Southern California Edison Co. v. Federal Energy Regulatory Commission

                  United States Court of Appeals

               FOR THE DISTRICT OF COLUMBIA CIRCUIT

      Argued September 16, 1999   Decided November 2, 1999 

                           No. 98-1439

               Southern California Edison Company, 
                            Petitioner

                                v.

              Federal Energy Regulatory Commission, 
                            Respondent

               Laidlaw Gas Recovery Systems, Inc., 
                            Intervenor

              Petition for Review of Orders of the 
               Federal Energy Regulatory Commission

     Russell C. Swartz argued the cause for petitioner.  With 
him on the briefs was Joseph E. Stubbs.

     Timm L. Abendroth, Attorney, Federal Energy Regulatory 
Commission, argued the cause for respondent.  With him on 
the brief were Douglas W. Smith, General Counsel, Jay L. 

Witkin, Solicitor, and John H. Conway, Deputy Solicitor, 
Federal Energy Regulatory Commission.

     Before:  Williams, Rogers and Garland, Circuit Judges.

     Opinion for the Court filed by Circuit Judge Rogers.

     Rogers, Circuit Judge:  Southern California Edison Com-
pany ("Edison") appeals two orders of the Federal Energy 
Regulatory Commission ("FERC") interpreting the "small 
power production facility" provision of s 3(17) of the Federal 
Power Act to permit such a facility to use fossil fuels to 
supplement alternative fuels in a manner not expressly autho-
rized under the statute.1  Edison contends that s 3(17)(A) & 
(B), on which FERC relied, is unambiguous, and consequently 
the two orders cannot stand.  FERC, in response, contends 
that s 3(17)(B) is ambiguous and that the court must defer to 
FERC's reasonable interpretation of the statute inasmuch as 
it fosters the congressional purpose of encouraging the devel-
opment of power production from alternative fuel sources by 
addressing circumstances that Congress could not have fore-
seen.

     While there is a certain appeal to FERC's final point, 
neither FERC nor the court can ignore the plain terms of the 
statute.  Section 3(17) is plainly crafted to allow small power 
producers to engage in a rather carefully defined set of 
exceptional uses for fossil fuels, whereas FERC has adopted 
an interpretation under which fossil fuel uses may encompass 
essentially whatever FERC may find desirable in light of 
policy considerations and various statutory goals.  In contrast 
to FERC's interpretation, the rather obvious alternative 
reading offered by Edison gives effect to all of the text.  
FERC's interpretation of s 3(17) in the orders under review 
is also contradicted by FERC's own regulation.  Consequent-
ly, FERC's continued application of its interpretation of 
s 3(17)(B) in LUZ Solar Partners, Ltd., 30 FERC (CCH) 
p 61,122 (1985), is inconsistent with the unambiguous terms of 

__________
     1  Section 3(17) of the Federal Power Act ("FPA") was added by 
s 201 of Public Utilities Regulatory Policies Act of 1978, 16 U.S.C. 
s 796(17) (1994).

its post-LUZ regulation.  Accordingly, on either ground, 
FERC's orders cannot stand, and we grant the petition.

                                I.

     The Public Utilities Regulatory Policies Act of 1978 
("PURPA"), Pub. L. No. 95-617, 92 Stat. 3117 codified at 16 
U.S.C. ss 796(17)-(18), 824a-3, 824i, 824k (1994), was one of 
five statutes enacted in 1978 as part of the National Energy 
Act, in response to the nation's fuel shortage.2  At that time, 
approximately one-third of the electricity in the United States 
was generated through use of oil and natural gas, S. Rep. No. 
95-361 at 32 (1977), and in the five-year period prior to 
enactment, oil costs had increased by approximately 400% 
and natural gas costs had increased by more than 175%. 
S. Rep. No. 95-442 at 9 (1977).  Responding to heightened fuel 
costs and potential fuel shortages, Congress sought to pro-
mote conservation of oil and natural gas by electricity utili-
ties.  See FERC v. Mississippi, 456 U.S. 742, 745-46 (1982).  
Thus, to encourage the development of facilities that generate 
electricity using renewable resources and facilities engaged in 
cogeneration of electricity and useful heat or steam that 
might otherwise be wasted, id. at 750, and to overcome the 
reluctance of traditional utilities to buy from, and sell to, 
these alternative producers, Congress granted qualifying 

