Bankruptcy judges will have to learn to work in harmony with federal energy regulators in determining the fate of bankrupt power companies’ large contracts due to a recent federal appeals court decision.
The U.S. Court of Appeals for the Sixth Circuit ruled last month that bankruptcy courts have the authority to reject electricity purchase agreements that bankrupt utilities want to escape. Courts must first consider the public interest and allow the Federal Energy Regulatory Commission to review the agreements and voice its opinion, the Sixth Circuit said.
FERC’s authority to regulate the transmission and sale of natural gas and electricity—which comes from the Federal Power Act (FPA)—has been called into question only a handful of times in bankruptcy proceedings. The agency has consistently held that its discretion does not take a backseat in Chapter 11 cases.
The Sixth Circuit “struck a nice balance” in its attempt to end a tug of war over jurisdictional authority arising from the Chapter 11 case for FirstEnergy Solutions Corp., Proskauer Rose LLP attorney Chad Dale said.
The three-judge panel sought to resolve competing concerns between a central U.S. Bankruptcy Code goal of facilitating debtor reorganizations and FERC’s role of regulating contracts and rates under the Federal Power Act.
“They harmonized the two statutory schemes nicely,” said Dale.
Bankruptcy courts will likely have to learn to integrate FERC’s input in weighing whether canceling a power purchase agreement will harm the public interest, attorneys say.
The Sixth Circuit was “trying to find a way to let FERC give its input,” K&L Gates LLP attorney William Keyser said. But the commission may see the ruling as a “hollow victory” if its opinion doesn’t sufficiently factor into the bankruptcy court’s ultimate determination, he said.
The legal wrangling over jurisdictional authority isn’t finished. FERC is claiming it has concurrent jurisdiction with the bankruptcy court in a nearly identical appellate fight stemming from the bankruptcy case for California power giant PG&E Corp.
FERC declined to comment on the Sixth Circuit opinion.
FERC has argued that it has Congressional authority to modify or repeal energy contracts within its regulatory purview and determine whether doing so would harm the public interest.
In addition to holding its ground in the appeal from the FirstEnergy case, FERC is currently urging the U.S. Court of Appeals for the Ninth Circuit to overturn a California bankruptcy court’s ruling that PG&E doesn’t need the agency’s approval to cancel renewable energy supply contracts.
PG&E operates in a state with aggressive clean energy goals and has said it will assume all of its purchase commitments. But the sides are still duking out their disagreement over FERC’s jurisdiction.
The Fifth Circuit is the only other federal appeals court to directly address the issue, in a challenge arising from the bankruptcy for Mirant Corp. in 2004.
The Fifth Circuit ruled that although FERC can’t force a bankrupt company to continue honoring all the terms of a supply contract, a bankruptcy judge can’t block “all of FERC’s regulatory functions.”
Separately, in the 2006 case for Calpine Corp., the U.S. District Court for the Southern District of New York ruled that the rejection of a filed energy contract—which are power purchase contracts with rates that are set with FERC—is within FERC’s exclusive jurisdiction.
Mayer Brown LLP attorney Paul Forrester called the Sixth Circuit’s decision “somewhat in the middle” of the Calpine and Mirant rulings.
In FirstEnergy’s Chapter 11 case, Judge Alan Koschik of the U.S. Bankruptcy Court for the Northern District of Ohio said he had the power to pause proceedings in front of FERC and exclusively determine the company’s bid to reject energy supply agreements.
Koschik’s ruling “went far too far” by ignoring portions of the Mirant decision that limit a bankruptcy judge’s ability to enjoin FERC, the Sixth Circuit said. It instructed the judge to reconsider the matter under a “higher standard” that takes public interest into account.
Koschik must now accommodate FERC’s input when he rehears FirstEnergy’s bid to reject contracts it signed with Ohio Valley Electric Corp., Duke Energy and Maryland Solar Holdings Inc. All three power generators opposed the company’s rejection of their supply deals in bankruptcy along with an Ohio consumer advocacy group.
Koschik could summarily “come to the same conclusion” based on the underlying facts, Dale said. FirstEnergy was losing money by buying energy and renewable credits it did not need, he said.
FirstEnergy has also argued that the contracted generators could easily sell their electricity to other wholesale purchasers or into the regional electric markets.
Observers say Koschik could reverse his original decision if the commission finds that canceling the agreements would harm the public’s interest.
“I just think in the real world that would not happen because the purpose of a Chapter 11 case is to get the company out of bankruptcy and survive,” said K&L Gates LLP attorney Robert Honeywell.
The Sixth Circuit’s resolution of the jurisdictional dispute also highlights other issues related to the Federal Power Act that remain unresolved, according to Forrester, who agreed with the appellate court’s conclusion about considering public interest.
The FPA should be legislatively amended to account for the growth of competition in the energy market over the last several decades, but it still remains the law that FERC has jurisdictional authority over filed rates, he said.
“We’ve substantially deregulated generation across the country,” he said. “Now you have other people who can step in and provide that power. That would not have been the case 50 years ago.”