AMERICAN PAPER INSTITUTE, INC., PETITIONER v. AMERICAN ELECTRIC
POWER SERVICE CORP., ET AL.

   FEDERAL ENERGY REGULATORY COMMISSION, PETITIONER v. AMERICAN
ELECTRIC POWER SERVICE CORP., ET AL.

   No. 82-34, No. 82-226

   In the Supreme Court of the United States

   October Term, 1982

   On writ of certiorari to the United States Court of Appeals for the
District of Columbia Circuit

   Brief for the Federal Energy Regulatory Commission

            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statutes and regulations involved
   Statement:
      A. The statutory background
      B. The rules adopted by the Commission
      C. The decision of the court of appeals
   Summary of Argument
   Argument:
      I.  In vacating the Commission's Full Avoided
          Cost Rule the court of appeals misconstrued the
          underlying statute, misperceived the nature and effect
          of the rule, and applied an erroneous standard of
          judicial review
          A. The Full Avoided Cost Rule satisfies the
             relevant statutory criteria
          B. The court of appeals' detailed (and erroneous)
             evaluation of the Full Avoided Cost Rule
             reflects its improper intrusion into the domain
             reserved to the administrative agency
             1. The Full Avoided Cost Rule does not
                automatically require that the actual rate
                paid by a utility to a qualifying
                facility be fixed at full avoided cost
             2. The court of appeals ignored the findings
                of Congress and the Commission that
                utilities possess monopsony power
             3. The Full Avoided Cost Rule will not
                result in higher rates to utility customers
          C. In vacating the Full Avoided Cost
             Rule the court of appeals applied an
             erroneous standard of review
          D. The court of appeals' erroneous decision
             to vacate the Full Avoided Cost Rule
             jeopardizes a significant federal
             program for the development of new and
             efficient energy sources that is still
             in its infancy
      II. The Commission has complete authority
          under Section 210(a) of PURPA to require
          utilities to interconnect with qualifying
          facilities as a necessary incident of its specific
          statutory duty to encourage cogeneration by the
          adoption of rules for the purchase and sale of
          electric power between utilities and qualifying
          facilities
          A. The Power Act Amendments were intended

@ to enhance the efficiency and reliability of

             transmission systems nationwide; they have
             nothing to do with PURPA's separate goal
             of encouraging cogeneration
          B. Section 210(a) of PURPA grants the
             Commission complete authority to order the
             interconnections necessary to effectuate
             the purchases and sales essential to effectuate
             a meaningful cogeneration program
   Conclusion
   Appendix

                            OPINIONS BELOW

   The opinion of the court of appeals (Pet. App. B-1 to B-34) /1/ is
reported at 675 F.2d 1226.  The opinions accompanying the orders
denying rehearing and rehearing en banc (Pet. App. B-202 to B-208) are
reported at 675 F.2d 1246.  The orders of the Commission (Pet. App.
B-38 to B-119, B-120 to B-174 and B-175 to B-199) are reported at 45
Fed. Reg. 12214, 17959 and 33958, respectively.

                             JURISDICTION

   The judgment of the court of appeals (Pet. App. B-200 to B-201) was
entered on January 22, 1982.  A petition for rehearing was denied on
April 9, 1982 (Pet. App. B-202 to B-208).  The petition for a writ of
certiorari in No. 82-34 was filed on July 8, 1982.  The petition for
certiorari in No. 82-226 was filed, pursuant to two extensions of
time, on August 9, 1982.  The petitions were both granted on October
12, 1982.  The jurisdiction of this Court rests on 28 U.S.C. 1254(1).

                   STATUTES AND REGULATIONS INVOLVED

   The pertinent statutes and regulations are set forth in an appendix
to this brief.

                          QUESTIONS PRESENTED

   In Section 210(a) of the Public Utility Regulatory Policies Act of
1978 (PURPA), Congress directed the Federal Energy Regulatory
Commission to issue rules requiring electric utilities to purchase
power from and sell back-up power to qualifying cogeneration and small
power production facilities and to establish a rate for such purchases
and sales.  The questions presented are:

   1. Whether the Commission's rule establishing the rate at which
utilities must offer to purchase power from qualifying facilities at
"full avoided cost" satisfies the statutory directive that the
Commission adopt a rule that is just and reasonable to electric
consumers, in the public interest and nondiscriminatory in its effects
on qualifying facilities.

   2. Whether Section 210(e)(3)(B) of PURPA requires the Commission to
conduct an evidentiary adjudication under provisions of the Federal
Power Act each time it seeks to compel a utility to interconnect with
a qualifying facility for the purpose of effectuating the purchases
and sales mandated by the Commission's rules under Section 210(a) of
PURPA.

                               STATEMENT

                      A. The Statutory Background

   This case involves a judicial challenge to certain regulations
promulgated by the Federal Energy Regulatory Commission pursuant to
Section 210 of the Public Utility Regulatory Policies Act of 1978
(PURPA), 16 U.S.C. (Supp. V) 824a-3.  The constitutional validity of
the Act, including Section 210, was upheld by this Court in FERC v.
Mississippi, No. 80-1749 (June 1, 1982).  As this Court noted in that
case, PURPA was enacted as part of a comprehensive legislative package
in an effort to "lessen the country's dependence on foreign oil, to
avoid repetition of the shortage of natural gas that had been
experienced in 1977, and to control consumer costs." Id. at 2.  /2/

   1. Section 210 of PURPA was enacted to promote development of
cogeneration and small power production facilities /3/ based on
Congress' judgment that "increased use of these sources of energy
would reduce the demand for traditional fossil fuels." FERC v.
Mississippi, supra, slip op. 6.  In adopting this legislation,
Congress recognized that two longstanding problems had frustrated the
growth of these alternative sources of electric energy:  "(1)
traditional electric utilities were reluctant to purchase power from,
and to sell power to the non-traditional (generating) facilities;  and
(2) the regulation of these alternative energy sources by state and
federal utility authorities imposed financial burdens upon the
nontraditional facilities and thus discouraged their development." Id.
at 6-7 (footnotes omittedy9

   In order to overcome the first problem, Congress, in Section 210(a)
of PURPA, 16 U.S.C. (Supp. V) 824a-3(a), directed the Commission,
within one year of PURPA's enactment, to prescribe "such rules as it
determines necessary to encourage cogeneration and small power
production," including rules requiring electric utilities to offer to
purchase electricity from, and sell electricity to, qualifying
facilities.  Section 210(b) of PURPA, 16 U.S.C. (Supp. V) 824a-3(b),
provides that the Commission's rules requiring the purchases by a
utility of electricity from a qualifying facility shall insure that
the rates for such purchase are:  (1) just and reasonable to the
utility's customers and in the public interest;  and (2)
nondiscriminatory with respect to the qualifying cogeneration or small
power production facility.  Section 210(b) declares that no rule
prescribed by the Commission "shall provide for a rate which exceeds
the incremental cost to the electric utility of alternative electric
energy." /4/ Section 210(f) of PURPA, 16 U.S.C. (Supp. V) 824a-3(f),
requires each state regulatory authority and nonregulated utility to
implement the Commission's rules.

   The second barrier that had hindered the development of these
nontraditional energy sources was removed by Section 210(e)(1) of
PURPA, 16 U.S.C. (Supp. V) 824a-3(e)(1), which authorizes the
Commission to exempt qualifying facilities from federal and state
regulation as public utilities if it determines that such exemption is
necessary to encourage cogeneration and small power production.

   2. In addition to its concern with encouraging cogeneration,
Congress also was mindful of the problem of "wasteful
over-construction of new generating and transmission facilities * * *
." /5/ It added Sections 210, 211 and 212 of the Federal Power Act
("FPA" or "Power Act) /6/ to meet that problem.  These provisions of
the Power Act granted the Commission new authority to order, inter
alia, "any electric utility" /7/ to "interconnect" or to "wheel" power
/8/ if such interconnection or wheeling would "further energy
conservation(,) efficient use of facilities or * * * improve
reliability." /9/ "(A)ny cogeneration facility (or) small power
production facility" is also subject to a Commission order to
interconnect or otherwise coordinate under Section 210 of the Power
Act.  Section 210(e)(3)(B) of PURPA further specifies that the
Commssion may not exempt qualifying facilities from "the provisions of
section 210, 211, or 212 of the Federal Power Act * * * ." 16 U.S.C.
(Supp. V) 824a-3(e)(3)(B).  /10/ Before compelling interconnection or
wheeling under the Power Act provisions, the Commission must determine
that such operations are in the public interest and would conserve
energy or capital, optimize efficiency, or improve the reliability of
the affected utility systems.  See 16 U.S.C. (Supp. V) 824i(c), and
824j(a).

   The term "electric utility," as used in FPA Sections 210, 211 and
212, includes entities that previously had been outside the
Commission's regulatory control, such as state agencies (16 U.S.C.
824(f)) and utilities that do not sell electricity in interstate
commerce (16 U.S.C. 824(e)).  See note 7, supra.  Congress extended
the new interconnection and wheeling requirements to these entitities
in part to eliminate the inefficiencies caused by the refusal of some
wholly intrastate utilities to interconnect with interstate systems in
order to avoid becoming subject to the full panoply of Federal Power
Act regulation.  /11/ In Section 201(b)(2) of the FPA, Congress
specified that while these otherwise nonjurisdictional entities "shall
be subject to the jurisdiction of the Commission for purposes of
carrying out" orders under the new interconnection and wheeling
authority, compliance with such orders would not make such entities
subject to the Commission's jurisdiction for any other purposes.  16
U.S.C. (Supp. V) 824(b)(2).

                B. The Rules Adopted By The Commission

   Following extensive rulemaking proceedings, /12/ the Commission
issued Order No. 69 (Pet. App. B-38 to B-119), governing transactions
between utilities and qualifying facilities.  That order embodies a
number of regulations designed to accomplish the statutory goal of
encouraging the development of cogeneration and small power
production.  Two of those regulations are at issue here.  /13/

   1. The first regulation provides that the rate for a purchase of
electricity by a utility from a new qualifying facility must be equal
to the utility's full "avoided costs." 18 C.F.R. 292.304(b)(2).  The
term "avoided costs" is defined in 18 C.F.R. 292.101(b)(6) as the
equivalent of the statutory term "incremental cost of alternative
electric energy." See note 4, supra.

