Recent bankruptcy cases involving utility companies have pitted the Federal Energy Regulatory Commission (“FERC”) against bankruptcy courts regarding which body has the final say in allowing debtors to back out of power purchase agreements (“PPAs”). This showdown has resulted in various decisions that are shaping the future of bankruptcy proceedings filed by utility companies across the country.
Background
Congress vested federal district courts with “original and exclusive jurisdiction” over bankruptcy cases.1 In turn, through referral from the district court, bankruptcy courts have exclusive jurisdiction over all property of the bankruptcy estate, including any of the debtor’s agreements in effect at the commencement of proceedings.2 The Bankruptcy Code authorizes a debtor-in-possession to “reject” these agreements (provided certain requirements are met) during the bankruptcy proceedings.3 Rejection is an extremely useful tool for debtors because it allows a debtor to cease performing under a contract, and the resulting damages are treated as unsecured prepetition claims against the estate (which may be discharged at pennies on the dollar).
Utilities are subject to the Federal Power Act (“FPA”), which grants FERC the “exclusive authority” to determine the reasonableness of interstate utility rates charged by utility companies.4 Under the “filed rate doctrine,” FERC has the power to determine a reasonable rate and a court generally cannot order a different rate or collaterally attack the reasonableness of that rate.
When debtor utility companies seek bankruptcy court authorization to reject PPAs, counterparties to those PPAs-eager to avoid the potential for devastating losses—have sought FERC review and approval of such rejection. For its part, FERC has claimed that it has concurrent jurisdiction to review and address the rejection of PPAs in bankruptcy proceedings.5 However, as discussed below, courts have taken varying positions on the issue.
Appellate Courts Chart Their Course
In 2004, the Fifth Circuit court of appeals determined that “Congress intended [a bankruptcy court’s rejection powers] to apply to contracts subject to FERC regulation,” and the court had the ability to authorize a rejection “so long as that rejection does not constitute a challenge to that agreement’s filed rate.”6 The court reasoned that the rejection of a PPA in bankruptcy should not be characterized as a challenge to the filed rate because “any effect on the filed rate[] from a motion to reject would result not from the rejection itself, but from the application of the terms of a confirmed reorganization plan to the unsecured breach of contract claims.”8 The court, however, suggested that bankruptcy courts should apply a heightened standard when considering PPA rejection motions and seek FERC assistance in balancing the equities.8
The Sixth Circuit court of appeals has largely adopted the approach of the Fifth Circuit. In 2018, the Northern District of Ohio bankruptcy court relied on the Fifth Circuit’s ruling to enjoin FERC from requiring debtors to perform under contracts that they sought to reject.9 On appeal, the Sixth Circuit held that “the public necessity of available and functional bankruptcy relief is generally superior to the necessity of FERC’s having complete or exclusive authority to regulate energy contracts and markets.”10 The Sixth Circuit, however, also held that the bankruptcy court had primary, but not exclusive jurisdiction over the issue and advised that bankruptcy courts considering the rejection of a FERC-governed energy contract “must consider the public interest and ensure that the equities balance in favor of rejecting the contract, and it must invite FERC to participate and provide an opinion[.]”11
Conversely, district courts in the Second Circuit have held that bankruptcy courts lack jurisdiction to authorize the rejection of FERC-regulated PPAs because doing so would constitute a collateral attack on the filed rate and interfere with FERC’s exclusive jurisdiction over the rates, terms, conditions, and duration of energy contracts.12 The Second Circuit has yet to weigh in on the issue.
Last summer, the Northern District of California bankruptcy court rejected FERC’s concurrent jurisdiction argument entirely, insisting that it “guts and renders meaningless the bankruptcy court’s responsibilities.”13 Rather, the court suggested that a bankruptcy court faced with a rejection motion should “consider the merits of any such motion and if consideration implicates public policy interests as well as reorganization goals, those interests can be considered as part of the higher standard for the rejection decision.”14 In September 2019, the Ninth Circuit court of appeals agreed to directly review this ruling, and the pending appeal is now fully-briefed.
The Road Ahead
The outcome of this jurisdictional battle will impact the future of the energy industry, where companies rely on PPAs to obtain project financing. The varying appellate views on the issue may spur debtors to think carefully about where to file for bankruptcy, with the preference being a circuit that allows for PPA rejection without FERC interference. Ultimately, Congress may have to clarify FERC’s powers or the Supreme Court may be called upon to resolve a circuit split. Seward & Kissel LLP will continue to monitor this issue closely.
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1 28 U.S.C. § 1334(a).
2 28 U.S.C. § 1334(e).
3 11 U.S.C. § 365(a).
4 See 16 U.S.C. § 824d(a),(e); Mississippi Power & Light Co. v. Mississippi, 487 U.S. 354, 371-72 (1988).
5 See, e.g., Order on Petition for Declaratory Order and Complaint, Exelon Corp. v. Pacific Gas and Electric Co., 166 FERC ¶ 61,053, Docket No. EL 19-63-000 (Jan. 28, 2019).
6 In re Mirant Corp., 378 F3d 511, 519, 522 (5th Cir. 2004).
7 Id. at 521.
8 See id. at 525-26 (“When considering these issues, the courts should carefully scrutinize the impact of rejection upon the public interest and should, inter alia, ensure that rejection does not cause any disruption in the supply of electricity to other public utilities or to consumers.”).
9 See In re FirstEnergy Solutions Corp., Nos. 18-50757, 18-05021, 2018 Bankr. LEXIS 1488, at *60 (Bankr. N.D. Ohio May 18, 2018).
10 In re FirstEnergy Solutions, Corp., 945 F.3d 431, 445-46 (6th Cir. 2019).
11 Id. at 454.
12 See In re Calpine Corp., 337 B.R. 27, 36 (S.D.N.Y. 2006); see also In re Boston Generating, LLC, 10 Civ. 6528, 2010 U.S. Dist. LEXIS 116073, at *16 (S.D.N.Y. Nov. 1, 2010) (noting disagreement between Calpine and Mirant).
13 See In re PG&E Corp., 603 B.R. 471, 476 (Bankr. N.D. Cal. 2019).
14 Id. at 490.
