Entergy Services, Inc. v. Federal Energy Regulatory Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 7, 2008 Decided June 12, 2009

No. 07-1343

ENTERGY SERVICES, INC.,
PETITIONER

v.

FEDERAL ENERGY REGULATORY COMMISSION,
RESPONDENT

ARKANSAS ELECTRIC COOPERATIVE CORPORATION,
INTERVENOR

On Petition for Review of an Order
of the Federal Energy Regulatory Commission

Floyd L. Norton IV argued the cause for petitioner. With
him on the briefs was Erin M. Murphy.

Samuel Soopper, Attorney, Federal Energy Regulatory
Commission, argued the cause for respondent. With him on the
brief were Cynthia A. Marlette, General Counsel, and Robert H.
Solomon, Solicitor.

Sean T. Beeny argued the cause for intervenor. With him on
the brief were Phyllis G. Kimmel and Milton J. Grossman.
 2

Before: SENTELLE, Chief Judge, and RANDOLPH and
GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge GARLAND.

GARLAND, Circuit Judge: This petition for review
challenges the Federal Energy Regulatory Commission’s
(FERC’s) resolution of a contract dispute between Entergy
Arkansas, Inc., an operating subsidiary of petitioner Entergy
Services, Inc. (“Entergy”), and Arkansas Electric Cooperative
Corporation (“Arkansas Electric”). Entergy contends that the
plain language of the contract permits it to take into account
transmission system operating constraints in determining the
billing rate for energy supplied to Arkansas Electric’s
customers. In the two rulings under review, FERC found that
the relevant contract provisions are ambiguous, but that they are
best interpreted to bar this billing practice. Ark. Elec. Coop.
Corp. v. Entergy Ark., Inc., 119 F.E.R.C. ¶ 61,314 (2007)
[hereinafter Order on Rehearing]; Ark. Elec. Coop. Corp. v.
Entergy Ark., Inc., 117 F.E.R.C. ¶ 61,099 (2006) [hereinafter
Order on Initial Decision]. FERC’s orders are carefully
reasoned, and we have little difficulty upholding them under our
deferential standard of review.

I

Petitioner Entergy Services, Inc. is the services company for
Entergy Corporation, a public utility holding company that sells
electricity in Arkansas, Louisiana, Mississippi, and Texas
through operating subsidiaries named after their respective
jurisdictions -- in this case, Entergy Arkansas, Inc. Arkansas
Electric is an electric generation and transmission cooperative
that provides wholesale electricity to its members in Arkansas.
Entergy and Arkansas Electric share an ownership interest in
several resources, including two coal-fired generation plants,
 3

each of which contains two generating units. Arkansas Electric
also wholly owns two gas-fired plants. Pursuant to a 1977
Power Coordination, Interchange and Transmission Service
Agreement (“Power Agreement”) and several location-specific
contracts (“Co-Owner Agreements”), Entergy and Arkansas
Electric have integrated their generation resources, with Entergy
given full control over their scheduling and dispatch. All of the
energy produced by Arkansas Electric’s resources within the
Entergy control area flows through Entergy’s multistate
transmission system. The Power Agreement provides a billing
mechanism known as after-the-fact or theoretical “redispatch,”
whereby Arkansas Electric compensates Entergy retrospectively
for the energy that Entergy has delivered to Arkansas Electric’s
customers.

During certain periods, Entergy is able to supply Arkansas
Electric’s customers with energy derived solely from Arkansas
Electric’s own resources. For this service, the contract is clear
that Arkansas Electric owes Entergy nothing. Power Agreement
art. V, § 5(a)(i). During other periods, Arkansas Electric
indisputably has sufficient resources available to satisfy its
customer demand, yet Entergy elects to fulfill some of that
demand with energy produced elsewhere. For this service,
Entergy bills Arkansas Electric at the “Substitute Energy” rate,
which approximates what it would have cost Arkansas Electric
to produce the energy itself. Id. art. V, § (a)(ii); id. exhibit E,
Redispatching Principle No. 6.1

During still other periods, Arkansas Electric’s customers’
demand for energy may exceed the physical “capability” of its
units, as that term is defined in Article II, Section 17 of the