   The Commission noted that "under the full avoided cost standard,
the utilities' customers are kept whole, and pay the same rates as
they would have paid had the utility not purchased energy and capacity
from the qualifying facility" (Pet. App. B-65).  In addition, the
Commission made the following observations (ibid.):

         Although use of the full avoided cost standard will not
      produce any rate savings to the utility's customers, several
      commenters stated that these ratepayers and the nation as a
      whole will benefit from the decreased reliance on scarce fossil
      fuels, such as oil and gas, and the more efficient use of
      energy.

         The Commission notes that, in most instances, if part of the
      savings from cogeneration and small power production were
      allocated among the utilities' ratepayers, any rate reduction
      will be insignificant for any individual customer.  On the other
      hand, if these savings are allocated to the relatively small
      class of qualifying cogenerators and small power producers, they
      may provide a significant incentive for a higher growth rate of
      these technologies.

   The Commission considered, but rejected, a
fixed-percentage-of-avoided-cost-rule, finding that such a rule would
cause a qualifying facility to cease production of energy if its costs
exceeded that fixed percentage price (Pet. App. B-66).  The Commission
explained that "(i)f this occurs, the utility will be forced to
operate generating units which either are less efficient than those
which would have been used by the qualifying facility, or which
consume fossil fuel rather than the alternative fuel which would have
been consumed by the qualifying facility had the price had been set at
full avoided costs" (ibid.).

   2. The second regulation at issue, codified at 18 C.F.R. 292.303,
requires electric utilities to:  (1) purchase any energy and capacity
made available from a qualifying facility;  (2) sell energy and
capacity to any qualifying facility at the latter's request;  and (3)
make the interconnections necessary to accomplish such transactions at
the qualifying facility's expense.  /14/ As the Commission recognized,
Section 210(a) of PURPA expressly refers only to purchases and sales
and not to interconnections.  The Commission concluded, however, that
Congress' directive that the Commission "prescribe * * * such rules as
it determines necessary to encourage cogeneration and small power
production" (16 U.S.C. (Supp. V) 824a-3(a)) provides clear authority
for the Commission to require the interconnections necessary to
accomplish the expressly mandated purchases and sales (Pet. App. B-58
to B-59).

   The Commission rejected the argument that under Section
210(e)(3)(B) of PURPA it must afford an evidentiary hearing and
"require that qualifying facilities go through the complex procedures
(required by Sections 210 and 212 of the Power Act) simply to gain
interconnection" for the purpose of effectuating the transactions
mandated by Section 210(a) of PURPA (Pet. App. B-59 to B-60).  The
Commission reasoned that the language of Section 210(a) of PURPA
"provides a general mandate for the Commission to prescribe rules
necessary to encourage cogeneration and small power production (and
thus provides) sufficient authority to require interconnection" (Pet.
App. B-60).  On the other hand, the Commission determined, to require
qualifying facilities to utilize FPA Sections 210 and 212 as the means
of obtaining interconnection would "significantly frustrate"
achievement of the purpose of Section 210(a) of PURPA, viz., to
provide a market for the electricity generated by cogenerators and
small power producers (Pet. App. B-60).

   On rehearing, the Commission adhered to these determinations (Pet.
App. B-179 to B-182).  It recognized that the "primary question" with
regard to the interconnection issue is the proper interpretation of
Section 210(e) of PURPA, which empowers the Commission generally to
exempt qualifying facilities from regulation as public utilities under
the Power Act except -- by virtue of subsection (e)(3)(B) -- from the
authority newly granted in Sections 210 and 212 of the Power Act (Pet.
App. B-180).  In the Commission's opinion, subsection (e)(3)(B) has no
application to Section 210(a) of PURPA, but rather evinces Congress'
intent to "impose (certain) obligations on qualifying facilities,
including requiring the physical connection of the qualifying facility
with the applicant, the sale or exchange (of) electric energy, or an
increase in transmission capacity * * * " (Pet. App. B-181).  The
Commission believed that "(t)o 'exempt' qualifying facilities does not
mean to deny them a privilege or right to which they would otherwise
be entitled (i.e., to apply for an interconnection order under FPA
Section 210)";  rather "it is from these obligations (of FPA Sections
210 and 212 making qualifying facilities subject to an interconnection
order) that section 210(e)(3)(B) provides that qualifying facilities
may not be exempted" (Pet. App. B-181).

                C. The Decision Of The Court Of Appeals

   The court of appeals vacated the Commission's rules as to full
avoided cost and interconnection (Pet. App. B-1 to B-34).

   1. In striking down the "full avoided cost" rule, the court viewed
the critical issue as whether the rule "is consistent with the
statutory mandate that the rates set by the Commission must, in
addition to not discriminating against cogenerators, also be 'just and
reasonable to the electric consumer of the electric utility' and 'in
the public interest'" (Pet. App. B-9).  The court held that the
Commission had not adequately established that the full avoided cost
rule met these statutory requirements (ibid.).

   First, the court determined that the Commission "without convincing
explanation had simply adopted as a uniform rule the maximum purchase
rate specified in the statute" (Pet. App. B-10).  The Commission had
failed, in the court's view, to meet the "minimum" requirement that it
"make clear and explain how the rates it sets are consistent with the
statutory criteria" (ibid.).  The court believed that the Commission
had not "demonstrate(d) the factual basis" for its determination that
something less than full avoided cost would result in
"'insignificant'" rate reductions for utility customers (id. at B-11).
 Second, the court upheld the Commission's rejection of a
split-the-savings /15/ rule on the ground that such a rule "would
require utilities-type regulation in contravention of the purpose of
PURPA," but the court noted that there are other alternatives that the
Commission could have adopted instead of full avoided cost that also
might avoid the traditional utilities-style ratemaking that Congress
sought to prevent (ibid.).  Finally, the court asserted that the
Commission's determination "that the bare, unquantified possibility
that a rule permitting rates at less than full cost might be
insufficient to encourage the last kilowatt hour of cogeneration" is
"inconsistent with the clear intent of section 210(b), which seeks to
strike a balance among the interests of cogenerators, 'electric
consumers of electric utilit(ies)' and the 'pubic interest'" (id. at
B-12;  emphasis in original).  The court directed that on remand the
Commission "should allocate the benefits more evenly between the
cogenerators and the utilities if the utilities can demonstrate that,
under a percentage of avoided cost approach, an allocation less
heavily favoring the cogenerators is in the public interest of the
utilities' electric consumers, and will not disproportionately
discourage cogeneration" (ibid.).

   2. The court below also invalidated the rule authorizing
interconnections between qualifying facilities and utilities.  In its
view, since Section 210(e)(3)(B) of PURPA prohibits the Commission
from exempting qualifying facilities from Sections 210, 211 and 212 of
the Federal Power Act, the Commission must afford evidentiary hearings
and make findings under these provisions before ordering any
interconnections it deems necessary to accomplish the purchases and
sales required under Section 210(a) of PURPA (Pet. App. B-20 to B-25).
 The court interpreted the Commission's interconnection rule as
effectively exempting qualifying facilities from these Power Act
procedures, a result that the court believed was inconsistent with the
statutory requirements.

   The court characterized the Commission's interpretation of Section
210(e)(3)(B) of PURPA "as protecting cogenerators who are targets of
other parties seeking interconnection, and not extended to situations
where the cogenerator is an applicant for an interconnection itself"
(Pet. App. B-24;  emphasis in original).  While the court agreed that
this was "an interesting and not inherently implausible suggestion,"
it believed that this interpretation was not supported by the language
or legislative history of the statute (id. at B-25).  Finally, the
court expressed the view that any undue burden its interpretation
placed on qualifying facilities could be avoided by adopting
"streamlined procedures," but that, if even those were too burdensome,
"the necessary amendment must come from Congress" (id. at B-23).

   3. The Commission's petition for rehearing was denied by the panel
(Pet. App. B-202 to B-204).  A majority of the whole court did not
participate in considering the suggestion for rehearing en banc and
that suggestion also was denied (Pet. App. B-205 to B-208).  The only
two judges (apart from the panel members) to consider the suggestion
voted to rehear the case en banc "because of the importance of the
issues to major new energy programs of cogeneration and small power
production and because of serious doubts over the panel's resolution
of those issues" (id. at B-206).

   As to the full avoided cost issue, the dissenters expressed the
view that the Commission appears to have acted reasonably in weighing
the statutory interests and adopting "a rate that would encourage
cogeneration without raising rates to consumers" (Pet. App. B-207),
and that the panel erroneously had employed the more stringent
"substantial evidence" test rather than the applicable "arbitrary and
capricious" standard of review (id. at B-207 & n.2).

   As to interconnection, the dissenters noted that "(t)he panel has
interpreted an incredibly complex and ambiguous interlace of statutory
sections to require a full-scale evidentiary hearing prior to any
interconnections for the sale or purchase of cogenerated power" (Pet.
App. B-207 to B-208).  In the dissenters' view, the Commission's
interpretation, which the panel rejected, "is a plausible one and
appears to be more closely in line with Congress' expressed desire to
encourage cogeneration" (id. at B-208).

                          SUMMARY OF ARGUMENT

   Pursuant to Section 210(a) of PURPA, the Commission promulgated a
series of rules designed to effectuate the congressional directive "to
encourage cogeneration and small power production." The court of
appeals vacated two of these rules:  (1) the rule establishing the
rate for purchases of cogeneration-produced power at the utility's
full avoided cost;  and (2) the rule requiring utilities to
interconnect with cogenerators in order to facilitate the purchases of
cogeneration-produced power that were mandated by Congress in PURPA
Section 210.  The court's decision as to both rules is based on a
serious misunderstanding of the statutory and regulatory scheme.
Unless overturned, the decision below will substantially thwart the
congressional purpose of reducing the nation's reliance on imported
oil by encouraging the development of nontraditional energy sources.

                                   I

   A. Contrary to the apparent assumption of the court of appeals,
Congress clearly contemplated that a full avoided cost rate would be
within a "zone of reasonableness," albeit at the upper end of that
zone.  Although Section 210(b) of PURPA, 16 U.S.C. (Supp. V)
824a-3(b), states that rates for purchases by a utility of
cogeneration-produced electricity are to be just and reasonable to the
utility's customers and in the public interest, the statute also
expressly authorizes the Commission to set rates at a level not to
exceed full avoided (or incremental) cost.  Thus, a full avoided cost
rate is consistent with the literal terms of the statute.  Moreover,
in holding that the Commission is required under the just and
reasonable standard to pass along the benefits of lower costs to the
utility's customers, the court below has disregarded the basic
statutory mandate, which is to "encourage" cogeneration, not to avoid
"disproportionately discourag(ing) cogeneration" (Pet. App. B-12).

