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Declaratory Ruling 19-18: Bayswater Peaking Facility, LLC and Calpine Operating Services Company

STATE OF NEW YORK
DEPARTMENT OF ENVIRONMENTAL CONSERVATION

In the Matter of Bayswater Peaking Facility, LLC and
Calpine Operative Services Company, Inc.

INTRODUCTION

Bayswater Peaking Facility, LLC ("Bayswater"), through its representative David M. Cleary, and Calpine Operating Services Company, Inc. ("Calpine"), through its representative Sarah G. Novosel (collectively the "Petitioners"), both petition the Department, pursuant to Section 204 of the State Administrative Procedure Act (SAPA) and 6 NYCRR Part 619, for a declaratory ruling with respect to the interpretation and application of the CO2 Budget Trading Program, 6 NYCRR Part 242 ("Part 242" or the "Program"). This declaratory ruling responds to both petitions, as I have combined both petitions into one proceeding.

Petitioners seek a ruling that: (1) the carbon dioxide (CO2) emissions attributable to the production of thermal energy from certain cogeneration units are not subject to Part 242 (i.e., such cogeneration units would only be required to obtain CO2 allowances for CO2 emissions attributable to the production of electric power); and (2) the financial hardship demonstration required in 6 NYCRR § 242-5.3(d)(3) is satisfied by documentation that a long term contract (LTC) applicant is unable to pass on the cost of CO2 allowances to the purchasing party. Petitioners also seek a number of additional rulings related to the administrative implementation of 6 NYCRR § 242-5.3(d) ("subdivision 5.3(d)" or the "LTC Set-Aside Provision").

Pursuant to Section 204(1) of SAPA, "[o]n petition of any person, any agency may issue a declaratory ruling with respect to (i) the applicability to any person, property, or state of facts of any rule or statute enforceable by it, or (ii) whether any action by it should be taken pursuant to a rule." A declaratory ruling is binding upon the agency unless it is altered or set aside by a court. An agency may not retroactively change a valid declaratory ruling, but nothing in SAPA prevents an agency from prospectively changing any declaratory ruling.

The Department implements SAPA § 204 through 6 NYCRR Part 619. For the purposes of issuing a declaratory ruling only, the Department will assume that the facts alleged in the petitions are true, subject to the caveat that the Department may take official notice of any fact not subject to reasonable dispute if it is either generally known or can be accurately and readily verified. 6 NYCRR § 619.2(b). The binding effect of the ruling is limited by the assumed or readily verifiable fact predicate. See Power Auth. of State of N. Y. v New York State Dept. of Envtl. Conservation, 58 NY2d 427, 434, 461 NYS2d 769, 772 (1983). The Department will not assume the truth of statements which are legal conclusions.

For reasons explained below, I find as follows: (1) Petitioners' request that thermal-related CO2 emissions from certain cogeneration units be exempt from Part 242 is denied; (2) Petitioners' request that the financial hardship demonstration required in 6 NYCRR § 242-5.3(d)(3) be satisfied by documentation that an LTC applicant is unable to pass on the cost of CO2 allowances to the purchasing party is granted; and (3) all of Petitioners' other requests are granted, with modification.

PROCEDURAL BACKGROUND

The Department received Calpine's petition on June 18, 2009, and Bayswater's petition on June 25, 2009. By letters dated July 2, 2009, I notified Petitioners that I would be combining their petitions into one proceeding, and that I would ultimately issue only one declaratory ruling, if any. I also notified Petitioners that, pursuant to 6 NYCRR § 619.1(e)(1), I found that soliciting public comments on the petitions would be in the public interest. Thus, notice of receipt of the petitions and a solicitation for public comments was placed in the Environmental Notice Bulletin (ENB) on July 29, 2009. See http://www.dec.ny.gov/enb/20090729_not0.html. Public comments were received through September 10, 2009. Pursuant to 6 NYCRR § 619.1(e)(2), Petitioners had an opportunity to respond to such public comments, although only Petitioner Calpine availed itself of this opportunity.

STATEMENT OF FACTS

Part 242 establishes the CO2 Budget Trading Program, which is a mandatory, market-based program to reduce CO2 emissions from power plants in New York State. The Program sets a statewide tonnage limit on overall CO2 emissions from all applicable sources, and then, starting in 2015, gradually reduces that limit by ten percent by 2018. The Program creates CO2 allowances, which are limited authorizations to emit up to one ton of CO2. At the end of each three-year control period, CO2 budget sources must have obtained a sufficient number of CO2 allowances to cover the amount of their actual CO2 emissions over that period. The Department primarily distributes CO2 allowances through quarterly regional auctions; CO2 allowances may also be freely traded on the secondary market.

While most of the New York State CO2 allowances are initially distributed through regional auctions, some are instead distributed by the Department pursuant to specific provisions of Part 242. The LTC Set-Aside Provision at issue in this ruling is one example. The LTC Set-Aside Provision of the Program allocates 1.5 million CO2 allowances annually from the Program's annual base budget to the LTC set-aside account. These CO2 allowances may then be allocated, pursuant to the LTC Set-Aside Provision, to LTC applicants that the Department determines meet the requirements of subdivision 5.3(d).

The Department is currently reviewing applications for CO2 allowances from the LTC Set-Aside for the 2009 allocation year, and Petitioners are among the current LTC applicants. In total, applications were submitted for approximately 6.6 million allowances from the LTC Set-Aside. If the overall number of CO2 allowances in Department-approved requests from the LTC Set-Aside exceeds the 1.5 million available, then the Department allocates allowances to successful LTC applicants on a pro rata basis.

Petitioner Bayswater (FPL Energy) owns and operates a simple cycle combustion turbine electric generating facility (the "Bayswater Facility") that supplies electricity to the Long Island Power Authority under an LTC. Bayswater has requested 325,371 CO2 allowances from the LTC Set-Aside for the Bayswater Facility.