__________
     2  In addition to PURPA, Congress enacted the Energy Tax Act 
of 1978, Pub. L. No. 95-618, 92 Stat. 3174;  the National Energy 
Conservation Policy Act, Pub. L. No. 95-619, 92 Stat. 3206;  the 
Powerplant and Industrial Fuel Use Act of 1978, Pub. L. No. 
95-620, 92 Stat. 3289;  and the Natural Gas Policy Act of 1978, Pub. 
L. No. 95-621, 92 Stat. 3351.  The statutory background has been 
discussed in related contexts in American Paper Inst. v. American 
Elec. Power Serv. Corp., 461 U.S. 402, 404-06 (1983), rev'g, Ameri-
can Elec. Power v. FERC, 675 F.2d 1226, 1229-31 (D.C. Cir. 1982) 
(also discussing background);  FERC v. Mississippi, 456 U.S. 742, 
745-46 (1982);  New Charleston Power I, L.P. v. FERC, 56 F.3d 
1430, 1431-34 (D.C. Cir. 1995);  Independent Energy Producers 
Ass'n, Inc. v. California Pub. Util. Comm'n, 36 F.3d 848, 850 (9th 
Cir. 1994);  Puerto Rico Elec. Power Auth. v. FERC, 848 F.2d 243, 
244-45 (D.C. Cir. 1988).

small power production facilities certain benefits.  Under 
PURPA, such facilities were exempt from certain regulatory 
controls, and they were assured a market by providing a right 
to interconnect with the local public utility and to receive 
rates, as prescribed by FERC, up to the full avoided cost of 
the utility.  See American Paper Inst. v. American Elec. 
Power Serv. Corp., 461 U.S. 402, 404-06 (1983);  PURPA 
ss 210, 212, 16 U.S.C. ss 824a-3, 824i, 824k.

     Of relevance to the instant appeal are two provisions of 
PURPA and one provision of FERC's regulations.  The first 
two define the features of a "small power production facility" 
potentially eligible for the statutory entitlements.  The regu-
lation, discussed in Part IV, further defines the permissible 
uses of fossil fuels by such a facility.3  In s 3(17)(A), Con-
gress defined a "small power production facility," in pertinent 
part, to be:

     a facility which ... produces electric energy solely by the 
     use, as a primary energy source, of biomass, waste, 
     renewable resources, geothermal resources, or any com-
     bination thereof[.]
     
16 U.S.C. s 796(17)(A)(i). Elaborating on the meaning of 
"primary energy source," Congress defined that term in 
s 3(17)(B) to mean:

     the fuel or fuels used for the generation of electric 
     energy, except that such term does not include, as deter-
     mined under rules prescribed by the Commission, in 
     consultation with the Secretary of Energy--
     
          (i) the minimum amounts of fuel required for ignition, 
          startup, testing, flame stabilization, and control uses, 
          and
          
          (ii) the minimum amounts of fuel required to alleviate 
          or prevent--
          
               (I) unanticipated equipment outages, and
     
__________
     3  A fossil fuel is "a fuel (as in coal, oil, or natural gas) that is 
formed in the earth from plant or animal remains."  Merriam 
Webster's Collegiate Dictionary 460 (10th ed. 1993).

          (II) emergencies, directly affecting the public 
          health, safety, or welfare, which would result from 
          electric power outages[.]
     
16 U.S.C. s 796(17)(B).

     FERC also promulgated regulations under PURPA.  Of 
significance here is FERC's amendment, effective February 
24, 1995, which provided at the time Laidlaw sought a declar-
atory ruling that:

     (b) Fuel Use.
     
     ....
     
     (2) Use of oil, natural gas and coal by a facility, under 
     section 3(17)(B) of the Federal Power Act, is limited to 
     the minimum amounts of fuel required for ignition, start-
     up, testing, flame stabilization, and control uses, and the 
     minimum amounts of fuel required to alleviate or prevent 
     unanticipated equipment outages, and emergencies, di-
     rectly affecting the public health, safety, or welfare, 
     which would result from electric power outages.  Such 
     fuel use may not, in the aggregate, exceed 25 percent of 
     the total energy input of the facility during the 12-month 
     period beginning with the date the facility first produces 
     electric energy and any calendar year subsequent to the 
     year in which the facility first produces electric energy.
     
18 C.F.R. s 292.204(b)(2) (1999).

                               II.

     Laidlaw Gas Recovery Systems, Inc. ("Laidlaw")4 owns and 
operates 13 landfill gas-to-energy plants at which methane 
gas produced by decomposition is burned to generate electric-
ity.  On May 19, 1995, Laidlaw sought a declaratory ruling 
from FERC that its Coyote Canyon Landfill Gas Power Plant 
in Orange County, California, would remain a "qualifying 
small power production facility" under s 3(17)(C), and 

__________
     4  Laidlaw has changed its name to Gas Recovery Systems, Inc., 
but for the sake of consistency we retain the designation used in the 
orders under review.

FERC's regulations, if it began burning natural gas in any 
amount up to 25% of its annual energy input.  Specifically, 
Laidlaw requested permission to burn natural gas to boost 
output from 17 megawatts ("MW") to 20MW, to sustain 
output at that level despite fluctuations in landfill gas supply, 
and to alleviate the effects of forced outages and landfill 
maintenance.

