Brazos Elec Pwr Coop v. FERC

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 98-60568
_____________________

BRAZOS ELECTRIC POWER COOPERATIVE INCORPORATED

Petitioner

v.

FEDERAL ENERGY REGULATORY COMMISSION;

Respondent

_________________________________________________________________

Petition for Review of Order of the
Federal Energy Regulatory Commission
_________________________________________________________________
February 29, 2000
Before KING, Chief Judge, and REYNALDO G. GARZA and EMILIO M.
GARZA, Circuit Judges.

KING, Chief Judge:

Petitioner Brazos Electric Power Cooperative, Inc.

(“Brazos”) seeks review of an order of the Federal Energy

Regulatory Commission (“FERC,” or “the Commission”) denying

Brazos’ motion and petition to revoke the certification of

Tenaska IV Texas Partners, Ltd. (“Tenaska”) as a “qualifying

cogeneration facility” under the Public Utilities Regulatory

Policies Act of 1978. We deny the petition for review.

I.

Tenaska is a privately-held partnership engaged in the

1
production of wholesale electric power. Tenaska developed and

owns a cogeneration plant in Cleburne, Texas. A cogeneration

plant is a facility which produces electric energy and either

steam or some other form of useful energy which is used for

commercial, industrial, heating, or cooling purposes. See 16

U.S.C. § 796(18)(A). Brazos is an electric utility cooperative

engaged in the generation and transmission of electric power.

The utility is comprised of individual electric cooperatives in

Texas and provides power to those cooperatives. Currently,

Brazos is purchasing electricity from Tenaska pursuant to the

facilities’ Power Purchase Agreement. The Power Purchase

Agreement was certified under a Texas statute that granted

certification of such contracts only if the cogeneration facility

met the requirements of the Public Utilities Regulatory Policies

Act of 1978 (“PURPA”), 16 U.S.C. § 823a et seq. Brazos seeks to

undo the contract, arguing that Tenaska no longer meets PURPA’s

requirements.

A further understanding of the facts of this case requires

some explanation of the statutes and regulations that control the

relationship between a private producer such as Tenaska and

public utility corporation such as Brazos. PURPA was enacted in

response to the nation’s fuel shortage, and its primary aim was

to promote conservation of oil and natural gas in electricity

generation. See FERC v. Mississippi, 456 U.S. 742, 745-46

(1982). To those ends, PURPA required FERC to promulgate rules

2
encouraging the development of alternative generators of

electricity, such as cogeneration facilities. See 16 U.S.C. §

824a-3(a). The rationale behind encouraging cogeneration is that

the production of electricity frequently results in the

production of thermal energy as a byproduct; by using small

amounts of additional fuel, cogenerators can produce large

amounts of thermal energy to be used in other processes.

Congress created regulatory benefits to provide economic

encouragement to such nontraditional power producers. For

example, qualifying cogenerators are exempt from wholesale rate

regulation under all federal and state public utility statutes,

see 18 C.F.R. §§ 292.601, 292.602, and utilities can be compelled

to interconnect with them, paying rates no greater than the

utility’s full avoided costs, see 18 C.F.R. §§ 292.303, 292.308,

292.101(b). In this way, PURPA ensures the cogenerator a market

for its electricity production and allows it to make a profit

when it can produce power at an average cost lower than the

utility’s avoided cost.

Of relevance to the instant appeal are PURPA’s guidelines

for the certification of facilities as “qualifying cogeneration

facilities,” and FERC’s rules prescribing the standards for that

certification. The statute defines “cogeneration facility” as

one that produces “(i) electric energy, and (ii) steam or forms

of useful energy (such as heat) which are used for industrial,

3
commercial, heating, or cooling purposes.” 16 U.S.C.

§ 796(18)(A). To determine which nontraditional power producers

could receive benefits, PURPA created a category of “qualifying

cogeneration facilities,” or QFs, which includes any facility

FERC determines has met the regulatory requirements. See 16

U.S.C. § 796(18)(B)(i).

FERC’s regulations prescribe operating, efficiency, and

ownership standards for facilities seeking QF status. See 18

C.F.R. § 292.205 (operating and efficiency standards); 18 C.F.R.

§ 292.206 (ownership criteria). Relevant here is the requirement

that electric utilities hold less than 50% of the equity interest

in the cogeneration facility. See 18 C.F.R. § 292.206. In

addition, the cogeneration facility must “produce electric energy

and forms of useful thermal energy (such as heat or steam), used

for industrial, commercial, heating, or cooling purposes, through

the sequential use of energy.” 18 C.F.R. § 292.202(c) (emphasis

added).

FERC has explained that “the ultimate determination of

usefulness will be made in the marketplace.” See Electrodyne

Research Corp., 32 FERC ¶ 61,102, ¶ 61,278 (1985). It therefore

applies one of three economic tests in determining whether a

thermal output is useful for purposes of QF certification.

First, if a cogenerator proposes to use its thermal energy in a

common industrial or commercial process, that energy is

4
considered presumptively useful. See id. at ¶ 61,279. A

process, or thermal application, will be deemed “common” after

the Commission has received a satisfactory number of QF

applications proposing the same use for the thermal output. See

Kamine/Besicorp Allegany, L.P., 63 FERC ¶ 61,320, ¶ 63,158

(1993). The Commission reasons that, if a thermal application is

a common one, the technology involved must be established and

there must be a market for the application’s end-product. See

Arroyo Energy, L.P. (Arroyo II), 63 FERC ¶ 61,198, ¶ 62,545

(1993); Polk Power Partners, L.P., et al., 61 FERC ¶ 61,300, ¶

62,128 (1992). As such, when a facility’s proposed use of

thermal energy is common in the industry, FERC presumes the

energy used in that application is useful and performs no further

analysis regarding the economics of the thermal application. See

Bayside Cogeneration, L.P. (Bayside II), 67 FERC. ¶ 61,290, ¶

62,006 (1994).

When the facility proposes an uncommon application, i.e.,

one that involves a new technology or creates an end-product

without an established market, FERC’s analysis is different. See

Electrodyne, 32 FERC at ¶ 61,278. It employs separate analyses

depending on whether the purchaser of the thermal energy - the

“thermal host” - is an entity unaffiliated or affiliated with the

cogenerator. If an independent entity, unaffiliated with the

cogenerator, purchases the thermal energy, FERC considers the

5
energy useful because it assumes no entity would purchase the

thermal output, or the end-product produced with the aid of the

thermal output, unless it served some legitimate purpose. See

Liquid Carbonic Industries Corp. v. FERC, 29 F.3d 697, 700 (D.C.

Cir. 1994). In other words, purchase by the thermal host

establishes that there is an arm’s-length market for the output.

See Kamine, 63 FERC at ¶ 63,158; Electrodyne, 32 FERC at

¶ 61,279. FERC, therefore, deems the thermal energy useful and

performs no further analysis regarding the economics of the

thermal application. See LaJet Energy Co., 44 FERC ¶ 61,288,

¶ 61,194 (1988); Electrodyne, 32 FERC at ¶ 61,279.