Petitioner Calpine has requested 80,607 CO2 allowances from the LTC Set-Aside for the KIAC Partners facility (the "KIAC Facility"), which is located at the John F. Kennedy International Airport and supplies electric and thermal energy to the Port Authority of the State of New York under an LTC. Calpine has also requested 112,569 CO2 allowances from the LTC Set-Aside for the Nissequogue Cogen Partners facility (the "NCP Facility"), which supplies electric and thermal energy to the State University of New York's Stony Brook campus under an LTC. For both facilities, Calpine's requests are for only a portion of the total number of CO2 allowances needed to cover actual CO2 emissions. Calpine's requests represent only the portion of its allowance costs that it is unable to recover from the purchasing party. Moreover, Calpine's requested amounts account for the fact that a portion of each facility's output is sold on a merchant basis, and therefore is not subject to the respective LTC.

DISCUSSION

In considering the requests made by Petitioners, I have reviewed and taken into account many documents, including the following: Petitioners' initial submissions; public comments received on the initial submissions; Petitioners' response to public comments; the regulatory text; and the existing administrative record, including the rulemaking record. I first consider the request to exempt thermal-related emissions from certain cogeneration sources. Second, I consider the request to interpret the financial hardship demonstration requirement as being satisfied by a demonstration that the LTC applicant is unable to pass on the cost of CO2 allowances to the purchasing party. Finally, I consider Petitioners' other requests related to the administrative implementation of the LTC Set-Aside Provision.

1) Request to Exempt Thermal-Related Emissions from Certain Cogeneration Sources

I reject Petitioner Calpine's request to interpret the rule so that CO2 emissions related to certain CO2 budget sources' production of thermal energy are exempt from Part 242. Cogeneration facilities, such as Petitioner Calpine's KIAC Facility and NCP Facility, are subject to the requirements of Part 242, provided that there is at least one unit at the facility that serves a generator with a capacity of at least 25 MWe. Moreover, LTC cogeneration facilities, just as is the case with any source subject to Part 242, must obtain allowances for all CO2 emissions, whether those emissions are related to the production of electric power or thermal energy. Finally, although Petitioner Calpine also raises policy arguments to support its position, when issuing a declaratory ruling, I interpret the meaning of existing language in a fully promulgated regulation, rather than pass judgment on a public policy issue that is more appropriate as the subject of the rulemaking process.

A) Are Cogeneration Sources Subject to Part 242?

I first consider whether cogeneration sources are subject to Part 242. Particularly in its response to public comments, Petitioner Calpine seems to suggest that Part 242 does not apply to cogeneration facilities. At a minimum, Petitioner Calpine argues, Part 242 does not apply to particular equipment at a cogeneration facility that is used to produce thermal energy and that does not serve an electric generator.

i) Regulatory Text

Subdivision (a) of section 242-1.4 sets forth the applicability of the Program as follows:

Any unit that, at any time on or after January 1, 2005, serves an electricity generator with a nameplate capacity equal to or greater than 25 MWe shall be a CO2 budget unit, and any source that includes one or more such units shall be a CO2 budget source, subject to the requirements of this Part. 6 NYCRR § 242-1.4(a).

The term "unit" is further defined as "[a] fossil fuel-fired stationary boiler, combustion turbine, or combined cycle system." 6 NYCRR §242-1.2(b)(78). "[A] 'source' with multiple units, shall be considered a single 'facility.'" 6 NYCRR § 242-1.2(b)(68). Finally, a "CO2 budget source" is a source that includes one or more CO2 budget units. 6 NYCRR § 242-1.2(b)(27).

These provisions make clear that the primary trigger for applicability of the Program is whether a unit serves an electricity generator with a nameplate capacity of at least 25 MWe. Thus, as Petitioner Calpine and public commenters state, the Program does not apply to a particular facility if the facility does not contain a unit that, at any time on or after January 1, 2005, serves an electricity generator with a capacity greater than or equal to 25 megawatts. In other words, a facility with only stand-alone, steam-only boilers that never serve a generator with a capacity of at least 25 MWe is not subject to the Program.

This does not mean, however, that cogeneration facilities, such as the KIAC Facility and the NCP Facility, are exempt from the Program. A cogeneration facility typically includes at least one unit that serves an electric generator. As stated above, "any source that includes one or more such units shall be a CO2 budget source, subject to the requirements of [Part 242]." 6 NYCRR § 242-1.4(a). Thus, cogeneration facilities that produce both electric and thermal energy are considered CO2 budget sources, provided that there is some point in time after January 1, 2005 in which at least one unit at the cogeneration facility serves an electric generator with a capacity of at least 25 MWe.

Calpine also argues that it is possible for a particular piece of equipment at a facility to be exempt from the Program, provided that the piece of equipment does not serve an electric generator and is instead used to produce only useful thermal energy. In particular, Calpine argues that a "unit" refers only to a specific piece of equipment, as opposed to the sum of all equipment located at a facility. As described above, the definition of the term "unit," combined with the applicability provision of Part 242, provides that stand-alone boilers, combustion turbines, or combined cycle systems that do not serve a generator with a nameplate capacity of at least 25 MWe are not subject to the Program. On the other hand, individual pieces of equipment that are directly associated with a CO2 budget unit, and which may serve a generator with a nameplate capacity of at least 25 MWe, are subject to the Program.

Moreover, a single CO2 budget unit may be made up of more than one piece of equipment. For example, as cited above, the definition of the term "unit" includes the term "combined cycle system." A "combined cycle system" is defined as "[a] system comprised of one or more combustion turbines, heat recovery steam generators, and steam turbines configured to improve overall efficiency of electricity generation or steam production." 6 NYCRR § 242-1.2(b)(33). Therefore, a "combined cycle system," made up of multiple pieces of equipment, may be considered, in its entirety, to be a single "unit" under the terms of the Program. As a result, as long as the overall system serves an electric generator with a nameplate capacity of at least 25 MWe, multiple pieces of equipment that make up a single "CO2 budget unit" are subject to Part 242.

