Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-98-01439/USCOURTS-caDC-98-01439-0/pdf.json

Parties Involved:
Federal Energy Regulatory Commission
Respondent
Laidlaw Gas Recovery Systems, Inc.
Intervenor
Southern California Edison Company
Petitioner

Document Text:

<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 16, 1999 Decided November 2, 1999

No. 98-1439

Southern California Edison Company,

Petitioner

v.

Federal Energy Regulatory Commission,

Respondent

Laidlaw Gas Recovery Systems, Inc.,

Intervenor

Petition for Review of Orders of the

Federal Energy Regulatory Commission

Russell C. Swartz argued the cause for petitioner. With

him on the briefs was Joseph E. Stubbs.

Timm L. Abendroth, Attorney, Federal Energy Regulatory

Commission, argued the cause for respondent. With him on

the brief were Douglas W. Smith, General Counsel, Jay L.

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 1 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Witkin, Solicitor, and John H. Conway, Deputy Solicitor,

Federal Energy Regulatory Commission.

Before: Williams, Rogers and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Rogers.

Rogers, Circuit Judge: Southern California Edison Company ("Edison") appeals two orders of the Federal Energy

Regulatory Commission ("FERC") interpreting the "small

power production facility" provision of s 3(17) of the Federal

Power Act to permit such a facility to use fossil fuels to

supplement alternative fuels in a manner not expressly authorized under the statute.1 Edison contends that s 3(17)(A) &

(B), on which FERC relied, is unambiguous, and consequently

the two orders cannot stand. FERC, in response, contends

that s 3(17)(B) is ambiguous and that the court must defer to

FERC's reasonable interpretation of the statute inasmuch as

it fosters the congressional purpose of encouraging the development of power production from alternative fuel sources by

addressing circumstances that Congress could not have foreseen.

While there is a certain appeal to FERC's final point,

neither FERC nor the court can ignore the plain terms of the

statute. Section 3(17) is plainly crafted to allow small power

producers to engage in a rather carefully defined set of

exceptional uses for fossil fuels, whereas FERC has adopted

an interpretation under which fossil fuel uses may encompass

essentially whatever FERC may find desirable in light of

policy considerations and various statutory goals. In contrast

to FERC's interpretation, the rather obvious alternative

reading offered by Edison gives effect to all of the text.

FERC's interpretation of s 3(17) in the orders under review

is also contradicted by FERC's own regulation. Consequently, FERC's continued application of its interpretation of

s 3(17)(B) in LUZ Solar Partners, Ltd., 30 FERC (CCH)

p 61,122 (1985), is inconsistent with the unambiguous terms of

__________

1 Section 3(17) of the Federal Power Act ("FPA") was added by

s 201 of Public Utilities Regulatory Policies Act of 1978, 16 U.S.C.

s 796(17) (1994).

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 2 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

its post-LUZ regulation. Accordingly, on either ground,

FERC's orders cannot stand, and we grant the petition.

I.

The Public Utilities Regulatory Policies Act of 1978

("PURPA"), Pub. L. No. 95-617, 92 Stat. 3117 codified at 16

U.S.C. ss 796(17)-(18), 824a-3, 824i, 824k (1994), was one of

five statutes enacted in 1978 as part of the National Energy

Act, in response to the nation's fuel shortage.2 At that time,

approximately one-third of the electricity in the United States

was generated through use of oil and natural gas, S. Rep. No.

95-361 at 32 (1977), and in the five-year period prior to

enactment, oil costs had increased by approximately 400%

and natural gas costs had increased by more than 175%.

S. Rep. No. 95-442 at 9 (1977). Responding to heightened fuel

costs and potential fuel shortages, Congress sought to promote conservation of oil and natural gas by electricity utilities. See FERC v. Mississippi, 456 U.S. 742, 745-46 (1982).

Thus, to encourage the development of facilities that generate

electricity using renewable resources and facilities engaged in

cogeneration of electricity and useful heat or steam that

might otherwise be wasted, id. at 750, and to overcome the

reluctance of traditional utilities to buy from, and sell to,

these alternative producers, Congress granted qualifying

__________

2 In addition to PURPA, Congress enacted the Energy Tax Act

of 1978, Pub. L. No. 95-618, 92 Stat. 3174; the National Energy

Conservation Policy Act, Pub. L. No. 95-619, 92 Stat. 3206; the

Powerplant and Industrial Fuel Use Act of 1978, Pub. L. No.

95-620, 92 Stat. 3289; and the Natural Gas Policy Act of 1978, Pub.