If the use of thermal energy is uncommon and the thermal

host is the cogenerator itself, or its affiliate, only then will

FERC inquire into the economic viability of the thermal use. See

Electrodyne, 32 FERC at ¶ 61,279. Specifically, the cogenerator

is required to provide evidence that “the output would be

economically justified in an independent business setting.” Id.

at ¶ 61,278. That is, the cogenerator must show that the thermal

use is itself profitable without subsidy from the sale of

electricity. FERC imposed this requirement on affiliated thermal

hosts to prevent cogenerators whose thermal outputs have no

established market from pawning off their thermal energy for an

impractical purpose, while retaining their QF status and

concomitant right to sell power at avoided cost rates. See id.

FERC’s certification process occurs prior to the

6
construction of the facility, and QF status is granted or denied

based on the representations in a facility’s application. The

regulations provide, however, that FERC may revoke the QF status

of a previously-certified facility if the facility, when

operational, fails to comply with any of the statements in its

application. See 18 C.F.R. § 292.207(d)(1).

Brazos challenges Tenaska’s certification as a QF. Tenaska

and Brazos entered their Power Purchase Agreement (“PPA”) in

1993, which obligated Brazos to purchase electric power from

Tenaska for twenty-three years, with a seventeen-year rollover,

at prices fixed in the PPA. This was not a situation where

Brazos was compelled under PURPA to purchase electricity from a

QF. Rather, both parties were equally interested in Tenaska’s

becoming certified as a QF. Tenaska wanted to qualify for PURPA

benefits. Brazos wanted the best rates. According to Philip

Segrest, Brazos’ attorney at the time, the only power sources in

Texas were public utilities and QFs. As a QF, Tenaska would only

be able to charge rates up to Brazos’ avoided costs. The public

utilities, however, were currently charging rates above Brazos’

avoided costs. Thus, because Tenaska’s rates were favorable and

because the option of building its own plant was impractical,

Brazos “insist[ed] that the PPA be certified by the [Public

Utility Commission of Texas] pursuant to PURA [the Public Utility

Regulatory Act] ....” Affidavit of Philip Segrest. Under PURA,

certification of power purchase agreements was permitted only if

7
the power was being purchased from a QF, as that term was defined

in PURPA. See TEX. REV. CIV. STAT. ANN. art. 1446c (West Supp.

1994) (repealed 1995).

Therefore, on October 20, 1994, Tenaska applied to FERC for

QF certification, obviously with Brazos’ blessing. According to

its application, Tenaska intended to sell its electrical output

to Brazos, while its thermal output, steam, was to be converted

into distilled water for sale to “a third party.” FERC published

notice of Tenaska’s application in the Federal Register but

received no protests or requests for interventions to Tenaska’s

certification. Therefore, on January 13, 1995, the Commission

granted Tenaska QF status. In doing so, FERC determined, in

relevant part, that Tenaska fulfilled its ownership requirement

that utilities own less than 50% equitable interest in the

facility. More importantly, FERC also concluded that the

conversion of steam to distilled water was a common industrial

process and application of thermal energy for that use was,

therefore, presumptively useful.

Tenaska entered into an arrangement with the City of

Cleburne (the “City”) in which Tenaska would (1) purchase the

City’s potable water for use in its steam generator, (2) recover

the reject water stream from the steam generator’s boiler makeup

water treatment system and use it to supply the distilled water

system, (3) sell the distilled water to the City, and (4)

purchase effluent water from the City’s wastewater treatment

8
facility for use in its cooling tower. Under this arrangement,

the City gave Tenaska a ten-dollar credit on its water bill for

its production of the distilled water, and the City was obligated

to construct the facilities necessary for transporting both the

effluent water to Tenaska and the distilled water from Tenaska.

The City was responsible for the initial financing of the

construction, including the issuance of tax-exempt municipal

bonds, for which Tenaska would reimburse the City in monthly

payments when the debt service was owed. The facility became

operational in January 1997.

The City had originally agreed to purchase Tenaska’s

distilled water in order to attract industries to an industrial

park near Tenaska’s facility, by offering the ready supply of

distilled water for sale as process water. Water which was not

resold was to be used to augment the flow of Buffalo Creek, a

stream running near the City’s business district whose stagnant

waters were encouraging nuisance conditions and an increased

mosquito population. While negotiations continued with potential

occupants of the industrial park, the City ran into difficulty

garnering permits from the Environmental Protection Agency to

increase Buffalo Creek’s flow with distilled water. Initially,

therefore, the City had no specific use for the distilled water

it was purchasing from Tenaska, and it released its purchase into

the City’s sewer system. An occupant of the industrial park

began purchasing the distilled water in September 1997.

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 On August 22, 1997, Brazos filed with FERC a motion and

petition for revocation of Tenaska’s QF status. According to

Brazos, the use of Tenaska’s thermal output for the production of

distilled water had not proven to be “useful.” The presumption

of usefulness on which Tenaska’s QF status was certified, Brazos

argued, was rebutted by actual operation of the facility -

notably, by the fact that the City paid only ten dollars a month

for thousands of gallons of water and then dumped the water in

the sewer. Meanwhile, Brazos was being forced under the PPA to

pay fixed rates which, five years into the deal, were no longer

below the market price. In addition, Brazos contended that

Tenaska did not satisfy the ownership requirements for QF status.

Although utilities owned less than 50% of Tenaska, Brazos alleged

that the utilities’ 45% interest gave them effective control in a

voting procedure requiring a 70% vote to take action.

FERC denied Brazos’ motion. FERC stated that once it

determines the proposed use of thermal energy is common, it

presumes the thermal energy is useful. FERC would not inquire

thereafter into how the thermal host used its purchase, nor would

it question whether the cogeneration facility was actually making

money from its sale. FERC also found that Tenaska satisfied the

ownership requirements for QF status, noting that the utilities’

45% interest was insufficient to effect day-to-day action without

the votes of 25% of the non-utility owners. Additionally, the

Commission noted that Tenaska’s ownership structure had not

10
changed since its certification, and because Brazos failed to

object then, its complaint now was untimely.

Subsequently, Brazos filed a request for rehearing and its

request was denied. Brazos now petitions this Court for review

of FERC’s order denying the revocation of Tenaska’s QF status.

II.

We must affirm FERC’s order unless it is “arbitrary,

capricious, an abuse of discretion, or otherwise not in

accordance with law.” 5 U.S.C. § 706(2)(A). The scope of review

under this standard is narrow; it does not authorize a reviewing

court to substitute its judgment for that of the agency. See

Motor Vehicles Mfrs. Ass’n v. State Farm Mutual Ins. Co., 463

U.S. 29, 43 (1983). Rather, we must examine “‘whether the

decision was based on a consideration of the relevant factors and

whether there has been a clear error of judgment.’” Id. (quoting

Bowman Transp., Inc. v. Arkansas-Best Freight Sys., Inc., 419

U.S. 282, 285 (1974). Where an agency has considered the

relevant factors and provided a satisfactory explanation for its

actions, its decision will be upheld.

III.

Noting that FERC regulations allow for post-operational

challenges to a QF’s certification, Brazos maintains that Tenaska

is not entitled to benefits under PURPA because, after its

facility was certified and became operational, Tenaska failed to

11
uphold the regulatory requirements for QF status in accordance

with projections contained in its application for QF

certification. Brazos advances the same arguments it did below:

the Commission should revoke Tenaska’s QF status because the

production of distilled water has not proven to be useful, and

because Tenaska does not meet PURPA’s ownership requirements. We

address each contention in turn.

