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