L. No. 95-621, 92 Stat. 3351. The statutory background has been

discussed in related contexts in American Paper Inst. v. American

Elec. Power Serv. Corp., 461 U.S. 402, 404-06 (1983), rev'g, American Elec. Power v. FERC, 675 F.2d 1226, 1229-31 (D.C. Cir. 1982)

(also discussing background); FERC v. Mississippi, 456 U.S. 742,

745-46 (1982); New Charleston Power I, L.P. v. FERC, 56 F.3d

1430, 1431-34 (D.C. Cir. 1995); Independent Energy Producers

Ass'n, Inc. v. California Pub. Util. Comm'n, 36 F.3d 848, 850 (9th

Cir. 1994); Puerto Rico Elec. Power Auth. v. FERC, 848 F.2d 243,

244-45 (D.C. Cir. 1988).

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 3 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

small power production facilities certain benefits. Under

PURPA, such facilities were exempt from certain regulatory

controls, and they were assured a market by providing a right

to interconnect with the local public utility and to receive

rates, as prescribed by FERC, up to the full avoided cost of

the utility. See American Paper Inst. v. American Elec.

Power Serv. Corp., 461 U.S. 402, 404-06 (1983); PURPA

ss 210, 212, 16 U.S.C. ss 824a-3, 824i, 824k.

Of relevance to the instant appeal are two provisions of

PURPA and one provision of FERC's regulations. The first

two define the features of a "small power production facility"

potentially eligible for the statutory entitlements. The regulation, discussed in Part IV, further defines the permissible

uses of fossil fuels by such a facility.3 In s 3(17)(A), Congress defined a "small power production facility," in pertinent

part, to be:

a facility which ... produces electric energy solely by the

use, as a primary energy source, of biomass, waste,

renewable resources, geothermal resources, or any combination thereof[.]

16 U.S.C. s 796(17)(A)(i). Elaborating on the meaning of

"primary energy source," Congress defined that term in

s 3(17)(B) to mean:

the fuel or fuels used for the generation of electric

energy, except that such term does not include, as determined under rules prescribed by the Commission, in

consultation with the Secretary of Energy--

(i) the minimum amounts of fuel required for ignition,

startup, testing, flame stabilization, and control uses,

and

(ii) the minimum amounts of fuel required to alleviate

or prevent--

(I) unanticipated equipment outages, and

__________

3 A fossil fuel is "a fuel (as in coal, oil, or natural gas) that is

formed in the earth from plant or animal remains." Merriam

Webster's Collegiate Dictionary 460 (10th ed. 1993).

(II) emergencies, directly affecting the public

health, safety, or welfare, which would result from

electric power outages[.]

16 U.S.C. s 796(17)(B).

FERC also promulgated regulations under PURPA. Of

significance here is FERC's amendment, effective February

24, 1995, which provided at the time Laidlaw sought a declaratory ruling that:

(b) Fuel Use.

....

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 4 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

(2) Use of oil, natural gas and coal by a facility, under

section 3(17)(B) of the Federal Power Act, is limited to

the minimum amounts of fuel required for ignition, startup, testing, flame stabilization, and control uses, and the

minimum amounts of fuel required to alleviate or prevent

unanticipated equipment outages, and emergencies, directly affecting the public health, safety, or welfare,

which would result from electric power outages. Such

fuel use may not, in the aggregate, exceed 25 percent of

the total energy input of the facility during the 12-month

period beginning with the date the facility first produces

electric energy and any calendar year subsequent to the

year in which the facility first produces electric energy.

18 C.F.R. s 292.204(b)(2) (1999).

II.

Laidlaw Gas Recovery Systems, Inc. ("Laidlaw")4 owns and

operates 13 landfill gas-to-energy plants at which methane

gas produced by decomposition is burned to generate electricity. On May 19, 1995, Laidlaw sought a declaratory ruling

from FERC that its Coyote Canyon Landfill Gas Power Plant

in Orange County, California, would remain a "qualifying

small power production facility" under s 3(17)(C), and

__________

4 Laidlaw has changed its name to Gas Recovery Systems, Inc.,

but for the sake of consistency we retain the designation used in the

orders under review.

FERC's regulations, if it began burning natural gas in any

amount up to 25% of its annual energy input. Specifically,

Laidlaw requested permission to burn natural gas to boost

output from 17 megawatts ("MW") to 20MW, to sustain

output at that level despite fluctuations in landfill gas supply,

and to alleviate the effects of forced outages and landfill

maintenance.