A. Useful Thermal Output

The thrust of Brazos’ argument is that the Commission’s

precedent has not established an irrebuttable presumption of

usefulness. Brazos does not take issue with the use of the

presumption during certification, before the facility is even

built; then, Brazos reasons, the Commission is justified in

relying on hypothetical facts and an applicant’s claim that,

because the proposed thermal use is common, the thermal energy

will be useful. Rather, Brazos asserts that the Commission was

obligated to consider post-operational facts that could rebut the

presumption of a thermal output’s usefulness. Specifically,

Brazos avers first that, although Tenaska represented in its

application for QF status that distilled water would be produced

for sale to a third party, the sale of water to the City is a

“sham” sale designed only to retain PURPA benefits; it is not a

sale serving an independent business purpose that could be

economically justified. Second, Brazos contends that the water

12
was not useful because before the City found a purchaser, it was

pouring the water in the sewer.

In response, FERC asserts that Tenaska continues to satisfy

PURPA’s regulatory requirements, as represented in its

application for QF status. First, Tenaska’s sale of water was

one piece of a legitimate, integrated financing package. Second,

Tenaska’s thermal energy has been useful since the day it was

certified, for Tenaska has used “an established technology to

produce a common product with an existing market.” Arroyo, 63

FERC at ¶ 62,545 n.4. According to the Commission, there is no

statutory or precedential requirement that, upon the facility’s

operation, it examine how each individual thermal host is using

its purchases or how economically sound every transaction turned

out to be. In fact, FERC argues, doing so would undermine its

directives under PURPA, for conditioning the maintenance of QF

status on investigations into the economics of a thermal host’s

purchase would impede the development of cogeneration. We agree

that Brazos has misconstrued the Commission’s prior holdings.

Further, to the extent that the present factual scenario differs

from that of the Commission’s precedents, FERC’s use of its

presumption here furthers its congressional mandate under PURPA

consistently with its regulations promulgated thereto.

The Commission has consistently refused to inquire into the

economics of common thermal applications to rebut the presumption

of a thermal output’s usefulness. See Polk Power Partners, L.P.,

13
et al., 61 FERC ¶ 61,300, ¶ 62,128 (1992) (“We think it better,

once a thermal process has been found to be common, to refrain

from second-guessing the decision to use cogenerated thermal

energy in a particular industrial process and in a particular

manner.”); Arroyo II, 63 FERC at 62,546 (stating that, when a

cogenerator proposes a common application for its thermal energy,

“the Commission does not perform an economic analysis” because

“[a] contrary approach would act to discourage the development of

the cogeneration industry”). So too has the Commission refused

to examine the economics of a particular thermal host’s ultimate

use of its purchase. See Brooklyn Navy Yard Cogeneration

Partners, L.P., 74 FERC at ¶ 61,015, ¶ 61,046 (1996) (stating

that, if the thermal application is common, FERC “will not

inquire further into how the [end] product is being used [by the

thermal host]”); Arroyo Energy, L.P. (Arroyo I), 62 FERC ¶

61,257, ¶ 62,722-23, reh’g denied 63 FERC ¶ 61,198 (1993)

(concluding that it is the common nature of the industrial or

commercial process, not the use to which the product is put, that

determines that the thermal energy is useful).

In Bayside II, for example, a utility challenged the

cogenerator’s proposed application of its thermal output to

create distilled water, arguing that the proposed thermal host’s

intended use of the water was not economically viable and that

the cogenerator’s thermal output was therefore required to serve

14
“an independent business purpose with some economic

justification.” Bayside II, 67 FERC at ¶ 62,006 (internal

citation omitted). Noting that the distillation of water was a

common application, and thus the thermal output presumptively

useful, the Commission rejected this argument:

[The utility] would have the Commission view this
“presumption” as an evidentiary presumption that is
rebuttable upon the submission of economic evidence by
a party opposing certification. But this has never
been the Commission’s intention or practice. Rather,
the Commission, upon a finding that the usefulness of a
thermal application has been established by common
practice, is making a finding that practice has
established that a particular use of cogenerated
thermal energy is economic. It thus “presumes” that
the thermal output is useful; there is no need to
engage in a further inquiry into the usefulness of the
particular output. In other words, when the Commission
has found a use to be common, there is no need to
determine whether a particular use of a particular
applicant’s output would be economically justified.

Id.

Given the consistency with which FERC has denied further

inquiry into common thermal applications, nothing in these

precedents persuades us that FERC’s presumption of usefulness is

rebuttable, even post-operation, by the two sets of facts Brazos

presents. Brazos asserts first that the Commission should have

examined the economics of Tenaska’s Distilled Water Supply

Agreement with the City and applied the independent business

purpose test to that transaction. For this proposition, Brazos

relies on LaJet Energy Co., 43 FERC ¶ 61,288 (1988), which was

decided before the Commission deemed the distillation process

15
common. In LaJet, the Commission stated that “the thermal

application, here the distilled water process, must be

economically viable on its own to be considered ‘useful,’

economic viability meaning that anticipated revenues of the

distilled water process should be higher than anticipated

expenses.” 43 FERC at ¶ 61,790. As noted above, however, the

Commission has steadfastly refused to examine the economic

viability of transactions in common applications, noting that it

“looks at the economic viability of the use of thermal output to

assess whether the energy is ‘useful’ only in very limited

circumstances,” Bayside II, 67 FERC at ¶ 62,006: only when the

cogenerator’s thermal host is an affiliate (or the cogenerator

itself), and then only when the cogenerator has proposed an

uncommon application. See LaJet, 43 FERC at ¶ 61,790;

Electrodyne, 32 FERC at ¶ 61,278. Such was the case in LaJet,

where FERC examined an affiliate’s use of what was, in 1988

anyway, a novel thermal application. It was for that reason that

the Commission applied the independent business purpose test for

affiliate use of novel applications, rather than the presumption

of usefulness for non-affiliate use of common applications.

Brazos is correct, however, that the precedents FERC relies

upon in this case focus on FERC’s initial certification of

cogenerators, not the revocation of QF status after the facility

is operational. Kamine/Besicorp Allegany, L.P., 63 FERC ¶ 61,320

(1993), is instructive to Brazos’ complaint. There, the

16
cogenerator applying for QF status entered a contract to sell its

thermal energy, steam, to a non-affiliate distillation plant. The

distillation of water was considered an uncommon application at

the time, but because the cogenerator had already entered an

arm’s-length contract with its thermal host, it satisfied the

test for non-affiliate use of uncommon applications. Relying on

LaJet, the public utility requested that the Commission review

the cogenerator’s contract to determine if the sale was in fact

“useful,” because the cogenerator had not included the contract

as part of its QF application. The Commission refused to review

the contract, but not because the cogenerator had provided

specific evidence of an arm’s-length market. Instead, the

Commission held that,

[G]iven that we now have seen at least four
applications, other than Kamine’s, proposing to distill
water with the assistance of the thermal output of a
cogeneration facility ..., we believe that the
distillation of water is a common industrial process,
and that ultra-pure or distilled water is a common
product; thus, the distillation of water is common for
purposes of determining usefulness ....
Because the thermal energy output of the Kamine
facility is presumptively useful, the Commission has no
need to review the contracts between Kamine and the
non-affiliated purchaser of the facility’s thermal
output.