     Laidlaw's request for a declaratory ruling arose from its 
potential inability to supply the required power under its 30-
year purchase power contract with Edison.  In 1984, Laidlaw 
had agreed to supply Edison with at least 80% of Coyote 
Canyon's contract capacity during the peak hours of the four 
summer months.  Initially, contract capacity had been 15MW, 
but the contract was amended in 1986 to increase contract 
capacity to 20MW.  Once commercial operation at Coyote 
Canyon began in 1989, Laidlaw encountered difficulties.  
During the summer of 1989, Laidlaw failed to meet its 
contractual supply obligations, and, under the terms of the 
contract, Coyote Canyon's capacity was permanently derated 
to 17.1MW, and Laidlaw was forced to refund $600,000 to 
Edison.  In 1990, the landfill was closed, but Laidlaw expects 
to have a commercially-sustainable gas supply until at least 
2010.

     According to Laidlaw's petition, Coyote Canyon's current 
production problems stem from two environmental require-
ments under state law, whereby the closed landfill has been 
covered with an 18-inch impermeable clay cover and conden-
sation can not be reinjected, a process that would have 
increased the rate of decomposition and therefore gas produc-
tion.  Combined with the limitations imposed by the atmo-
spheric pressure in southern California, implementation of 
the state requirements has resulted in a smaller gas supply 
than Laidlaw had anticipated.

     Edison and the Public Utilities Commission of the State of 
California ("CPUC") intervened in opposition to the petition.  
Edison maintained that under PURPA Laidlaw was restrict-
ed in its use of natural gas to the purposes specified in the 
statute.  Edison argued that Laidlaw could not justify its 

proposed use of natural gas as one of the specified uses in 
s 3(17)(B), nor could it meet the "essential fixed assets" 
standard enunciated in LUZ whereby FERC had recognized 
permissible uses for fossil fuels beyond those expressly set 
forth in the statute.  See Laidlaw Gas Recovery Sys., Inc., 74 
FERC (CCH) p 61,176 (1996) ("1996 Order").  Edison con-
cluded that even if Laidlaw could meet the LUZ standard, 
FERC should abandon it as no longer supported by the policy 
considerations that led to its adoption and as inconsistent 
with PURPA's plain language.5

     In LUZ, FERC ruled that a solar-powered plant could 
burn fossil fuels to operate a gas-fired superheater, an oil-
fired "emergency" steam generator, and an auxiliary gas-fired 
steam boiler even though these uses of fossil fuels were not 
expressly authorized under s 3(17)(A) & (B).  LUZ, 30 
FERC at p. 61,226.  FERC reasoned that Congress' use of 
the word "primary" in s 3(17)(A) and (B) necessarily implied 
that there could be permissible secondary uses of fossil fuels.  
While FERC acknowledged that "Congress specified in sec-
tion 3(17)(B) ... certain uses of gas which fall into this 
secondary category," FERC determined that it remained free 
to permit additional secondary uses because Congress "did 
not explicitly state [that the secondary uses specified in 
s 3(17)(B)] would be the sole [secondary uses] permitted."  
LUZ, 30 FERC at p. 61,225 (quoted in Laidlaw Gas Recovery 
Sys., Inc., 84 FERC (CCH) p 61,070 at p. 61,294-95 (1998)).  
FERC also determined, relying principally upon two brief 
passages from the Conference Report on PURPA, that the 
legislative history supported its interpretation.  FERC relied 
on a reference to "other minor uses" in regard to the use of 
fossil fuels by a "small power production facility"6 and a 

__________
     5  CPUC joined Edison in arguing that Laidlaw's proposed use 
of natural gas would not fit within either the express uses permitted 
by PURPA or the use permitted under the LUZ standard.  CPUC 
did not challenge the LUZ standard itself.

     6  The term "small power production facility" derives from 
S. 2114 s 12(c)(4), which read:

reference to the use of natural gas or oil for the generation of 
electricity during "scheduled outages."7  Given its determina-
tion that it was free to define permissible secondary uses of 
fossil fuels outside of those specified in s 3(17)(B), FERC 
concluded in LUZ that fossil fuels could be utilized to "im-
prove[ ] the efficiency of those fixed assets of the small power 
production facility that are essential to the facility...."  
LUZ, 30 FERC at p. 61,226.

     Applying LUZ in Laidlaw's case, FERC granted Laidlaw's 
petition in part.  In the 1996 Order, FERC ruled that, 
without jeopardizing its status as qualifying small power 

__________
     "small power production facility" means a facility owned by a 
     person not primarily engaged in the generation or sale of 
     electric power, which facility produces electric energy by the 
     use of solid waste and/or renewable resources.
     