1
The term “Substitute Energy” does not appear in the Power
Agreement, but has long been used by the parties.
 4

Power Agreement,2 and Entergy must make up the difference.
This discrepancy is billed at a premium rate, known as the
“Replacement Energy” rate, under the contract’s provision for
“energy used by [Arkansas Electric] on redispatch for which
[Arkansas Electric] did not have sufficient [Arkansas Electric]
Resources available.” Id. art. V, § 5(c). The premium rate also
applies in cases of “outages,” when Arkansas Electric’s
resources are out of service because of emergency or planned
maintenance and Entergy must replace the lost generation. Id.
art. III, § 5.3

2
Pursuant to Article II, Section 17, the parties conduct regular
tests to determine the net generating capability, or rated capacity, of
Arkansas Electric’s resources. This is the amount of energy that the
resources are physically capable of producing in a given amount of
time. The provision states as follows:

Determination of Capability of Arkansas Electric Owned
Resources. The capability of Arkansas Electric Owned
Resources shall be net generating capability based on tests
conducted in accordance with approved Entergy
Corporation capability rating plant testing procedures. The
determination of such capability shall be based on tests
conducted jointly by Arkansas Electric and Entergy at
mutually agreed times; provided, that either party shall have
the right to require a new test at any time not sooner than
twelve months after the last previous test.

J.A. 98 (acronyms replaced).
3
Article III, Section 5 states:

Outage of Arkansas Electric Owned Resources. When any
Arkansas Electric Owned Resource is out of service because
of emergency or planned maintenance, Entergy will replace
Arkansas Electric’s generation so lost, to the extent possible,
with power and energy from Arkansas Electric Resources.
 5

The instant dispute concerns whether the premium rate
applies in yet another situation. During some periods, Arkansas
Electric’s resources are physically capable of producing energy
sufficient to meet its customers’ needs -- they are not
experiencing outages and their rated capacity is greater than or
equal to real-time demand -- yet on account of “transmission
system operating constraints,” Entergy cannot or will not use all
of this capacity. Instead, Entergy satisfies some portion of
Arkansas Electric’s customers’ needs by drawing on other
sources. The system operating constraints that lead Entergy to
take these actions are the product of many factors and can take
many forms. Across its vast transmission system, Entergy’s
dispatchers may face unpredictable fluctuations in output, load,
and third-party deliveries. To meet their obligations effectively
in the face of such fluctuations, Entergy maintains, its
dispatchers must sometimes turn down energy from Arkansas
Electric’s units to accommodate delivery from other resources.

The parties mostly agree on the causes and effects of these
system operating constraints, but they vehemently disagree on
their relevance to billing. Entergy argues that, whenever system
operating constraints induce it to supply Arkansas Electric’s
customers with energy from other sources, that energy must be
billed at the Replacement Energy rate because Arkansas Electric
“did not have sufficient . . . resources available” to satisfy its
customers. Power Agreement art. V, § 5(c). Arkansas Electric
counters that, so long as there are no outages and its units are

Subject to availability, Entergy will supply the remaining
requirements as Replacement Energy which will be billed to
Arkansas Electric and paid for at the following [premium]
rate . . . .

J.A. 101-02 (acronyms replaced).
 6

capable of meeting its customers’ requirements, billing must be
calculated at the cheaper Substitute Energy rate.

Entergy did not always take its current position. For most
of the life of the contract, Entergy applied the billing
methodology that Arkansas Electric favors. Entergy began to
reassess this approach in the early 2000s, as system operating
constraints grew more acute and financial losses on Substitute
Energy mounted. Entergy ultimately determined that its new
view was the only permissible reading of the Power Agreement.
Indeed, Entergy claimed that it had been unnecessarily
“subsidiz[ing]” Arkansas Electric and other co-owners by
“protect[ing] [them] from the impacts of system operating
constraints.” Affidavit of John P. Hurstell ¶¶ 44-45 (J.A. 295-
96). Determined to forswear such countertextual corporate
altruism, Entergy unilaterally changed its billing procedures in
July of 2004. Following an unsuccessful attempt at
reconciliation, Arkansas Electric filed a complaint with FERC
alleging, inter alia, that Entergy’s actions violated the Power
Agreement.