Finally, it is also worth noting that certain industrial cogeneration sources are in fact exempt from Part 242. In particular, the Program contains a limited exemption known as the "behind-the-meter" (BTM) exemption. 6 NYCRR § 242-1.4(b). The BTM exemption is limited to units that, by December 1, 2008, applied for and accepted an "enforceable permit condition restricting the supply of the unit's annual electrical output to the electrical grid to less than or equal to 10 percent of the annual gross generation of the unit." Id. Only two units applied for and were granted the BTM exemption. Neither the KIAC Facility nor the NCP Facility applied for this exemption. Moreover, the existence of this limited exemption in Part 242 suggests that, but for the inclusion of the BTM exemption, Part 242 would otherwise apply to this limited class of industrial cogeneration facilities.

ii) Administrative Record

In addition to the actual regulatory text, the administrative record lends further support to the fact that the Program applies to cogeneration facilities, including all units at a cogeneration facility. For example, during the rulemaking process, one public commenter suggested that Part 242 should exempt facilities that are considered Qualifying Facilities, as defined by the Federal Energy Regulatory Commission under the federal Public Utilities Regulatory Policies Act. See, Assessment of Public Comments, 6 NYCRR Part 242, CO2 Budget Trading Program, 21 NYCRR Part 507, CO2 Allowance Auction Program, Comments Received from October 24, 2007 to December 24, 2007 (hereafter "APC I"), Comment No. 484, p. 274-76. The Department declined this suggestion, stating as follows:

The Department included [the BTM exemption] provision to exempt industrial sources, not typically regulated in New York as electric generators that provide little or no electrical output to the grid. Since the language was carefully developed to limit the exemption to specific sources identified by the Department, no changes will be made to the exemption language. Id., Response to Comment No. 484, p. 276.

Moreover, subsequent to the promulgation of Part 242, two separate cogeneration facilities inquired about the applicability of the Program. In response, the Department responded in writing as follows:

Part 242 applies to any unit that, at any time on or after January 1, 2005, serves an electricity generator with a name plate capacity equal to or greater than 25 MWe. Moreover, any source that includes one or more such units is considered a CO2 budget source. [The Cogeneration facility's] generator is listed in EPA's Source Management System with a nameplate capacity of [greater than 25 MWe]. Therefore, all units that serve that generator are CO2 budget units, and the [cogeneration] facility is a CO2 budget source. See Letter from Mr. Michael P. Sheehan to Mr. David Petty, April 3, 2009; Letter from Mr. Michael P. Sheehan to Mr. Michael J. Gwyther, May 5, 2009; Exhibits 1 and 2.

Together, these statements in the administrative record confirm what the regulatory text makes clear: cogeneration sources with units serving an electric generator with a nameplate capacity of at least 25 MWe are subject to Part 242.

B) Are Certain CO2 Emissions from Cogeneration Sources Exempt from Part 242?

Given that a cogeneration facility, and all units that are part of that cogeneration facility, are subject to Part 242, the next issue is whether the Program nevertheless exempts certain emissions from cogeneration facilities. Petitioner Calpine argues that Part 242 is silent regarding whether the Program applies to emissions attributable to the production of thermal energy, and therefore that I have the discretion to exempt such emissions from the Program's requirements through a declaratory ruling. In considering whether the Program allows for this discretion, I consider both the regulatory text and the administrative record.

i) Regulatory Text

As described above, the applicability provision of the Program is tied to physical units and sources, rather than a particular category or categories of emissions. In other words, the fact that some portion of a cogeneration source's output (i.e., the useful thermal energy) might not serve a generator is irrelevant for purposes of determining the applicability of the Program. Regardless, Petitioner Calpine still argues that, even if a given cogeneration facility is otherwise subject to the requirements of the Program, the CO2 emissions related to the production of thermal energy at the facility are exempt from Part 242.

While CO2 budget sources are subject to various requirements under the Program, a primary requirement is that, at the end of the three-year control period, each unit must hold enough CO2 allowances to cover its actual CO2 emissions over that period. Specifically, at the CO2 allowance transfer deadline, each unit that is subject to the Program is required to hold CO2 allowances "in an amount not less than the total CO2 emissions for the control period from all CO2 budget units at the source . . . ." 6 NYCRR § 242-1.5(c)(1) (emphasis added).

This provision explicitly covers all CO2 emissions from all CO2 budget units at a CO2 budget source. In other words, there is no distinction between whether such emissions are attributable to the production of thermal or electric energy. Put simply, rather than being silent, as claimed by Petitioner Calpine and some public commenters, Part 242 clearly covers all emissions of CO2 from all units that are subject to the Program.

In fact, the only limited exemption allowed in the rule is for emissions attributable to the burning of "eligible biomass." The provision at 6 NYCRR § 242-6.5(b) provides that the Department or its agent will deduct CO2 allowances from a source's compliance account "(1) until the amount of CO2 allowances deducted equals the number of tons of total CO2 emissions, less any CO2 emissions attributable to the burning of eligible biomass . . . ." (emphasis added). In other words, the regulation explicitly states that CO2 allowances are not needed for any CO2 emissions attributable to the burning of eligible biomass, but does not set forth any similar exemptions. The fact that Part 242 provides for this specific exemption lends further support to the conclusion that all other CO2 emissions - regardless of the type of fuel burned, use of energy, or kind of facility - must be covered by an equivalent number of CO2 allowances. Outside of this limited eligible biomass exemption, the rule does not provide for any other emissions to be deducted from the amount of allowances necessary for compliance.

