About four months ago, at a conference at Stanford University’s Center for International Development, the economist and utility industry expert Frank Wolak turned heads with a not-so-new but very...
The developing jurisdictional battle over authorizing rejection of wholesale power supply agreements is getting white-hot, pitting creditors against ratepayers.
Does the Federal Energy Regulatory Commission (FERC) or the federal bankruptcy courts decide whether a bankrupt energy marketer can get out of a wholesale power contract that the marketer says isn't profitable enough? A high-stakes turf battle between FERC and the federal bankruptcy courts is being waged over just this question, and the resolution of the case is anything but clear.
At stake is whether the interests of creditors or the interests of ratepayers will win out in the end. In an industry littered with bankrupt and troubled energy marketers, it's more than an academic question being batted around by teams of lawyers.
The battle has been most dramatically illustrated in the case of NRG Power Marketing Inc. (NRG-PMI), where the variety and pace of legal proceedings involving the company, the Connecticut attorney general, and Connecticut Department of Public Utility Control resembles a complex legal chess match.
Unfortunately, the battle so far between creditors and ratepayers appears to be taking place in two parallel universes, the bankruptcy court and FERC. Because it's not clear which, if either of these arbiters has authority over the other, there's a real danger that NRG-PMI may be faced with conflicting, all-or-nothing results. It's a fight that could ultimately end up in the U.S. Supreme Court.
The Roots of the Conflict
In the bankruptcy court, protection of creditor interests is paramount. Ratepayers are unlikely to have meaningful direct participation in a merchant company case. Bankruptcy courts apply the business judgment test to assess what contracts, if any, of the bankrupt entity will be honored. The key to the business judgment test is whether it makes financial sense to continue an agreement, in light of the bankrupt business' status. Consequently, a debtor would likely be permitted to reject a below-market contract even if that contract was profitable-if the debtor could utilize its same resources to enter into a new contract on more profitable terms. The standard unquestionably permits a debtor to reject an unprofitable contract. Thus bankruptcy courts will favor rejection of any below-market power supply agreement, and they will place the entire financial burden of that rejection upon ratepayers.
Conversely, ratepayer interests are paramount under the public interest standard at FERC; the interests of creditors of the merchant power supplier are likely to be considered tangentially, if at all. Only in the event that the debtor's creditor problems are so severe that continued performance of an unprofitable contract would cause disruption or termination of service to customers would FERC consider canceling or modifying the contract -and then just to the extent necessary to ensure continued service. The Mobile-Sierra standard therefore generally serves to place the economic burden of an unprofitable contract substantially, if not exclusively, upon the creditors of the merchant company rather than upon ratepayers.
It remains to be seen whether appellate courts will attempt to develop and apply principles that reconcile and accommodate these competing bankruptcy and FERC standards to avoid the current