Commission Watch

FERC Versus Bankruptcy Jurisdiction:

Two recent articles in the ¹ discussed conflicts that have emerged in the last 18 months over the respective jurisdictions of bankruptcy courts under the Bankruptcy Code ² and the Federal Energy Regulatory Commission (FERC) under the Federal Power Act. ³ This occurs when a debtor seeks the bankruptcy court's approval under Section 365(a) of the code ⁴ to reject a wholesale electricity sales contract that is a FERC-jurisdictional rate. Another pending high-profile dispute involves the respective jurisdictions of FERC and the bankruptcy courts when a debtor seeks to enforce, rather than reject, such a contract. ⁵

The jurisdictional conflict may have even broader impacts on the electricity and the natural gas industries. While the context of the disputes has been wholesale electricity sales contracts, similar disputes could arise if a debtor were to seek to reject electricity transmission or inter-state natural-gas transportation contracts that are FERC- jurisdictional rates.

The United States Court of Appeals for the Fifth Circuit, in its opinion issued on Aug. 4, 2004,, ⁶ ruled in favor of bankruptcy court jurisdiction over requests to reject FERC-jurisdictional wholesale electricity sales contracts. Yet, as discussed below, the court did not resolve- and arguably magnified-uncertainties about the standard that should be employed by a bankruptcy court in considering such a request, essentially leaving the task of establishing the standard to the lower court, while suggesting but not mandating a hybrid standard. ⁷

The uncertainties that remain in the wake of mean financially troubled companies and their actual and potential counter-parties in many cases will continue to have difficulty in assessing business, default, and credit risks.

Moreover, the jurisdictional conflict is a blade that cuts both ways for troubled companies. Success in obtaining a more favorable forum and a more lenient standard for rejecting contracts may come at a significant price-counterparties sometimes might decline to do business with such companies or may be willing to enter into transactions only on terms and conditions, including security requirements, that are more difficult, more costly, or even impossible for the troubled company to meet.

The Harmony of the Spheres

Disputes about claimed conflicts between federal insolvency statutes and federal regulatory statutes, and how such statutes should be read together, are not a new development. The Supreme Court confronted a claimed conflict between an insolvency-related statute and a banking regulation statute as long ago as 1883. ⁸ More recently, the court has addressed claimed conflicts between the Bankruptcy Code and the National Labor Relations Act (NLRA), ⁹ between the code and other banking regulation statutes, ¹⁰ and between the code and the Communications Act of 1934.

When two federal statutes claimed to be in conflict are capable nonetheless of "co-existence," the federal courts normally seek to give effect to both, absent clear Congressional intent to the contrary. ¹² The courts, when they determine that there is a conflict between two statutes, may resolve the conflict in a relatively mechanical fashion based on one or more of the canons of statutory construction, but they also may seek to harmonize the statutes