Petitioner Calpine is correct that Part 242 does not expressly include thermal output from cogeneration facilities. In fact, Part 242 does not expressly include any particular kind of CO2 emissions or output. This, of course, does not mean that a declaratory ruling could be issued to exempt any type of emissions. Instead, the allowance requirements apply to all CO2 emissions, with the exception of emissions attributable to the burning of eligible biomass.

Finally, in its response to public comments, Calpine raises an alternative argument regarding a facility's internal "parasitic load." In particular, Calpine argues, even if I will not allow all of a cogeneration facility's thermal-related emissions to be exempt from the Program, I could at least exempt emissions related to a cogeneration facility's internal parasitic load. In making this argument, Calpine cites to the early reduction allowance (ERA) provision and its use of the term "net electrical output." 6 NYCRR § 242-5.3(b)(3)(i)(a). It is true that the definition of the term "net electrical output" specifically excludes electrical output used by a cogeneration facility. 6 NYCRR § 242-1.2(b)(58). Regardless, this exemption only applies to provisions in Part 242 in which the term "net electrical output" is relevant, such as the ERA provision. As Petitioner Calpine itself points out, the ERA language "is a discrete provision of the rule with a very limited scope." Therefore, emissions related to a facility's internal parasitic load - like all emissions from a facility - are subject to the allowance requirements of the Program.

ii) Administrative Record

In addition to the actual regulatory text, the rulemaking record further precludes me from interpreting the Program so as to allow for an exemption for thermal-related emissions from certain cogeneration facilities. During the rulemaking process, several public commenters requested that the Department provide some sort of exemption, set-aside, or other credit for cogeneration facilities. In response, the Department clearly and consistently stated that Part 242 would contain no such special treatment for cogeneration facilities.

For example, the Department stated that it "is not providing credit, considering remaining useful heat after electric production for CHP sources, in calculating the CO2 allowance surrender ratio from CHP sources under the RGGI." APC I, Response to Comment No. 109, p. 88. Similarly, the Department also made clear that, in this aspect of Part 242, "no further changes, including free allocation [of CO2 allowances,] are required." Id. Response to Comment No. 167, p. 113. Moreover, the Department explicitly stated that:

In regard to exempting emissions associated with thermal production, the Department would like to state that all emissions from the source, with the exception of those associated with the verified combustion of eligible biomass, are subject to the allowance requirements of the Program. Assessment of Public Comments, 6 NYCRR Part 242, CO2 Budget Trading Program, 21 NYCRR Part 507, CO2 Allowance Auction Program, Comments Received from May 7, 2008 to June 23, 2008 (hereafter "APC II"), Response to Comment No. 99, p. 50.

In fact, Calpine itself requested a thermal exemption for cogeneration facilities during the public comment period, and the Department again responded with the same statement: "all emissions from the source, [except for those associated with eligible biomass], are subject to the allowance requirements of the [P]rogram." APC II, Response to Comment No. 118, p. 63.

Even subsequent to the rulemaking process, the Department has confirmed that Part 242 covers all CO2 emissions from affected units at a source that is subject to the Program, with the exception of emissions related to the burning of eligible biomass. In the same letters described above, the Department stated that "all emissions from every CO2 budget unit . . . are subject to the requirements of Part 242, including the emission limitations. Part 242 does not contain an exemption for emissions that result from a CO2 budget unit's thermal output." See Exhibits 1 and 2. Together, the regulatory text and administrative record do not allow for an exemption for thermal-related emissions from certain cogeneration facilities.

C) Other Considerations

In addition to the arguments described above based on the regulatory language in Part 242, Calpine also makes several policy-based arguments regarding the need for a thermal exemption for cogeneration units. In particular, Calpine's primary argument seems to be based on the fact that emissions from stand-alone, steam-only boilers are not covered under Part 242. According to Calpine, because thermal-related emissions from such stand-alone boilers are not subject to the Program, fairness dictates that thermal-related emissions from cogeneration facilities should also be exempt from the Program.

As stated above, it is true that stand-alone boilers that only generate steam and that do not serve an electric generator are not subject to the Program. To be clear, it is not the emissions that are exempt from Part 242, but rather the boilers themselves that are altogether exempt from the Program. Regardless, in issuing a declaratory ruling, I do not have the ability to re-examine the merits of particular aspects of an existing regulation. The decision to base applicability of Part 242 on the inclusion of a unit that serves an electric generator was made during the rulemaking process. The rulemaking process followed the requirements of SAPA, including multiple opportunities for public notice and comment. Once a regulation has been fully and properly promulgated, as is the case with Part 242, I may only interpret the language in an existing regulation as part of a declaratory ruling.

Moreover, it may be true that the State favors cogeneration facilities over traditional facilities for certain reasons. Even so, there may be separate State programs and policies that might serve to promote and encourage cogeneration facilities. This motivation cannot, however, be a basis for my interpretation of an existing regulation through a declaratory ruling. The primary purpose of Part 242 is not to encourage any particular type of facility or fuel, but rather to limit CO2 emissions in the State from subject sources. Part 242 treats all facilities subject to the Program equally; all subject sources must obtain CO2 allowances to cover all CO2 emissions.

Finally, even if I were able and willing to exempt thermal-related emissions from certain cogeneration units, doing so would create other problems. First, there is no doubt that an exemption would reduce the overall number of allowances needed by New York State sources, thereby weakening the environmental effectiveness of the overall CO2 emission budget (i.e., the cap). Second, there is no basis in Part 242 for limiting an exemption to only cogeneration sources with LTCs, as opposed to applying the exemption to any and all cogeneration sources. Finally, it would be difficult for the Department to apply and enforce the exemption, in part because of the resulting need to distinguish between a given source's emissions related to the production of electric power, and the source's emissions related to the production of thermal energy. While the Department did solicit and receive suggestions regarding how to make this distinction, there is no basis for such a distinction in Part 242.

