"We view the [Entergy-ITC] transaction [as] an attempt to extract excess value."-Mississippi PSC
Circuit's decision in , the court mused that if Mirant had sought rejection of the PEPCO contract for reasons not related to rates, the court "would have [had] authority to authorize the rejection." 23 The court also stated that if Mirant had first obtained FERC's permission to discontinue service, then rejection would potentially have been available.
As a consequence of the district court's decision in , and the disposition of similar issues in , an energy merchant in bankruptcy presently has no right in the Northern District of Texas or Southern District of New York federal courts to cease performing an unprofitable wholesale power agreement with a load-serving entity without FERC's imprimatur. Merchants in other courts face an uphill battle, considering the influence these early decisions will have. This limits the ability of an energy merchant to deploy the full spectrum of tools Congress provides debtors under the Bankruptcy Code, which seems incongruent in the absence of some counterbalance.
One such counterbalance could be a limitation on the right of the load-serving entity to exact credit support from merchant counterparties. If, as the highest courts to address the issue so far have announced, the bankruptcy court alone cannot authorize rejection of wholesale power agreements between them, then a load-serving entity buying power from an energy merchant faces less risk and should have to adjust its collateral demands accordingly. Of course, neither FERC nor any state agency has yet condoned this approach, which shows the prevailing construction of the interplay between the Bankruptcy Code and the FPA rests on tenuous grounds.
The Fifth Circuit's Challenging Task
The power struggle over jurisdiction moves next to the United States Court of Appeals for the Fifth Circuit, which already has declined to stay the district court order. If the appeals court upholds the district court's decision in , merchant energy companies will face risks greater than most other commercial enterprises because they will not enjoy the full array of reorganization tools available.
It would then be incumbent on FERC to develop an expedited process similar to that employed by bankruptcy courts for determining when creditors' interests justify freeing a debtor from a money-losing contract. The track record of FERC is not encouraging. A complaint under section 206 of the FPA typically lasts several years and results in FERC (not the real party affected) defending the outcome on appeal. 24
Moreover, one cannot reasonably expect to foster investment in the merchant energy sector without a transparent, expeditious process for resolving competing interests of creditors and bankrupt entities. To minimize regulatory risk, that process ought to yield results consistent with the claims priorities established by the Bankruptcy Code. Otherwise, creditors will quickly learn of their disfavored status and direct their capital elsewhere, defeating FERC's policy objective of a stable electric supply at competitive prices.
The Swinging Pendulum
The disparity in between the bankruptcy court's decision and that of the district court illustrates the challenge the appeals court faces. At one extreme of the pendulum swing, the Mirant bankruptcy court injunction against FERC was the first of its kind