   B. In addition, the court misapprehended the thrust of the
Commission's full avoided cost rule.  The rule does not require a full
avoided cost rate for the purchase of cogeneration-produced power;
the rule simply sets the context for bargaining between the utility
and the cogenerator.  Parties are free to negotiate a contract for
purchases at a lower rate.  Moreover, the state regulatory commission
can seek a waiver of the rule if it shows that a full avoided cost
rate is not necessary to encourage cogeneration.

   Furthermore, the decision below is grounded on the mistaken premise
that the Commission had failed to determine that utilities possess
monopsony power.  But both Congress and the Commission have stated
that a primary reason for enactment of Section 210 of PURPA was the
monopsony power of electric utilities, manifested by their refusal to
purchase cogeneration-produced electricity at all, or their
unwillingness to pay an appropriate rate for such power.

   The court of appeals expressed the belief that rates to consumers
would be increased under a full avoided cost standard.  This belief is
based on an erroneous understanding of the manner in which costs would
be allocated to customers under a full avoided cost rule.  By
definition, full avoided (or incremental) cost is no higher than the
cost to the utility of generating electricity itself or purchasing
electricity from another source.

   C. The court of appeals applied an erroneous standard of review.
In vacating the full avoided cost rule, the court appears to have
applied the "substantial evidence" test, a standard that not only is
incompatible with review of informal agency action generally, but is
especially unsuited to reviewing a rule such as the full avoided cost
rule, which was adopted as a predictive judgment based on agency
expertise regarding the rate level necessary to encourage future
cogeneration and small power production.  The court's conclusion that
it would not uphold the Commission's determination to promulgate the
full avoided cost rule unless the rule is supported by specific
factual findings represents the same type of judicial interference
with agency decisionmaking that this Court condemned in Vermont Yankee
Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435
U.S. 519, 547-548 (1978).

                                  II

   In empowering the Commission under Sections 210, 211 and 212 of the
Federal Power Act to require greater coordination of the nation's
electric transmission facilities, Congress dealt with an entirely
different problem than the concern addressed in Section 210 of PURPA,
which was enacted to remove the impediments to the development of
cogeneration and small power production.

   The language and history of the Power Act provisions demonstrate
that Congress sought to assure that the Commission could require any
entity that sells electricity to coordinate its transmission
operations with other such entities.  Congress hoped that by
exercising this power, the Commission could avoid construction by
utilities of expensive excess transmission and generating capacity,
while at the same time enhancing the reliability of all systems.

   On the other hand, in Section 210 of PURPA, Congress sought to
remove the barriers that had impeded development of energy-efficient
alternative sources of electric power.  Thus, Congress required
utilities to provide a market for power generated by cogenerators and
small power producers and to sell back-up power to them;  and Congress
provided that these alternative sources of electricity may be exempted
from state and federal regulation as public utilities.

   At the same time, however, Congress sought to insure that the
Commission's broad new Power Act authority to order interconnection
would apply to all nonjurisdictional entities, including cogenerators
and small power production facilities.  Accordingly, in Section
210(e)(3)(B) of PURPA, 16 U.S.C. (Supp. V) 824a-3(e)(3)(B), Congress
expressly precluded the Commission from exempting qualifying
facilities from that Power Act authority.

   Instead of viewing this limitation in light of the distinct
congressional purposes underlying the amendments to the Power Act and
the provisions of Section 210 of PURPA, the court below erroneously
concluded that, under Section 210(e)(3)(B) of PURPA, cogenerators and
small power producers must use the Power Act procedures -- which
require evidentiary hearings and specific public interest findings --
each time they wish to interconnect with a reluctant public utility in
order to effectuate a purchase and sale mandated under Section 210(a)
of PURPA.  This interpretation is not only contrary to a common sense
reading of the statutory language, but it also would effectively
reimpose the barriers to cogeneration and small power production that
Congress sought to remove in enacting Section 210 of PURPA.

                               ARGUMENT

 I. IN VACATING THE COMMISSION'S FULL AVOIDED COSTS RULE THE COURT OF
APPEALS MISCONSTRUED THE UNDERLYING STATUTE, MISPERCEIVED THE NATURE
AND EFFECT OF THE RULE, AND APPLIED AN ERRONEOUS STANDARD OF JUDICIAL
REVIEW

   Throughout its opinion, the court of appeals evinced a strong
hostility to the full avoided cost rule adopted by the Commission.
/16/ This antagonism appears to have influenced the court's ultimate
conclusion that the rule did not satisfy the statutory standards.
Even more directly, the court's apparent distaste for the rule seems
to have triggered its decision to substitute its view of public policy
for that of the Commission.  The fact is, however, that the court
below seriously misunderstood the nature and effect of the rule.
Accordingly, as we proceed to identify the court's legal errors we
also will document its factual misperceptions in order to demonstrate
that the court's misgivings as to a full avoided cost rate are
unfounded.

 A. The Full Avoided Cost Rule Satisfies The Relevant Statutory
Criteria

   Following a lengthy rulemaking proceeding conducted pursuant to
Section 210 of PURPA, the Commission determined that purchases of
electricity by a utility from a new qualifying facility must be at a
rate equal to the utility's full "avoided costs" (18 C.F.R.
292.304(b)(2)), and it defined "avoided costs" as the equivalent of
the statutory term "incremental cost of alternative electric energy."
18 C.F.R. 292.101(b)(6).  Although the basis articulated by the court
for vacating this rule was that the "(Commission) did not justify and
explain its decision to adopt the rule" (Pet. App. B-34), a careful
reading of the court's opinion indicates that the court also viewed
the full avoided cost rule as inconsistent with the requirements of
the statute.  /17/

   Under the court's analysis (see Pet. App. B-10 to B-12), the rule
fails to take account of the "just and reasonable" and "in the public
interest" criteria of Section 210(b) of PURPA.  This analysis appears
to rest on the assumption that under the statutory "just and
reasonable" standard, the upper end of the "zone of reasonableness" --
the area within which the Commission has the discretion to select a
rate -- falls somewhere below the level of full avoided cost.  This
assumption is based on a statement in the legislative history
indicating that the lower of a "just and reasonable" and a full
avoided cost rate was to apply.  /18/ The ultimate logic of this
position appears to be that the rates to the electric consumers of a
utility can never be considered "just and reasonable" unless such
consumers are allowed to share directly in the short term benefits of
the new program by virtue of a reduction in their rates.  It is our
submission that this view misconceives the statutory framework and
fails to give adequate consideration to the findings of the
Commission.

   1. The statute expressly authorizes the Commission to adopt a rule
based on full avoided cost.  Section 210(b) of PURPA states that "(no)
rule (establishing a rate for purchases) shall provide for a rate
which exceeds the incremental cost to the electric utility of
alternative electric energy." Incremental cost means full avoided
cost.  /19/ At the same time, the Commission is required to establish
a rate that is "just and reasonable to the electric consumers of the
electric utility and in the public interest * * * ." 16 U.S.C. (Supp.
V) 824a-3(b)(1).  /20/ Although Congress did not specifically
establish a "zone of reasonableness" for the Commission in mandating a
just and reasonable rate for purchases, it expressly declared, in
Section 210(b) of PURPA, that the rate may not exceed incremental (or
full avoided) cost.  Thus, Congress clearly contemplated that a full
avoided cost rate would be within that zone, albeit at the upper end.
See H.R. Conf. Rep. No. 95-1750, 95th Cong., 2d Sess. 98 (1978).

   It is settled that "courts are without authority to set aside any
rate selected by the Commission which is within a 'zone of
reasonableness.'" Permian Basin Area Rate Cases, 390 U.S. 747, 767
(1968), quoting FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 585
(1942).  Indeed, it is firm doctrine that the "Commission may, within
this zone, employ price functionally in order to achieve relevant
regulatory purposes;  it may, in particular, take fully into account
the probable consequences of a given price level for future programs
of exploration and production." Mobil Oil Corp. v. FPC, 417 U.S. 283,
317 (1974), quoting Permian Basin, supra, 390 U.S. at 796-798.  The
Commission's full avoided cost rule, by not exceeding the upper limit
set by Congress, clearly falls within the zone of reasonableness.
Thus, the court of appeals erred in setting the rule aside on the
belief that Congress required the Commission to set the rate for
purchases at a level below incremental cost.

   2. The court's erroneous view of the statutory standard is
underscored by its misapprehension of the showing that would be
necessary to support adoption of a full avoided cost rule.  In the
court's opinion, the statute requires an immediate "share of the
benefits" to the utilities' customers so long as that would not
"disproportionately discourage cogeneration" (Pet. App. B-12;
emphasis added).  That, however, is not the statutory standard.  As
the Commission recognized, the central aim of Congress in Section 210
of PURPA was to encourage cogeneration through a program that serves
the interest of the public and of the utilities' customers.

   While the Commission recognized that "the full avoided cost
standard will not produce any rate savings to the utility's customers"
(Pet. App. B-65), it did not view this as the dispositive
consideration.  On the contrary, the Commission concluded that "these
ratepayers and the nation as a whole will benefit from the decreased
reliance on scarce fossil fuels, such as oil and gas, and the more
efficient use of energy" (ibid.).  /21/ Under this approach, the
utilities' customers are "kept whole" while "a significant incentive
(is provided) for a higher growth rate of (cogeneration and small
power production) technologies" (ibid.).

   3. The court of appeals' rejection of the Commission's considered
interpretation of the statute represents a marked departure from
traditional standards governing judicial review of an agency's
construction of the statute it administers.  As this Court has made
clear, "in determining whether the Commission's action was 'contrary
to law,' the task for the Court of Appeals was not to interpret the
statute as it thought best but rather the narrower inquiry into
whether the Commission's construction was 'sufficiently reasonable' to
be accepted by a reviewing court." FEC v. Democratic Senatorial
Campaign Committee, 454 U.S. 27, 39 (1981).  Respect for the agency's
view is particularly appropriate "when the administrative practice at
stake involves a contemporaneous construction of a statute by the men
charged with the responsibility of setting its machinery in motion, of
making the parts work efficiently and smoothly while they are yet
untried and new." Udall v. Tallman, 380 U.S. 1, 16 (1965), quoting
Power Reactor Development Co. v. International Union of Electrical,
Radio & Machine Workers, 367 U.S. 396, 408 (1961).  See Zenith Radio
Corp. v. United States, 437 U.S. 443, 450 (1978).  The court below
failed to follow these precepts in this case.  Moreover, as we now
show, the court compounded this error by substituting its judgment for
that of the Commission, contrary to the well established principle
that courts "'should not overrule an administrative decision merely
because they disagree with its wisdom.'" CBS, Inc. v. FCC, 453 U.S.
367, 394 (1981), quoting Radio Corp. of America v. United States, 341
U.S. 412, 420 (1951).

