UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


SO CA EDISON CO

v.

FERC


98-1439a

D.C. Cir. 1999


*	*	*


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


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




__________

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


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


I.


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




__________

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


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


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


a facility which ... produces electric energy solely by the  use, as a
primary energy source, of biomass, waste,  renewable resources,
geothermal resources, or any com- bination thereof[.]


16 U.S.C. s 796(17)(A)(i). Elaborating on the meaning of  "primary
energy source," Congress defined that term in  s 3(17)(B) to mean:


the fuel or fuels used for the generation of electric  energy, except
that such term does not include, as deter- mined under rules
prescribed by the Commission, in  consultation with the Secretary of


(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




__________

n 3 A fossil fuel is "a fuel (as in coal, oil, or natural gas) that is 
formed in the earth from plant or animal remains." Merriam  Webster's
Collegiate Dictionary 460 (10th ed. 1993).


(II) emergencies, directly affecting the public  health, safety, or
welfare, which would result from  electric power outages[.]


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


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


(b) Fuel Use.


....


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


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


II.


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




__________

n 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


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


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


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


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




__________

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


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


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


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




__________

n "small power production facility" means a facility owned by a  person
not primarily engaged in the generation or sale of  electric power,
which facility produces electric energy by the  use of solid waste
and/or renewable resources.


S. Rep. No. 95-442, 95th Cong. (1978). The relevant changes  made by
the Conference Committee were to change "which facility  produces
electric energy by the use of " to "a facility which ...  produces
electric energy solely by the use, as a primary energy  source, of,"
where "primary energy source" is a term of art defined  in 16 U.S.C. s
796(17)(B). The Conference Report explains:


The conferees added the term 'primary energy source' to this 
definition in recognition of the fact that a facility using waste, 
biomass, or renewable resources, or any combination thereof as  the
primary fuel might nevertheless require the use of oil or  natural gas
or other nonrenewable fuels in emergencies or in  outages or to start
the unit, test it, stabilize the flame or  control the operation of
the unit or for other minor uses.


H.R. Conf. Rep. No. 95-1750 at 89 (emphasis added), reprinted in  1978
U.S.C.C.A.N. at 7823.


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


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


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


III.


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




__________

n 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


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


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


A.


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


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


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


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


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


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


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


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


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




__________

n 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 


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


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




__________

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


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


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


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


B.


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




__________

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


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


C.


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


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


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


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


IV.


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


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


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


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




__________

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


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


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


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