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.