Laidlaw's request for a declaratory ruling arose from its

potential inability to supply the required power under its 30-

year purchase power contract with Edison. In 1984, Laidlaw

had agreed to supply Edison with at least 80% of Coyote

Canyon's contract capacity during the peak hours of the four

summer months. Initially, contract capacity had been 15MW,

but the contract was amended in 1986 to increase contract

capacity to 20MW. Once commercial operation at Coyote

Canyon began in 1989, Laidlaw encountered difficulties.

During the summer of 1989, Laidlaw failed to meet its

contractual supply obligations, and, under the terms of the

contract, Coyote Canyon's capacity was permanently derated

to 17.1MW, and Laidlaw was forced to refund $600,000 to

Edison. In 1990, the landfill was closed, but Laidlaw expects

to have a commercially-sustainable gas supply until at least

2010.

According to Laidlaw's petition, Coyote Canyon's current

production problems stem from two environmental requirements under state law, whereby the closed landfill has been

covered with an 18-inch impermeable clay cover and condenUSCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 5 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

sation can not be reinjected, a process that would have

increased the rate of decomposition and therefore gas production. Combined with the limitations imposed by the atmospheric pressure in southern California, implementation of

the state requirements has resulted in a smaller gas supply

than Laidlaw had anticipated.

Edison and the Public Utilities Commission of the State of

California ("CPUC") intervened in opposition to the petition.

Edison maintained that under PURPA Laidlaw was restricted in its use of natural gas to the purposes specified in the

statute. Edison argued that Laidlaw could not justify its

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 6 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

proposed use of natural gas as one of the specified uses in

s 3(17)(B), nor could it meet the "essential fixed assets"

standard enunciated in LUZ whereby FERC had recognized

permissible uses for fossil fuels beyond those expressly set

forth in the statute. See Laidlaw Gas Recovery Sys., Inc., 74

FERC (CCH) p 61,176 (1996) ("1996 Order"). Edison concluded that even if Laidlaw could meet the LUZ standard,

FERC should abandon it as no longer supported by the policy

considerations that led to its adoption and as inconsistent

with PURPA's plain language.5

In LUZ, FERC ruled that a solar-powered plant could

burn fossil fuels to operate a gas-fired superheater, an oilfired "emergency" steam generator, and an auxiliary gas-fired

steam boiler even though these uses of fossil fuels were not

expressly authorized under s 3(17)(A) & (B). LUZ, 30

FERC at p. 61,226. FERC reasoned that Congress' use of

the word "primary" in s 3(17)(A) and (B) necessarily implied

that there could be permissible secondary uses of fossil fuels.

While FERC acknowledged that "Congress specified in section 3(17)(B) ... certain uses of gas which fall into this

secondary category," FERC determined that it remained free

to permit additional secondary uses because Congress "did

not explicitly state [that the secondary uses specified in

s 3(17)(B)] would be the sole [secondary uses] permitted."

LUZ, 30 FERC at p. 61,225 (quoted in Laidlaw Gas Recovery

Sys., Inc., 84 FERC (CCH) p 61,070 at p. 61,294-95 (1998)).

FERC also determined, relying principally upon two brief

passages from the Conference Report on PURPA, that the

legislative history supported its interpretation. FERC relied

on a reference to "other minor uses" in regard to the use of

fossil fuels by a "small power production facility"6 and a

__________

5 CPUC joined Edison in arguing that Laidlaw's proposed use

of natural gas would not fit within either the express uses permitted

by PURPA or the use permitted under the LUZ standard. CPUC

did not challenge the LUZ standard itself.

6 The term "small power production facility" derives from

S. 2114 s 12(c)(4), which read:

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 7 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

reference to the use of natural gas or oil for the generation of

electricity during "scheduled outages."7 Given its determination that it was free to define permissible secondary uses of

fossil fuels outside of those specified in s 3(17)(B), FERC

concluded in LUZ that fossil fuels could be utilized to "improve[ ] the efficiency of those fixed assets of the small power

production facility that are essential to the facility...."

LUZ, 30 FERC at p. 61,226.

Applying LUZ in Laidlaw's case, FERC granted Laidlaw's

petition in part. In the 1996 Order, FERC ruled that,

without jeopardizing its status as qualifying small power

__________

"small power production facility" means a facility owned by a

person not primarily engaged in the generation or sale of

electric power, which facility produces electric energy by the

use of solid waste and/or renewable resources.

