50 Percent Utility Ownership

FERC Issues First Order Approving QF That Exceeds 50 Percent Utility Ownership in The Early Years of Operation

For the first time, FERC has issued an order granting qualifying facility status to a project which will provide more than 50 percent of its total benefits to a utility subsidiary in the first five years of its operation. The Commission determined that the utility subsidiary, wholly-owned by Southern California Edison Company, would receive less than 50 percent of the "stream of benefits" over the life of a partnership agreement between the facility’s owners and thus satisfied the 50 percent utility ownership cap requirement. James River Cogeneration Company and Cogentrix of Virginia, Inc., issued September 21, 1988.

Except for depreciation, both partners shared the "stream of benefits" from the partnership equally. FERC depreciation between the partners, which increased the benefits to the utility subsidiary against liquidation proceeds, and a discount rate of 11 percent to account for the time value of money over the term of the partnership.

The Commission found that the allocation of the depreciation to the utility sub would be more than offset by a reduction in liquidation entitlement to the utility sub if liquidation were to occur in the early years, and that this differential favoring the non-utility partner will continue over the life of the partnership.

FERC declined to establish a generic test with respect to evaluating the stream of benefits, holding that a case-by-case analysis was preferable since many financial arrangements are complex and require discrete analysis.

Robert F. Shapiro
September 21, l988