Id. at ¶ 63,158 (footnote omitted). Similarly, the City in the

instant case is a non-affiliated purchaser of a product produced

by a common application. Further, as in Kamine, a questionable

thermal energy contract was available for the Commission to

review to establish whether the distillation of water met LaJet’s

17
stringent independent business purpose test. As Brazos points

out, Tenaska’s contract with the City was in place when it

applied for certification as a QF. Because Tenaska was proposing

a common application, however, it was not required to submit

economic evidence. See Bayside Cogeneration, L.P. (Bayside I),

66 FERC ¶ 61,259, reh’g denied, 67 FERC ¶ 61,290, ¶ 61,631 (1994)

(stating that “applications involving water distillation ... need

not be accompanied by evidence of arm’s-length contracts ... or

economic viability”). Further, if Brazos had requested such

evidence, as it does now, the Commission would have declined to

review it. PURPA and its implementing regulations require only

that the thermal energy be useful; they do not demand that the

sale of every end-product be profitable. See Bayside II, 67 FERC

at ¶ 62,006 (“There is no statutory requirement that the

Commission find that the thermal output is being used in an

economic manner.”). Said differently, the issue is not whether

the cogenerator makes money from its common application, but

that, because there is a market for the application, it is

capable of doing so. See id.

The Commission has previously opined that treating its

presumption as rebuttable would be inconsistent with PURPA’s

goals, in that “[p]roviding an opportunity for evidentiary

hearings before the Commission ... would seriously impede the

very development of cogeneration ... that Congress sought to

facilitate.” Id. at 62,006 n.5 (quoting American Paper

18
Institute, Inc. v. American Electric Power Service Corp., 461

U.S. 402, 420 (1983)) (internal quotations omitted).

Nonetheless, even if we were to look behind the presumption here,

we, like the Commission, are not persuaded that the sale to the

City is a sham. Tenaska correctly points out that it received

much more than ten dollars in its transactions with the City, for

the Distilled Water Supply Agreement was only one piece of their

arrangement’s puzzle: Tenaska purchased potable water from the

City for use in its steam generator, the reject stream from the

generator was turned into distilled water, the City purchased the

distilled water to attract industrial customers to an adjacent

industrial park, the plant’s blowdown water was transported to

the City’s sewage treatment center, and Tenaska purchased the

treated sewage effluent from the City for use in the

cogenerator’s cooling tower. In addition, Tenaska received tax

abatements, as well as access to the City’s debt for construction

of its water facilities so all of this could take place. Seen in

the context of a complex project financing, Tenaska’s arrangement

with the City garnered it more than ten dollars a month. Thus,

as proposed in its QF application, Tenaska has sold its product

to a third party.

In addition to the economics of Tenaska’s transaction with

the City, Brazos urges the Commission to examine the City’s use

of the distilled water during its first year of operation

because, according to Brazos, the City’s actual use would rebut

19
the Commission’s initial presumption of the thermal energy’s

usefulness. Relying heavily on Arroyo II, 63 FERC ¶ 61,198

(1993), Brazos contends that, before determining that a thermal

output is useful, the Commission must be satisfied that the

thermal host’s use of its purchase is a bona fide industrial or

commercial use. When Tenaska first became operational, it was

pouring its distilled water into a sewer, which Brazos maintains

was not a bona fide use and renders the thermal energy used to

create the water non-useful. Brazos contends that the

Commission’s failure to take into account the City’s actual use

of the water was an unexplained departure from its precedents.

In Arroyo II, the cogenerator’s thermal output, steam, was

to be used in absorption refrigeration (AR) equipment to provide

ice to an adjacent ice rink. The utility complained that the use

of thermal output to help create and maintain an ice rink was a

novel use requiring application of the independent business

purpose test. The Commission declined to apply the test because

it found that AR technology was a common use for steam, and the

steam was therefore useful. Brazos, however, relies on several

passages in the opinion as evidence that the Commission has

tempered its presumption of usefulness by also examining the

proposed end-use to which the thermal product would be put:

Our review of the evidence compiled in this proceeding
confirms that the proposed use of the Arroyo
[cogeneration] facility’s thermal output for
refrigeration purposes is indeed bona fide. SDG&E [the

20
 utility] presents us with no new reason to upset our
earlier determination that the technology to be applied
by Arroyo, as well as the end product, are established
and, accordingly, that the thermal output of the
facility is presumptively useful.

Arroyo II, 63 FERC at ¶ 62,545 (citation omitted) (Brazos’

emphasis added). This passage does not support Brazos’

contention that FERC examines the thermal host’s end-use of its

purchase in determining the usefulness of a cogenerator’s thermal

output. It is the cogenerator’s use of thermal energy that must

be bona fide, not the thermal host’s end-use of the end-product,

and the cogenerator’s use is bona fide when it is common in the

industry. Thus, the passage states that the thermal energy was

useful because the thermal output (steam) was put to a bona fide

use in a common application (AR technology) and created a common

product (ice). This passage does not say that the cogenerator’s

thermal energy was useful because the thermal host’s use of ice

to build an ice rink was bona fide. The passage does not refer

at all to the thermal host’s end-use of the thermal product. Nor

should it. As the Commission has noted, “if a cogenerator

produces a product that has already met the Commission’s

usefulness requirement, there is no further inquiry to determine

if the product is being used by the recipient for a common

purpose.” Brooklyn Navy Yard, 74 FERC at ¶ 61,046.

In this way, Brazos’ complaint that the distilled water was

not “useful” misses the point. The distillation of water is

21
common, so the steam used to create it is useful. The use an

unaffiliated thermal host makes of its arm’s-length purchase is

irrelevant. See Arroyo I, 62 FERC at ¶ 62,723 (“The fact that

this is the first instance before the Commission in which this

common refrigeration technology is associated with a common

refrigeration product for end-use in an ice rink is

irrelevant.”). This is because the Commission, as the arbiter of

“usefulness,” has defined the concept in terms of economics. If

an application is common, the technology is established and there

is a market for the product. If the technology is established

and there is a market for the product, that which is used in the

application to create the product is “useful.” Once the energy

used in the established technology or the product with the

established market is purchased by a thermal host, FERC has no

further involvement. The purchaser bears the market risk of its

purchase, not the seller, and whatever use or profit the

purchaser makes of its purchase, whether by pouring it in a sewer

or reselling it, is of no moment to the seller. See Bayside II,

67 FERC at ¶ 62,006 n.7 (stating that “PURPA does not require

that the Commission ensure that a thermal host make as much money

as possible, or make any money at all; all PURPA requires is that

the Commission ensure that the thermal host takes useful thermal

energy that is used for industrial, commercial, heating, or

cooling purposes.” (internal quotations omitted) (emphasis

22
added)). The point is that the seller has successfully sold its

output in an arm’s-length market and the purchaser has access to

the same market for resale. There is, of course, proof of this

point in the instant case - two weeks after Brazos filed its

motion and petition for revocation, the City found a purchaser

for its distilled water from among those industries it was trying

to attract with the supply of that water.

Brazos also points us to FERC’s response to the utility’s

suggestion in Arroyo II that the Commission’s presumption of

usefulness would allow certification of a QF proposing to throw

away the product of a common application “in an underhanded

effort” to meet the regulatory requirements. The Commission

stated:

[T]he Commission does not apply the presumption of
usefulness so cavalierly and, as explained above, must
be assured that the thermal energy output is being used
in a bona fide manner for a legitimate industrial,
commercial, heating, or cooling purpose.

