The marriage between Exelon and PSEG would create the largest electric utility in the United States. The policy implications could loom even larger, however. Standing at risk is nothing less than...
variety of trumping strategies. In the meantime, the question of who takes the financial hit, the creditors or the ratepayers, hangs in the balance.
- There is some dispute on the record in the NRG-PMI proceedings whether continued performance of the SOSA results in an actual loss to NRG in the magnitude of $500,000 per day or whether the SOSA is simply "below market" by that amount without causing actual losses to NRG-PMI. While this latter scenario would change the arithmetic somewhat, the basic principle of equality of creditor treatment would still be served in the same manner by contract rejection. Under this scenario, NRG-PMI would not be required to use any of its $100 million cash reserves to continue to perform the SOSA. However, if it were freed from that SOSA, NRG-PMI could use its resources to enter into an alternative power supply agreement that would produce $70 million more in revenues than the SOSA through Dec. 31, 2003. In that event, total assets within the NRG-PMI estate would presumably increase from $100 million to $170 million as a result of the contract rejection. CL&P would have the same $70 million damage claim as in the original scenario. Total claims would thus increase from $300 million to $370 million. This hypothetical would yield a dividend to creditors of 33-1/3 percent if the contract were not rejected ($300 million of claims against $100 million of available assets) versus a dividend of approximately 47 percent to all creditors in the event of rejection ($370 million of claims against $170 million of assets).
- Also disputed on the record in the proceedings is whether a contract "rejection" under the Bankruptcy Code is equivalent to, or should be distinguished from, an "abrogation" under FERC precedent. No effort is made here to parse this distinction. The article assumes the two are functional equivalents. Subsequent appeals may or may not validate this assumption.
- Additional debate centers on whether the SOSA is a FERC jurisdictional contract. Again, no effort is made here to resolve that issue.
- This multiple entity issue is particularly critical for public utility distribution companies and state utility regulators in structuring fu-ture standard offer supply agreements in various jurisdictions. As a matter of contract, it will certainly be advantageous to bind all affiliated power supply entities to future contract performance and to obtain strong financial guarantees or other assurances of future contract performance. Much can be done through appropriate contract terms and financial assurances to prevent repeat occurrences of the battle in the NRG-PMI matter.
Seeds of Discord
A brief summary of the proceedings to date in the NRG-PMI cases.
When NRG-PMI sought bankruptcy court approval to reject an out-of-the-money power supply agreement with Connecticut Light & Power Co. (CL&P), alleging that it cost NRG-PMI $500,000 per day to perform, it came as little surprise to most observers that the bankruptcy court authorized rejection of the contract under the well-settled bankruptcy law "business judgment" doctrine. The contract at issue (a standard offer supply agreement or SOSA) is the source of 45 percent of the power required for