S. Rep. No. 95-442, 95th Cong. (1978).  The relevant changes 
made by the Conference Committee were to change "which facility 
produces electric energy by the use of " to "a facility which ... 
produces electric energy solely by the use, as a primary energy 
source, of," where "primary energy source" is a term of art defined 
in 16 U.S.C. s 796(17)(B).  The Conference Report explains:

     The conferees added the term 'primary energy source' to this 
     definition in recognition of the fact that a facility using waste, 
     biomass, or renewable resources, or any combination thereof as 
     the primary fuel might nevertheless require the use of oil or 
     natural gas or other nonrenewable fuels in emergencies or in 
     outages or to start the unit, test it, stabilize the flame or 
     control the operation of the unit or for other minor uses.
     
H.R. Conf. Rep. No. 95-1750 at 89 (emphasis added), reprinted in 
1978 U.S.C.C.A.N. at 7823.

     7  With regard to the definition of 'small power production 
facility' the conferees intend, for purposes of maintaining status as a 
small power production facility, that the phrase 'primary energy 
source' does not preclude the use of gas or oil in a facility for the 
generation of electricity during scheduled outages.

H.R. Conf. Rep. No. 95-1750 at 88-89 reprinted in 1978 
U.S.C.C.A.N. at 7822-23.

production facility,8 Laidlaw could use natural gas at its 
Coyote Canyon facility up to 25% of its energy input in order 
to "levelize" production at 17MW, as well as during forced 
outages and landfill maintenance;  it denied Laidlaw's request 
to use natural gas to increase production to 20MW.  1996 
Order, 74 FERC at p. 61,615, (JA 167).  Laidlaw and Edison 
sought rehearing, and by Order of July 21, 1998 ("1998 
Order"),9 FERC denied rehearing, rejecting Laidlaw's factual 
contention that the Coyote Canyon facility could produce 
20MW using only landfill gas as unsupported.  FERC re-
buffed Edison's repeated attack on LUZ by reiterating in 
large measure its reasoning in LUZ.  In response to Edison's 
request for clarification of the 1996 Order, FERC explained 
that Laidlaw could use natural gas to produce up to 17MW at 
its Coyote Canyon facility "when burning natural gas will 
permit the facilities to make more efficient use of their 
essential fixed assets."  1998 Order, 84 FERC at p. 61,296, 
(JA 236).

                               III.

     Edison appeals the 1996 and 1998 Orders on the principal 
ground that FERC would allow Coyote Canyon to burn 
natural gas up to 25% of its annual energy input contrary to 
the plain meaning of the statute that defines a "small power 
production facility."  Relying on the statutory text and struc-
ture, Edison maintains that the permissible uses of fossil fuels 
by such a facility are expressly restricted to those set forth in 
the statute, which does not include a delegation of the author-
ity to FERC to expand the permissible uses of fossil fuels and 
none may be implied.  Consequently, Edison contends, 
FERC should have reconsidered and not extended the appli-
cation of its decision in LUZ to the instant case.  In addition, 
Edison maintains that FERC's reasoning is flawed because it 
fails to explain any link between the uses authorized by the 
statute and LUZ's "essential fixed assets" standard, or why 

__________
     8  On May 11, 1988, Laidlaw filed its notice of qualifying status 
as a "small power production facility."  See 16 U.S.C. s 796(17)(C);  
18 C.F.R. ss 131.80, 292.203, 292.207.

     9  Laidlaw Gas Recovery Sys., Inc., 84 FERC p 61,070 (1998), 
(JA 231).

the uses permitted under LUZ are of the same character as 
those listed in the statute, and FERC relied on a factor--
more efficient use--that Congress did not intend to be consid-
ered.

     Under the now familiar Chevron test, this court must first 
determine whether Congress has addressed the precise issue 
at hand.  Chevron U.S.A. Inc. v. NRDC, Inc., 467 U.S. 837, 
842-43 (1984).  To do so, the court must exhaust the tradi-
tional tools of statutory construction.  Halverson v. Slater, 
129 F.3d 180, 184 (D.C. Cir. 1997);  accord Engine Mfr. Ass'n 
v. EPA, 88 F.3d 1075, 1084 (D.C. Cir. 1996).  Of course, the 
starting point, and the most traditional tool of statutory 
construction, is to read the text itself.  Engine Mfr. Ass'n, 88 
F.3d at 1088. To determine whether the plain meaning of the 
statutory text resolves the issue, the court considers "the 
particular statutory language at issue, as well as the language 
and design of the statute as a whole."  Halverson, 129 F.3d at 
184 (quoting K Mart v. Cartier, Inc., 486 U.S. 281, 291 
(1988)).  Only then, if the court determines that Congress has 
not spoken to the question at issue, does Chevron step two 
come into play, requiring the court to defer to the agency's 
reasonable interpretation of the statute.  In our Chevron step 
one discussion, we turn first to the text, then the structure of 
PURPA, and finally to the context.

                                A.