 B. The Court Of Appeals' Detailed (And Erroneous) Evaluation Of The
Full Avoided Cost Rule Reflects Its Improper Intrusion Into The Domain
Reserved To The Administrative Agency

   We have already suggested that the court of appeals' erroneous view
of the statute was bottomed in large part upon its failure to
understand the Commission's full avoided cost rule.  Even more
seriously, the court's misapprehension of, and manifest hostility to,
the rule colored the scope of its review of the Commission's decision.
 After first focusing on the court's errors with regard to the nature
and effect of the full avoided cost rule, we will demonstrate that the
court erred in substituting its own views for those of the Commission
and in applying an erroneous standard of review.

 1. The Full Avoided Cost Rule does not automatically require that the
actual rate paid by a utility to a qualifying facility be fixed at
full avoided cost

   The court below incorrectly assumed that utilities would always
have to pay a full avoided cost rate to qualifying facilities.  Thus,
the court stated, "(b)ut for FERC's regulations, the utility may have
paid a cogenerator a market purchase rate of something less than the
full avoided cost, under a standard industry practice" (Pet. App.
B-13;  footnote omitted).  Elsewhere the court remarked that "the
Commission came to the simplistic and uniform conclusion that the full
avoided cost standard would be just and reasonable in every case and
that this was necessary to encourage cogeneration in every case" (id
at B-9).  The court's assumption is entirely unfounded.

   To begin with, although Section 210(f) of PURPA requires the states
to "implement" the Commission's rules, any state regulatory authority
and any nonregulated electric utility may apply to the Commission for
a waiver of its rules.  Waivers may be granted where a full avoided
cost rate is demonstrated to be unnecessary to encourage cogeneration
or small power production.  See 18 C.F.R. 292.403.  /22/

   Even more important, however, under the Commission's rules,
qualifying facilities and utilities may negotiate contract prices that
are lower than a full avoided cost rate.  See 18 C.F.R. 292.301(b)(1).
 Both the utility and the qualifying facility obtain significant
advantages from such a negotiated agreement.  Many qualifying
facilities must secure a long term agreement with a utility in order
to obtain institutional financing for a project.  Because the
Commission's rules do not require a utility to sign a long term
contract with a qualifying facility, the utility is in a position to
negotiate a price below full avoided cost in return for a long term
commitment.  In this way the qualifying facility, the utility and the
utility's customers all benefit.  /23/

   Thus, the fundamental error of the court of appeals was its failure
to recognize that the very purpose and intended effect of the full
avoided cost rule is to avoid the fixing of an unalterable economic
relationship.  Instead, as the Commission pointed out (Pet. App.
B-49), the aim of the rule is to set the context for bargaining
between qualifying facilities and utilities.  Only in the event that a
qualifying facility and a utility fail to reach agreement would the
state regulatory authority be required to apply the full avoided cost
rule.  As this Court recognized in FERC v. Mississippi, supra, slip
op. 16, "the statute and the implementing regulations simply require
the (state) authorities to adjudicate disputes arising under the
statute." See also id. at 1-2 n.1 (O'Connor, J., concurring in part in
the judgment and dissenting in part).  Moreover, as noted above, even
where the seller and the purchaser are unable to agree on a rate, the
state would be free to petition the Commission for a waiver of the
full avoided cost rule.

   In enacting Section 210 of PURPA, Congress recognized that
increased electric energy production by efficient qualifying
facilities will replace more expensive and less efficient generation
by utilities and help to avoid or defer construction of generating
capacity.  See FERC v. Mississippi, supra, slip op. 6, 13.
Ultimately, this will reduce utility rates and directly benefit
consumers and the nation.  /24/ Furthermore, in promulgating the full
avoided cost rate, the Commission reasoned (Pet. App. B-65 to B-66)
that a lower rate undoubtedly would deter some cogeneration and small
power production and thus perpetuate the inefficiencies of traditional
power production, to the ultimate detriment of the consumer.

   In the end, a rate set at full avoided cost simply duplicates the
context that would exist in a competitive and unregulated market.
/25/ Although the court of appeals expressed a strong preference for
regulation of prices by the market without governmental interference
(Pet. App. B-14 to B-16), the court acknowledged that its discussion
regarding marketplace regulation rested on the assumption that
utilities "are subject to some competitive restraints" (id. at B-16).
As we now show, that assumption too was totally unwarranted.

 2. The court of appeals ignored the findings of Congress and the
Commission that utilities possess monopsony power

   The court of appeals was of the view that the statutory "command
that the interests of consumers and the public be taken into account
contemplates consideration of the degree to which market forces may
encourage utilities to purchase, and cogenerators to sell, a
substantial amount of cogenerated power at a price lower than the
statutory limit" (Pet. App. B-14;  emphasis omitted).  Accordingly,
the court's opinion contains a lengthy discussion of the theoretical
price of cogenerated power in a competitive market (id. at B-14 to
B-16).  The court explained (id. at B-16) that this discussion was
relevant because the Commission had failed to determine that utilities
possess monopsony power.  /26/ The court suggested that if the
Commission had made such a finding, "then the Commission may have been
justified in its present regulation of rates charged by the utilities"
(ibid.).  The fact of the matter is, however, that both Congress and
the Commission did make that very finding.

   Indeed, while it did not use that precise term, the court of
appeals itself acknowledged (Pet. App. B-4) that the monopsony power
of electric utilities was a primary reason for enactment of Section
210 of PURPA.  Thus, in explaining the "major obstacles" faced by a
cogenerator or small power producer prior to PURPA, the court observed
that "utilities were often unwilling to purchase the other producers'
electric output at all or were unwilling to pay an appropriate rate"
(Pet. App. B-4).  /27/ Similarly, in FERC v. Mississippi, supra, slip
op. 6, this Court stated that it was Congress' belief that the
development of nontraditional generating facilities (i.e.,
cogeneration and small power production facilities) was impeded by,
inter alia, the reluctance of traditional electric utilities to
purchase power from the nontraditional sources.  /28/

   The court of appeals recognized that Congress designed Section 210
of PURPA "to remove (this) institutional barrier() to the development
of small power production and cogeneration" (Pet. App. B-5).  But the
court lost sight of the fact that it is precisely the utility's
economic ability successfully to refuse to purchase a qualifying
facility's output or to pay "an appropriate rate" (id. at B-4) that
demonstrates its monopsony power.

   In this context, the court's discussion of the role of free market
forces on the price of electricity produced by means of cogeneration
is entirely beside the point.  For example, the court asserted (Pet.
App. B-15 to B-16;  emphasis added):

      Cogenerators are in the same position as coal or oil producers
      -- if they are offered a sufficient price by the public
      utilities and are relieved from burdensome utility-type
      regulation, they will produce the needed power and sell it to
      the public utilities.  One reason that these sources have not
      done so before is that they feared regulation as public
      utilities.  The law which Congress passed was intended to
      correct the market distortions caused by government regulations
      and by the utilities -- not to create new ones.

   In this discussion, the court failed to focus on the second major
reason why cogenerators had not entered the market successfully prior
to PURPA -- i.e., the refusal of utilities to purchase cogenerated
power altogether or the utilities' practice of agreeing to purchase
such power only at a very low price, thus preventing cogenerators from
competing in the marketplace.  /29/

   Even assuming the existence of a competitive market for
cogeneration-produced power, Congress, in Section 210(a) of PURPA,
nonetheless expressly directed the Commission to issue rules "as it
determines necessary to encourage cogeneration and small power
production." This statutory directive rests in large part on the
determination by Congress that "the development of cogeneration and
small power production facilities would conserve energy." FERC v.
Mississippi, supra, slip op. 13.  In light of this congressional
finding, it is readily apparent that Congress desired to promote these
alternative sources of energy for the reason that their development
would benefit the nation as a whole -- including, as the Commission
found (Pet. App. B-65), the customers of electric utilities.  On the
other hand, leaving the price of congenerated power to the
vicissitudes of the current market for electric power, as the court
seems to suggest, would contradict Congress' express intent.

 3. The Full Avoided Cost Rule will not result in higher rates to
utility customers

   The court of appeals expressed a concern that a full avoided cost
rate for cogeneration-produced electricity could result in higher
electric rates for the customers of that utility (Pet. App. B-13).
/30/ This is also incorrect.  A qualifying facility selling power to a
utility does not "reduce the number of customer-purchased kilowatt
hours over which the utility can spread a share of the fixed costs" of
extra capacity (ibid.), as the court below thought.  Such a sale
simply replaces capacity and/or energy;  it does not affect customer
load on the utility's system.

   An industrial concern that in the past has purchased power from a
utility will continue such purchases even though, as a qualifying
facility, it will also be selling power to the utility.  Under the
simultaneous purchase and sale rule affirmed by the court below (Pet.
App. B-16 to B-20), a qualifying facility may sell all of its power at
a full avoided cost rate (or at some other rate determined by
negotiation) and purchase the power it needs at the utility's retail
rate.  Under this scheme, a qualifying facility will sell all of the
power it produces if the avoided cost rate is higher than the retail
rate.  Because the qualifying facility in this situation will purchase
the same amount of power that it did before, the utility will spread
its costs to customers over the same number of kilowatt hours and
therefore the customer rates will remain the same.

   On the other hand, if the utility's retail rate is higher than the
full avoided cost rate, the qualifying facility will consume rather
than sell the power it produces to avoid paying the higher retail
rate.  This will reduce the total number of kilowatt hours on a
utility's system.  But this result cannot be attributed to a full
avoided cost for utility purchases.  In fact, this result can only
occur if the avoided cost rate is too low.

