Liam Baker, vice president for regulatory affairs at US Power Generating, questions whether his company’s power plants and control systems in New York and Massachusetts must comply with the...
The commission's power grab over bankruptcy courts condemns merchants to a corporate netherworld.
Since we last visited the conflict between the Federal Energy Regulatory Commission (FERC) and bankruptcy courts over who decides whether a debtor can terminate unprofitable power contracts, 1 a new district court decision out of Texas has come down tilting the field in favor of FERC's assertion of exclusive authority. For merchant energy companies struggling with dwindling capital and mounting credit risks, this change could mean bankruptcy is no longer a viable option for reorganizing.
This latest decision, from , casts doubt on the ability of merchant energy companies in bankruptcy to reject economically burdensome contracts with load-serving entities without FERC approval. Section 365 of the Bankruptcy Code 2 ordinarily allows a debtor to reject unprofitable contracts. But for energy merchants that section could lose all meaning as applied to forward wholesale power agreements with load-serving entities if courts elsewhere follow this Mirant decision. Under this new paradigm, FERC would have to bless any rejection even if the bankruptcy court finds the contract is a loser for the energy merchant. Complicating matters, FERC has shown little interest in understanding the balance of debtor and creditor rights in the Bankruptcy Code provisions dealing with rejected contracts.
FERC has, essentially, become the senior partner to the bankruptcy courts for merchant power marketers. Unfortunately, this development comes at a time when many have begun to write epitaphs for energy merchants, further dimming prospects for the sector. 3 Utilities, now wary of the volatile electricity markets, are reportedly pulling back from wholesale trading and expanding their own power plant portfolios to meet demand. 4 The uncertain demarcation of FERC versus bankruptcy court jurisdiction raises serious questions that must be decided wisely. FERC's authority faces challenges ahead, especially as states move toward competitive procurement for standard offer or provider of last resort services.
Ironically, there may be a silver lining even if the decision is widely followed. A load-serving entity would, under the ruling, face less risk that its energy merchant counterparty could reject its wholesale power supply agreement through bankruptcy. That, arguably, should lessen collateral requirements, since the merchant supplier would have inferior bankruptcy rights, compared with those of other businesses.
The Mirant Case
Since the court and FERC rulings regarding NRG Power Marketing Inc. discussed in our earlier column, 5 the bankruptcy and district courts presiding over the Mirant 6 bankruptcy have weighed in on whether a merchant company in bankruptcy can discontinue supplying power without FERC approval. The Bankruptcy Court for the Northern District of Texas enjoined FERC from requiring Mirant to perform several of its jurisdictional contracts with Potomac Electric Power Co. (PEPCO) while that court considered pending and forthcoming motions by Mirant to reject those contracts. The Federal District Court for the Northern District of Texas disapproved and went in the opposite direction. The higher court denied Mirant's motion to reject one of those contracts and its request for injunctive relief. The degree to which each court took its reasoning is extraordinary.
The Bankruptcy Court's Mirant Decision