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.

EDWARDS, 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 commissionapproved 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. Inother 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.