As far as I can tell, you have to use the admin console to set up FAQ categories. The documentation on the faqcat command is kinda sketchy - for instance, what value do you put in for sort order field? Is it an integer, like 1, 2, 3, or a value, like ascending or descending?
I created a category called "How Do I..." like this:
faqcat add 1 "How Do I..." 1
That seemed to go through...but now the category is not showing up in the drop-down list on the page where you add FAQ entries.
Anyone else figured this all out?