) of this section for calculating operations, maintenance, and fuel expenses.

(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.

(ii) The annual cash outlays for operations and maintenance expenses (OM) and fuel expenses (FL) for an installation may be computed by the method specified in (A) below. A second method (B) may be used unless the energy or steam produced by the alternate fuel-fired unit would be less than that computed using method A.

(A) Base the computations on the actual power or steam generation schedule of the installation in which conversion is being considered and, if appropriate, the additional installation required due to derating of the facility being converted. If power output lost due to derating is recovered for the purpose of this calculation (see paragraph (d)(3) of this section), the petitioner must employ this method for calculating operations, maintenance, and fuel expenses.

(B) If the installation has been in operation for at least two years, assume it will annually generate an amount of energy or steam equal to the average amount of energy or steam produced annually for the last five years or the length of operation of

the installation if it is less than five years.

(5) The discount rate (k) for analyses of powerplants is 2.9% 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% or that which is computed as specified in Appendix I. The inflation index (IX) is shown in Table II-1 of Appendix II to this section. 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.

(6)(i) The remaining useful life (N) of a powerplant shall be thirty-five (35) years minus the age of the plant when it would begin using an alternate fuel. The remaining useful life of a major fuel burning installation shall be forty (40) years minus the age of the plant when it would begin using an alternate fuel. The petitioner or ERA may utilize an alternative useful life projection 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. If the unit's remaining useful life would be extended as the result of the conversion or refurbishment, that extension must be included in the remaining useful life.

(ii) If the life of a unit would be extended, the petitioner will have to modify his calculation so that the two cash flows being compared have the length of the unextended remaining useful life. To do this, (1) use the unextended useful life in Equations 2 and 5 for the unit when it is both converted and unconverted, and (2) multiply the capital investment term (I) for the converted unit (computed with Equation 3) by the following adjustment factor (A):

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