United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Submitted on the Briefs February 22, 2005
Decided March 8, 2005
No. 03-1271
ENTERGY SERVICES, INC.,
PETITIONER
v.
FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT
INTERNATIONAL PAPER COMPANY, ET AL.,
INTERVENORS
On Petition for Review of Orders of the
Federal Energy Regulatory Commission
J. Wayne Anderson, Erin M. Murphy, and Floyd L. Norton,
IV were on the brief for petitioner.
Cynthia A. Marlette, General Counsel, Federal Energy
Regulatory Commission, Dennis Lane, Solicitor, and Judith A.
Albert, Attorney, were on the brief for respondent. Laura J.
Vallance, Attorney, entered an appearance.
Neil L. Levy and Ashley C. Parrish were on the brief for
intervenor International Paper Company.
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Before: EDWARDS, SENTELLE, and ROGERS, Circuit
Judges.
Opinion for the Court filed by Circuit Judge EDWARDS.
ED WARDS, Circuit Judge: Entergy Services, Inc., an
affiliate of Entergy Corp., a registered public utility holding
company (individually and collectively “Entergy”), petitions for
review of orders by the Federal Energy Regulatory Commission
(“FERC” or “Commission”). FERC held that Entergy’s
practice of allocating all of a qualifying facility’s (QF) output to
its schedule and, in the event of a shortfall in the generation of
electric energy, serving the QF’s host load under retail rates was
unreasonable and unduly discriminatory. See Entergy Servs.,
Inc., 103 F.E.R.C. ¶ 61,125 (2003) (“Initial Order”); Entergy
Servs., Inc., 104 F.E.R.C. ¶ 61,061 (2003) (“Rehearing Order”).
The Commission’s ruling was intended to benefit customers by
treating QFs who wish to participate in the market for the
wholesale sale of electric energy comparably to other sellers in
that market. Initial Order, 103 F.E.R.C. at 61,395. FERC
directed Entergy to cease following its discriminatory allocation
methodology and make refunds of the charges that it had
collected under the unlawful methodology. See Initial Order,
103 F.E.R.C. at 61,399. Entergy now challenges the refund
order. For the reasons indicated below, we deny the petition for
review.
* * * *
“A QF is a cogeneration facility or a small power
production facility that meets the statutory and regulatory
requirements to be a qualifying facility. 16 U.S.C. §§ 796(17),
(18) (2000); 18 C.F.R. Part 292 (2002). Many QFs (particularly
those that are cogeneration facilities) are associated with and,
typically, interconnected with and supply electric energy to, an
industrial customer, generally referred to as their ‘host load.’”
Initial Order, 103 F.E.R.C. at 61,395 n.2. On June 1, 2001,
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Entergy filed with the Commission revisions to its Generator
Imbalance Agreement (“GIA”), which ensures the balancing of
flows of electrical power on Entergy’s transmission system.
Under Entergy’s proposed GIA, once a QF submitted a schedule
with Entergy for a wholesale sale, Entergy would deem the QF’s
output to go first to the scheduled transaction, with the
remainder deemed to serve the host load. Under this method of
allocating a QF’s output, Entergy would charge any energy
deficiencies to the QF’s host load, which Entergy then supplies
under its retail rates. Id. at 61,396. A number of intervenors
objected to this “schedules first” allocation methodology,
arguing that when a QF files a schedule with Entergy and
experiences a generation shortfall, Entergy’s GIA scheme would
prevent the QF from choosing to allocate its output first to meet
the needs of its host load and then obtain generator imbalance
energy to meet the shortfall in its schedule. Id. FERC agreed
with the intervenors:
Unlike other generators who do not produce sufficient
energy to meet their schedules, and thus pay for Deficient
Energy, under Entergy’s schedules first policy QFs do not
pay for Deficient Energy but instead Entergy imposes on
QF host loads a retail rate, including a demand rachet – i.e.,
a much higher rate. Intervenors present an example in
which under the schedules first policy the retail rates that
Entergy would charge the host load would be over 1,800
times the Deficient Energy charge for the same deficiency.
This sort of excessive and unduly discriminatory charge,
really a penalty, effectively excludes QFs from the
wholesale electric energy market in the Southeast, because
QFs would likely not risk exposing their host loads to such
high rates. . . . In sum, Entergy’s treatment of QFs differs
markedly, and unjustifiably, from its treatment of other
generation on its system.
Id. at 61,398 (footnotes omitted).
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To remedy this situation, FERC ordered Entergy “to
implement the host loads first allocation method, and to make
refunds accordingly.” Id. at 61,399. Under the “host loads first”
allocation methodology, when QFs fail to produce all the energy
they are scheduled to provide, they may – at their discretion –
assign their electric energy to their host loads first. If a QF
chooses to assign the power first to the host load, Entergy will
supply deficient energy to the QF under the GIA. The
“schedules first” and “host loads first” allocations produced very
different outcomes, because retail rates charged to the QF hosts
were much higher than the GIA rates that would be charged to
the QFs. See id. at 61,396-97.