S. Rep. No. 95-442, 95th Cong. (1978). The relevant changes

made by the Conference Committee were to change "which facility

produces electric energy by the use of " to "a facility which ...

produces electric energy solely by the use, as a primary energy

source, of," where "primary energy source" is a term of art defined

in 16 U.S.C. s 796(17)(B). The Conference Report explains:

The conferees added the term 'primary energy source' to this

definition in recognition of the fact that a facility using waste,

biomass, or renewable resources, or any combination thereof as

the primary fuel might nevertheless require the use of oil or

natural gas or other nonrenewable fuels in emergencies or in

outages or to start the unit, test it, stabilize the flame or

control the operation of the unit or for other minor uses.

H.R. Conf. Rep. No. 95-1750 at 89 (emphasis added), reprinted in

1978 U.S.C.C.A.N. at 7823.

7 With regard to the definition of 'small power production

facility' the conferees intend, for purposes of maintaining status as a

small power production facility, that the phrase 'primary energy

source' does not preclude the use of gas or oil in a facility for the

generation of electricity during scheduled outages.

H.R. Conf. Rep. No. 95-1750 at 88-89 reprinted in 1978

U.S.C.C.A.N. at 7822-23.

production facility,8 Laidlaw could use natural gas at its

Coyote Canyon facility up to 25% of its energy input in order

to "levelize" production at 17MW, as well as during forced

outages and landfill maintenance; it denied Laidlaw's request

to use natural gas to increase production to 20MW. 1996

Order, 74 FERC at p. 61,615, (JA 167). Laidlaw and Edison

sought rehearing, and by Order of July 21, 1998 ("1998

Order"),9 FERC denied rehearing, rejecting Laidlaw's factual

contention that the Coyote Canyon facility could produce

20MW using only landfill gas as unsupported. FERC rebuffed Edison's repeated attack on LUZ by reiterating in

large measure its reasoning in LUZ. In response to Edison's

request for clarification of the 1996 Order, FERC explained

that Laidlaw could use natural gas to produce up to 17MW at

its Coyote Canyon facility "when burning natural gas will

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 8 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

permit the facilities to make more efficient use of their

essential fixed assets." 1998 Order, 84 FERC at p. 61,296,

(JA 236).

III.

Edison appeals the 1996 and 1998 Orders on the principal

ground that FERC would allow Coyote Canyon to burn

natural gas up to 25% of its annual energy input contrary to

the plain meaning of the statute that defines a "small power

production facility." Relying on the statutory text and structure, Edison maintains that the permissible uses of fossil fuels

by such a facility are expressly restricted to those set forth in

the statute, which does not include a delegation of the authority to FERC to expand the permissible uses of fossil fuels and

none may be implied. Consequently, Edison contends,

FERC should have reconsidered and not extended the application of its decision in LUZ to the instant case. In addition,

Edison maintains that FERC's reasoning is flawed because it

fails to explain any link between the uses authorized by the

statute and LUZ's "essential fixed assets" standard, or why

__________

8 On May 11, 1988, Laidlaw filed its notice of qualifying status

as a "small power production facility." See 16 U.S.C. s 796(17)(C);

18 C.F.R. ss 131.80, 292.203, 292.207.

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

(JA 231).

the uses permitted under LUZ are of the same character as

those listed in the statute, and FERC relied on a factor--

more efficient use--that Congress did not intend to be considered.

Under the now familiar Chevron test, this court must first

determine whether Congress has addressed the precise issue

at hand. Chevron U.S.A. Inc. v. NRDC, Inc., 467 U.S. 837,

842-43 (1984). To do so, the court must exhaust the traditional tools of statutory construction. Halverson v. Slater,

129 F.3d 180, 184 (D.C. Cir. 1997); accord Engine Mfr. Ass'n

v. EPA, 88 F.3d 1075, 1084 (D.C. Cir. 1996). Of course, the

starting point, and the most traditional tool of statutory

construction, is to read the text itself. Engine Mfr. Ass'n, 88

F.3d at 1088. To determine whether the plain meaning of the

statutory text resolves the issue, the court considers "the

particular statutory language at issue, as well as the language

and design of the statute as a whole." Halverson, 129 F.3d at

184 (quoting K Mart v. Cartier, Inc., 486 U.S. 281, 291

(1988)). Only then, if the court determines that Congress has

not spoken to the question at issue, does Chevron step two

come into play, requiring the court to defer to the agency's

reasonable interpretation of the statute. In our Chevron step

one discussion, we turn first to the text, then the structure of

PURPA, and finally to the context.

A.