Arroyo II, 63 FERC at ¶ 62,545 n.4. Again, the Commission’s

response to the utility’s hypothetical provides no support for

Brazos’ assertion. First, a cogenerator seeking QF status by

proposing that it throw away its own common end-product is

markedly different from an unaffiliated, third-party thermal host

having to waste its arm’s-length purchase from a QF because of

protracted negotiations with buyers and permit problems. That

is, a cogenerator’s use of thermal energy is obviously not “bona

fide” if its intention from the outset is to dispose of it

23
itself. However, a cogenerator’s use of thermal energy is not

“mala fide” if a third-party purchaser of the output, through no

fault of its own, cannot resell its purchase.

Second, Brazos neglected to include the quoted footnote’s

final sentence: “The flaw in SDG&E’s argument is that Arroyo

proposes to apply the thermal energy output of its facility in a

useful manner using an established technology to produce a common

product with an existing market.” Id. Similarly, Brazos again

fails to recognize that Tenaska was using its thermal output

(steam) in an established technology (distillation) to produce a

common product (distilled water) with an existing market (the

City).

Although this case presents us with what, at first blush,

appears to be the proverbial “peppercorn” scenario - a party

paying ten dollars for thousands of gallons of distilled water

that for nine months it poured into the sewer - we are, for a

number of reasons, hesitant to look beyond FERC’s presumption of

usefulness to release Brazos from its contractual obligations.

First, Tenaska and the City entered an arm’s-length contract, one

amongst many contracts in which the risks and benefits of the

typical project finance arrangement were traded. That Brazos now

finds itself paying above-market prices for electricity because

it entered a “front-loaded” contract fails to undermine the

utility of the Commission’s presumption of the usefulness of

thermal energy in common applications. A front-loaded contract

24
means that the utility’s payment rates are determined at the time

the obligation to buy from the cogenerator is incurred, rather

than at the time of delivery. Such contracts are often used

because they allow the QF to finance the construction and

operation of the facility in the early years of the contract. As

the Ninth Circuit observed in Independent Energy Producers Ass’n,

Inc. v. California Pub. Util. Comm’n, 36 F.3d 848, 858 (9th Cir.

1994), such contracts have been upheld notwithstanding the

recognized risk that the prices set by the contract might at

times exceed the utility’s actual avoided costs, because

“certainty as to rate was important.” By ensuring a predictable

flow of income, such contracts encourage the development of

alternative facilities that might never be built. In FERC’s

words:

The Commission recognizes this possibility [that
current avoided costs might be lower than the rates
provided in the contracts] but is cognizant that in
other cases, the required rate will turn out to be
lower than the avoided cost at the time of purchase....
Many commentators have stressed the need for certainty
with regard to return on investment in new
technologies. The Commission agrees with these ...
arguments, and believes that, in the long run, “over
estimations” and “under estimations” of avoided costs
will balance out.

Small Power Production and Cogeneration Facilities; Regulations

Implementing Section 210 of PURPA, 45 Fed. Reg. 12224 (1980)

(quoted in Independent Energy Producers Ass’n, 36 F.3d at 858).

Second, allowing post-operation rebuttal of FERC’s

presumption of a thermal output’s usefulness on these grounds

25
would impede the development of cogeneration facilities, a

development PURPA was enacted to encourage. See Arroyo II, 63

FERC at ¶ 62,546 (explaining that performing economic analyses on

common applications would discourage cogeneration). By

sanctioning such rebuttal, we would ensure that every time the

market for electricity fluctuated and the utility that was the

QF’s only market recipient was suddenly displeased with its

rates, the utility could back out because it thought either the

QF or the thermal host was not being as economically wise or

efficient as it should be. This scenario poses several problems.

Owners of QFs would have little incentive to sell electric

energy if they had to go through an evidentiary hearing before

FERC in Washington, D.C., every time a utility claimed someone

else was behaving inefficiently with a common application. See

Polk Power Partners, 61 FERC at ¶ 62,128 (refusing to review

evidence of economic inefficiency because to do so would allow

third parties to “compel a hearing simply by the submittal of

evidence purporting to show that a thermal process is not the

most economic, no matter how common the process”). Presumptions

are over-inclusive by definition. FERC’s decision to apply one

strictly in this case neither contravenes PURPA’s mandates nor

supercedes the discretion afforded agencies in interpreting their

own regulations. See Chevron U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837, 844 (1984). PURPA, and

FERC’s regulations promulgated thereto, require only that a

26
cogenerator produce useful thermal energy for legitimate

processes. See 16 U.S.C. § 796(18)(A); 18 C.F.R. § 292.202.

Neither the statute nor the regulations insist or presuppose that

FERC should engage in such heavy-handed oversight as to keep tabs

on QFs’ arm’s-length purchasers. If we were to hold otherwise,

we would embrace the very form of micro-management that the

Commission has determined QFs are supposed to be freed from, and

we would “impute to Congress a purpose to paralyze with one hand

what it sought to promote with the other.” Clark v. Uebersee

Finanz-Korporation, A.G., 332 U.S. 480, 489 (1947).

More importantly, FERC’s presumption of usefulness is meant

to enable cogeneration facilities to obtain financing. The

presumption provides certainty for investors that their

investment is duly certified under PURPA and entitled to the

benefits of PURPA’s statutory imperatives, including the presence

of a utility to purchase the facility’s output. Because the

value of a facility’s hard assets is usually less than the

project debt, debt repayment and anticipated equity returns

depend on performance under project contracts. The contracts

constitute the framework for project viability because the

ability of the project sponsor to produce revenue from project

operation is the foundation of a project financing. The PPA is

the principal source of project revenue. Therefore, banks lend

money for construction and permanent financing on the strength of

the utility’s obligation to purchase power from a QF. Revocation

27
of a facility’s QF status releases the utility from its

obligation under the PPA. It leaves the facility without a

market recipient and thus without a revenue source for debt

repayment. We would be hard pressed to imagine the investor who

would contribute to a project so susceptible to such a scenario.

In sum, both FERC’s precedents and PURPA’s mandates persuade us

that Tenaska continues to produce useful thermal energy in

accordance with the representations in its application for QF

status.

B. Ownership Criteria

In order to obtain QF status under PURPA, a cogeneration

facility must not be owned by persons primarily engaged in the

generation or sale of electric power. See 16 U.S.C.

§ 796(18)(B). The Commission clarified this requirement,

determining that electric utilities may own no more than 50% of

the equity interest in a QF. See 18 C.F.R. § 292.206(b). FERC’s

regulations thus equate “ownership interest” with “equity

interest,” but they do not define the term “equity interest.”

See Ultrapower 3, 27 FERC ¶ 61,094, ¶ 61,183 (1984). Cases

discussing the Commission’s ownership criteria emphasize the

stream of benefits accruing to each partner, but the voting

interests of each partner have also been examined to avoid a

utility partner’s manipulation of those benefits. See id. at ¶

61,184. Accordingly, “a utility partner may not have more than

28
50% control of a qualifying facility.” Brooklyn Navy Yard, 74

FERC at ¶ 61,048.

