encode_entities expects a string of text for argument. As far as it's concerned, you passed the following 12 characters:

U+00E2  LATIN SMALL LETTER A WITH CIRCUMFLEX
U+0080  An unnamed control character
U+009C  STRING TERMINATOR, a control character
q
u
o
t
e
s
U+00E2  LATIN SMALL LETTER A WITH CIRCUMFLEX
U+0080  An unnamed control character
U+009D  OPERATING SYSTEM COMMAND, a control character
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You want to pass

U+201C  LEFT DOUBLE QUOTATION MARK
q
u
o
t
e
s
U+201D  RIGHT DOUBLE QUOTATION MARK
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So instead of

encode_entities("\xe2\x80\x9cquotes\xe2\x80\x9d")
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you should have used

encode_entities("\x{201C}quotes\x{201D}")
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What you passed is the bytes resulting from encoding "\x{201C}quotes\x{201D}" using UTF-8, so you could also use

encode_entities(decode("UTF-8", "\xe2\x80\x9cquotes\xe2\x80\x9d"))
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decode comes from Encode.