2) Request that Financial Hardship Demonstration Requirement be Satisfied by a Demonstration that an LTC Applicant is Unable to Pass on the Cost of Allowances

Petitioners' next request concerns the eligibility criteria for receipt of CO2 allowances from the LTC set-aside under subdivision 5.3(d). I am granting Petitioners' request that the financial hardship demonstration required in 6 NYCRR § 242-5.3(d)(3) is satisfied by documentation that an LTC applicant is unable to pass on the cost of CO2 allowances to the purchasing party.

First, the regulatory text in subdivision 5.3(d) sets forth three substantive eligibility criteria. One of these criteria is the financial hardship demonstration requirement, the precise meaning of which is not defined in Part 242 and therefore is an appropriate subject of a declaratory ruling. Second, during the rulemaking process, the Department made clear that the reason for creating the LTC set-aside was based on the distinction between LTC generators and other generators, namely that some LTC generators are unable to pass on the cost of CO2 allowances to the purchasing party. Finally, the Department's actual review of LTC applications confirmed the fact that any other interpretation of the financial hardship demonstration requirement would be unworkable and potentially arbitrary in its application.

A) Regulatory Text

The LTC Set-Aside Provision of the Program describes how the Department will administer the LTC set-aside account that contains 1.5 million CO2 allowances. The requirements that must be met to be awarded allowances from the LTC set-aside are set forth primarily in 6 NYCRR § 242-5.3(d)(3). An "LTC applicant may submit a written request to the department for the reward of a specified number of CO2 allowances in the long term contract set-aside account." 6 NYCRR § 242-5.3(d)(3). Moreover, such written request
"must include information to assure . . . to the department's satisfaction that [1] the long term contract was entered into prior to March 2006, [2] that
purchasing allowances at auction or in the secondary allowance market leads to financial hardship under the conditions of the long term contract, and
[3] that . . . each CO2 budget unit's . . . . primary fuel is natural gas or the CO2 budget source's emission rate is no higher than 1000 lbs/MWhr."
Id. (emphasis added).

The fact that this language states that these three criteria must be demonstrated to the Department's satisfaction makes clear that these three criteria are substantive, and not merely procedural.

On the other hand, other elements listed in subdivision 5.3(d), which are not expressly required to be demonstrated to the Department's satisfaction, are non-substantive. Mostly notably, subdivision 5.3(d) sets forth the required contents of an LTC application. The LTC Set-Aside Provision states that each request for an award of allowances from the LTC set-aside "shall contain, at a minimum, the following information . . ." and goes on to list the minimum content of an LTC application in subparagraphs (i) through (vi). Id. (emphasis added). Each of the elements in subparagraphs (i) through (vi) are procedural requirements that set forth the minimum content required in an LTC application.

The fact that the content requirements of the application are not substantive eligibility criteria does not mean that they are rendered meaningless and should never have been included in the regulation. Instead, these procedural requirements help to inform the meaning of the substantive requirements. More importantly, the content of an LTC application is useful to the Department for purposes of making its substantive review of each LTC applicant's eligibility. All of the information that must be submitted to the Department as part of an LTC application is reviewed by the Department and in part is used in the calculations, e.g., emissions, total net output, the portion of emissions covered by a contract, to determine each LTC applicant's eligibility under the set-aside program, including whether and to what extent an LTC applicant is able to pass on allowance costs to the purchasing party.

Other than paragraph (3) of subdivision 5.3(d), there are no other meaningful substantive requirements listed elsewhere in the LTC Set-Aside Provision. In other words, only paragraph (3) contains the eligibility criteria for an award of some amount of allowances from the LTC set-aside. Once the Department has determined that a given LTC applicant is eligible, then paragraph (4) of subdivision 5.3(d) specifies the formula used by the Department in calculating the actual amount of allowances the LTC applicant is eligible to receive. The other paragraphs set forth how allowances will be allocated, how they may be used, and other administrative implementation issues that are separate from the Department's actual determination of eligibility.

Therefore, there are three elements to the eligibility test in the LTC Set-Aside Provision: (1) the LTC applicant must have entered into an LTC before March 2006; (2) the LTC applicant must have a financial hardship; and (3) the facility's primary fuel must be natural gas, or the emission rate must be less than or equal to 1100 lbs/MWhr. Elements (1) and (3) provide straightforward, objective criteria with clear meanings, and that are met by Petitioners as well as most other LTC applicants. On the other hand, element (2) - financial hardship - is undefined in subdivision 5.3(d) or elsewhere in Part 242.

B) Administrative Record

Once it is clear that there are only three substantive eligibility criteria under the LTC set-aside provision, the issue becomes the meaning of the one eligibility criterion that is the issue of this declaratory ruling - the financial hardship demonstration requirement. The Department did not define the meaning of the financial hardship demonstration requirement in subdivision 5.3(d), or elsewhere in Part 242. Therefore, it is appropriate for me to clarify the Department's interpretation of this provision, based in part on the administrative record.

The record makes clear that the Department created the LTC set-aside in order to provide some relief for a limited category of sources. In particular, "[t]he Department created the Long Term Contract (LTC) set-aside to accommodate generators that will not be able to recover the cost of allowances in an auction as a result of the terms of the LTC." APC I, Response to Comment No. 547, p. 301 (emphasis added). Furthermore, the intent was to limit the possibility of relief to only those generators that demonstrate that they cannot pass on the cost of allowances: "The determination has been made to provide some relief only to those generators who cannot pass along their costs, for example those who hold long term contracts." APC I, Response to Comment No. 219, p. 150 (emphasis added). Together, these elements of the rulemaking record reflect that the Department's focus was on the inability to pass through allowance costs as the distinguishing characteristic of LTC-holders.

