"We view the [Entergy-ITC] transaction [as] an attempt to extract excess value."-Mississippi PSC
all-or-nothing approach. Alternatively, it is possible that legislation could be enacted that attempts some reconciliation of the two conflicting doctrines .
The NRG-PMI facts give a nice example of how contract rejection operates in the bankruptcy context. There, NRG-PMI alleges that the "costs" to perform the standard offer supply agreement, or SOSA, are $500,000 per day, totaling approximately $70 million if the contract is performed through the end of the term on Dec. 31, 2003.
Thus, if NRG-PMI were permitted to reject the SOSA, it would "save" $70 million. If NRG were allowed out of the contract, Connecticut Light & Power Co. (CL&P), in turn, would be entitled to assert a general creditor damage claim against the NRG-PMI bankruptcy estate in the amount of $70 million.
To assess the impact of rejection versus performance of the SOSA upon creditors of NRG, including CL&P, consider this hypothetical example, in which we assume that: (1) total assets available in the NRG bankruptcy estate are $100 million in cash; and (2) there are $300 million of general creditor claims against NRG, before considering any claims of CL&P.
If NRG were required to perform the SOSA through the end of its term, $70 million of its cash reserves would be required for this purpose, and its remaining cash assets would be reduced to $30 million ($100 million cash minus $70 million for the SOSA). CL&P would have no claim against NRG-PMI, because its contract would be fully performed.
The other creditors of NRG-PMI would receive a 10 percent dividend in relation to their $300 million of aggregate claims (the remaining $30 million constitutes 10 percent of the $300 million in claims, which would be allocated equally among creditors).
But if rejection of the SOSA was permitted, NRG-PMI would retain its entire $100 million cash reserve, because it would not be required to pay $70 million toward performance of the SOSA. In that instance, CL&P would be entitled to assert a damage claim of $70 million. Thus, the pool of NRG-PMI creditors would increase from $300 million to $370 million. Each of these general creditors would receive a dividend of approximately 27 percent on their aggregate claims of $370 million from the $100 million of available funds. Thus, the bankruptcy law principle of equal creditor treatment would be promoted by increasing the payout to creditors overall, rather than permitting a single creditor to retain the full advantage of a favorable contract and thereby causing a lesser distribution (10 percent) to all other creditors. 1
In contrast to the bankruptcy business judgment test, longstanding FERC precedent requires satisfaction of the so-called public interest test to abrogate 2 a jurisdictional power supply contract. 3 FERC succinctly de-scribed this standard in connection with its direction to NRG-PMI. In its June 25, 2003 order the commission said: "We direct NRG-PMI, on behalf of itself and its affiliates, to provide evidence sufficient to demonstrate that continued performance under the contract will impair its financial ability or the ability of its public utility affiliates to continue service, cast upon other customers