Surely it is significant that in deciding to confer substantial

benefits on "small power production facilit[ies]" Congress

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 9 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

took care to define the class of potential beneficiaries. Thus,

Congress required that such a facility must produce electric

energy "solely by the use, as a primary energy source, of

biomass, waste, renewable resources, geothermal resources,

or any combination thereof." Section 3(17)(A) of FPA, 16

U.S.C. s 796(17)(A). The limitation "solely" applies to the

phrase "primary energy source," which, given the structure of

the statute, is a term of art defining the full scope of

permissible fuel uses. Read together, paragraphs (A) and (B)

require that one or more of the alternative fuels listed in (A)

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 10 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

be the sole fuel or fuels used to generate electricity except

that the fuel used for specified uses related to maintaining

power production or to disruptions in power production may

be either alternative fuels or traditional fossil fuels. By

excepting the fuel used for these secondary uses, s 3(17)(B)

explains fully the use of the adjective "primary" in "primary

energy source."

FERC's construction, on the other hand, strikes "solely"

out of the statute and weakens the force of the command

"primary." Essentially, FERC would rewrite s 3(17)(A)'s

definition of a "small power production facility" to require

such a facility to generate electricity "primarily" by the use of

a permitted fuel as a primary energy source, rather than

"solely" by such use. Under this interpretation, the statute

can no longer include the term "solely" and the court would

have to condone striking a word from the statute. Yet FERC

has not suggested any reason why it is necessary to do so. A

reading that gives proper effect to the word "solely" does not

turn it into a non sequitur, as Edison observes, nor does it

produce absurd results. See Mova Pharm. Corp. v. Shalala,

140 F.3d 1060, 1070-72 (D.C. Cir. 1998); Engine Mfr. Ass'n,

88 F.3d at 1089-90, 1092-93. Even FERC acknowledged that

the definition of "primary energy source" provides a list of

exceptions that are themselves permitted "secondary" fuel

uses. See 1998 Order, 84 FERC at p. 61,295, (JA 235).

Were additional nonconforming fuel uses permitted, the facility would not be producing electric energy solely by use of a

permissible fuel.

In addition, in its brief FERC suggests that s 3(17)(B)

refers only to those uses that FERC may not consider in

determining a facility's primary energy source, but has no

bearing upon permissible uses of secondary energy sources.

FERC does not appear to base its decision in the orders on

appeal on such an interpretation of s 3(17)(B). To the contrary, FERC acknowledged that s 3(17)(B) specifies permissible secondary energy source uses but argued that this list is

not exhaustive and that Laidlaw's proposed fossil fuel uses

constitute permissible uses of a secondary energy source.

Indeed, in denying rehearing, FERC quoted LUZ to state

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 11 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

that the language of subsection 17(B) can "be read as not

constraining [FERC] in implementing this section, from permitting other 'secondary' uses of fossil fuel." 1998 Order, 84

FERC at p. 61,294, 61,295, (JA 234-35) (emphasis added).

Edison notes that FERC did not articulate a theory under

which FERC could define secondary fuel uses, entirely unconstrained by s 3(17)(B), following identification of a facility's primary energy source.

But assuming FERC may have relied on such a rationale in

the orders on appeal, see LUZ, 30 FERC at p. 61,225,

FERC's approach is problematic. To adopt FERC's rationale is to assume a new category of nonconforming uses

fueled by such a source that is nowhere mentioned in PURPA

or FERC's regulations and is unnecessary to give meaning to

the provisions Congress enacted. To suggest, as would

FERC, that Congress' use of the word "primary" left undefined uses for secondary sources fails to give meaning to all of

the terms that Congress used. Although as a linguistic

matter "secondary" is a corollary of "primary," FERC's

interpretation would have the effect of requiring Congress to

state expressly that the exceptions in s 3(17)(B)(i) and (ii),

which allow use of secondary fuels for certain uses, define the

universe of permitted fossil fuel uses. Yet the court has

repeatedly rejected the notion that the absence of an express

proscription allows an agency to ignore a proscription implied

by the limiting language of a statute, reasoning that such an

approach requires "tortured statutory interpretation" and is

based on the unlikely circumstance as to congressional intent

giving agencies "virtually limitless hegemony, a result plainly

out of keeping with Chevron." Halverson, 129 F.3d at 187

(quoting Railway Labor Executives Ass'n v. National Mediation Bd., 29 F.3d 655, 671 (D.C. Cir. 1994) (in banc)); accord

University of D.C. Faculty Ass'n v. District of Columbia

Financial Responsibility and Management Assistance Auth.,

163 F.3d 616, 621-22 (D.C. Cir. 1998); Engine Mfg. Ass'n, 88

F.3d at 1088.

Here, the limiting language in s 3(17)(B) loses virtually all

meaning if it delegates to FERC the authority to expand the

character and types of conforming uses of fossil fuels.