Moreover, the financial hardship requirement in subdivision 5.3(d) specifies that an LTC applicant must demonstrate that "purchasing allowances at auction or in the secondary allowance market leads to financial hardship under the conditions of the long term contract." 6 NYCRR § 242-5.3(d)(3) (emphasis added). This regulatory language suggests two things about the meaning of the financial hardship requirement: (1) it is the purchasing of allowances, and not some other external factors, that must lead to an LTC applicant's financial hardship; and (2) the terms of the LTC itself must be the actual reasons for this hardship. This was confirmed by the Department during the rulemaking process, when it stated as follows: "The CO2 Budget Trading Program contains a long-term contract (LTC) set-aside to provide allowances to LTC applicants that demonstrate, to the Department's satisfaction that allowance costs result in economic hardship to the CO2 Budget Source as a result of their existing contract." APC I, Response to Comment No. 219, p. 150 (emphasis added). Overall, the administrative record confirms that the financial hardship demonstration requirement was always focused on whether an LTC applicant is able to pass on the cost of allowances to the purchasing party, under the terms of the contract.

As some public commenters stated, there are other statements in the administrative record that emphasize the importance of receiving financial information from LTC applicants. For example, the Department declined to eliminate the requirement that LTC applicants submit financial information. In another instance, the Department stated:

The financial hardship demonstration is required to determine the impact of the program on the source requesting allowances from the set-aside. The award of LTC allowances is to support LTC sources that can clearly demonstrate that the Proposal and purchase of allowances at an auction results in a hardship. APC I, Response to Comment No. 555, p. 305.

But none of these other statements in the record specify exactly what was meant by the financial hardship demonstration requirement in subdivision 5.3(d). Instead, these statements merely acknowledge that the Department will consider financial information, as well as the terms of the LTC, in determining whether an LTC applicant has the ability to pass on the cost of CO2 allowances to the purchasing party.

Finally, it is important to note that, through this ruling, I have not eliminated any of the procedural requirements contained in subdivision 5.3(d) regarding the required contents of LTC applications. This includes the requirement that an LTC applicant submit financial information as part of its LTC application. As described above, subdivision 5.3(d) sets forth three substantive requirements that an LTC applicant must meet in order to be eligible to receive an award of CO2 allowances form the LTC Set-Aside. The procedural requirements, regarding the minimum contents of an LTC application, remain in place. The Department will continue to review this information for purposes of determining an LTC applicant's eligibility, including the financial hardship demonstration requirement, consistent with this ruling.

C) Department's Review of LTC Applications

The Department's actual review of LTC applications further confirms the fact that the inability to pass on the cost of allowances to the purchasing party satisfies the financial hardship demonstration requirement in the LTC Set-Aside Provision. The Department initially had its Division of Management and Budget (DMB) review five years' worth of financial information submitted by each LTC applicant. Moreover, the Department requested additional financial information in an attempt to enable a more thorough financial analysis of all LTC applicants. See, e.g., Letter from Mr. Michael Sheehan to Mr. Jason Goodwin, February 13, 2009, Exhibit 3. The Department's DMB attempted to apply financial ratio analysis in order to standardize the financial information supplied by LTC applicants. Information about LTC applicants' organizational structures was also reviewed to assist with identification of asset and liability movement among parents, subsidiaries, and affiliate entities.

Based on this analysis, the Department determined that there are many factors, apart from Part 242, that could potentially impact a given LTC applicant's financial well-being. As a result, the Department's thorough review of LTC applicants' financial information failed to provide any clear basis for distinguishing financial hardship among LTC applicants, except for by determining LTC applicants' ability to pass on the cost of allowances. That is, the Department's analysis demonstrated the fact that the only objective basis for the Department to determine financial hardship is the inability to pass on the cost of CO2 allowances to the purchasing party. Any other interpretation of financial hardship, such as one that analyzes relative financial health among LTC applicants based upon detailed financial statements, would be virtually impossible for the Department to implement effectively. Finally, because such an analysis is unworkable, any attempt to apply this type of analysis might lead to an arbitrary result.

3) Other Requests Related to the Administrative Implementation of Subdivision 5.3(d)

The Petitioners also make a number of requests related to the administrative implementation of subdivision 5.3(d). These include requests related to the definition of certain terms within subdivision 5.3(d), the formula used to determine the number of CO2 allowances allocated to a successful LTC applicant, and the procedure for distributing CO2 allowances. Finally, the Petitions also request clarification regarding LTCs that tie pricing under the contract to a tariff rate, whether an LTC applicant may receive an award of CO2 allowances from the LTC Set-Aside if it is able to pass on a portion of its CO2 allowance costs to the purchasing party, and whether LTC applications will be evaluated on an annual basis.

A) LTCs with Pricing Tied to Tariff Rate

Petitioner Calpine requests that, in the case of an LTC with pricing tied to a tariff rate, the Department consider the LTC applicant as being unable to pass on the cost of allowances, unless there is clear evidence that the respective tariff has been revised specifically to recover CO2 allowance cost. As described above, the Department will review all LTC applications to determine whether the LTC applicant meets the three substantive requirements in subdivision 5.3(d). In the case of an LTC with pricing tied to a tariff rate, just as is the case with any LTC applicant, an LTC applicant may demonstrate financial hardship with documentation that it is unable to pass on the cost of allowances to the purchasing party. In all cases, however, the burden is always on the LTC applicant to make this demonstration. Therefore, while the existence of a tariff rate may mean that a given LTC applicant is unable to pass on the cost of allowances, it does not automatically qualify an LTC applicant for an award of allowances from the LTC set-aside.

