By Robert Fallon and Christina Switzer, Engleman Fallon, PLLC,rfallon@efenergylaw.com, cswitzer@efenergylaw.com
On Thursday, December 12, 2019, the United States Circuit Court of Appeals for the 6th Circuit (6th Circuit) told the Federal Energy Regulatory Commission (FERC) that bankruptcy courts determine whether FERC jurisdictional contracts can be rejected in bankruptcy but the bankruptcy court must (i) apply a higher standard for rejection than normally exists in bankruptcy proceedings and (ii) “invite FERC to participate and provide an opinion [on rejection]” within a reasonable time. See Federal Energy Regulatory Commission, et. al. v. First Energy Solutions Corp., et. al, No. 18-3787; et. al., December 12, 2019. http://www.opn.ca6.uscourts.gov/opinions.pdf/19a0294p-06.pdf.
The decision could affect not only purchasers and sellers of wholesale power, but any entity subject to FERC regulation that goes into bankruptcy, including pipelines and shippers of natural gas. The bankruptcy of FERC regulated entities is very contentious and there have been very few cases addressing who makes the call — FERC, the bankruptcy courts or both — on rejecting a FERC regulated contract in bankruptcy. [1] The 6th Circuit said the bankruptcy courts make the ultimate call subject to FERC giving its opinion.
First Energy Solutions Corporation (FES) serves load. It buys power at wholesale, i.e., power sold that will later be resold. FES entered into a number of wholesale purchase power contracts. Those contracts subsequently became financially burdensome. FES filed for Chapter 11 bankruptcy protection. They then sought to reject the contracts in bankruptcy. The Bankruptcy Court rejected the contracts under the normal bankruptcy court standard of ordinary business-judgment, i.e., that the contracts were “financially burdensome” to FES and could inhibit FES’s Chapter 11 reorganization. FERC and other parties appealed to the 6th Circuit.
FERC argued (i) that FERC jurisdictional contracts are “filed-rate contract[s],” (Slip op. at 23) that the bankruptcy courts had no jurisdiction to reject, (ii) that FERC and the bankruptcy courts have concurrent jurisdiction to review and address the disposition of wholesale power contracts sought to be rejected through bankruptcy and (iii) thus a party to a FERC-jurisdictional wholesale power purchase agreement must obtain approval from both FERC and the bankruptcy court to reject the contract.[2]
The 6th Circuit said, however, that the bankruptcy court ultimately decides whether the contracts should be rejected — subject to the bankruptcy court applying a higher standard and FERC being given a reasonable opportunity to provide its opinion within a reasonable time. Because FERC jurisdictional contracts were “ordinary contracts susceptible to rejection in bankruptcy,” Id. at 16 and in bankruptcy the bankruptcy court’s jurisdiction tops FERC’s jurisdiction, the 6th Circuit said the bankruptcy court decides whether FES may reject FERC jurisdictional contracts and FERC “cannot independently prevent it [bankruptcy court rejection].” Id. at 16. For example, the 6th Circuit said that the bankruptcy court could enjoin FERC from issuing an order (or compelling an action) that would directly conflict with the bankruptcy court’s orders or interfere with its otherwise-authorized authority.
But in determining whether a FERC jurisdictional contract should be rejected, the 6th Circuit ordered that bankruptcy courts must apply a higher standard than ordinary business judgment. Citing a 5th Circuit decision in In re Mirant Corporation, 378 F.3d 511, 523 (5th Cir. 2004), the court said bankruptcy courts must consider and decide whether to reject a contract based on the public interest—including the consequential impact on consumers and any tangential contract provisions concerning such things as decommissioning, environmental management, and future pension obligations—to ensure that the “equities balance in favor of rejecting the contracts.” Id. at 27.
Further, the 6th Circuit said the bankruptcy court must invite FERC to participate and provide an opinion on whether the contract should be rejected under a more traditional Federal Power Act [or Natural Gas Act] approach, (e.g., under the Mobile–Sierra doctrine).[3] FERC is not required to participate but if it does participate it must provide an opinion within “a reasonable time,” i.e., the bankruptcy court need only provide FERC with a reasonable accommodation or need not suffer an unreasonable delay in providing FERC opportunity to participate and provide its opinion. Id. at 28.
Check back to this space for further developments including any further appeals to the United States Supreme Court for certiorari.
[1] NextEra Energy, Inc. and NextEra Energy Partners, L.P. v. Pacific Gas and Electric Company, Order on Petition for Declaratory Order and Complaint, 166 FERC ¶ 61,049, at Ps 23, 28 (2019) )((i) addressing Pacific Gas and Electric Company (PG&E) as purchaser, rejecting FERC wholesale contract in bankruptcy, “acknowledge[ing] that the law in this area is unsettled,” (ii) adding “[s]everal courts have read the FPA and the Bankruptcy Code in pari materia and reached different conclusions,” (iii) concluding “given the unsettled state of the law, we have reviewed the FPA and Bankruptcy Code in light of the arguments raised in the Petition, and conclude that this Commission and the bankruptcy courts have concurrent jurisdiction to review and address the disposition of wholesale power contracts sought to be rejected through bankruptcy” and thus (iv) “a party to a Commission-jurisdictional wholesale power purchase agreement must obtain approval from both the Commission and the bankruptcy court to modify the filed rate and reject the contract, respectively.”