According to Brazos, Tenaska has not satisfied the ownership

criteria for QF status because utilities have effective control

over the facility’s operation. Affiliates of three utilities own

a 45% interest in Tenaska and have a 38.9% voting interest in the

facility, in conformity with the regulatory limits. Before FERC,

however, Brazos contended that the utilities’ 45% interest in the

facility gives them effective control over the facility’s

operation, because a 70% vote of Tenaska’s Executive Review

Committee is needed to take significant actions.1 The Commission

disagreed, pointing out that the utility affiliates would still

need the approval of the non-utility owners to take significant

action. The Commission also pointed out that Tenaska’s ownership

structure had not changed since it was certified as a QF.

Because Brazos was listed as the utility-purchaser in QF

application and failed to object when the application was noticed

for comment, the Commission determined that Brazos’ challenge was

untimely.

In response, Brazos argues that the utility affiliates’ 45%

interest is enough to block significant action, thereby giving

them effective control. Further, Brazos contends that it should

1
It is unclear why Brazos’ “effective control” argument
focuses on the utility-affiliates’ ownership interest rather than
their voting interest.

29
not be faulted for failing to object because it was relying on

Tenaska’s contractual obligation to meet QF standards.

Brazos’ arguments are unpersuasive. All certification

orders granting QF status state the following: “To the extent

that facts or representations which form the basis for this order

change, this order cannot be relied upon.” Tenaska IV Texas

Partners, Ltd., 70 FERC ¶ 62,026, ¶ 64,081 (1995). Tenaska’s

ownership structure has not changed since it applied for and was

granted QF status. It follows that the order may still be relied

upon. Brazos’ contention that it was relying on Tenaska to meet

QF standards does not explain why it waited two and a half years

after Tenaska’s certification to object. We agree with the

Commission that “[a]llowing such belated challenges to QF

certifications despite unchanged facts would undermine the

contractual reliance QFs need in order to finance and build their

projects.” Brazos Electric Power Cooperative v. Tenaska IV Texas

Partners, Ltd., 85 FERC ¶ 61,097, ¶ 61,348 (1998).

Briefly, even if we were to give Brazos the benefit of the

doubt, its challenge is still without merit. As noted, FERC’s

ownership criteria are intended to prevent utilities from

diverting to themselves the stream of benefits flowing from a QF,

such that the utilities would gain some undue advantage vis-a-vis

non-utility partners. See Dominion Resources, Inc., 43 FERC

¶ 61,079, ¶ 61,251 (1988). In order to accrue such benefits,

“control” requires action, not inaction. That is, a minority

30
interest’s ability to block significant actions does not garner

the benefits the controlling interest can manipulate by taking

significant actions. Furthermore, if the ability to block

significant action constituted “control,” then Brazos is actually

contending that utilities may not have more than 30% control - a

proposition that finds no support in the Commission’s precedents.

See id. at ¶ 61,251 (stating that “a facility will meet the

ownership requirements of PURPA ... so long as the interest in

the stream of benefits and control by a utility or utilities, by

whatever mechanism used, does not exceed 50%”). The utility

affiliates’ equity and voting interests in Tenaska satisfy the

Commission’s ownership requirements for QF status.

IV.

For the foregoing reasons, we DENY Brazos’ petition for

review in No. 98-60684; No. 98-60568 is DISMISSED.

31
EMILIO M. GARZA, Circuit Judge, specially concurring:

The majority opinion reflects a wholesale endorsement of

both the result reached by the Federal Energy Regulatory

Commission (“FERC”) and the methodology used to reach that

result. I agree with the former, but not with the latter.

Accordingly, I concur in the result reached by the majority, but

write separately because the method by which FERC disposed of

this case could, if repeated, produce results clearly in conflict

with the language and intent of the Public Utility Regulatory

Policies Act of 1978 (“PURPA”), 16 U.S.C. § 823a et seq.

PURPA was passed in response to the 1970s oil crisis and the

corresponding fear of excessive American reliance on foreign oil.

As part of PURPA’s contribution to a diverse set of incentives

passed simultaneously,2 Congress chose to encourage cogeneration

because the increased energy efficiency from cogeneration would

2
President Carter signed PURPA as part of a larger undertaking, called the National
Energy Act of 1978 (NEA), which was Congress’s response to the President’s declaration that
the energy crisis was the “moral equivalent of war.” The package included the Energy Tax Act of
1978, Pub. L. 95-618, 92 Stat. 3174 (1978) , the National Energy Conservation Policy Act, Pub.
L. 95-619, 92 Stat. 3206 (1978), the Powerplant and Industrial Fuel Use Act of 1978, Pub. L. 95-
620, 92 Stat. 3289 (1978), and the Natural Gas Policy Act of 1978, Pub. L. 95-621, 92 Stat. 3351
(1978). See FERC v. Mississippi, 456 U.S. 742, 745 n.2, 102 S. Ct. 2126, 2130 n.2, 72 L. Ed.
2d 532, ___ (1982). Overall, the NEA was designed to promote conservation and increased
efficiency in the use of existing resources as well as the production of alternative energy sources.
See generally SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES, 95TH CONG., ENERGY
INITIATIVES OF THE 95TH CONGRESS 5 (Comm. Print 1979) (“The cornerstone of national energy
policy is that the growth of energy demand must be restrained through conservation and improved
energy efficiency.”).

32
presumptively result in decreased reliance on foreign fossil

fuels. See generally American Paper Inst. v. American Elec.

Power Serv., 461 U.S. 402, 415-16, 103 S. Ct. 1921, 1923, 76 L.

Ed. 2d 22, __ (1983); FERC v. Mississippi, 456 U.S. 742, 745, 102

S. Ct. 2126, 2129, 72 L. Ed. 2d 532, ___ (1982). Properly

constructed cogeneration facilities were desirable because while

excess energy was inevitably produced as a by-product to

electricity, if that excess energy was used rather than wasted,

the efficiency of electricity production plants would improve.

See Liquid Carbonic Ind. Corp. v. FERC, 29 F.3d 697, 699 (D.C.

Cir. 1994) (“[T]he production of electricity frequently results

in the production of thermal energy as a byproduct; by using

small amounts of additional fuel, cogenerators can produce large

amounts of thermal energy. . . . The additional thermal energy

can be used instead of discarded as waste.”); TEC Cogeneration,

Inc. v. Florida Power & Light, 76 F.3d 1560, 1564 n.2 (11th Cir.

1996) (“Cogeneration can be an efficient use of fuel because a

cogeneration facility (unlike some more traditional power plants)

can utilize thermal energy that might otherwise be a wasted

by-product in the production of electricity.”); Independent

Energy Producers Ass’n v. California Public Utilities Comm’n, 36

F.3d 848, 849 n.2 (9th Cir. 1994) (“Because cogeneration reuses

waste heat to produce additional energy, it is a particularly

efficient method of generating electric energy.”). The

33
construction of qualifying cogeneration facilities (“QFs”) was

not the end Congress sought, but rather one of many means to

produce the end of greater energy efficiency in electricity

production. See, e.g., Richard Cudahy, PURPA: The Intersection

of Competition and Regulatory Policy, 16 ENERGY L.J. 419, 421

(1995) (“PURPA encouraged energy conservation and energy

efficiency through measures such as cogeneration.”) (emphasis

added).

The language Congress provided to effectuate this desire for

energy efficiency through cogeneration was clear and concise.