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 12 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

FERC's interpretation would mean that Congress intended to

delegate authority so as to potentially nullify proscriptions it

had otherwise set as a quid pro quo for entitlement to

significant benefits. Instead, when the statutory words are

given their common or normal meaning the result is a congressional scheme carefully designed to carry out the statutory purposes. As we have observed, the statutory language is

plainly crafted to allow fossil fuel use by small power production facilities for only a rather carefully defined set of exceptional uses, whereas in the Orders on appeal and in LUZ,

FERC applied an interpretation under which the fossil fuel

uses may encompass essentially whatever FERC may find

desirable in light of sound policy and the various statutory

goals. This interpretation strips the substance from the word

"solely" whereas the rather obvious alternative reading offered by Edison still allows "primary" to have a meaning,

namely fuel uses other than the specified exceptions. Under

Chevron an agency may not "avoid the Congressional intent

clearly expressed in the text simply by asserting that its

preferred approach would be better policy." Engine Mfg.

Ass'n, 88 F.3d at 1089.

Laidlaw's reliance on the delegation of authority to FERC

in s 3(17)(C) is similarly misplaced.10 Laidlaw's interpretation of paragraph (C) seeks to broaden the set of "small

power production facilities," as defined in paragraphs (A) and

(B), when in reality the function of paragraph (C) is to carve

__________

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

facility" as

a small power production facility--

(i) which the Commission determines, by rule, meets such

requirements (including requirements respecting fuel use, fuel

efficiency, and reliability) as the Commission may, by rule,

prescribe; and

(ii) which is owned by a person not primarily engaged in the

generation or sale of electric power (other than electric power

solely from cogeneration facilities or small power production

facilities)

16 U.S.C. s 796(17)(C).

out a subset of that category. Neither the 1996 Order nor

the 1998 Order (nor LUZ) relies on paragraph (C) as authority for permitting Laidlaw's requested uses of natural gas;

nor did Laidlaw seek rehearing on the ground that FERC

should have authorized the requested uses as "control" uses

under s 3(17)(B). Therefore, neither issue is before the

court. Burlington Truck Lines, 371 U.S. at 168-69; 16

U.S.C. s 8251. Further, Laidlaw's view of paragraph (C)

ignores the two separate definitions in s 3(17) that make

"qualifying small power production facilit[ies]" under paragraph (C) a subset of the "small power production facilit[ies]"

defined in paragraphs (A) and (B). And, contrary to Laidlaw's argument, Edison's interpretation does not read paragraph (C) out of the statute. FERC has specified requirements respecting fuel use by qualifying facilities, such as the

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 13 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

75%/25% rule in 18 C.F.R. s 292.204(b), whereby FERC

defined the permissible amount of fuel for the exceptional

uses in s 3(17)(B), assuring that these would remain secondary. 1996 Order, 74 FERC at p. 61,614 n.1, (JA 166).

Paragraph (C) delegates to FERC the authority, for instance,

to add fuel use criteria after having defined the permissible

amount of fuel for the exceptional uses in s 3(17)(B).

FERC's 75%/25% rule is the product, in part, of FERC's

exercise of the delegation in paragraph (C) and is consistent

with Edison's interpretation of paragraphs (A) and (B).11

Laidlaw's reliance on the Power Plant and Industrial Fuel

Use Act of 1978, 42 U.S.C. ss 8301-8484 (1995), is no more

helpful to it; the term "primary energy source" in that

statute is defined in nearly the same terms as were used in

PURPA. Compare 42 U.S.C. s 8302(a)(15) (1994) with 16

U.S.C. s 796(17)(B).12 Laidlaw's reliance on LUZ's progeny

fares no better.13

__________

11 Edison does not challenge the regulation allowing use of

fossil fuel up to 25% of the annual energy input for the exceptional

uses in s 3(17)(B). See 18 C.F.R. s 292.204. Cf. New Charleston

Power I, L.P. v. FERC, 56 F.3d 1430, 1432-33 (D.C. Cir. 1995).

12 See also S. Rep. No. 95-361 at 27-28, 42 (1977) reprinted in

1978 U.S.C.C.A.N. 8173, 8173, 8188.

13 LUZ has been relied on sparingly by FERC. See Power

Developers, Inc., 32 FERC (CCH) p 61,101 (1985), order on reh'g, 34

Finally, Laidlaw, like FERC, relies on PURPA's broad

purpose of encouraging the development of small power

production facilities to justify the LUZ standard. But that

purpose is neither a grant of authority nor a basis on which

the court can ignore a statutory limitation. It bears noting

that Laidlaw's Coyote Canyon facility and other small power

production facilities have been developed and have operated

without the interpretation that FERC has given to the statute in the orders on appeal; indeed, Edison has suggested

that, contrary to congressional purpose, the orders on appeal

encourage the use of additional fossil fuel and ignore protection of ratepayers from rate increases attributable to mandatory purchases from qualifying facilities. Indeed, at oral

argument counsel for Edison represented that many small

power production facilities operate in accord with the congressional design.