B) Partial Recovery of Allowance Costs

Petitioner Calpine also requests that, if an LTC applicant is able to recover only a portion of its CO2 allowance costs, the LTC applicant may nevertheless be eligible to receive an award for the unrecovered portion of its CO2 allowance costs. I grant this request without modification. That is, if an LTC applicant is able to recover a portion of its CO2 allowance costs from the purchasing party, it may still be eligible to receive an award of allowances representing the unrecoverable portion of its CO2 allowance costs. For example, for a given LTC applicant, only a portion of the facility's output might be subject to an LTC; another portion might be sold into the wholesale electricity market with the ability to pass on the cost of allowances. Similarly, even if an LTC applicant's entire output is committed to the purchaser under the terms of the LTC, there still might be an opportunity for partial recovery of allowance costs under the terms of the contract. In either of these examples, or any others in which an LTC applicant is only able to recover a portion of its CO2 allowance costs from the purchasing party, the Department may provide a partial award of allowances from the LTC set-aside to the LTC applicant.


C) Future Possibility of Recovery Irrelevant

Petitioner Calpine requests a ruling that its pending applications must be evaluated solely for the current allocation year and control period, and that the possibility of recovery of allowance costs in the future should not be considered by the Department in making decisions on the pending applications. The LTC Set-Aside Provision requires annual submissions by LTC applicants. Moreover, in responding to public comments, the Department stated that it "will continue to require demonstration of financial hardship on an annual basis" and that "[t]he Department will make allowances available under LTC the [sic] set-aside on an annual basis." APC I, Response to Comment Nos. 571 and 572, p. 312-13. Thus, subdivision 5.3(d) clearly contemplates consideration by the Department on an annual basis, without taking into account speculation about what might or might not happen in the future. Accordingly, the request that LTC applications be evaluated on an annual basis is granted.

D) Calculation of Award

Petitioner Bayswater requests confirmation regarding the formula used to calculate an award of allowances to an eligible LTC applicant. In particular, Petitioner Bayswater requests that the Department confirm that the formula in 6 NYCRR § 242-5.3(d)(4) (the "Formula") is the only formula available for use by the Department in determining the number of CO2 allowances to be allocated to each eligible LTC applicant.

In fact, the Formula only represents part of the method used by the Department to calculate the number of CO2 allowances to be allocated to a successful LTC applicant. Once the Department determines that a particular LTC applicant is eligible for an award of CO2 allowances from the LTC Set-Aside, it first calculates a maximum potential award amount by using the Formula. Then, if applicable, the Department discounts the resulting figure by the following: (1) the percentage of allowance costs that the LTC applicant is able to pass on to the purchasing party; and/or (2) the percentage of emissions not covered by the LTC. Finally, if applicable, the Department applies the pro rata percentage to the resulting figure, as specified in 6 NYCRR § 242-5.3(d)(7). Accordingly, Petitioner Bayswater's request to confirm the method for calculation of allowances is granted, as modified herein.

E) Definitions

Petitioner Bayswater requests that I define certain terms in subdivision 5.3(d). First, Bayswater requests definition of the terms "financial hardship" and "long term contract hardship" as used in 6 NYCRR § 242-5.3(d)(3). As described above in section (2), the term "financial hardship" refers to the inability of an LTC applicant to pass on the costs of CO2 allowances to its purchasing party, under the terms of the LTC. The term "long term contract hardship" is actually part of the longer phrase "long term contract hardship demonstration documents," and simply refers to all of the materials that must be submitted by an LTC applicant. In other words, it refers to the LTC application documents.

Bayswater also requests that I define the term "budget source" as used in 6 NYCRR § 242-5.3(d)(3)(2), and clarify how the term "budget" relates to other uses of the term "budget" in subdivision 5.3(d). The term "budget source" is actually a "CO2 budget source," which is defined in Part 242 as follows: "A source that includes one or more CO2 budget units." 6 NYCRR § 242-1.2(b)(27). Other references to the term "budget" in subdivision 5.3(d) are to a "CO2 budget unit," which is also a defined term in Part 242. A "CO2 budget unit" is "a unit that is subject to the CO2 Budget Trading Program Requirements under Section 242-1.4."

Finally, Bayswater requests that I define the term "suffer losses" as used in 6 NYCRR § 242-5.3(d)(3)(vi), and the specific role that this term plays in the calculation of an award amount under the LTC Set-Aside Provision. First, the term "suffer losses" appears in the context of a requirement that an LTC application contain "a demonstration that the LTC applicant will suffer losses in excess of the value of allowances sought . . . ." 6 NYCRR § 242-5.3(d)(3)(vi). While not a substantive eligibility requirement, this means that an LTC application must include a demonstration that purchasing allowances results in a loss in revenue for the LTC applicant, and that such loss is greater than the value of the allowances themselves. For example, there may be transactional costs associated with the purchasing of allowances; these transactional costs might create a revenue loss for the LTC applicant that is greater than or additional to the value of allowances. Second, once the Department determines that a given LTC applicant is eligible to receive an award of allowances from the LTC set-aside, the term "suffer losses" plays no role in the calculation of an actual award amount. Instead, the Department calculates the number of allowances to be allocated to each eligible LTC applicant in the manner described above in subsection (D).

F) Allowance Distribution Procedure

Finally, Petitioner Bayswater requests confirmation of the allowance distribution procedure under the LTC Set-Aside Provision. Indeed, once the Department has determined that an LTC applicant is eligible to receive an award of CO2 allowances from the LTC Set-Aside, pursuant to the LTC Set-Aside Provision and as interpreted by this declaratory ruling, the Department will not consider financial hardship in calculating the actual number of CO2 allowances to be allocated to each eligible applicant. Instead, the Department will calculate the award based on the Formula, and the other potential considerations described in subsection (D) above. Once it determines that an LTC applicant is eligible to receive an award of allowances, the Department does not have any additional discretion to otherwise modify the amount of an award.