   As the dissenters from the denial of rehearing en banc pointed out,
the Commission selected a rate "that it believed would provide the
greatest incentives for cogeneration, as well as the greatest
incentives to decrease our national reliance on fossil fuels, without
leading to any increase in rates paid by electric consumers" (Pet.
App. B-206;  emphasis added).  This conclusion is inescapable, since
the Commission's rule sets the rate at full avoided (or incremental)
cost which, by definition is "the cost to the electric utility of the
electric energy which, but for the purchase from such cogenerator or
small power producer, such utility would generate or purchase from
another source." 16 U.S.C. (Supp. V) 824a-3(d).  /31/

 C. In Vacating The Full Avoided Cost Rule The Court Of Appeals
Applied An Erroneous Standard Of Review

   1.  This Court has repeatedly stated that rules promulgated after
informal rulemaking are subject, not to the "substantial evidence"
test, but to an "arbitrary and capricious" standard.  See, e.g., FCC
v. WNCN Listeners Guild, 450 U.S. 582, 594 (1981);  FCC v. National
Citizens Committee for Broadcasting, 436 U.S. 775, 803 (1978).  Yet,
in vacating the full avoided cost rule, the court below appears
instead to have relied on the rule of Public Systems v. FERC, 606 F.2d
973 (D.C. Cir. 1979), a case in which the court had applied a
"substantial evidence" test on review of an informal rulemaking by the
Commission under the Federal Power Act.  It is true that the provision
of the Power Act governing judicial review (16 U.S.C. 825l(b))
"prescribes a 'substantial evidence' standard for findings of fact in
orders." Public Systems v. FERC, supra, 606 F.2d at 979.  But, as the
dissenters from the denial of rehearing en banc recognized (Pet. App.
B-207 n.2), because Section 210 of PURPA -- pursuant to which the full
avoided cost rule was promulgated -- did not amend the Federal Power
Act, there was no basis for employing the "substantial evidence"
standard of review rather than the more lenient "arbitrary and
capricious" standard required by the Administrative Procedure Act, 5
U.S.C. 706(2)(A).  /32/

   2. Based on its application of the erroneous substantial evidence
test, the court of appeals deemed it "especially necessary" that the
Commission on remand "demonstrate the factual basis for its conclusion
of "insignificant' savings for (consumers)'" (Pet. App. B-11).  But
the court did not indicate how the Commission could better support in
a rulemaking record any particular percentage of avoided cost other
than 100%, or full avoided cost.  /33/ Presumably, if the Commission
instead had selected 75% or 85% of avoided cost, it still would be
subject to the identical claim that its decision was not factually
supported.

   The truth is that none of those who filed comments in the
rulemaking proceeding made any effort to demonstrate that any
particular percentage figure would be sufficient to induce the
development of cogeneration and small power production.  It apparently
was understood by all that the full avoided cost rule was adopted as a
predictive judgment based on agency expertise regarding the rate level
necessary to encourage future cogeneration and small power production,
and that factual justification was neither possible nor required.
See, e.g., FCC v. WNCN Listeners Guild, supra, 450 U.S. at 594-595;
FPC v. Transcontinental Gas Pipe Line Co., 365 U.S. 1, 28-29 (1961).
There is no reason to believe -- and, indeed, it is highly unlikely --
that a subsequent rulemaking would produce a better record in this
regard.  /34/

   At bottom, the decision below represents the same type of judicial
interference with agency rulemaking procedures that this Court
condemned in Vermont Yankee Nuclear Power Corp. v. Natural Resources
Defense Council, Inc., supra, 435 U.S. at 547-548:  "If the agency is
compelled to support the rule which it ultimately adopts with the type
of record produced only after a full adjudicatory hearing, it simply
will have no choice but to conduct a full adjudicatory hearing prior
to promulgating every rule."

   3. Indeed, by directing the Commission on remand to consider a host
of "concerns" raised by the full avoided cost rule (Pet. App. B-12 to
B-16), the court below has in essence, substituted its judgment for
that of the Commission.  For example, the court stated that the
Commission "should allocate the benefits more evenly between the
cogenerators and the utilities if the utilities can demonstrate that,
under a percentage of avoided cost approach, an allocation less
heavily favoring the cogenerators is in the public interest and the
interest of the utilities' electric consumers, and will not
disproportionately discourage cogeneration" (id. at B-12;  emphasis
added).  But Congress left it to the Commission, not the courts, to
balance these interests.  See, e.g., Arkansas Louisiana Gas Co. v.
Hall, 453 U.S. 571, 577 (1981);  Citizens to Preserve Overton Park,
Inc. v. Volpe, 401 U.S. 402, 416 (1971).  /35/ As the Commission
demonstrated (see pages 7-8, supra), the full avoided cost rule is the
result of a reasonable balancing of these interests.  While the court
might have preferred a different rule as a matter of policy, the court
exceeded its authority by overruling the Commission's judgment on that
ground.  /36/

 D. The Court Of Appeals' Erroneous Decision To Vacate The Full
Avoided Cost Rule Jeopardizes A Significant Federal Program For The
Development Of New And Efficient Energy Sources That Is Still In Its
Infancy

   Unless the decision below is overturned, the substantial benefits
that Congress sought to achieve in enacting Section 210 of PURPA --
i.e., increasing the efficient use of energy and reducing the nation's
reliance on traditional fossil fuels -- may never be realized.  A
majority of the states have complied with the requirements of Section
210 of PURPA by implementing the Commission's full avoided cost rule.
/37/ If the lower court's decision is permitted to stand, however, the
validity of the states' implementing regulations may be jeopardized.

   Furthermore, the several years' delay that would result from the
initiation of a new rulemaking in a remanded proceeding may cause
potential industrial cogenerators to forego the option of building new
cogeneration facilities due to the uncertainty of the price that those
firms can obtain from sales of cogenerated power.  In addition,
sources of funds for project financing of qualifying facilities are
likely to diminish since the revenue stream from the output of a
qualifying facility would no longer be assured.  It is also safe to
say, if past experience is a reliable guide, that utilities will be
unwilling to negotiate contracts with qualifying facilities, or will
only offer an unreasonably low price for cogenerated power once the
full avoided cost rule -- the context for bargaining -- is removed.

   Finally, we note that Section 210 of PURPA contemplates periodic
revisions to the rules concerning cogeneration and small power
production.  Thus, Section 210(a) states that within one year of
PURPA's enactment, "the Commission shall prescribe, and from time to
time thereafter revise, such rules as it determines necessary to
encourage cogeneration and small power production * * * ." 16 U.S.C.
(Supp. V) 824a-3(a) (emphasis added).  After the Section 210 program
and the now emergent alternative energy industry are more firmly
established, the Commission will have an opportunity to reexamine its
full avoided cost rule.  With the benefit of experience gained from
actual implementation of the full avoided cost rule, the Commission
may later find that such a rule is no longer necessary to encourage
cogeneration and small power production.  The effect of the decision
below, however, is to thwart the program at its very inception.

 II. THE COMMISSION HAS COMPLETE AUTHORITY UNDER SECTION 210(a) OF
PURPA TO REQUIRE UTILITIES TO INTERCONNECT WITH QUALIFYING FACILITIES
AS A NECESSARY INCIDENT OF ITS SPECIFIC STATUTORY DUTY TO ENCOURAGE
COGENERATION BY THE ADOPTION OF RULES FOR THE PURCHASE AND SALE OF
ELECTRIC POWER BETWEEN UTILITIES AND QUALIFYING FACILITIES

   The central purpose of Section 210 of PURPA is to encourage
production of electricity by qualifying cogeneration and small power
production facilities.  To that end, Congress, in Section 210(a) of
PURPA, directed the Commission to issue rules requiring electric
utilities to purchase power from these nontraditional facilities and
to provide them back-up power at nondiscriminatory rates.  The
Commission interpreted Section 210(a) as granting it power to issue a
generic rule requiring interconnection in order to implement the
statutory mandate of encouraging cogeneration and small power
production.  The court of appeals' decision vacating the Commission's
interconnection rule, like its decision vacating the full avoided cost
rule, is based on a serious misperception of the statutory scheme.

   Despite the plain fact that interconnection is an integral, indeed
essential, condition to the achievement of cogeneration under Section
210(a) of PURPA, the court of appeals nevertheless held that whenever
a qualifying facility seeks to interconnect with an unwilling utility
in order to engage in cogeneration, it will be required to undergo an
evidentiary adjudication to determine if the interconnection is
justified under Sections 210 and 212 of the Federal Power Act, 16
U.S.C. (Supp. V) 824i and 824k.  The court's conclusion essentially
rests on its interpretation of Section 210(e)(3)(B) of PURPA, 16
U.S.C. (Supp. V) 824a-3(e)(3)(B), which provides, inter alia, that the
Commission may not exempt qualifying facilities from the Commission's
newly granted authority under Section 210 of the Power Act to compel
any cogenerator or small power producer (whether a qualifying facility
or not), or any other entity that sells electricity, to interconnect
with any electric utility or qualifying facility.  As the court viewed
it (Pet. App. B-22;  emphasis in original):

         By requiring "any" utility to make interconnections with
      "any" cogenerator FERC designates, the Commission would in
      effect exempt qualifying cogenerators from the other procedural
      and substantive requirements * * * in FPA sections 210 and 212,
      and deprive utilities of the safeguards afforded by those
      provisions.

   It is our submission that this analysis is seriously flawed because
it is based on a misreading of Section 210(e)(3)(B) of PURPA and it
puts the status at cross purposes.

   There is no question that in Section 210 of PURPA, Congress enacted
legislation to promote cogeneration and small power production.  On
the other hand, Sections 210, 211 and 212 of the Power Act were
enacted to achieve greater coordination and reliability among the
nation's electric transmission systems.  These different statutory
goals address two entirely discrete aspects of efficient use of
facilities and resources, and Congress dealt with them separately.
The court of appeals' failure to appreciate the distinct purposes of
these separate statutes led it to err by superimposing the
requirements of the new Power Act provisions onto Section 210 of
PURPA.

 A. The Power Act Amendments Were Intended To Enhance The Efficiency
And Reliability Of Transmission Systems Nationwide;  They Have Nothing
To Do With PURPA's

               Separate Goal Of Encouraging Cogeneration

   1. Prior to the enactment in 1978 of Section 210 of the Federal
Power Act, the Commission's authority to order interconnections was
limited, under Section 202(b) of that Act, 16 U.S.C. 824a(b), to
utilities over which it had regulatory jurisdiction and, except for
emergencies, to situations in which a "person engaged in the * * *
sale of electric energy" had applied for an order directing a
jurisdictional utility to interconnect.  The legislative background of
FPA Section 210 shows that some intrastate utilities had in the past
refused to make interconnections with other systems because, had they
done so, they would have become part of an interstate system and
thereby subject to the full range of federal regulation under the
Federal Power Act.  The Commission, under its then-existing authority,
was powerless to remedy this problem.

