Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

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

an excessive burden, or be unduly discriminatory."

It is precisely the issue of whether NRG-PMI can satisfy this test that is the subject of the ongoing FERC proceeding, in which a final decision is expected shortly.

The goal here is to utilize several hypothetical scenarios to illustrate the distinction between the public interest test and the bankruptcy court business judgment test.

Fundamental to this distinction is the substantial concern with ratepayer impact that is present in the FERC standard, which is not encompassed in the bankruptcy court standard. This focus on public interest and ratepayer impact is at the heart of the strategy of the Connecticut attorney general and the Connecticut Department of Public Utility Control in pursuing the FERC challenge to bankruptcy court jurisdiction. As will be discussed in further detail below, Connecticut ratepayers would otherwise have no "seat at the table" in the NRG bankruptcy case.

Why Now?

The conflicting bankruptcy business judgment test and FERC public interest test have co-existed for decades, so why are we seeing a clash of these different standards now? Quite simply, deregulation created the right circumstances. Before deregulation, bankruptcies of regulated, vertically integrated public utilities were quite rare, and the nature of the regulated industry made it unlikely that a contract party other than a regulated utility would be involved in such a dispute.

The conflict has recently taken center stage due to two primary factors: (1) the deteriorating credit condition of many of the merchant power companies and the resulting bankruptcies within this sector; and (2) the disconnect of ratepayer interests from any direct linkage to the merchant power company bankruptcy proceedings.

In determining whether to reject the SOSA in the NRG bankruptcy case, for example, the only adverse party before the bankruptcy court was CL&P, a single potential creditor of NRG. CL&P's ratepayers, the parties ultimately most affected by the contract rejection, have no status as creditors in the bankruptcy proceedings of an unregulated merchant company such as NRG. In legal terms, ratepayers lack standing in the case, and so cannot appear in the case. That is because the regulated utility, in this case CL&P, stands between the ratepayers and the merchant generator. Prior to electric industry restructuring, the entity before the bankruptcy court in similar circumstances would likely have been a regulated public utility, with a direct relationship to ratepayers, and bankruptcy law would have recognized the need to incorporate applicable ratepayer interests in the context of any such bankruptcy case. In contrast, resorting to FERC jurisdiction appears to represent one of the few available means under current law to raise and seek to protect ratepayer interests in a merchant company bankruptcy.

Turning to the specific elements of the test, one key determinant is whether performance of the SOSA would threaten continued service to customers. In the hypothetical, where NRG's cash reserves would be reduced from $100 million to $30 million as a result of continued performance of the SOSA, no interruption of customer service can be reasonably foreseen; NRG at all times retains sufficient funds to perform the contract. Thus,