Entergy raises two issues in its petition for review. First,
Entergy argues that FERC acted beyond the scope of its
authority under the Federal Power Act (“FPA”), 16 U.S.C. §
824(a) and (b)(1) (2000), when it ordered Entergy to refund
retail rates collected pursuant to state utility commission-
approved tariffs. Second, Entergy contends that, even if FERC
acted within its authority, the Commission’s decision to order
refunds is arbitrary and capricious, because it deviates from
agency precedent without reasoned justification. We find no
merit in these claims.
Entergy’s first argument – that the Commission has no
jurisdiction to direct Entergy to make refunds, because, when
using the “schedules first” allocation methodology, Entergy was
collecting retail rates from QF host loads under state utility
commission-approved tariffs – finds no support in the law and
it defies logic. As the Commission noted,
[t]he ordering of refunds in this proceeding has nothing to
do with the regulation of retail rates. In the [Initial Order],
the Commission did not find that retail rates were unjust or
unreasonable; it found that Entergy should have been
charging QFs for Deficient Energy under the GIA. That is,
the Commission found that Entergy was providing a
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wholesale service, i.e., the provision of Deficient Energy
under its GIA, and that Entergy should have been charging
a wholesale rate, i.e., charging QFs Deficient Energy
charges.
The [Initial Order] found that Entergy’s schedules first
policy is unreasonable and unduly discriminatory. Because
Entergy does not contest this finding, Entergy, in effect,
concedes that, although it charged QF host loads, it had no
lawful right to do so. The Commission has, and must have,
the power to correct this wrong. Entergy cannot
successfully argue that because it improperly charged
customers retail rates for a wholesale service, it does not
have to refund the monies collected. Rather, the
Commission has the authority under Section 205 of the
FPA, 16 U.S.C. § 824d (2000), to direct refunds of amounts
improperly charged for Commission-jurisdictional services.
Rehearing Order, 104 F.E.R.C. at 61,213 (footnotes omitted).
As FERC makes clear, Entergy surely cannot avoid refunds
because it was charging QFs using the wrong methodology
under bundled state-jurisdictional retail rates. The rates at issue
related to what Entergy should have considered as wholesale
service provided by Entergy to QFs, which is clearly within the
Commission’s regulatory jurisdiction. Entergy used the
“schedules first” methodology in the GIA to give the appearance
of a retail sale to a QF host when lawfully under a “host loads
first” methodology this QF output should have been applied
initially to its host load so that any deficiency would result in a
wholesale sale to satisfy the QF’s schedule. Therefore, we agree
with FERC that the ordering of refunds in this case had nothing
to do with the regulation of retail rates.
Entergy’s second argument is equally unpersuasive.
Entergy claims that FERC’s decision requiring Entergy to shift
from the “schedules first” to the “host loads first” methodology
was a change in rate design, and that FERC failed to provide a
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reasoned explanation for departing from its precedent under
which changes in rate design are implemented prospectively.
FERC does not dispute that, under existing agency policy, the
Commission generally avoids imposing retroactive changes to
rate designs. See Consumers Energy Co., 89 F.E.R.C. ¶ 61,138,
at 61,397 (1999). Rather, the Commission maintains that
Entergy should not have been charging QF host loads under
its schedules first policy; instead, it should have been
collecting Deficient Energy charges from QFs. This is not
a change in rate design, this is merely finding that Entergy
billed the wrong customers at the wrong rates.
Rehearing Order, 104 F.E.R.C. at 61,212. In other words, there
were no rate design changes in this case.
The issue that FERC addressed was which allocation
methodology to apply to which customer. By contrast, the
FERC decisions on which Entergy relies, Wis. Pub. Serv.
Comm’n, 51 F.E.R.C. ¶ 61,347 (1990), and Union Elec. Co., 64
F.E.R.C. ¶ 61,355 (1993), involved changes in rates. Entergy’s
position that rate design is any “methodology [that] determines
how the supplier will be paid,” Petitioner’s Br. at 17, is as FERC
states, “so broad that it would seem to cover virtually any
situation in which the Commission has found that a regulated
entity has charged unlawful rates, and is incorrect.”
Respondent’s Br. at 21-22. Because FERC reasonably
concluded that the orders under review did not present a change
in rate design, the Commission’s refund decision is not
inconsistent with FERC precedent that changes in rate designs
should be prospective.
Finding no merit in Entergy’s claims, we hereby deny the
petition for review.
So Ordered.