   Congress enacted Sections 210, 211 and 212 of the Power Act to
grant remedial authority to the Commission to cope with these
transmission problems and thereby enhance the reliability of all
electric power systems.  The new Power Act provisions are thus aimed
at improving the coordination of electric transmission operations in
order to optimize economic use of the nation's generating capacity
while at the same time enhancing reliability.  And it is from the
requirements that Congress found necessary to achieve these aims --
which are entirely distinct from the purchases and sales necessary to
promote cogeneration -- that the Commission may not exempt qualifying
facilities under Section 210(e)(3)(B) of PURPA.

   2. This separate statutory goal is plain from the face of the Power
Act provisions themselves.  Section 210(a)(1) of the Power Act, 16
U.S.C. (Supp. V) 824i(a)(1), empowers the Commission, "(u)pon
application of any electric utility, Federal power marketing agency, *
* * qualifying cogenerator or qualifying small power producer," to
issue an order requiring "the physical connection of any cogeneration
facility, any small power production facility, or the transmission
facilities of any electric utility, with the facilities of such
applicant." /38/ Thus, in Section 210 of the Power Act, Congress was
broadly concerned with ensuring the availability of interconnections
necessary to coordinate transmission of electricity throughout the
nation, not with controlling exchanges of power at the distribution
level for cogeneration purposes.  /39/

   Sections 210(b) and (c) of the Power Act further confirm that the
Power Act amendments are wholly unrelated to cogeneration.  Those
provisions require the Commission, upon receipt of an application for
an interconnection order, to issue a notice, to "afford an opportunity
for an evidentiary hearing," and, before ordering an interconnection,
to make a determination that the interconnection is in the public
interest and would conserve energy or capital, optimize efficiency, or
improve the reliability of the affected utility systems.  See 16
U.S.C. (Supp. V) 824i(b) and (c).  /40/ Congress could not possibly
have meant for the Commission to make these findings every time a
qualifying facility seeks to interconnect with a utility for the
purpose of effectuating the purchases and sales mandated by Section
210(a) of PURPA, because in enacting the latter status Congress itself
struck the balance in favor of compelling utilities to purchase
electricity from any qualifying facility.  See J.A. 17, 47-48.

   In short, these new Power Act provisions granted the Commission
needed authority to subject nonjurisdictional entities, such as
intrastate utilities, municipal utilities and rural cooperatives, to
orders directing interconnection and wheeling.  At the same time, in
Section 201(b)(2) of the Power Act, 16 U.S.C. (Supp. V) 824(b)(2),
Congress provided that compliance with such orders would not subject
these entities to Commission regulation under any other provision of
the Power Act.  /41/

   3. The legislative history of the Power Act provisions supports our
submission that Congress was concerned with enhancing efficiency of
transmission services, not with imposing limitations on the
cogeneration authority fully provided for in Section 210 of PURPA.  As
Senator Metzenbaum stated, in explaining the purpose of the Power Act
Amendments (124 Cong. Rec. 34763-34764 (1978)) /42/ :

         Individual electric utility systems need to have adequate
      reserves in the event some of its (sic) generating facilities or
      transmission lines become inoperable.  Unfortunately, to provide
      for such situations, many utilities have overbuilt.  They have
      made large capital investments in generating facilities which
      stand idle most of the time.  And which add considerably to
      consumer costs.

         A better solution would have been * * * (to) create a
      national grid * * * to provide a reliable national network of
      transmission facilities so that when one area is power short,
      energy could be moved across transmission lines to prevent
      blackouts like we have seen in New York and New England in
      recent years * * * .  The bill pending before us would certainly
      not create a national grid.  However, it would grant to FERC
      some authority so that we could prevent wasteful
      overconstruction of new generating and transmission facilities
      and make better use of existing facilities.

   Although many utility systems are interconnected voluntarily,
Congress found it necessary to adopt these new Power Act provisions
because some utilities, operating entirely intrastate and therefore
beyond the Commission's existing Power Act jurisdiction, had refused
to interconnect across the state line in order to avoid becoming
subject to the full panoply of Federal Power Act regulation.  Senator
Bartlett specifically addressed this problem in his discussion of the
legislation (124 Cong. Rec. 34770 (1978)) /43/ :

         The history of these provisions (Sections 210, 211 and 212 of
      the Power Act), in both the House Committee on Interstate and
      Foreign Commerce and the Senate Committee on Energy and Natural
      Resources, shows that one of the problems these provisions are
      designed to meet is the apparent lack of an appropriate forum in
      which to resolve the so-called Texas problem.  The Electric
      Reliability Council of Texas, know (sic) as ERCOT, contains the
      major portion of the electric utilities in Texas and has
      apparently operated in electrical isolation from the rest of the
      United States for a number of years * * * .

         A number of public utilities operating both within and
      outside the State of Texas have sought to achieve electrical
      interconnection between ERCOT and the Southwest power pool, but
      they have been strongly opposed by several of the major
      utilities in ERCOT.  * * * Whatever the merits of this
      controversy may be, practically everyone who has seriously
      addressed the question agrees that there should be full
      authority in the Federal Energy Regulatory Commission, either on
      its own motion or on the motion of any of the utilities
      involved, to hold hearings and decide whether it is in the
      national interest that the isolation of ERCOT be terminated by
      any adequate system of interconnection and the necessary
      coordination to accompany it, or whether the status quo should
      be maintained.

 B. Section 210(a) Of PURPA Grants The Commission Complete Authority
To Order The Interconnections Necessary To Effectuate The Purchases
And Sales Essential To Effectuate A Meaningful Cogeneration Program

   1. In Section 210(a) of PURPA, 16 U.S.C. (Supp. V) 824a-3(a),
Congress imposed on the Commission the duty to "prescribe * * * such
rules as it determines necessary to encourage cogeneration and small
power production," including rules requiring utilities to purchase
power from and sell power to qualifying facilities.  Because physical
interconnections are absolutely essential to the consummation of such
transactions, the authority to require by rule purchases and sales
must necessarily include the power to mandate the necessary
interconnections.  Thus, a straightforward reading of the express
language of Section 210(a) of PURPA fully supports the Commission's
view that the provision grants "sufficient authority to require
interconnection" (Pet. App. B-60).

   This interpretation is confirmed by an examination of Section 210
of PURPA in its entirety, which reveals that Congress intended that
statute to constitute a complete and self-contained authority to
insure the incorporation of cogeneration and small power production
into the electric industry.  Thus, Section 210(a) requires utilities
to provide a market for electricity generated by such facilities that
qualify under the Commission's rules for benefits under PURPA and to
provide back-up power for such facilities.  Sections 210(b), (c) and
(d) assure that the rates at which utilities purchase electricity from
and sell back-up power to qualifying facilities are neither
discriminatory toward qualifying facilities nor unreasonable to the
utilities' customers, and that cogeneration and small power production
will not be subsidized by electric utility customers but rather will
gain a share of the market only when they are economically competitive
with alternative sources of power.  Section 210(e) removes the
regulatory impediments to cogeneration and small power production by
allowing the Commission to exempt qualifying facilities from state and
federal regulation as public utilities.  Section 210(f) provides for
implementation of the Commission's rules at the state level, and
Sections 210(g) and (h) concern enforcement of federal and state rules
and judicial review of federal and state action under Section 210.

   To conclude, as did the court of appeals, that Congress intended to
omit from this comprehensive mandate the very authority that is
absolutely essential to make the program work -- i.e., the authority
of the Commission to direct utilities to hook-up with qualifying
facilities -- "would be to impute to Congress a purpose to paralyze
with one hand what it sought to promote with the other." Clark v.
Uebersee Finanz-Korporation, A.G., 332 U.S. 480, 489 (1947).

   2. The legislative history of Section 210 of PURPA supports the
Commission's interpretation.  Neither the House nor the Senate version
of the legislation that went to conference contained any special
procedural prerequisites for interconnections between qualifying
facilities and utilities.  The Senate bill contained a general mandate
to the Secretary of Energy (not the Commission) to recommend
"guidelines" to state regulatory commissions that would have required
electric utilities to purchase electricity from and sell electricity
to qualifying cogenerators and small power producers.  S.2114, Section
12, 95th Cong., 1st Sess. (1977).  The House bill, on the other hand,
contained a provision that would have directed the Commission to
prescribe "rules respecting the interconnection of a qualifying
cogeneration facility to the distribution system of any electric
utility or to a centrally dispatched power pool * * * ." H.R.8444,
Section 546(a)(2), 95th Cong., 1st Sess. (1977).  In addition, Section
546(a) of the House bill would have required the Commission to issue
rules for allocating costs of a qualifying facility;  rules relating
to minimum reliability standards for a qualifying facility;  rules
regarding the responsibility of an owner or operator of a qualifying
facility during a period of electric shortage;  and rules specifying
the reliability of emergency electric service available to a
qualifying facility.  /44/

   In enacting PURPA, Congress essentially adopted the House version,
but it deleted the enumeration of rules relating to interconnection,
allocation of costs, reliability and other similar factors.  It
therefore is reasonable to conclude that Congress viewed the
obligation to interconnect as subsumed within the obligation to
purchase and sell, which was retained in the legislation as part of
Section 210(a) of PURPA.  /45/

   3. Despite this strong evidence of congressional intent, the court
of appeals rejected the Commission's view because in Section
210(e)(3)(B) of PURPA Congress stated that qualifying facilities are
not exempt from "the provisions of section 210, 211 or 212 of the
Federal Power Act * * * ." Viewing this language in isolation, the
court below reached the erroneous conclusion that unless this
limitation was meant to apply in the context of cogeneration,
utilities would be "depriv(ed) of the safeguards afforded by" the new
Power Act provisions (Pet. App. B-22).  As we have demonstrated,
however, the limitation in Section 210(e)(3)(B) was necessary in order
to make certain that the general exemption of qualifying facilities
from the Power Act was not to be read as inconsistent with those new
amendments to the Power Act that gave the Commission authority over
any nonjurisdictional entity that sells electricity.  Hence, to insure
that the Commission did not reopen the regulatory gap that Congress
had just closed, Congress, in Section 210(e)(3)(B), prohibited the
Commission from exempting some of those entities -- qualifying
facilities -- from the new authority granted to the Commission to
order interconnections.  /46/

   It seems evident, therefore, that Section 210(e)(3)(B) does not
address, much less restrict, the authority granted to the Commission
under Section 210(a) of PURPA to require that electric utilities
purchase electricity from and sell electricity to qualifying
facilities.  In seizing upon this provision as dispositive, the court
below failed to "look to the provisions of the whole law, and to its
object and policy" (Pennhurst State School and Hospital v. Halderman,
451 U.S. 1, 18 (1981));  as a result it departed completely from the
intent of Congress.  If the historically reluctant utilities may
resist the required purchases and sales by challenging each
facilitating interconnection in administrative and judicial
proceedings, then Congress' effort to promote development of
alternative sources of electricity will be stillborn.  This Court
should reject such a manifest distortion of the congressional purpose.
 /47/

                              CONCLUSION

   The judgment of the court of appeals should be reversed.