An Administrative Law Judge initially sided with Entergy,
Ark. Elec. Coop. Corp. v. Entergy Ark., Inc., 114 F.E.R.C. ¶
63,015 (2006), but the Commission reversed. The Commission
found that the Power Agreement is ambiguous as to the billing
methodology that applies in situations of transmission system
operating constraints, but that it is best read to require Entergy
to charge the Substitute Energy rate. Order on Initial Decision,
117 F.E.R.C. at 61,496-97. “The provisions of the billing
mechanism,” the Commission concluded, “confirm Arkansas
Electric’s view that they are designed to render it economically
indifferent as to the actual amount of power that the Entergy
dispatcher decides to dispatch from Arkansas Electric’s units as
long as the units are physically capable of generating the power
needed to serve its own load.” Id. at 61,500. The Commission
 7

therefore held that the premium Replacement Energy rate
applies only if, and to the extent that, Entergy delivers power to
Arkansas Electric’s customers in excess of the rated capacity of
Arkansas Electric’s units or, in the case of outages, in excess of
the actual dispatchability of the units. Id. at 61,496.

In essence, the Commission ratified the parties’ pre-2004
understanding of the contract: no matter how difficult it may be
for Entergy to utilize Arkansas Electric’s resources, the
Replacement Energy rate does not apply to periods in which
Arkansas Electric’s units are physically capable of satisfying its
customers’ demand. The Order on Initial Decision directed
Entergy to cease and desist from its new billing method and to
refund, with interest, all charges collected pursuant thereto. The
Order on Rehearing reaffirmed and elaborated the same
conclusions.

II

This court reviews the Commission’s orders under the
Administrative Procedure Act’s “arbitrary and capricious”
standard. 5 U.S.C. § 706(2)(A). To satisfy this standard, the
Commission must “demonstrate that it has made a reasoned
decision based upon substantial evidence in the record, and the
path of its reasoning must be clear.” Sithe/Independence Power
Partners v. FERC, 165 F.3d 944, 948 (D.C. Cir. 1999) (internal
quotation marks and citation omitted). We review claims that
the Commission acted arbitrarily and capriciously in interpreting
contracts within its jurisdiction by employing the familiar
principles of Chevron U.S.A. Inc. v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984). We evaluate de novo the
Commission’s determination that a contract is ambiguous, but
we give Chevron-like deference to its reasonable interpretation
of ambiguous contract language. See Old Dominion Elec.
Coop., Inc. v. FERC, 518 F.3d 43, 48-49 (D.C. Cir. 2008);
 8

Cajun Elec. Power Coop., Inc. v. FERC, 924 F.2d 1132, 1135-
36 (D.C. Cir. 1991). To help resolve contractual ambiguity, we
have indicated that the Commission may look to extrinsic
evidence such as the background of negotiations, Sw. Elec.
Coop., Inc. v. FERC, 347 F.3d 975, 983 (D.C. Cir. 2003), and
the parties’ subsequent course of performance, S.D. Pub. Utils.
Comm’n v. FERC, 934 F.2d 346, 351 (D.C. Cir. 1991).

Both sides agree that the key parts of the Power Agreement
are the billing provisions of Article V, Section 5 and the
redispatching principles set out in Exhibit E. Section 5 of
Article V states:

Energy. It is the intent of both parties that all resources
of both parties will be dispatched by Entergy for
maximum combined efficiency, and that Arkansas
Electric’s Resources will, on a retroactive basis,
considering their availability on an hour-to-hour basis,
be used to theoretically redispatch Arkansas Electric’s
load from Arkansas Electric’s Resources.
....
For billing purposes:
....
(c) Excess Energy. For any energy used by
Arkansas Electric on redispatch for which
Arkansas Electric did not have sufficient Arkansas
Electric resources available, Arkansas Electric
will pay to Entergy an amount calculated as in
Article III, section 5 [i.e., the Replacement Energy
rate applicable to outages].

(d) Redispatching Principles. All redispatching of
Arkansas Electric’s Resources will be in
accordance with the principles outlined in Exhibit
E.
 9

J.A. 111-14 (emphases added and acronyms replaced). Exhibit
E states:

Redispatching Principles. For billing purposes, the
following principles will be utilized:

(1) The first cost will be the minimum operating
level for each unit. The minimum operating level
will be the lowest level of net generation at which
the plant can be operated as designated by the
owner and furnished to the Entergy dispatcher.

(2) For redispatch purposes it will be assumed that
each unit will not be loaded above 95% of rated
capacity unless said unit actually operated at a
greater value.