     Surely it is significant that in deciding to confer substantial 
benefits on "small power production facilit[ies]" Congress 
took care to define the class of potential beneficiaries.  Thus, 
Congress required that such a facility must produce electric 
energy "solely by the use, as a primary energy source, of 
biomass, waste, renewable resources, geothermal resources, 
or any combination thereof."  Section 3(17)(A) of FPA, 16 
U.S.C. s 796(17)(A).  The limitation "solely" applies to the 
phrase "primary energy source," which, given the structure of 
the statute, is a term of art defining the full scope of 
permissible fuel uses.  Read together, paragraphs (A) and (B) 
require that one or more of the alternative fuels listed in (A) 

be the sole fuel or fuels used to generate electricity except 
that the fuel used for specified uses related to maintaining 
power production or to disruptions in power production may 
be either alternative fuels or traditional fossil fuels.  By 
excepting the fuel used for these secondary uses, s 3(17)(B) 
explains fully the use of the adjective "primary" in "primary 
energy source."

     FERC's construction, on the other hand, strikes "solely" 
out of the statute and weakens the force of the command 
"primary."  Essentially, FERC would rewrite s 3(17)(A)'s 
definition of a "small power production facility" to require 
such a facility to generate electricity "primarily" by the use of 
a permitted fuel as a primary energy source, rather than 
"solely" by such use.  Under this interpretation, the statute 
can no longer include the term "solely" and the court would 
have to condone striking a word from the statute.  Yet FERC 
has not suggested any reason why it is necessary to do so.  A 
reading that gives proper effect to the word "solely" does not 
turn it into a non sequitur, as Edison observes, nor does it 
produce absurd results.  See Mova Pharm. Corp. v. Shalala, 
140 F.3d 1060, 1070-72 (D.C. Cir. 1998);  Engine Mfr. Ass'n, 
88 F.3d at 1089-90, 1092-93.  Even FERC acknowledged that 
the definition of "primary energy source" provides a list of 
exceptions that are themselves permitted "secondary" fuel 
uses.  See 1998 Order, 84 FERC at p. 61,295, (JA 235).  
Were additional nonconforming fuel uses permitted, the facili-
ty would not be producing electric energy solely by use of a 
permissible fuel.

     In addition, in its brief FERC suggests that s 3(17)(B) 
refers only to those uses that FERC may not consider in 
determining a facility's primary energy source, but has no 
bearing upon permissible uses of secondary energy sources.  
FERC does not appear to base its decision in the orders on 
appeal on such an interpretation of s 3(17)(B).  To the con-
trary, FERC acknowledged that s 3(17)(B) specifies permis-
sible secondary energy source uses but argued that this list is 
not exhaustive and that Laidlaw's proposed fossil fuel uses 
constitute permissible uses of a secondary energy source.  
Indeed, in denying rehearing, FERC quoted LUZ to state 

that the language of subsection 17(B) can "be read as not 
constraining [FERC] in implementing this section, from per-
mitting other 'secondary' uses of fossil fuel."  1998 Order, 84 
FERC at p. 61,294, 61,295, (JA 234-35) (emphasis added).  
Edison notes that FERC did not articulate a theory under 
which FERC could define secondary fuel uses, entirely un-
constrained by s 3(17)(B), following identification of a facili-
ty's primary energy source.

     But assuming FERC may have relied on such a rationale in 
the orders on appeal, see LUZ, 30 FERC at p. 61,225, 
FERC's approach is problematic.  To adopt FERC's ratio-
nale is to assume a new category of nonconforming uses 
fueled by such a source that is nowhere mentioned in PURPA 
or FERC's regulations and is unnecessary to give meaning to 
the provisions Congress enacted.  To suggest, as would 
FERC, that Congress' use of the word "primary" left unde-
fined uses for secondary sources fails to give meaning to all of 
the terms that Congress used.  Although as a linguistic 
matter "secondary" is a corollary of "primary," FERC's 
interpretation would have the effect of requiring Congress to 
state expressly that the exceptions in s 3(17)(B)(i) and (ii), 
which allow use of secondary fuels for certain uses, define the 
universe of permitted fossil fuel uses.  Yet the court has 
repeatedly rejected the notion that the absence of an express 
proscription allows an agency to ignore a proscription implied 
by the limiting language of a statute, reasoning that such an 
approach requires "tortured statutory interpretation" and is 
based on the unlikely circumstance as to congressional intent 
giving agencies "virtually limitless hegemony, a result plainly 
out of keeping with Chevron."  Halverson, 129 F.3d at 187 
(quoting Railway Labor Executives Ass'n v. National Media-
tion Bd., 29 F.3d 655, 671 (D.C. Cir. 1994) (in banc));  accord 
University of D.C. Faculty Ass'n v. District of Columbia 
Financial Responsibility and Management Assistance Auth., 
163 F.3d 616, 621-22 (D.C. Cir. 1998);  Engine Mfg. Ass'n, 88 
F.3d at 1088.

     Here, the limiting language in s 3(17)(B) loses virtually all 
meaning if it delegates to FERC the authority to expand the 
character and types of conforming uses of fossil fuels.  