Only those facilities which produced both

(I) electric energy, and
(ii) steam or forms of useful energy (such as heat)
which are used for industrial, commercial, heating, or
cooling purposes

were deemed “cogeneration facilities” worthy of benefits. 16

U.S.C. § 796(18)(A) (emphasis added). This language clearly

expressed the congressional purpose: a power production facility

was only of the type Congress wanted to promote if it produced

both electricity and another form of “useful” thermal energy.

With this general restriction in mind, Congress gave FERC

the responsibility to issue rules “as it determines necessary to

encourage cogeneration.” 16 U.S.C. § 824a-3. Congress broadly

outlined which specific “cogeneration facilities” would qualify for benefits. First, “qualifying

cogeneration facilities” must meet specific FERC “technical” regulations, to be determined,

“respecting minimum size, fuel use, and fuel efficiency.” 16 U.S.C. § 796(18)(B). Second, QFs

34
must meet “ownership” restrictions, not being “owned . . . by a person not primarily engaged in

the generation or sale of electric power.” Id. Those facilities which meet the qualifying criteria

receive tremendous financial benefits.3

FERC regulations have since delineated both the technical and ownership requirements for

facilities to be termed QFs. The technical restrictions integrate the Congressional definition of

“cogeneration” and further define “useful thermal energy” as, inter alia, thermal energy “[t]hat is

made available to an industrial or commercial process.” 18 C.F.R. § 292.202(h)(1). Accordingly,

under FERC regulations, facilities must produce both electricity and thermal energy “made

available to an industrial or commercial process” to satisfy FERC’s QF technical requirements.4

Since FERC was authorized to administer PURPA, we give its interpretation of the statute

Chevron deference. See WRT Energy Corp. v. FERC, 107 F.3d 314, 318 (5th Cir. 1997) (citing

Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S. Ct.

2778, 81 L. Ed. 2d 694 (1984)). Accordingly, if PURPA speaks clearly on the precise issue in

question, that plain meaning must govern; however, if PURPA’s application to a particular issue is

3
The benefits Congress had in mind to encourage the construction of cogeneration
facilities were: (1) mandating that utilities purchase electricity from such QFs at above-market
rates, and (2) exempting such facilities from much state regulation. See 16 U.S.C. § 824a-3; 16
U.S.C. § 824(I); see also Southern California Edison Co. v. FERC, 195 F.3d 17, 19 (D.C. Cir.
1999) (“Under PURPA, such facilities were exempt from certain regulatory controls, and they
were assured a market by providing a right to interconnect with the local public utility and to
receive rates, as prescribed by FERC, up to the full avoided cost of the utility.”). These benefits
can be tremendous. See, e.g., New Charleston Power, L.L.P. v. FERC, 56 F.3d 1430, 1433 (D.C.
Cir. 1995) (“Southern California Edison estimated that, had it purchased power from a non-QF
generating plant during the time petitioners' facility was out of compliance, it would have saved
$7 million per year in purchased power costs.”).
4
FERC technical regulations also mandate that at least 5% of QFs’ total energy be
devoted to producing their coproduct. See 18 C.F.R. § 292.205(a).

35
ambiguous, FERC’s interpretation will be upheld so long as it is a “permissible construction” of

the statute. See id; American Airlines, Inc. v. Dep’t of Transp., No. 99-60008, 2000 WL

121847, at *1, *3 (5th Cir. Feb. 1, 2000). Though this deference is significant, “courts are not

obliged to stand aside and rubberstamp their affirmance of administrative decisions that they deem

inconsistent with the statutory mandate or that frustrate the congressional policy underlying a

statute.” Texas Power & Light Co. v. FCC, 784 F.2d 1265, 1269 (5th Cir. 1986) (citing NLRB v.

Brown, 380 U.S. 278, 291, 85 S. Ct. 980, 988, 13 L. Ed. 2d 839, 858 (1965)).

FERC considers whether a facility produces “useful” thermal energy and is, therefore,

worthy of QF status, at two distinct occasions. First, at the initial certification stage, which

occurs well before the facility is built, FERC considers whether a proposed facility would meet its

technical and ownership guidelines.5 In this context, FERC has established a presumption that if

coproduced thermal energy is used in an established technology or will produce a common

product, it will not consider whether the co-product’s production is useful. Rather, because the

“common product” could theoretically be sold in the marketplace, FERC considers the co-product

presumptively “useful” and certifies the facility.6 See Electrodyne Research Corp., 32 FERC ¶

5
“[T]he Commission, in acting on an application for certification of qualifying
status, essentially renders a declaratory order. That is, the Commission determines, based on the
information in the application and the responsive pleadings, whether or not a facility, as described
in the application, meets or does not meet the statutory and regulatory requirements for qualifying
status set forth in the Public Utility Regulatory Policies Act of 1978 (PURPA) and our
implementing regulations.” Kamine/Besicorp Allegany L.P., 63 FERC ¶ 61,320 (1993).
6
FERC’s determination that all thermal energy “made available to a common
industrial or commercial process” is definitively and irrebutably “useful” is questionable. Notably,
the statute does not define “useful” by reference to whether energy is used in for “industrial,
commercial, heating or cooling” purposes. Rather, the plain terms of the statute mandate that the
energy coproduct be forms of “useful energy . . . which are used for industrial, commercial,
heating, or cooling purposes.” 16 U.S.C. § 796(18)(A). Therefore, to fall within the plain terms

36
61,102 (1985) (“There is no hard and fast test for establishing the usefulness of a thermal energy

output. However, the test is an economic test. Thus, common industrial or commercial

applications are presumptively useful, regardless of the user’s status.”). The policy rationale

behind this))that intensive intrusion into the use of the proposed facility’s excess thermal energy

could discourage the construction of cogeneration facilities))is, even though in some cases

arguably at odds with the statutory mandate, compelling. See Arroyo Energy, L.P., 62 FERC ¶

61,257 (“When an applicant submits a cogeneration proposal which uses thermal energy in an

established technology or produces a common product, the commission does not perform an

economic analysis. A contrary approach would act to discourage the development of the

cogeneration industry.”).7 I agree with the majority that, in this context, FERC’s construction of

the statutory term “useful” is a permissible one.

FERC has a second opportunity to determine whether cogeneration plants meet QF

criteria in the context of a petition to revoke QF certification. These petitions, which can be

of the statute, a facility’s co-product must be both useful and used for industrial, commercial,
heating or cooling purposes. Proving the latter does not necessarily, in all circumstances, make
the former irrefutably true.
7
As the majority correctly notes, FERC has consistently utilized the presumption in
pre-certification orders and justified it with this policy rationale. See, e.g., Brooklyn Navy Yard
Cogeneration Partners, L.P., 74 FERC ¶ 61,015 (1996); Bayside Cogeneration, L.P., 66 FERC ¶
61,259, reh’g denied 67 FERC ¶ 61,290 (1994); Kamine/Besicorp Allegany, L.P., 63 FERC ¶
61,320 (1993); Arroyo Energy, L.P., 62 FERC ¶ 61,257 (1993); Polk Power Partners, L.P., 61
FERC ¶ 61,300 (1992). Furthermore, both in this case, see Brazos Elec. Power Cooperative v.
Tenaska IV Texas Partners, 83 FERC ¶ 61,176 (1998), and in another recent case, see
Pennsylvania Power & Light Co. v. Schuylkill Energy Resources, Inc. , 83 FERC ¶ 61,188
(1998), FERC utilized the presumption in the context of petitions to revoke certification. See
Pennsylvania Power & Light, 83 FERC ¶ 61,188 (“Indeed, the Commission looks at the
economic viability of the use of thermal output to assess whether the energy is ‘useful’ only in
very limited circumstances))only when the thermal host is an affiliate of the cogenerator (or the
cogenerator itself), an then only when the technology is previously unproven.”).