   Respectfully submitted.

   REX E. LEE

      Solicitor General

   LOUIS F. CLAIBORNE

      Deputy Solicitor General

   ELLIOTT SCHULDER

      Assistant to the Solicitor General

   CHARLES A. MOORE

      General Counsel

   JEROME M. FEIT

      Solicitor

   A. KAREN HILL

   ROBERT F. SHAPIRO

      Attorneys Federal Energy Regulatory Commission

   DECEMBER 1982

   /1/ "Pet. App." refers to the appendix to the petitions for a writ
of certiorari in No. 82-34.

   /2/ Senator Jackson, Chairman of the Senate Energy Committee and
one of the principal proponents of the legislation in Congress, stated
that PURPA was aimed "at promoting conservation of electric energy by
consumers, efficient use of facilities and resources by the utility
industry, conservation of capital by more effective use of existing
plants and equity in ratemaking." 124 Cong. Rec. 34558 (1978).

   /3/ The statute defines a "cogeneration facility" as a facility
that produces both electric energy and steam or some other form of
useful energy, such as heat.  16 U.S.C. (Supp. V) 796(18)(A).  A
"small power production facility" is a facility that has a production
capacity of not more than 80 megawatts and uses biomass, waste, or
renewable resources (such as wind, water, or solar energy) to produce
electric power.  16 U.S.C. (Supp. V) 796(17)(A).

   Unless otherwise specified, "cogeneration" denotes both
cogeneration and small power production, and "qualifying facility"
designates those cogeneration and small power production facilities
authorized by statute to sell electricity to and purchase electricity
from utilities.

   /4/ In Section 210(d), 16 U.S.C. (Supp. V) 824a-3(d), Congress
defined the term "incremental cost of alternative electric energy" as
"the cost to the electric utility of the electric energy which, but
for the purchase from such cogenerator or small power producer, such
utility would generate or purchase from another source."

   /5/ 124 Cong. Rec. 34764 (1978) (remarks of Sen. Metzenbaum).

   /6/ 16 U.S.C. (Supp. V) 824i, 824j and 824k.  These sections were
added to the Power Act by Sections 202, 203 and 204 of PURPA.

   /7/ For purposes of Sections 210, 211 and 212 of the Power Act, the
term "electric utility" is defined as "any person or State agency
which sells electricity." 16 U.S.C. (Supp. V) 796(22).

   /8/ An "interconnection" is a physical connection that permits
electricity to flow from one entity to another (Pet. App. B-20).
"Wheeling" has been defined as the "transfer by direct transmission or
displacement (of) electric power from one utility to another over the
facilities of an intermediate utility." Otter Tail Power Co. v. United
States, 410 U.S. 366, 368 (1973).

   /9/ 124 Cong. Rec. 34558 (1978) (remarks of Sen. Jackson).

   /10/ Section 210(e)(3) of PURPA also limits the general exemption
authority granted to the Commission in Section 210(e)(1) (see page 4,
supra) by prohibiting the Commission from exempting qualifying
facilities both from state laws implementing the cogeneration rules
prescribed by the Commission pursuant to Section 210 of PURPA and from
the hydroelectric licensing provisions of Part I of the Federal Power
Act.

   /11/ See, e.g., 124 Cong. Rec. 34770 (1978) (remarks of Sen.
Bartlett);  123 Cong. Rec. 32397-32398 (1977) (colloquy between Sen.
Domenici and Sen. Johnston).

   /12/ In June, 1979, the Commission issued a staff discussion paper
addressing issues arising under Section 210 of PURPA.  J.A. 6-35.  In
addition to receiving written comments on the paper, the Commission's
staff held public hearings in San Francisco, Chicago and Washington,
D.C.  In October 1979, the Commission issued a Notice of Proposed
Rulemaking on Section 210 of PURPA.  J.A. 36-89.  Additional comments
were received and public hearings were held in Seattle, New York City,
Denver and Washington, D.C.  A final draft rule was made available on
January 29, 1980, and representatives of electric utilities and public
utility commissioners were invited to comment at public meetings held
in February, 1980.  See Pet. App. B-40 to B-41.

   /13/ In Order No. 70 (Pet. App. B-120 to B-174), the Commission
established criteria for determining when a cogeneration or small
power production facility shall be considered a qualifying facility
within the meaning of PURPA.  The regulations adopted in Order No. 70
were upheld by the court of appeals below and are not at issue here.

   /14/ The requirement that the qualifying facility bear the expense
of making the interconnection is codified at 18 C.F.R. 292.306.

   /15/ As the court explained, under a "split-the-savings" approach,
"the price is set somewhere between the incremental cost of the buying
utility and the incremental cost of the selling utility, so that each
benefits by the transaction" (Pet. App. B-13 n.37).

   /16/ E.g., "(T)he Commission came to the simplistic and uniform
conclusion that the full avoided cost standard would be just and
reasonable in every case and that this was necessary to encourage
cogeneration in every case" (Pet. App. B-9);  the adoption of the rule
"without convincing explanation" avoids "the hard questions * * * "
(id. at B-10);  the rule is not the product of "reasoned consideration
* * * " (id. at B-12).

   /17/ Indeed, the court stated at one point that the Commission's
rejection of a rule that would have established rates at less than
100% of avoided costs "seems entirely inconsistent with the clear
intent of section 210(b)" (Pet. App. B-12).  Respondents appear to
agree with this assessment (see Br. in Opp. 9, 10, 18).

   To be sure, in its opinion denying rehearing, the court stated
(Pet. App. B-203) that it had not declared the Commission's rule to be
inconsistent with the statute.  But the court's hostility to the full
avoided cost rule appears to rest, at least in part, on the notion
that the Commission lacks authority to adopt such a rule, whatever
justifying reasons it might proffer.

   This Court previously has had occasion to pierce the literal
language of a court of appeals' opinion to find the actual basis for
the lower court's decision.  In Vermont Yankee Nuclear Power Corp. v.
Natural Resources Defense Council, Inc., 435 U.S. 519, 541-542 (1978),
this Court found that, despite the fact that the lower court
"refrained from actually ordering the agency to follow any specific
procedures, * * * there is little doubt in our minds that the
ineluctable mandate of the court's decision is that the procedures
afforded during the hearings were inadequate." After concluding that
the procedures employed by the agency satisfied legal requirements,
this Court reversed the lower court's decision.  Id. at 542-548.

   /18/ See Pet. App. B-9 to B-10, quoting H.R. Conf. Rep. No.
95-1750, 95th Cong., 2d Sess. 98 (1978).

   /19/ The court of appeals recognized that the full avoided cost
standard utilized by the Commission is identical to the statutory
concept of "incremental cost * * * of alternative energy." See Pet.
App. B-8 n.28.

   /20/ The terms "in the public interest" and "just and reasonable"
are interchangeable terms in the public utility ratemaking context.
See, e.g., United Gas Pipe Line Co. v. Mobile Gas Service Corp., 350
U.S. 332, 345 (1956);  FPC v. Sierra Pacific Power Co., 350 U.S. 348,
355 (1956).  In both cases this Court concluded that a Commission
finding that a rate is so low as to adversely affect the public
interest is sufficient to satisfy identical provisions of the Natural
Gas Act and the Federal Power Act requiring a Commission finding that
a rate is "unjust" or "unreasonable" before the Commission may fix a
new rate.  By the same token, the terms "public interest" and "just
and reasonable to the electric consumers" in Section 210(b)(1) of
PURPA surely enlarge the Commission's regulatory focus beyond the
narrow question whether a particular rate for purchases of electricity
from qualifying facilities will actually result in lower rates to
consumers.

   /21/ As we have observed (see note 20, supra), the inquiry under
the statute does not focus on the consumers' interests in isolation,
but rather examines their concerns in the context of the broader
"public interest."

   /22/ Moreover, state regulators and nonregulated utilities are
permitted, without seeking a waiver, to set the rate at a level below
full avoided cost for purchases from facilities whose construction
began prior to the effective date of PURPA if they determine that a
lower rate is consistent with the statutory standards and is
sufficient to encourage cogeneration and small power production.  See
18 C.F.R.292.304(B)(3).

   /23/ As the Commission explained (Pet. App. B-49), its rules also
provide that contracts already in existence prior to the issuance of
the rules will not be disturbed, even if they provide for a rate below
full avoided cost.  See 18 C.F.R.292.301(B)(2).

   /24/ See, e.g., L. Johnson & D. Seidman, The Rand Corporation, No.
N-1876-DOE, An Analysis of the Department of Energy's Nonprice
Regulation of Industrial Energy Use 27-39 (May 1, 1982).

   /25/ In a perfectly competitive market, price is set at or near the
level of marginal cost.  See 1 A. Kahn, The Economics of Regulation
65-67 (1970).  Full avoided cost, or incremental cost, approximates
marginal cost.

   /26/ Monopsony power is like monopoly power except that it applies
to purchasers in the market rather than to sellers.  See Permian Basin
Area Rate Cases, 390 U.S. 747, 794 n.64 (1968);  Pan-Islamic Trade
Corp. v. Exxon Corp., 632 F.2d 539, 548 n.13 (5th Cir. 1980), cert.
denied, 454 U.S. 927 (1981).  This market power is generally
demonstrated by an ability to control prices and output, or to exclude
competitors.  See American Tobacco Co. v. United States, 328 U.S. 781,
811 (1946);  In Re Beef Industry Antitrust Litigation, 600 F.2d 1148,
1154 n.3 (5th Cir. 1979), cert. denied, 449 U.S. 905 (1980).

   /27/ The Commission made a similar observation in its order
adopting the full avoided cost rule (Pet. App. B-39).

   /28/ Both this Court, in FERC v. Mississippi, supra, slip op. 6-7
n.12, and the court of appeals in this case (Pet. App. B-4 n.8) cited
the legislative history of PURPA in support of this point.

   /29/ Moreover, the court's statement comparing cogenerators to coal
and oil producers is wide of the mark.  Unlike cogenerators, coal and
oil producers are not constrained to sell their product to a single
customer.