FERC's interpretation would mean that Congress intended to 
delegate authority so as to potentially nullify proscriptions it 
had otherwise set as a quid pro quo for entitlement to 
significant benefits.  Instead, when the statutory words are 
given their common or normal meaning the result is a con-
gressional scheme carefully designed to carry out the statuto-
ry purposes.  As we have observed, the statutory language is 
plainly crafted to allow fossil fuel use by small power produc-
tion facilities for only a rather carefully defined set of excep-
tional uses, whereas in the Orders on appeal and in LUZ, 
FERC applied an interpretation under which the fossil fuel 
uses may encompass essentially whatever FERC may find 
desirable in light of sound policy and the various statutory 
goals.  This interpretation strips the substance from the word 
"solely" whereas the rather obvious alternative reading of-
fered by Edison still allows "primary" to have a meaning, 
namely fuel uses other than the specified exceptions.  Under 
Chevron an agency may not "avoid the Congressional intent 
clearly expressed in the text simply by asserting that its 
preferred approach would be better policy."  Engine Mfg. 
Ass'n, 88 F.3d at 1089.

     Laidlaw's reliance on the delegation of authority to FERC 
in s 3(17)(C) is similarly misplaced.10  Laidlaw's interpreta-
tion of paragraph (C) seeks to broaden the set of "small 
power production facilities," as defined in paragraphs (A) and 
(B), when in reality the function of paragraph (C) is to carve 

__________
     10  Section 3(17)(C) defines a "qualifying small power production 
facility" as

     a small power production facility--
     
     (i) which the Commission determines, by rule, meets such 
     requirements (including requirements respecting fuel use, fuel 
     efficiency, and reliability) as the Commission may, by rule, 
     prescribe;  and
     
     (ii) which is owned by a person not primarily engaged in the 
     generation or sale of electric power (other than electric power 
     solely from cogeneration facilities or small power production 
     facilities)
     
16 U.S.C. s 796(17)(C).

out a subset of that category.  Neither the 1996 Order nor 
the 1998 Order (nor LUZ) relies on paragraph (C) as authori-
ty for permitting Laidlaw's requested uses of natural gas;  
nor did Laidlaw seek rehearing on the ground that FERC 
should have authorized the requested uses as "control" uses 
under s 3(17)(B).  Therefore, neither issue is before the 
court.  Burlington Truck Lines, 371 U.S. at 168-69;  16 
U.S.C. s 8251.  Further, Laidlaw's view of paragraph (C) 
ignores the two separate definitions in s 3(17) that make 
"qualifying small power production facilit[ies]" under para-
graph (C) a subset of the "small power production facilit[ies]" 
defined in paragraphs (A) and (B).  And, contrary to Laid-
law's argument, Edison's interpretation does not read para-
graph (C) out of the statute.  FERC has specified require-
ments respecting fuel use by qualifying facilities, such as the 
75%/25% rule in 18 C.F.R. s 292.204(b), whereby FERC 
defined the permissible amount of fuel for the exceptional 
uses in s 3(17)(B), assuring that these would remain second-
ary.  1996 Order, 74 FERC at p. 61,614 n.1, (JA 166).  
Paragraph (C) delegates to FERC the authority, for instance, 
to add fuel use criteria after having defined the permissible 
amount of fuel for the exceptional uses in s 3(17)(B).  
FERC's 75%/25% rule is the product, in part, of FERC's 
exercise of the delegation in paragraph (C) and is consistent 
with Edison's interpretation of paragraphs (A) and (B).11  
Laidlaw's reliance on the Power Plant and Industrial Fuel 
Use Act of 1978, 42 U.S.C. ss 8301-8484 (1995), is no more 
helpful to it;  the term "primary energy source" in that 
statute is defined in nearly the same terms as were used in 
PURPA.  Compare 42 U.S.C. s 8302(a)(15) (1994) with 16 
U.S.C. s 796(17)(B).12  Laidlaw's reliance on LUZ's progeny 
fares no better.13

__________
     11  Edison does not challenge the regulation allowing use of 
fossil fuel up to 25% of the annual energy input for the exceptional 
uses in s 3(17)(B).  See 18 C.F.R. s 292.204.  Cf. New Charleston 
Power I, L.P. v. FERC, 56 F.3d 1430, 1432-33 (D.C. Cir. 1995).

     12  See also S. Rep. No. 95-361 at 27-28, 42 (1977) reprinted in 
1978 U.S.C.C.A.N. 8173, 8173, 8188.

     13  LUZ has been relied on sparingly by FERC.  See Power 
Developers, Inc., 32 FERC (CCH) p 61,101 (1985), order on reh'g, 34 

     Finally, Laidlaw, like FERC, relies on PURPA's broad 
purpose of encouraging the development of small power 
production facilities to justify the LUZ standard.  But that 
purpose is neither a grant of authority nor a basis on which 
the court can ignore a statutory limitation.  It bears noting 
that Laidlaw's Coyote Canyon facility and other small power 
production facilities have been developed and have operated 
without the interpretation that FERC has given to the stat-
ute in the orders on appeal;  indeed, Edison has suggested 
that, contrary to congressional purpose, the orders on appeal 
encourage the use of additional fossil fuel and ignore protec-
tion of ratepayers from rate increases attributable to manda-
tory purchases from qualifying facilities.  Indeed, at oral 
argument counsel for Edison represented that many small 
power production facilities operate in accord with the con-
gressional design.