37
brought at any time after a facility has been certified as a QF, are often brought years after

certification by parties who are disadvantaged by the fact that the particular facility has gained QF

certification.8 See, e.g., Pennsylvania Power & Light Company v. Schuylkill Energy Resources,

Inc., 83 FERC ¶ 61,188 (1998) (addressing claim of a utility forced to overpay for electricity

based on the fact that facility had been certified as a QF). When these petitions claim lack of

compliance with FERC’s technical requirements, FERC occasionally hears evidence to determine

whether a facility is complying. For example, FERC will examine whether a facility has met the

technical requirement that the thermal output of the facility be no less than 5% of the facility’s

total energy output. If a petitioner (whatever its motives) proves lack of compliance on this

ground, FERC will revoke the facility’s certification. See id. However, if a petition (like the one

in the case at bar) is based not on the lack of 5% coproduction but rather on the lack of real-

world “usefulness,” FERC refuses to hear evidence, again relying on the irrebutable presumption

that if the thermal energy is used in a common process, it is ipso facto “useful.”

In this case, the majority is correct in rejecting Brazos’s claim that any “usefulness” from

cogeneration in the Tenaska facility is “flushed down the sewer.” The evidence shows that the

thermal energy produced by the Tenaska facility is used to distill water which is sold to the city or

directed into Buffalo Creek to attract customers to an adjacent industrial park. Accordingly, the

thermal energy produced by Tenaska is “useful” in any sense of the word, and we defer to

8
The majority’s characterization of Brazos’s motives for bringing this suit))that it
is seeking a way out of a contract which it freely signed but is no longer to its benefit))is
unquestionably accurate. However, this case is no more about money than most civil suits. The
issue before FERC and before us))whether Tenaska’s Cleburne facility is a QF))makes Brazos’s
motivation for bringing the suit irrelevant.

38
FERC’s interpretation.9

However, Brazos’s allegations, when considered relative to FERC’s treatment of petitions

to revoke QF certification, beg the question: what if Tenaska’s cogenerated energy was used to

distill water which was promptly flushed down the sewer? Clearly, nothing “useful” would result

from the cogeneration, but since the cogenerated energy was “used in a common process,” FERC

would rely on its presumption of usefulness and the facility would retain QF certification. I fully

agree with the majority’s statement that “PURPA and its implementing regulations require only

that the thermal energy be useful; they do not demand that the sale of every end-product be

profitable.” However, under FERC’s procedural rationale, the Commission cannot ever be sure

that the thermal energy is “useful” in the everyday sense of the word.10 In some cases, FERC’s

failure to even address claims that a facility’s thermal energy is not “useful” could contravene both

the language and the intent of PURPA. See Liquid Carbonic, 29 F.3d at 706 (“Congress intended

9
Webster’s Dictionary defines “useful” as, inter alia, “producing or having the
power to produce good: serviceable for a beneficial end or object.” See WEBSTER’S NEW INT’L
DICTIONARY 2524 (3rd ed. 1993).
10
The majority asserts “the Commission, as the arbiter of ‘usefulness,’ has defined
the concept in terms of economics” and concludes that “Brazos’ complaint that the distilled water
was not ‘useful’ misses the point. The distillation of water is common, so the steam used to
create it is useful.” I disagree. PURPA contemplates that the thermal energy produced by
cogenerators is “useful” in the sense that it is used in some beneficial way. Given that it passed
PURPA in an effort to increase energy conservation and efficient electricity production, Congress
could hardly have intended to promote facilities who coproduced thermal energy, used it in a
“common process,” and then completely wasted the product of that process. Because of the
tremendous benefits PURPA provides QFs, it is profitable for a electricity generator to
“cogenerate” in the sense of using its excess thermal energy to, for example, distill water, and then
completely waste the distilled water. Even if the final product poured down the sewer, the
“cogeneration” was still economically beneficial to the facility because of the tremendous benefits
PURPA provides it as a QF. Yet Congress encouraged these facilities precisely so that the end
product of their cogeneration would not be wasted. In this manner, FERC’s procedural
framework threatens to defy the language and spirit of PURPA.

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PURPA to encourage the development of cogeneration facilities . . .[but] [t]he encouragement of

the goal must, but its nature, limit entry to those who actually further the goal by producing useful

energy . . . .”).

FERC’s irrebutable presumption of usefulness is justified in the context of petitions for

initial certification, upon which financing to build such facilities often depends. As the majority

notes, in this context “[p]roviding for evidentiary hearings before the Commission . . . would

seriously impede the very development of cogeneration . . . that Congress sought to facilitate.”

However, FERC and the majority exaggerate the possibility that an evidentiary hearing years after

a facility has been in operation to determine whether the facility truly produces “useful” thermal

energy would impede the initial development of the facility. Any hesitancy that this potential

future evidentiary hearing might produce is mitigated, if not eliminated, by the fact that FERC

already performs evidentiary investigations into other issues of technical compliance (for example,

into the 5% mandate). The alternative to allowing post-certification evidentiary hearings on

“usefulness,” which currently exists, allows facilities to retain QF benefits even if they are not (in

fact, even if they never were) the type of facilities to which Congress wanted to afford such

benefits. In many cases, this is a clear departure from the statutory mandate, and therefore an

impermissible construction of PURPA.

Tenaska has proven that the energy it produces as a co-product to electricity is “useful” in

producing distilled water which benefits the community at large, and thus that the benefits

afforded it as a QF are justified. Accordingly, I concur in the decision allowing Tenaska’s

Cleburne facility to retain QF status. However, I cannot agree with the majority’s endorsement of

the procedure by which FERC summarily dismissed this case. Congress wanted to encourage the

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production of cogeneration facilities because, in developing alternative sources of “useful” energy

while producing electricity, they improved the energy efficiency of electricity generation facilities

in particular and the nation in general. By establishing an irrebutable presumption that prevents it

from ever examining whether a facility’s co-produced energy is ever “useful,” FERC has opened

the door to facilities who meet FERC’s technical requirements but defy the language and spirit of

PURPA.11

11
Brazos refers to Tenaska’s Cleburne facility as a “PURPA machine,” i.e. a facility
designed to generate PURPA revenues, not to produce a useful co-product. Several
commentators have noted the influx of these facilities, which cogenerate merely to gain QF
benefits and where the cogeneration is, ultimately, useless. See, e.g., Douglas Gagax & Kenneth
Nowotny, Competition and the Electric Utility Industry: An Evaluation, 10 YALE J. ON REG. 63,
77 & n.36 (1993) (“A ‘PURPA machine’ is a QF which would not exist except by virtue of the
requirement that a utility purchase the power it creates. Such QFs are totally in contravention of
the idealistic and optimistic purposes of the Public Utility Regulatory Policy Act of 1978.”); Jim
Rossi, Redeeming Judicial Review: The Hard Look Doctrine and Federal Regulatory Efforts to
Restructure the Electric Utility Industry, 1994 WISC. L. REV. 763, 782-83 (1994).

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