(3) For redispatch purposes appropriate
consideration will be given to other operating
constraints which limit the availability of the plant
to the Entergy dispatcher.
....
(6) If the capability of Arkansas Electric
Resources is sufficient to supply Arkansas Electric
requirements and if Arkansas Electric
requirements are greater than the energy supplied
from Arkansas Electric Resources in an hour,
Arkansas Electric will pay to Entergy Arkansas
Electric’s incremental cost per kWh of the energy
deficiency.

(7) If the capability of Arkansas Electric
Resources is not sufficient to supply Arkansas
Electric requirements in an hour, Arkansas
Electric may purchase Replacement Energy in
 10

accordance with Article III, section 5, after giving
consideration to the principles in 1, 2 and 3 above.

Id. at 157-59 (emphases added and acronyms replaced); see also
Order on Initial Decision, 117 F.E.R.C. at 61,501-02
(reproducing additional portions of the Power Agreement).

FERC was correct in finding these provisions ambiguous.
Article V, Section 5(c) provides that the Replacement Energy
rate will apply during any period in which Arkansas Electric
does “not have sufficient resources . . . available.” Power
Agreement art. V, § 5(c) (emphasis added). The very next
clause states that all redispatch billing must “be in accordance
with the principles outlined in Exhibit E,” id. art. V, § 5(d), and
Principle 7 of that Exhibit indicates that the Replacement
Energy rate applies only if the “capability” of Arkansas
Electric’s resources “is not sufficient to supply [its customers’]
requirements,” id. exhibit E, Redispatching Principle No. 7
(emphasis added). Hence, without explanation the key terms
(“availability” and “available”) in Article V, Section 5 are
replaced by another term (“capability”) in the corresponding
provision of Exhibit E. As the Commission observed,
“availability” could therefore be given at least two different
meanings:

(1) the capability of the unit to generate power
irrespective of whether and in what amount power is
actually dispatched, as Arkansas Electric interprets it,
or (2) whether the power the unit is capable of
generating is usable by the Entergy dispatcher based on
operating conditions on the transmission system, as
Entergy apparently interprets it.

Order on Initial Decision, 117 F.E.R.C. at 61,497.
 11

Entergy draws on scattered provisions of the Power
Agreement to argue for the latter interpretation. The company
argues, for example, that the reference to “maximum combined
efficiency” in the lead paragraph of Article V, Section 5 should
be read to endorse a systemwide approach to redispatch, and that
the Agreement’s various references to “availability” should be
read to refer to the actual accessibility of resources to Entergy at
a given moment in time, rather than to their theoretical
accessibility based on the rated capacity of Arkansas Electric’s
units. Entergy also argues that the reference to “other operating
constraints” in Redispatching Principle 3 should be read to
encompass more than just constraints on rated capacity.4

Although Entergy’s textual argument is reasonable, the
Commission’s reading of the Power Agreement is more so. The
Commission observes that in the three places where the contract
provides for Replacement Rate billing -- in Article III, Section
5 (regarding outages, see supra note 3); Article V, Section 5(c);
and Exhibit E’s Redispatching Principle 7 -- there is no mention
of “transmission system operating constraints” or anything
comparable. Order on Initial Decision, 117 F.E.R.C. at 61,496.
The Commission further notes that, whereas the other billing
provisions turn on undefined terms such as “availability,”
“efficiency,” and “appropriate consideration,” Redispatching

4
Entergy further contends that, in interpreting the Power
Agreement, the Commission should have consulted certain language
in the Co-Owner Agreements. We do not find the language Entergy
cites particularly illuminating; more important, the Power Agreement
was the rightful focus of FERC’s analysis because the Co-Owner
Agreements do not address questions of billing methodology. Nor are
we persuaded by Entergy’s insistence that the Commission should
have attended more closely to considerations of “good utility
practice.” Because such considerations relate primarily to dispatch
rather than redispatch (i.e., billing), they are inapposite here.
 12

Principles 6 and 7 offer clear guidance: For any hour in which
Arkansas Electric’s resources have the “capability” (i.e., the
tested capacity, see art. II, § 17) to meet its customers’
requirements, the Replacement Rate does not apply; but for any
hour in which Arkansas Electric’s resources are incapable of
meeting its customers’ requirements, the Replacement Rate does
apply.

