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Commission Watch

The developing jurisdictional battle over authorizing rejection of wholesale power supply agreements is getting white-hot, pitting creditors against ratepayers.
Fortnightly Magazine - September 1 2003

the same hypothetical fact pattern that easily justifies bankruptcy court rejection of the SOSA rather clearly fails to meet the .

Alternative hypothetical scenarios that could justify canceling of the SOSA under the standard may include: (1) a scenario by which NRG-PMI did not have sufficient funds to perform the SOSA (e.g., less than $70 million of available funds); (2) a scenario in which NRG-PMI's continued performance would somehow cause the shutdown of generation plants of affiliated entities and thereby jeopardize service to customers; and/or (3) a scenario in which NRG was required to divert resources or generation capacity to service the SOSA and thereby impair service to other electric customers.

The foregoing examples make clear that the determination of which legal standard will govern power contract rejection will have dramatically different impacts upon creditors of merchant companies such as NRG on the one hand, and ratepayers of contract counterparties such as CL&P on the other hand.

Policy and Legal Minefields

The NRG SOSA and similar standard offer service agreements of Mirant and PG&E National Energy Group are among the most compelling cases to invoke the public interest standard. In such instances, a very direct link can be made between the wholesale power supply contract and the impact upon a large group of consumer ratepayers. It remains to be seen whether the case is compelling enough to warrant ending the contracts where no direct linkage between wholesale customers and consumer ratepayers is evident, or where contract rejection affects only a limited number of large, sophisticated customers?

The NRG-PMI case has proceeded on the assumption that if the SOSA is abrogated and CL&P is required to obtain substitute power at a higher price, CL&P will be permitted to pass along this cost to ratepayers. Will it always be the case that the wholesale customer/electric distribution company will/should be able to pass along contract damage costs to ratepayers, which would implicate the public interest standard? If not, should the tests be applied differently?

Another complexity arises from the multiple entity structure present in most merchant power corporate groups. Often, as is the case with NRG-PMI, power contracting and trading is conducted through one entity within the corporate group, while power generation facilities are commonly held by separate affiliated entities. What will be the result if the trading entity by itself lacks the resources to perform a jurisdictional contract under the strictest standard, but an affiliated generation company could provide such service? Is it necessarily the case that the courts can require a generation affiliate, not controlled by the trading entity, to provide service? What if, as is likely to be the case in many merchant power company bankruptcies, the affiliated generation company is sold off during the course of the bankruptcy case to a non-affiliated third party? Is there any means to require the third party to supply service under the original contract terms? 4

Many judicial and administrative battles remain to be fought over wholesale power supply agreements of debtor merchant companies, and both creditors and ratepayer advocates will seek to invoke a