   /30/ The court's apparent concern is that the production of
electricity through cogeneration may reduce customer load on the
utility's system.  Since the utility's costs will be the same under a
full avoided cost rate for purchases from a cogenerator, the utility's
customers, according to the court, will end up paying higher rates
because the utility's costs will be spread over fewer billing units.

   /31/ The court's other assumptions as to the effect of the full
avoided cost rule are also flawed.  The court suggested that the
Commission in promulgating the rule failed to accommodate the public
interest by not considering possible higher pollution effects and
lower tax recovery effects from the encouragement of cogeneration
(Pet. App. B-12 to B-13).

   But the Commission's environmental assessment (45 Fed. Reg. 23661,
23682-23683 (1980)) indicated generally that there would be no
significant environmental impacts associated with the development of
any PURPA-induced technology at full avoided cost.  Moreover, the
Commission specifically concluded that employment of these
technologies would result in significant net reductions in the use of
oil, natural gas and coal.  Id. at 23683.  The single exception
involves the Commission's ongoing consideration of the effects of
diesel-fueled cogeneration in New York City, on rehearing of its order
qualifying such facilities.  Order No. 70-E, 46 Fed. Reg.33025 (1981).

   The court's reference to taxes (Pet. App. B-12) is puzzling.  There
should be no difference in income tax revenue recovery as a result of
the full avoided cost rule, since the utility will continue to supply
service to its customers at the same rates as before;  the only
difference will be that cogenerated power will replace
utility-generated power.  If the court's reference is to tax benefits
made available to qualifying facilities under the Energy Tax Act of
1978, Pub. L. No. 95-618, 92 Stat. 3174 et seq., its argument is wide
of the mark.  The statutory requirement that the Commission issue
rules to encourage technologies that are energy efficient and not
dependent on fossil fuels is consistent with Congress' establishment
of tax benefits for such enterprises.  Congress has determined that
the promotion of alternative energy is of greater public benefit than
additional tax dollars to the Treasury from traditional energy
sources.  See Montgomerie, Federal Income Tax Incentives for the
Development and Use of Alternative Energy Sources, 14 Nat. Resources
Law. 339 (1981).  The full avoided cost rule merely provides the
maximum encouragement contemplated by Congress.  Moreover, any tax
statute that provides greater benefits for cogenerators than for
utilities can be revised at the discretion of the taxing body if that
body finds that it would be appropriate to recover greater tax
revenues from cogenerators.  This would apply to state and local taxes
as well as to federal taxes.

   /32/ Indeed, it may also be argued that the "substantial evidence"
test is not applicable to review of an informal rulemaking proceeding
under the Federal Power Act and that, therefore, Public Systems was
erroneously decided.

   /33/ The difficulties involved in establishing any particular
percentage figure are formidable.  The necessary analysis would
require consideration of the cost of electric energy and capacity from
every sort of cogeneration and small power production technology.
These technologies may include steam turbines, combustion turbines,
internal combustion engines, solar cells, windmills, and hydro
turbines.  The fuels used may range from biomass, waste, and
geothermal energy in the case of small power production facilities to
coal, oil, gas, and nuclear energy for cogenerators.  Furthermore, the
Commission has received notice of qualifying status for facilities of
widely varying capacities, ranging from a single kilowatt to 600
megawatts -- a six hundrend thousand-fold difference.  Even if all
production costs could be estimated, the Commission would still have
to determine whether a particular rate would be sufficient to
encourage developers whose required rates of return may be markedly
different.  Cogenerators may be major corporations (engaged in many
diverse industrial activities), limited partnerships, owners of
commercial properties, non-profit entities such as schools or
hospitals, and private individuals.  See Br. of Diamond Shamrock, et
al., as amici curiae, for a description of various technologies, fuel
sources and developers involved in the cogeneration program.

   /34/ It also should be noted that Congress directed the Commission
to promulgate its rules under Section 210 of PURPA within a one-year
deadline.  As the District of Columbia Circuit itself has recognized,
"unless we are quite certain of our basis for doing so, we must be
slow to overturn the Agency's judgment, whichever way it may incline,
when Congress has required it to act quickly and decisively despite
the lack of exact data." Weyerhaeuser Co. v. Costle, 590 F.2d 1011,
1026 (1978).

   /35/ Moreover, as we have already pointed out (see pages 19-20,
supra), this judicial directive ignores the fact that in Section
210(a) of PURPA, Congress expressly authorized the Commission to issue
rules that will "encourage cogeneration," not rules that "will not
disproportionately discourage cogeneration."

   /36/ The court faulted the Commission for failing to consider a
flexible rule setting the rate within a range of 80-100% of avoided
cost (Pet. App. B-12;  see also id. at B-203).  The court acknowledged
that Congress intended cogenerators to be regulated in a less
burdensome manner than traditional utilities (id. at B-10), but failed
to explain how an 80-100% of avoided cost rule might accomplish this
result.  In fact, this sort of rule would simply shift the regulatory
burden to the states to determine precisely where within the range the
rate should be set in any given case.  Presumably, each cogenerator
would have to develop a utility-type cost of service to determine if a
rate exceeding 80% of full avoided cost would be needed to encourage
it to produce electricity through cogeneration.  This is exactly the
sort of utility regulation that Congress sought to avoid.  The court
itself admitted that "it would probably be an untoward burden and
expense to determine permissible rates on a case-by-case basis, or
perhaps even a cogeneration method-by-cogeneration method basis.  Such
a requirement would, in fact, be inconsistent with the overarching
congressional intent to streamline rather than impede the
implementation of cogeneration" (id. at B-16).  Yet the court's
suggestion of a percentage range rule not only thwarts the intent of
Congress, but attempts to impose a policy judgment entrusted by
Congress to the Commission.  Thus, the court stated at one point (id.
at B-7 n.26) that "(i)f (respondents) prevail before this Court, the
rule will be changed to permit the states to allow the (respondents)
to purchase electricity at prices lower than those now required."

   /37/ Based on information provided to the Commission by the states
pursuant to 18 C.F.R. 292.401(c), 39 state commissions have
implemented the full avoided cost rule.

   /38/ In addition to authorizing the Commission to order
interconnections, Congress in FPA Section 210 also empowered the
Commission to order "sales" and "exchanges" of electricity.  The
congressional mandate to the Commission in Section 210(a) of PURPA to
require utilities to engage in sales of back-up power to cogenerators
would thus be redundant unless Congress, in FPA Section 210, had in
mind sales other than those required under PURPA.

   /39/ Permitting qualifying facilities to apply for such
interconnection orders is entirely consistent with Congress' concern
with optimizing use of the nation's electric transmission systems.
For instance, it is quite conceivable that a qualifying facility might
seek to use another cogenerator's or small power producer's lines,
rather than build its own lines, to transmit power to a more distant
utility.  Or a qualifying facility selling electric power at the
retail level under the regulation of state authorities might wish to
interconnect with a utility or another small power producer to assure
an additional supply of power that it could draw upon to serve its
customers.  In the 1978 amendments to the Power Act, Congress clearly
wished to empower the Commission, in these and similar circumstances,
to order interconnections that would optimize efficient use of
existing facilities.

   /40/ See similarly Sections 211(a) and 212(a) of the Power Act, 16
U.S.C. (Supp. V) 824j(a) and 824k(a).

   /41/ Section 201(b)(2) of the Power Act, 16 U.S.C. (Supp. V)
824(b)(2) (as added by Section 204(b)(2) of PURPA) provides:

         The provisions of sections (210, 211) and (212) * * * shall
      apply to the entities described in such provisions, and such
      entities shall be subject to the jurisdiction of the Commission
      for purposes of carrying out such provisions and for purposes of
      applying the enforcement authorities of this (Act) with respect
      to such provisions.  Compliance with any order of the Commission
      under the provisions of section (210) or (211) * * * shall not
      make an electric utility or other entity subject to the
      jurisdiction of the Commission for any purposes other than the
      purposes specified in the preceding sentence.

   /42/ See also 124 Cong. Rec. 38369 (1978) (remarks of Rep. Dingell
introducing the Conference Report on the floor of the House).

   /43/ See 123 Cong. Rec. 31194 (1977) (remarks of Sen. Johnston);
id. at 32397-32398 (colloquy between Sen. Domenici and Sen. Johnston);
 id. at 32398-32399 (colloquy between Sen. Bartlett and Sen.
Johnston).  See also Public Utility Rate Proposals of President
Carter's Energy Program:  Hearing on S.122, S.1300, S.1363, S.1364,
S.1469 (Part E) Before the Subcomm. on Energy Conservation and
Regulation of the Senate Comm. on Energy and Natural Resources, 95th
Cong., 1st Sess., Pt. 3 (1977).

   /44/ It is worth noting that the House version's specific mention
of interconnection rules was not written in terms authorizing the
Commission to require interconnection, or establishing procedural
requirements as a precondition for interconnection;  the necessity for
interconnections appears to have been assumed.  By proposing to
empower the Commission to include "rules respecting" interconnection,
along with other rules respecting allocation of costs, reliability,
etc., the House was simply anticipating some of the factors involved
in establishing the new program of mandating utilities to transact
with qualifying facilities.

   /45/ That Congress assumed utilities and qualifying facilities
would be required to interconnect to carry out the mandate of Section
210 is also supported by the Conference Report, which indicates that
in setting rates at which utilities sell back-up power to qualifying
facilities, the Commission is to disallow "unreasonable hook-up
charges." H.R. Conf. Rep. No. 95-1750, supra, at 98.  See J.A. 18.

   /46/ Similarly, although the Commission may exempt qualifying
facilities from state regulation, it is prohibited, in Section
210(e)(3)(A), from exempting qualifying facilities from any state law
or regulation implementing Section 210 of PURPA.  Here, too, Congress
simply was assuring that the Commission would not undermine through
regulations what Congress had sought to achieve in the statute.

   /47/ The lower court's suggestion that the Commission could use
"streamlined procedures" (Pet. App. B-23) cannot be squared with the
statute's definition of "evidentiary hearing" (16 U.S.C. (Supp. V)
796(20)) as "a proceeding conducted as provided in sections 554, 556,
and 557 of title 5, (United States Code,)" i.e., the Administrative
Procedure Act.  Moreover, each interconnection order under the Power
Act is subject to judicial review under the substantial evidence test.
 See 16 U.S.C. 825l.  The substantial evidence requirement would, as a
practical matter, limit efforts to "streamline" proceedings.

   Appendix Omitted