Commission Watch

Why FERC must yield to bankruptcy law.

 

How will regulators react if the current trickle of bankruptcies within the debt-laden merchant power sector should suddenly become a torrent? Will they encourage the necessary restrcturing of debt, or will they stand in the way?

PG&E National Energy Group and Mirant recently filed bankruptcy. Exelon just walked away from seven plants near Boston. Speculation abounds that Edison Mission may be a candidate for bankruptcy protection. ¹ All this suggests that a new set of owners, whether they be creditors or new investors, could well take over the merchant sector, with a likely and perhaps dramatic scaling back of operations.

There is nothing inherently wrong with this looming financial restructuring. The Bankruptcy Code offers a ready road map for the working out of debt. Many insolvent businesses have emerged successfully, including some utilities. The trick lies in balancing the concerns of creditors with ratepayer rights and the public interest, as protected under the Federal Power Act.

Lately, however, the road to solvency has taken a wrong turn. In a recent ruling, the Federal Energy Regulatory Commission (FERC) has upset the delicate balance between creditor and ratepayer. This ruling, known as , ² does not bode well for maintaining a consistent approach to balancing the competing interests.

In the opinion itself, issued Aug. 15, FERC said it may force a merchant generator to continue to perform under a forward power contract-even if a bankruptcy judge has allowed the petitioner in bankruptcy to reject the contract, as commonly occurs under bankruptcy law. Instead of premising its action on issues of health, safety, and reliability-where the commission's power is at its zenith-FERC has abused its authority by failing to accord respect for the Bankruptcy Code's priority scheme for creditor claims and exclusive jurisdiction over estate assets.

The recent wave of telecom industry failures shows that the process of bankruptcy-though fraught with pitfalls and expense-can work well for companies that serve the public interest, and even for entire industries once considered natural monopolies.

Yet in the most basic sense, FERC's recent opinion raises troubling conflicts with the mandate and authority of the bankruptcy courts. This action threatens to undermine the reorganization efforts not only of NRG Power Marketing Inc. (NRG-PMI), but those of every other wholesale energy merchant currently in bankruptcy.

And even beyond that, FERC's decision also may prove detrimental to energy merchants trying to restructure their financial positions outside of bankruptcy, a process that necessarily includes an analysis of possible bankruptcy scenarios that must be relatively predictable. Rather than focusing on health, safety, and reliability, where its authority is strongest (protecting the power grid, for instance), FERC has focused its analysis on economic matters, where its authority is plainly not exclusive.

The Recent NRG Ruling

FERC's improper focus on economics can be seen in the details of the opinion itself.

In June 2003, the commission had ruled as an initial matter in the same proceeding that, notwithstanding a bankruptcy court order approving a debtor-supplier's rejection of a wholesale power contract, NRG-PMI must continue to