                                B.

     The structure of the statute lends weight to the conclusion 
that Congress intended that the only permissible uses of 
fossil fuels by a small power production facility would be the 
fuel uses specified in paragraph (B).  Congress set out the 
relevant definitions beginning with "small power production 
facility," followed by "primary energy source," followed by 
"qualifying small power production facility."  See 16 U.S.C. 
s 796(17)(A), (B), & (C).  The first definition defines the 
facility based on fuel use and size, and, as Edison notes, only 
then authorizes FERC to determine which facilities are "qual-
ifying" facilities.  Paragraph (A) thus relies on paragraph (B) 
to define the facilities that come within the class of "small 

__________
FERC p 61,136 (1986);  Northeastern Power Company, 34 FERC 
(CCH) p 61,197 (1986);  Energy Tech. Eng'g Ctr. 43 FERC (CCH) 
p 61,251 (1988);  Hydro Corp. of Penn., 43 FERC (CCH) p 61,276 
(1988);  see also County Sanitation Districts of Orange County, 
Cal., 41 FERC (CCH) p 62,244 (1987) (Office Director opinion). 
Edison maintains that inasmuch as LUZ has been applied on a case-
by-case basis, the instant case is the first time that FERC's 
essential fixed assets standard has been presented to a court for 
review.  Cf. Brown v. Gardner, 513 U.S. 115, 122 (1994).

power production facilities", while paragraph (C) authorizes 
FERC to determine a qualifying subset of paragraph (A) 
facilities.  By setting out a general definition in paragraph 
(A), and then refining the term "primary energy source" in 
paragraph (B), the exceptions explain the use of the word 
"primary" in that phrase.  FERC has no authority under 
paragraph (B) to expand the list of fossil fuels that are not 
expressly stated in the statute.  And under paragraph (C), 
FERC's authority is to define by rule requirements that allow 
certain small power production facilities to become qualifying 
facilities.  These in turn must first be "small power produc-
tion facilit[ies]."

                                C.

     Finally, the context in which Congress enacted PURPA 
also supports the Chevron step one analysis.  At the time of a 
national energy crisis, Congress sought in a variety of ways to 
reduce the use of natural gas for electricity generation.  
FERC v. Mississippi, 456 U.S. 742, 745-46 (1982);  S. Rep. No. 
95-442 at 9 (1977).  PURPA was designed to encourage the 
development of alternative sources of energy by eliminating 
preexisting barriers, and in so doing, the Act authorized 
limited uses of fossil fuels.  While Congress might also have 
enacted a statute that allowed uses of natural gas to maximize 
or increase the production "efficiency" focusing on the "essen-
tial fixed assets" of "small power production facilities," its 
choice of language and structure weigh heavily in support of 
the conclusion that it did not do so.  Rather it seems clear 
from the language and structure it chose that Congress 
envisioned alternative fuel sources being developed without 
the additional use of natural gas as part of the regular and 
permanent production process;  the exceptions it authorized 
for fossil fuel use in the statute are of a limited number and 
character--for emergency, maintenance and quality control.  
See American Electric Power Serv. v. FERC, 675 F.2d 1226, 
1230 n.1 (D.C. Cir. 1982), rev'd in part sub nom., American 
Paper Inst. v. American Electric Power Serv. Corp., 461 U.S. 
402 (1983).  If, as FERC would have it, Congress could not 
have foreseen all of the circumstances under which it would 

be advisable to allow natural gas to be used in the production 
of electricity with alternative fuel sources, then Congress 
should not have defined the permissible fuel uses by small 
power production facilities with such precision, using the 
word "solely" in describing the alternative fuels to be used as 
the "primary energy source."

     The context further suggests that in exchange for signifi-
cant benefits involving exemption from certain regulations 
and a guaranteed market, Congress required small power 
production facilities to generate electricity from alternative 
sources of energy with only limited uses of fossil fuels.  Those 
purposes, Congress indicated in the statute, were of a start-
up, testing, or emergency nature, as opposed to a continuing 
and permanent usage associated directly with the production 
of electricity.  This was the quid pro quo.  FERC has not so 
far shown that the uses permitted in the orders under review 
are of the kind or character that Congress expressly permit-
ted.