In construing a contract that “is not well-written and scatters
provisions [on billing] in three separate parts,” Order on
Rehearing, 119 F.E.R.C. at 62,806, the Commission has
reasonably chosen to ground its analysis in these specific
instructions. See Order on Initial Decision, 117 F.E.R.C. at
61,495 n.47 (“In the interpretation of a contract, specific and
exact terms have a greater weight than general language.
Attention and understanding are likely to be in better focus when
language is specific or exact . . . .” (citing Sw. Elec. Coop., 347
F.3d at 982-83)). The Commission infers from Principles 6 and
7 that the term “availability” in Article V, Section 5 is best
understood to be synonymous with the term “capability,” as
defined by Article II, Section 17, unless there are outage
conditions that decrease a unit’s ability to produce power. See
Order on Rehearing, 119 F.E.R.C. at 62,806 (clarifying this
point); supra note 2 (text of Section 17). The two terms are
connected but not conflated. For any period in which Arkansas
Electric’s units have the capacity to satisfy demand and are in
service, the Commission reasonably concludes, Arkansas
Electric necessarily has sufficient resources “available” within
the meaning of Article V, Section 5(c).

FERC’s reading of the contract has the substantial virtue of
harmonizing the Redispatching Principles of Exhibit E with the
body of the Power Agreement. By equating “availability” with
“capacity” except in cases of outages, FERC manages to adhere
to the interpretive maxim of meaningful variation while
 13

honoring the specific commands of Redispatching Principles 6
and 7. Likewise, by construing the phrase “other operating
constraints” in Redispatching Principle 3 to follow Principles 1
and 2 in referring to other physical, unit-based constraints (like
rated capacity), rather than to systemwide constraints (i.e.,
transmission system operating constraints), FERC adheres to the
canon of ejusdem generis, see Cement Kiln Recycling Coal. v.
EPA, 493 F.3d 207, 221 (D.C. Cir. 2007) (“[W]here general
words follow specific words, the general words are construed to
embrace only objects similar in nature to those objects
enumerated by the preceding specific words.” (internal quotation
marks omitted)), while reconciling those Principles with Article
V, Section 5. If there is any other way to make the contract
hang together, Entergy has not told us how.

The reasonableness of FERC’s interpretation is further
confirmed by reference to the parties’ course of conduct. See
S.D. Pub. Utils. Comm’n, 934 F.2d at 351 (observing that
course-of-performance evidence “of course is probative” in the
context of a FERC contract interpretation dispute). As the
Commission found, “[t]he record is replete with evidence that
for over twenty-three years both parties regarded Arkansas
Electric as entitled to pay the lower incremental fuel (coal) cost
of its units when the units were capable of meeting Arkansas
Electric’s load, regardless of whether and to what extent Entergy
actually dispatched power from those units.” Order on Initial
Decision, 117 F.E.R.C. at 61,500; see also Oral Arg. Recording
at 10:30 (concession by counsel for Entergy that FERC’s finding
was accurate). That is, for over twenty-three years both parties
applied the billing methodology that Entergy now disclaims.
When Entergy “restated” the contract in 2001 and refiled it with
FERC the following year, see Power Agreement pmbl., it did so
against a background of more than two decades of consistent
billing practice. If the contractual language were in fact as clear
-- and if Arkansas Electric’s interpretation thereof were in fact
 14

as untenable -- as Entergy now alleges, then it is hard to fathom
why Entergy would have applied Arkansas Electric’s less
favorable interpretation of the billing provisions for all those
years prior to 2004. In short, we cannot agree that the only
plausible way to interpret the contract is precisely opposite from
the way that Entergy itself interpreted it for more than twenty
years.

Finally, Entergy maintains that, as a matter of fairness, it
deserves additional compensation for those occasions when
factors beyond its control compel it to satisfy Arkansas
Electric’s customers with energy from third parties. The
Commission’s analysis, by contrast, appropriately focused on
the contract the parties negotiated rather than on which side
struck the better bargain. See, e.g., Order on Rehearing, 119
F.E.R.C. at 62,808-09. Similarly, the question before us is not
whether the contract was reasonable, a technical issue as to
which courts have little expertise, but rather whether FERC’s
construction of that contract was reasonable -- the kind of legal
dispute that this court resolves every day. And as to the latter,
we have no doubt.

III

For the foregoing reasons, the petition for review is

Denied.