[co-author: Casey Norman]

Introduction

Periods of volatility in energy prices cause spikes in energy companies’ bankruptcies. These bankruptcies lead to debtors’ attempts to reject power purchase agreements (“PPAs”). These attempts ignite the unresolved legal issue—who has the authority to approve the rejection; the bankruptcy court under its authority to approve assumption or rejection of executory contracts, or the Federal Energy Regulatory Commission (“FERC”) exercising its exclusive authority under the Federal Power Act (“FPA”) and the filed-rate doctrine over wholesale power rates and terms and conditions of service under contracts that are filed with and approved by FERC. The usual pattern is for the debtor to commence an adversary proceeding in the bankruptcy court seeking to enjoin FERC from interfering with the debtor’s ability to reject the PPA.

State of the Law

In Calpine and NRG Energy, courts within the Southern District of New York held that only FERC has jurisdiction to approve a debtor’s rejection of PPAs. In Mirant, the Fifth Circuit held that the bankruptcy court has jurisdiction to approve rejection of a PPA and reversed the bankruptcy court’s decision that FERC has exclusive jurisdiction over the matter. Recently, in PG&E, the bankruptcy court held that the bankruptcy court has exclusive jurisdiction over the matter and enjoined FERC from interfering with the debtors’ attempt to reject PPAs. The PG&E opinion has been certified for direct appeal to the Ninth Circuit.

FirstEnergy Solutions

FERC vs. Bankruptcy Court Jurisdiction

In FirstEnergy Solutions, the debtor, shortly after the filing, sought to reject certain PPAs. The bankruptcy court held that it has exclusive jurisdiction over the matter and enjoined FERC from taking any action in respect of the PPAs in question.

On appeal, the Sixth Circuit, in a 2-1 opinion, held that while the bankruptcy court does have jurisdiction to authorize rejection of the PPAs, the injunction issued by the bankruptcy court was so broad that it exceeded the bankruptcy court’s jurisdiction. The majority found that the portion of the bankruptcy court’s injunction that enjoined FERC from ordering the debtor to continue performance under PPAs, or prohibited the debtor from seeking to reject these contracts, was appropriate.

The portion of the injunction, however, that enjoined FERC from “initiating or continuing any proceeding,” or interfering with the bankruptcy court’s exclusive jurisdiction, which it does not have, was improper and void. FERC is authorized by the FPA to conduct its business and determine the public interest involved under its mandate to protect energy markets and consumers. And in fact, FERC, in performing its duties and advocating for its position before the bankruptcy court, could be valuable and beneficial to the court’s ultimate determination on the sought for rejection.

The dissenting judge concluded that the majority ignored or misapplied the “filed-rate doctrine.” Both the majority and the minority agreed that courts have held that once a PPA is filed with FERC it carries the weight of a statute or a regulation. The majority concluded, however, that for bankruptcy purposes, that is not the case, and the PPAs are ordinary contracts that may be rejected. The minority disagreed. The minority concluded that the obligations under the filed rate are separate and distinct from the contract itself, and the rejection of the contract, in and of itself, would be meaningless since the debtor’s obligations under a contract that was filed with FERC may not be eliminated by the bankruptcy court. Thus, under the minority judge’s view, the debtor should apply both to the bankruptcy court and to FERC in order to obtain complete relief and be relieved of its obligations under a FERC-filed PPA.

The Standard of Review

The bankruptcy court utilized the deferential business judgement test in evaluating the debtor’s motion to reject the PPAs and refused to consider any public interest principle that may be implicated. Agreeing with the Fifth Circuit in Mirant, the majority and the dissent held that the bankruptcy court erred in the standard it applied and that a higher standard is required; the bankruptcy court must consider the impact of the PPAs’ rejection on the public interest, including impact on counterparties, consumers, decommissioning and environmental issues, and pension obligations “to ensure that the equities balance in favor of rejecting the contracts.”

Conclusion

It does not appear that the FirstEnergy opinion has done much to clarify the state of the law with respect to the “competing” jurisdiction of FERC and the bankruptcy courts over PPAs’ rejection. It did, however, align the majority of the Sixth Circuit’s panel with the Fifth Circuit, and aligned these two circuits on the appropriate standard of review to be applied by bankruptcy courts.

The Ninth Circuit will wade into these issues next in the PG&E case. Stay tuned.

Read the opinion >>