Power contracts and utility bankruptcies
A US appeals court made it easier in December for long-term power purchase agreements that independent generators sign with utilities to be set aside in utility bankruptcies.
An issue in such situations is who has the final word whether such a contract can be set aside: the bankruptcy court or the Federal Energy Regulatory Commission, which regulates wholesale sales of electricity.
The bankruptcy court may be more interested in eliminating burdensome purchase agreements that are weighing a utility down into bankruptcy, while the Federal Energy Regulatory Commission may be more focused on the importance of honoring contractual commitments for the healthy functioning of the wholesale power market.
A three-judge panel of the 6th circuit US court of appeals — meaning the court that hears appeals of cases in four rust belt states — said the bankruptcy court has the final word.
The appeals court said the utility does not need separately to obtain a ruling from FERC as part of its request to reject the PPA in the bankruptcy case. However, when considering the utility’s request, the bankruptcy court must take into account the public-interest issues that FERC would otherwise consider if the utility were required to seek permission from FERC directly. In addition, the bankruptcy court must invite FERC to participate in the bankruptcy proceeding — the appeals court said — and to provide an advisory opinion about the requested rejection applying its standards under the Federal Power Act.
The decision is good law in the four states from the which the 6th circuit court hears appeals: Kentucky, Michigan, Ohio and Tennessee. It is not binding on the federal courts in other parts of the country.
There has been a split among the US appeals courts for the last 20 years on the issue of the supremacy of the bankruptcy court and the FERC over wholesale power contracts.
Federal courts in the 2nd circuit, which covers Connecticut, New York and Vermont, have held that FERC, not the bankruptcy court, has the ultimate authority to decide whether a wholesale power contract should be terminated. The leading decision in the 2nd circuit involved PPAs with Calpine, which had filed for bankruptcy and was trying to reject burdensome contracts.
Courts in the 5th circuit, which covers Texas, Louisiana and Mississippi, have held that the bankruptcy court has the ultimate decision. The leading decision in that circuit involved PPAs with Mirant, another bankrupt independent power company.
The issue of supremacy over power contracts arises because there are competing federal statutes that talk about exclusive jurisdiction. The Bankruptcy Code gives the bankruptcy court the exclusive jurisdiction over the bankruptcy estate, which includes contracts such as PPAs. The Federal Power Act give FERC exclusive jurisdiction over the rates at which electricity is sold in wholesale power markets, which includes PPAs. The issue of who gets the final decision on the PPAs has never been addressed by the US Supreme Court
In March 2018, FirstEnergy Solutions Corp (FES), an electricity distributor, filed for bankruptcy in Ohio and immediately asked the bankruptcy judge for a declaratory judgment that the bankruptcy court’s jurisdiction trumped FERC’s jurisdiction in connection with PPA rejection issues. It also asked for an injunction to prevent FERC from interfering with FES’s intended rejection of certain PPAs and prohibiting FERC from evening conducting any proceedings concerning these PPAs.
FES said it had no use for the electricity provided under the PPAs it sought to reject. None of its customers, or any consumers, would be without electricity if these PPAs were rejected, it said.
Four parties to the PPAs, along with FERC, intervened in the bankruptcy proceeding. The four and FERC argued that FERC had concurrent jurisdiction and the last word on termination of power contracts.
Ultimately, the bankruptcy judge ruled that the bankruptcy court had exclusive jurisdiction over whether FES could reject PPAs, and the bankruptcy court enjoined FERC from taking any action in the case. The judge’s decision was extremely broad. He not only held that FERC could not rule in a manner that was inconsistent with the bankruptcy court, but also said FERC could not even hold a hearing, collect information or express an opinion.
The bankruptcy judge said the bankruptcy court only needed to weigh the request by FES to reject power contracts under a relatively low “business-judgment” standard. This is not a difficult standard to meet. The utility must simply demonstrate that rejection of the contract at issue would benefit it in the bankruptcy case. For example, if the utility is paying above-market prices under a PPA, then it would not be difficult to demonstrate that getting rid of the PPA would help the utility re-emerge from bankruptcy.
In applying only this business-judgment standard, the bankruptcy court said it would not consider any public-interest principles that could be implicated by the Federal Power Act or any harm that rejection could cause to the independent generators with whom it has contracts or to consumers.
FERC and the other parties appealed.
The appeals court agreed that the bankruptcy court, not FERC, had the “superior” interest in determining whether PPAs could be rejected as part of bankruptcy and therefore should be the deciding authority on the issue.
It said “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.” With that, the court held that the decision on whether a utility can reject a PPA is to be made by the bankruptcy court alone. FERC does not have concurrent jurisdiction, meaning FERC cannot prevent rejection.
However, the court did not turn its back on FERC. The court chastised the bankruptcy court for its injunction preventing FERC from taking any actions whatsoever while the rejection issue played out in the bankruptcy case.
The court then turned to the standard of review to be used in considering whether a PPA should be rejected in bankruptcy.
It said the public-interest considerations should have received at least some attention from the bankruptcy court rather than having rejection turn solely on a “business-judgement” standard.
It held that FERC is entitled to participate in the bankruptcy case to share its opinions when rejection of a PPA otherwise subject to FERC’s jurisdiction is sought. The bankruptcy court must consider the public interest, as informed by FERC, and must ensure that the equities balance in favor of rejection of the PPA — not simply that rejection of the PPA could comply with the lower business-judgment standard. But, at the end of the day, the court found that the bankruptcy law has the final say, in a manner similar to the 5th circuit in the Mirant case. In fact, the court repeatedly quoted from the Mirant decision and ignored the federal court’s analysis in Calpine.
This may not be the end of the story even in the 6th circuit.
On January 27, FERC and another one of the PPA counterparties filed petitions with the court of appeals asking for a rehearing by the full court — a so-called en banc review. These requests are rarely granted. The December decision was rendered by only a three-judge panel.
Whether or not rehearing en banc is granted, the parties have a right to petition for review by the US Supreme Court if the 6th circuit decision stands. Petitions for review are rarely granted by the Supreme Court. However, given the split among the various circuits, the probability that the Supreme Court would grant review is increased.
The issue of the supremacy of the Bankruptcy Code versus the Federal Power Act is an issue of current relevance in the PG&E bankruptcy. PG&E obtained a ruling from the bankruptcy court in California that would prevent FERC from exercising jurisdiction over termination of its power contracts. It now appears to be a moot point in the PG&E bankruptcy, as PG&E has agreed to assume all of its power contracts as part of its proposed restructuring plan. But that plan has not been approved yet.