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Smackdown! Round Three - The Bankruptcy Court vs. FERC
The jurisdictional battle over authorizing rejection of wholesale power contracts continues.
The District Court order in Calpine is now on appeal to the United States Court of Appeals for the 2nd Circuit. No further actions have been taken by FERC, and Calpine is continuing to perform the power contracts at issue while the appeal is pending.
Scorecard So Far
A review of the litigation scorecard to date, and a prognostication of the battles to come, indicate that market participants are in for continued uncertainty. The round one NRG fight, due primarily to its short duration, provided no meaningful appellate-level guidance on the jurisdictional turf battle. The Mirant case in round two resulted in an appellate decision that clearly established, at least in regard to the specific type of power contracts at issue there, that the bankruptcy court, rather than FERC, had jurisdiction over power contract rejection. The 5th Circuit provided additional guidance concerning the need for a bankruptcy court to use an enhanced standard for power-contract rejection decisions. While it suggested some general guidelines, the 5th Circuit did not attempt to provide a comprehensive definition or manner for application of such an enhanced standard.
Because the District Court decision following remand in Mirant relied primarily on other grounds in denying contract rejection, round two ended without a court decision that comprehensively applied an enhanced rejection standard to specific power contracts under specific economic and public policy circumstances.
As has been made clear in round three action to date in the Calpine case, and whatever guidance may be obtained from the 5th Circuit Mirant decision, that decision is controlling only within the 5th Circuit. Clearly, the District Court in Calpine was not constrained by the 5th Circuit in reaching what it admitted to be a contrary decision.
Attention is focused now on the United States Court of Appeals for the 2nd Circuit, which soon will weigh in on the questions posed to it in the Calpine appeal. The 2nd Circuit certainly will address the issue of whether FERC or the bankruptcy court has jurisdiction over power-contract rejection and also may enunciate its views on what standards should govern any such rejection determination. Because this litigation is playing out at such an early stage of the Calpine bankruptcy and because the power contracts at issue are sufficiently long term, round three represents the best opportunity so far to achieve a final decision that not only answers the jurisdictional question but defines and applies a rejection standard.
With all the above being said, however, it is important to recognize that the most that will result from round three is the establishment of jurisdictional rules and rejection guidelines that will be controlling in regard to bankruptcy cases filed within the 2nd Circuit. Of the 11 judicial circuits in the United States where bankruptcy cases can be filed, only the 5th and 2nd Circuits will have provided guidance on the relevant issues in the foreseeable future.
Continued case-by-case handling of power contract rejection in bankruptcy cases that may be filed in other jurisdictions thus portends years of uncertainty and potentially conflicting results. The fate of power-contract