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Commission Watch

The commission's power grab over bankruptcy courts condemns merchants to a corporate netherworld.
Fortnightly Magazine - May 2004

In their bankruptcy, the Mirant debtors sought to reject an agreement called the Back-to-Back Agreement, which resulted from the purchase by Southern Energy Inc. (Mirant's predecessor) from PEPCO of various generation assets sold in connection with restructuring implemented in PEPCO's Maryland and Washington, D.C., service areas. The agreement provided that if certain third parties did not agree to PEPCO's assignment of their power purchase agreements to Mirant, PEPCO would remain liable to pay for power under the unassigned agreements, and Mirant would in turn purchase all that power from PEPCO.

Mirant filed a motion to reject the Back-to-Back Agreement pursuant to section 365 of the Bankruptcy Code, contending it was too burdensome economically and impeded its ongoing business operations. Mirant simultaneously filed a lawsuit against PEPCO and FERC seeking to enjoin them from "taking any action, or encouraging any person or entity to take an action, to require or coerce" Mirant to keep performing the Back-to-Back Agreement it wished to reject or two other agreements with PEPCO, which Mirant contemplated also rejecting. 7

In September 2003, the Mirant bankruptcy court ruled that, as part of its power to order whatever is "necessary or appropriate" to preserve the debtors' assets, it could restrain FERC and others from taking any action to "require or coerce" Mirant to perform several contracts with PEPCO. 8

Although stating it did not "wish to test its jurisdictional muscle against" FERC, the bankruptcy court said it issued the preliminary injunction "to serve as a gatekeeper" and to protect "the reorganization process from unfettered interference through initiation of actions in other tribunals," referring to FERC. 9 The court reasoned that because Congress did not specifically treat energy contracts any differently from executory contracts in general, the PEPCO contracts fell within the ambit of what Congress intended Bankruptcy Code section 365 to cover. 10 From there, the court concluded it possessed the power to enjoin FERC preliminarily to preserve the court's jurisdiction over pending and future rejection motions. 11 Notably, the bankruptcy court rested its action on finding that FERC could have utilized its police and regulatory powers, which a governmental unit is ordinarily permitted to do under the Bankruptcy Code. The bankruptcy court, notwithstanding the exception to the automatic stay the Bankruptcy Code affords governmental units, deliberately sought to restrain FERC from exercising its police and regulatory powers, at least temporarily.

The District Court's Mirant Decision

After the district court granted their request to withdraw this dispute from the bankruptcy court, PEPCO and FERC argued the bankruptcy court's preliminary injunction violated the exclusive authority granted to FERC in the Federal Power Act (FPA). 12 In December 2003, the district court agreed with them. The higher court denied Mirant's requests to reject the Back-to-Back Agreement and for injunctive relief prohibiting FERC from requiring Mirant to perform it.

The district court, looking to the August 2003 district court decision in and the Fifth Circuit Court of Appeals decision in , 13 ruled FERC alone had the authority to permit a merchant energy company to discontinue performing the wholesale supply agreement at issue,