Entergy Services, Inc. v. F.E.R.C.

• Decision Date: 12 June 2009
• Docket Number: No. 07-1343.,07-1343.
• Citation: 568 F.3d 978
• Parties: ENTERGY SERVICES, INC., Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Arkansas Electric Cooperative Corporation, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

568 F.3d 978

ENTERGY SERVICES, INC., Petitioner v. FEDERAL ENERGY REGULATORY COMMISSION, Respondent Arkansas Electric Cooperative Corporation, Intervenor.

No. 07-1343.

United States Court of Appeals, District of Columbia Circuit.

Argued October 7, 2008.

Decided June 12, 2009.

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.

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, 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 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

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 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 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, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). We evaluate de novo the Commission's...