*1 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 *2 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,
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, *4 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.,
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
*6
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,
¶ 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 *7 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 *8 the power was being purchased from a QF, as that term was defined in PURPA. See T EX . R EV . C IV . S TAT . A NN . 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 *9 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.
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 *11 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 *12 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 *13 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.,
*14
et al.,
61,257, ¶ 62,722-23, reh’g denied
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 *15 “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.,
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.,
(1993), is instructive to Brazos’ complaint. There, the *17 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
*18
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),
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 *19 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
*20
the Commission’s initial presumption of the thermal energy’s
usefulness. Relying heavily on Arroyo II,
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 *21 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 *22 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 *23 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 *24 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
*25
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,
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,
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.,
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 *28 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,
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 *30 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.,
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 *31 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.
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
*33
presumptively result in decreased reliance on foreign fossil
fuels. See generally American Paper Inst. v. American Elec.
Power Serv.,
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 *35 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
,
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 ¶ *37 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.
,
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.
,
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 *39 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
,
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 *41 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]
Notes
[1] It is unclear why Brazos’ “effective control” argument focuses on the utility-affiliates’ ownership interest rather than their voting interest.
[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
,
[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,
[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).
[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.
,
[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
[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.
[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 W EBSTER ’ S N EW I NT ’ L D ICTIONARY 2524 (3 rd 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.
[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 Y ALE J. ON R EG . 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 W ISC . L. R EV . 763, 782-83 (1994).