CONCLUSIONS

For the reasons described above, I find as follows: (1) there is no exemption in Part 242 for CO2 emissions related to the production of thermal energy; i.e., all CO2 budget sources, including cogeneration sources, must obtain CO2 allowances for all CO2 emissions from the source, with the exception of emissions attributable to the burning of eligible biomass; (2) an LTC applicant may satisfy the financial hardship demonstration requirement in subdivision 5.3(d) with documentation that it is unable to pass on the cost of CO2 allowances to the purchasing party under the terms of the LTC; and (3) all of Petitioners' other requests, related to the administrative implementation of subdivision 5.3(d), are granted, with some modification as described above.


Dated: November 5, 2009


/s/
________________________
Alison H. Crocker
Deputy Commissioner
and General Counsel

EXHIBIT 1

New York State Department of Environmental Conservation
Office of General Counsel, 14th Floor
625 Broadway, Albany, New York 12233-1500
FAX: (518) 402 9018 or (518) 402-9019
Website: www.dec.ny.gov

April 3, 2009

Mr. David Petty
SUEZ Energy Generation NA, Inc.
Nassau Energy Corporation
185 Chalres Lindbergh Blvd.
Garden City, NY 11530-4819

Dear Mr. Petty,

This is in response to your March 20, 2009 letter requesting clarification regarding your facility's participation in the CO2 Budget Trading Program, Part 242. In the letter you specifically ask the following: (1) if the emissions from the facility's thermal generation are exempt from Part 242; and (2) in the event that the cogneration facility is off-line, whether the emissions from the back up boilers are subject to Part 242.

Part 242 applies to any unit that, at any time on or after January 1, 2005, serves an electricity generator with a name plate capacity equal to or greater than 25 MWe. Moreover, any source that includes one or more such units is considered a CO2 budget source. Nassau Energy Corporation's generator is listed in EPA's Source Management System with a nameplate capacity of 44 MWe. Therefore, all units that serve that generator are CO2 budget units, and the Nassau Energy Corporation facility is a CO2 budget source. As such, all emissions from every CO2 budget unit that serves that generator are subject to the requirements of Part 242, including the emission limitations. Part 242 does not contain an exemption for emissions that result from a CO2 budget unit's thermal output.

In regard to Nassau's back up boilers, if they meet the definition of a CO2 budget unit, the emissions from those units are subject to the requirements of Part 242. Please let me know if you have any additional questions.

Sincerely,

/s/

Michael P. Sheehan
Chief, Mobile Source Planning Section
Division of Air Resources

EXHIBIT 2

New York State Department of Environmental Conservation
Office of General Counsel, 14th Floor
625 Broadway, Albany, New York 12233-1500
FAX: (518) 402 9018 or (518) 402-9019
Website: www.dec.ny.gov

May 5, 2009

Mr. Michael J. Gwyther
SUEZ Energy Generation NA, Inc.
Syracuse Energy Corporation
56 Industrial Drive
Syracuse, New York 13204

Dear Mr. Gwyther,

This is in response to your March 3, 2009 letter requesting clarification regarding your facility's participation in the CO2 Budget Trading Program, 6 NYCRR Part 242 (Part 242). In the letter you specifically ask the following: (1) when co-generating, if the emissions from the facility's steam production are exempt from Part 242; and (2) when not generating electricity and only operating as a steam supplier, are the emissions exempt from Part 242.

Part 242 applies to any unit that, at any time on or after January 1, 2005, serves an electricity generator with a name plate capacity equal to or greater than 25 MWe. Moreover, any source that includes one or more such units is considered a CO2 budget source. Syracuse Energy Corporation's generator is listed in EPA's Source Management System with a nameplate capacity of 80 MWe. Therefore, all units that serve that generator are CO2 budget units, and the Syracuse Energy Corporation facility is a CO2 budget source. As such, all emissions from every CO2 budget unit that serves that generator are subject to the requirements of Part 242, including the emission limitations. Part 242 does not contain an exemption for emissions that result from a CO2 budget unit's steam output from co-generation.

In regard to when the CO2 budget units are operating just to produce steam, as noted above, all emissions from those units are subject to the requirements of Part 242. Please let me know if you have any additional questions.

Sincerely,

/s/

Michael P. Sheehan
Chief, Mobile Source Planning Section

EXHIBIT 3

New York State Department of Environmental Conservation
Office of General Counsel, 14th Floor
625 Broadway, Albany, New York 12233-1500
FAX: (518) 402 9018 or (518) 402-9019
Website: www.dec.ny.gov

February 13, 2009

Mr. Jason M. Goodwin
KIAC Partners and
Nissequogue Cogen Partners
c/o Calpine Operating Services Company, Inc.
717 Texas Ave
Suite 1000
Houston, TX 77002

Re: Long Term Contract Set-Aside Program

Dear Mr. Goodwin,

Thank you for your interest in participating in the New York CO2 Budget Trading Long Term Contract Set-Aside Program (Program). We have received a number of applications from electric generators seeking allocations under the Program. In order to fully assess the applications, we are asking several of the applicants to provide additional financial information regarding their facility.

To continue to be considered for set-aside allocations, please provide us with detailed year end balance sheets for the most recent five years along with the accompanying footnotes for both income (profit and loss) statements and the balance sheets for the above periods for both of your facilities. The footnotes should include explanations of when, why, and how assets, liabilities, revenues and expeditures flow among affiliates, including flows between parent and subsidiaries. If assets, liabilities, revenues and/or expenditures flow among affiliates, parent and/or subsidiaries, please include an ownership diagram that indicates percentages of ownership. Please provide all the above information by February 27, 2009.

In addition, if you have not already provided the required certification under subdivision 242-2.1(e) of the Program, please submit the certification along with your response. If you have any questions, feel free to contact me at 518-402-8396.

Sincerely,

/s/

Michael Sheehan
Chief, Mobile Source Planning

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