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Parties Involved:
Arkansas Electric Cooperative Corporation
Intervenor
Entergy Services, Inc.
Petitioner
Federal Energy Regulatory Commission
Respondent

Document Text:

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.

USCA Case #07-1343 Document #1185206 Filed: 06/12/2009 Page 1 of 14
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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,

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1

The term “Substitute Energy” does not appear in the Power

Agreement, but has long been used by the parties.

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

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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.

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

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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).

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

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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

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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);

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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.

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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

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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.

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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.

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

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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

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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

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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.

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