     Upon examination of the text, structure, and context of the 
statute, we conclude that Edison has correctly construed 
s 3(17)(A) & (B), giving rather obvious meaning to all of the 
words and phrases that Congress used, and leaving no ambi-
guity to resolve at step two of Chevron.  By failing to adhere 
to the statutory limitations, FERC has impermissibly con-
strued the statute.  Where Congress has taken care, given 
the benefits it would confer, to specify exceptions for usages 
otherwise prohibited, the court has no reason to assume 
ambiguity for the purpose of allowing the agency to improve, 
in its view, upon Congress' design.  Hence, we conclude that 
FERC's 1996 and 1998 Orders incorporate an impermissible 
construction of the provisions of PURPA defining a "small 
power production facility."

                               IV.

     An additional reason for rejecting FERC's interpretation of 
s 3(17)(A) & (B) in the orders under review is that this 
interpretation is contradicted by the plain terms of FERC's 
regulation, which is consistent with the statutory text as 

construed under our Chevron step one analysis and seemingly 
inconsistent with FERC's prior interpretation of the statute 
in LUZ before the amended regulations were in place.

     As originally promulgated in 1980, 18 C.F.R. s 292.204(b) 
provided only that "use of oil, natural gas, and coal by a 
facility may not, in the aggregate, exceed 25 percent of the 
total energy input of the facility during any calendar year 
period."  18 C.F.R. s 292.204(b) (1994).  The preamble to the 
1980 rule stated that use of fossil fuel was restricted to the 
purposes specified in the statute.  Order No. 70, 45 Fed. Reg. 
17,959, 17,966 (Mar. 20, 1980).  In LUZ, FERC acknowledged 
this preamble in concluding that the more expansive reading 
of the regulation was in error.  LUZ, 30 FERC at 61,227-28 
n.7.  Nonetheless, the LUZ decision authorized usage beyond 
the statutory uses specified, and thus was contrary even to 
FERC's rules as they existed when LUZ was decided.14

     In any event, at the time Laidlaw filed its request for a 
declaratory order, FERC's regulation expressly identified 
permissible uses for fossil fuels by a small power production 
facility. Before Laidlaw sought a declaratory ruling from 
FERC, FERC had amended s 292.204(b) in 1995 to state 
that the use of fossil fuels is "limited" to the uses enumerated 
in the regulation, which are identical to those expressly 
permitted in the statute.  See 18 C.F.R. s 292.204(b) (1999).  
How FERC can reconcile the provisions of its regulations 
with its 1996 and 1998 Orders is unclear.  In the 1996 Order, 
FERC described the amendment to s 292.204(b) as codifying 
FERC's longstanding interpretation of the rule under which 
fossil fuels could be used only "for statutorily permissible 
purposes up to the 25 percent limit."  1996 Order, 74 FERC 
at p. 61,614 n.1, (JA 166).  In its brief on appeal, FERC 
concedes that s 292.204(b) "closely tracks" the statutory ex-

__________
     14  Indeed, FERC acknowledged in Power Developers, Inc., 34 
FERC (CCH) p 61,136 (1986), on reh'g from 32 FERC p 61,101 
(1985), that LUZ's "essential fixed assets" standard is appropriately 
viewed as a loosening of the regulatory restrictions.  34 FERC at p. 
61,236.

ceptions in 16 U.S.C. s 796(17)(B).  In fact, the regulation 
directly mimics the statute.

     FERC's contention that the LUZ standard sets forth a 
permissible use for fossil fuel is belied by the absence of any 
mention of LUZ or "essential fixed assets" from both the text 
of the amended rule and its preamble.  See generally 18 
C.F.R. s 292.204(b);  Order No. 575, 60 Fed. Reg. 4831, 4847 
(Jan. 25, 1995).  On the contrary, in LUZ, and in the orders 
under review, FERC permitted facilities to burn fossil fuels 
under the "essential fixed assets" standard as a permissible 
"other minor use" under s 3(17)(B).  See LUZ, 30 FERC at 
p. 61,225-26;  1996 Order, 74 FERC at p. 61,615-16, (JA 167-
68);  1998 Order, 84 FERC at p. 61,294-95, (JA 234-35).  
While the court's review of an agency's interpretation of its 
own regulation is deferential, see, e.g., Auer v. Robbins, 519 
U.S. 452, 461 (1997), FERC's reliance on LUZ in the 1996 and 
1998 Orders cannot be sustained.  Treating the "essential 
fixed assets" use as permissible under s 3(17)(B), as FERC 
did in LUZ and the orders under review, is inconsistent with 
the regulation, which directs that "[u]se of oil, natural gas and 
coal by a facility, under section [3](17)(B) ... is limited to the 
minimum amounts of fuel required for" the express purposes 
in s 3(17)(B)(i) and (ii).  18 C.F.R. s 292.204(b)(2).

     Accordingly, because the 1996 and 1998 Orders rely on an 
interpretation of s 3(17) that is foreclosed by unambiguous 
statutory text, and, alternatively, by FERC's own regulation, 
we grant Edison's petition for review.