# 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

E NTERGY S ERVICES

, I NC

., P ETITIONER

v.

F EDERAL E

NERGY R

EGULATORY C OMMISSION

, R ESPONDENT

I NTERNATIONAL P APER C OMPANY

, ET AL

.,

I NTERVENORS

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, D ennis Lane , Solicitor, and J udith A.

Albert

, Attorney, were on t he brief for respondent. L aura J.

Vallance , Attorney, entered an appearance.

Neil L. Levy and Ashley C. Parrish were o n the brief for

intervenor International Paper Company.2

Before: E D WARDS

, S ENTELLE

, and R OGERS

, Circuit

Judges

.

Opinion for the Court filed by Circuit Judge E DWARDS

.

E D WARDS

, Circuit Judge : Entergy Services, Inc., an

affiliate of Entergy Cor p., a registered public utility holding

company (individually and collectiv ely “Entergy”), petitions for

review of orders by the F ederal 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 e vent of a shortfall in the generation of

electric energy, serving the QF’s host load u nder retail rates was

unreasonable and unduly discriminatory. S ee Entergy Serv s

., 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 cust omers by

treating QFs who wish to participat e 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

direct ed Entergy to cease following its discriminatory allocation

methodology and make refunds of th e charges that it had

collected under the unlawful m ethodology. S ee 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

producti on 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 ass ociated with and,

t ypically, interconnected with and supply electric energy to, an

indu strial customer, generally referred to as their ‘host load.’”

Initial Order

, 103 F.E.R. C. at 61,395 n.2. On June 1, 2001,3

Entergy filed wi

th the Commission revisions to its Generator

Imbalance Agreement (“GIA”), which ensures the balancing of

f lows of electrical power on Entergy’s transmission system.

Under Entergy’s proposed GIA, once a QF submitted a schedule

with Entergy f

or a wholesale sale, Entergy would deem the QF’s

output to go fi

rst 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 t

he 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” alloc a tion methodology,

arguing that when a QF files a schedule with Entergy and

experiences a generation shortfall, E ntergy’s GIA scheme would

prevent the QF from choosi ng 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. I d

. FERC agreed

with the intervenors:

Unlike other gen

erators who do not produce sufficient

energy to meet their schedules, and thus pay for Def icient

Energy, under Entergy’s sc h edules 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

E ntergy would charge the host load would be over 1,8 0 0

times t he Deficient Energy charge for the same deficiency.

T his sort of excessive and unduly discriminatory charge,

re ally a penalty, effectively excludes QFs from the

whol esale electric energy market in the Southeast, because

QFs w o uld 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).4

To remedy this situation, FERC order ed Entergy “to

implement the host loads fir st allocation method, and to make

refunds accordingly.” I

d

. at 61,399. Under the “host loads first”

allocation methodology, when QFs fail to produce al l the energy

they a re scheduled to provide, they may – at their discretion –

assign their ele ctric 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 u nder the GIA. The

“schedules first” and “host loads first” allocations pro d uced very

different outcomes, becaus e retail rates charged to the QF hosts

were much higher tha n the GIA rates that would be charged to

the QFs. See id. at 61,396-97.

E ntergy raises two issues in its petition for review. First,

Entergy argues that FERC acted beyond the scope of its

authori ty 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 tarif

fs. Second, Entergy contends that, even if FERC

acted within its authority, the C ommission’s decision to order

re funds 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 E

ntergy to make refunds, because, when

using the “schedules first” allocation methodology, Entergy was

collecting retail rates from QF host loads unde r state utility

commission-approve d tariffs – finds no support in the law and

it defies logic. As the Commission noted,

[t]he ordering of refunds in this p roceeding has nothing to

do with the regulation of retail rates. In the [ I nitial Order

],

the Commission did not fi nd 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 a5

w h olesale service, i.e.

, the provision of Deficient Energy

under its GIA, and that Ente rgy 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 discriminat ory. Because

Enter gy 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 r efund the monies collected. Rather, the

Commission has the author ity under Section 205 of the

FPA, 16 U.S.C. § 824d (2000), to direct refunds of amounts

i mproperly charged for Commission-jurisdictional servic es.

Rehearing Order

, 104 F.E.R.C. at 61,213 (footnotes omitted).

As FERC makes clear, Entergy surely cann ot avoid refunds

because it was c harging QFs using the wrong methodology

under bundled state-jurisdictional retail rat es. The rates at issue

related to what Entergy should have considered as wholesale

service provided by En

tergy to QFs, which is clearly within the

Commission’s regulatory jurisdictio n. Entergy used the

“schedules first” methodology in the GIA to give the appearance

of a retail sa le 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 orderi ng 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 requir ing Entergy to shift

from the “schedules first” to the “host loads first” methodology

was a change in r a te design, and that FERC failed to provide a6

reasoned explanation for departing from its precedent under

which changes in rate design are implement ed prospectively.

FERC does not dispute that, under existing age ncy policy, the

Commission generally

avoids imposing retroactive changes to

rate designs. S ee 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 ho st loads under

its schedules first policy; instead, it sho uld 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 E ntergy relies, W

is. Pub. Serv.

Comm’n

, 51 F.E.R.C. ¶ 61,347 (1990), and Union Elec. Co.

, 64

F.E.R.C. ¶ 61,355 (19 93), involved changes in rates. Entergy’s

position that rate design is any “metho dology [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 un lawful rates, and is incorrect.”

Respondent’s Br. at 21-22. Because FERC reasonably

concluded that the order s under review did not present a change

in rate design, the Commission’s refund deci sion is not

inconsistent with FERC prec edent that changes in rate designs

should be prospective.

Finding no merit in Entergy’s claims , we hereby deny the

petition for review.

So Ordered

.