B.

The structure of the statute lends weight to the conclusion

that Congress intended that the only permissible uses of

fossil fuels by a small power production facility would be the

fuel uses specified in paragraph (B). Congress set out the

relevant definitions beginning with "small power production

facility," followed by "primary energy source," followed by

"qualifying small power production facility." See 16 U.S.C.

s 796(17)(A), (B), & (C). The first definition defines the

facility based on fuel use and size, and, as Edison notes, only

then authorizes FERC to determine which facilities are "qualifying" facilities. Paragraph (A) thus relies on paragraph (B)

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 14 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

to define the facilities that come within the class of "small

__________

FERC p 61,136 (1986); Northeastern Power Company, 34 FERC

(CCH) p 61,197 (1986); Energy Tech. Eng'g Ctr. 43 FERC (CCH)

p 61,251 (1988); Hydro Corp. of Penn., 43 FERC (CCH) p 61,276

(1988); see also County Sanitation Districts of Orange County,

Cal., 41 FERC (CCH) p 62,244 (1987) (Office Director opinion).

Edison maintains that inasmuch as LUZ has been applied on a caseby-case basis, the instant case is the first time that FERC's

essential fixed assets standard has been presented to a court for

review. Cf. Brown v. Gardner, 513 U.S. 115, 122 (1994).

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 15 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

power production facilities", while paragraph (C) authorizes

FERC to determine a qualifying subset of paragraph (A)

facilities. By setting out a general definition in paragraph

(A), and then refining the term "primary energy source" in

paragraph (B), the exceptions explain the use of the word

"primary" in that phrase. FERC has no authority under

paragraph (B) to expand the list of fossil fuels that are not

expressly stated in the statute. And under paragraph (C),

FERC's authority is to define by rule requirements that allow

certain small power production facilities to become qualifying

facilities. These in turn must first be "small power production facilit[ies]."

C.

Finally, the context in which Congress enacted PURPA

also supports the Chevron step one analysis. At the time of a

national energy crisis, Congress sought in a variety of ways to

reduce the use of natural gas for electricity generation.

FERC v. Mississippi, 456 U.S. 742, 745-46 (1982); S. Rep. No.

95-442 at 9 (1977). PURPA was designed to encourage the

development of alternative sources of energy by eliminating

preexisting barriers, and in so doing, the Act authorized

limited uses of fossil fuels. While Congress might also have

enacted a statute that allowed uses of natural gas to maximize

or increase the production "efficiency" focusing on the "essential fixed assets" of "small power production facilities," its

choice of language and structure weigh heavily in support of

the conclusion that it did not do so. Rather it seems clear

from the language and structure it chose that Congress

envisioned alternative fuel sources being developed without

the additional use of natural gas as part of the regular and

permanent production process; the exceptions it authorized

for fossil fuel use in the statute are of a limited number and

character--for emergency, maintenance and quality control.

See American Electric Power Serv. v. FERC, 675 F.2d 1226,

1230 n.1 (D.C. Cir. 1982), rev'd in part sub nom., American

Paper Inst. v. American Electric Power Serv. Corp., 461 U.S.

402 (1983). If, as FERC would have it, Congress could not

have foreseen all of the circumstances under which it would

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 16 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

be advisable to allow natural gas to be used in the production

of electricity with alternative fuel sources, then Congress

should not have defined the permissible fuel uses by small

power production facilities with such precision, using the

word "solely" in describing the alternative fuels to be used as

the "primary energy source."

The context further suggests that in exchange for significant benefits involving exemption from certain regulations

and a guaranteed market, Congress required small power

production facilities to generate electricity from alternative

sources of energy with only limited uses of fossil fuels. Those

purposes, Congress indicated in the statute, were of a startup, testing, or emergency nature, as opposed to a continuing

and permanent usage associated directly with the production

of electricity. This was the quid pro quo. FERC has not so

far shown that the uses permitted in the orders under review

are of the kind or character that Congress expressly permitted.

Upon examination of the text, structure, and context of the

statute, we conclude that Edison has correctly construed

s 3(17)(A) & (B), giving rather obvious meaning to all of the

words and phrases that Congress used, and leaving no ambiguity to resolve at step two of Chevron. By failing to adhere

to the statutory limitations, FERC has impermissibly construed the statute. Where Congress has taken care, given

the benefits it would confer, to specify exceptions for usages

otherwise prohibited, the court has no reason to assume

ambiguity for the purpose of allowing the agency to improve,

in its view, upon Congress' design. Hence, we conclude that

FERC's 1996 and 1998 Orders incorporate an impermissible

construction of the provisions of PURPA defining a "small

power production facility."

IV.

An additional reason for rejecting FERC's interpretation of

s 3(17)(A) & (B) in the orders under review is that this

interpretation is contradicted by the plain terms of FERC's

regulation, which is consistent with the statutory text as

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 17 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

construed under our Chevron step one analysis and seemingly

inconsistent with FERC's prior interpretation of the statute

in LUZ before the amended regulations were in place.

As originally promulgated in 1980, 18 C.F.R. s 292.204(b)

provided only that "use of oil, natural gas, and coal by a

facility may not, in the aggregate, exceed 25 percent of the

total energy input of the facility during any calendar year

period." 18 C.F.R. s 292.204(b) (1994). The preamble to the

1980 rule stated that use of fossil fuel was restricted to the

purposes specified in the statute. Order No. 70, 45 Fed. Reg.

17,959, 17,966 (Mar. 20, 1980). In LUZ, FERC acknowledged

this preamble in concluding that the more expansive reading

of the regulation was in error. LUZ, 30 FERC at 61,227-28

n.7. Nonetheless, the LUZ decision authorized usage beyond

the statutory uses specified, and thus was contrary even to

FERC's rules as they existed when LUZ was decided.14

In any event, at the time Laidlaw filed its request for a

declaratory order, FERC's regulation expressly identified

permissible uses for fossil fuels by a small power production

facility. Before Laidlaw sought a declaratory ruling from

FERC, FERC had amended s 292.204(b) in 1995 to state

that the use of fossil fuels is "limited" to the uses enumerated

in the regulation, which are identical to those expressly

permitted in the statute. See 18 C.F.R. s 292.204(b) (1999).

How FERC can reconcile the provisions of its regulations

with its 1996 and 1998 Orders is unclear. In the 1996 Order,

FERC described the amendment to s 292.204(b) as codifying

FERC's longstanding interpretation of the rule under which

fossil fuels could be used only "for statutorily permissible

purposes up to the 25 percent limit." 1996 Order, 74 FERC

at p. 61,614 n.1, (JA 166). In its brief on appeal, FERC

concedes that s 292.204(b) "closely tracks" the statutory ex-

__________

14 Indeed, FERC acknowledged in Power Developers, Inc., 34

FERC (CCH) p 61,136 (1986), on reh'g from 32 FERC p 61,101

(1985), that LUZ's "essential fixed assets" standard is appropriately

viewed as a loosening of the regulatory restrictions. 34 FERC at p.

61,236.

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 18 of 19
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

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

directly mimics the statute.

FERC's contention that the LUZ standard sets forth a

permissible use for fossil fuel is belied by the absence of any

mention of LUZ or "essential fixed assets" from both the text

of the amended rule and its preamble. See generally 18

C.F.R. s 292.204(b); Order No. 575, 60 Fed. Reg. 4831, 4847

(Jan. 25, 1995). On the contrary, in LUZ, and in the orders

under review, FERC permitted facilities to burn fossil fuels

under the "essential fixed assets" standard as a permissible

"other minor use" under s 3(17)(B). See LUZ, 30 FERC at

p. 61,225-26; 1996 Order, 74 FERC at p. 61,615-16, (JA 167-

68); 1998 Order, 84 FERC at p. 61,294-95, (JA 234-35).

While the court's review of an agency's interpretation of its

own regulation is deferential, see, e.g., Auer v. Robbins, 519

U.S. 452, 461 (1997), FERC's reliance on LUZ in the 1996 and

1998 Orders cannot be sustained. Treating the "essential

fixed assets" use as permissible under s 3(17)(B), as FERC

did in LUZ and the orders under review, is inconsistent with

the regulation, which directs that "[u]se of oil, natural gas and

coal by a facility, under section [3](17)(B) ... is limited to the

minimum amounts of fuel required for" the express purposes

in s 3(17)(B)(i) and (ii). 18 C.F.R. s 292.204(b)(2).

Accordingly, because the 1996 and 1998 Orders rely on an

interpretation of s 3(17) that is foreclosed by unambiguous

statutory text, and, alternatively, by FERC's own regulation,

we grant Edison's petition for review.

USCA Case #98-1439 Document #473891 Filed: 11/02/1999 Page 19 of 19